United Spirits extends fall, stock down 6%. Should you buy?

Shares of United Spirits extended the previous session’s losses to trade 6 percent lower on November 10 morning. The stock has been in a downward spiral since the company reported negative earnings for the September quarter, with revenue slipping 1.4 percent and PAT 13.6 percent on-year.

According to analysts, United Spirits remains the best play on India’s liquor industry (in the listed space) by virtue of robust market share and benefits ensuing from management control of Diageo. However, trends in raw material prices and timelines on the India-UK FTA will be key factors to watch out for.

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United Spirits parent Diageo has started taking steps to turn around the company, which includes changes at management and distribution levels, change in brand promotions strategy, enhancing efficiency in the supply chain, focus on lean portfolio, engaging with the government and improving work culture, said Nuvama Institutional Equities.

Buy, sell or hold?

“Management’s strategy of re-launch and focus on key brands remains in the right direction. The strategy of franchising of popular segments is also bearing fruit in terms of release of working capital and improving margins. These brands are being defocused to concentrate on core brand,” the brokerage said. It has a “hold” call on the stock with a target price of Rs 1,150.

Motilal Oswal Financial Services has increased its FY24/FY25 EPS estimates by 8.7 percent and 10 percent respectively, anticipating EBITDA margin gains.

However, in the near term, cost inflation will be a challengem, analysts said. There will also be persistent pressure in the popular and low-prestige categories due to high inflation.

While other discretionary companies have achieved double-digit sales/EBITDA growth over the past five years in a relatively stable demand environment, United Spirits has recorded single-digit growth in the same period, the brokerage noted. As a result, Motilal Oswal has a “neutral” call on the stock with a target price of Rs 1,050.

United Spirits is among HDFC Securities’ top Diwali stock picks. The company will continue to focus on driving profitability led by double-digit topline growth, sustained advertising & promotional spend, improved pricing and premium mix and productivity gains, the brokerage said. In line with its new strategy, Unite Spirits is working on reshaping the portfolio and improving value chain efficiency.

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“Regulatory changes in terms of taxes, distribution, marketing ban, interstate moves etc, rise in raw material and packing costs, slowdown in spend on drinking or downtrading are some key risks faced by the company, the brokerage said. Investors can buy the stock in the Rs 915-1,040 band for a target of Rs 1,195, it added.

At 11:28 am, the stock was trading at Rs 1,031.80 on the National Stock Exchange, down 5 percent from the previous close. The stock has risen 29 percent in 2023, outperforming the benchmark Nifty 50.

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