Expect cost inflation of 4-5% to continue – Diageo India (United Spirits)

Expect cost inflation of 4-5% to continue – Diageo India (United Spirits)

Update on the Indian Equity Market:

On Tuesday, Nifty closed higher at 17,576 (+1.4%). METAL (+4.5%), PHARMA (+2.3%), and HEALTHCARE (+2.2%) were the top gainers while AUTO (-0.8%), OIL & GAS (-0.7%), and PSU BANK (-0.6%) were top losing sectors.

The top gainers were TATASTEEL (+7.5%), SUNPHARMA (+6.9%), and INDUSINDBK (+6.1%) while BPCL (-4.5%), IOC (-2.8%), and TATAMOTORS (-2.6%) were the top losers.

Edited excerpts of an interview with Ms. Hina Nagarajan, Managing Director, and Chief Executive Officer, Diageo, India with CNBC TV18 on 31st January 2022:

  • The company’s management is focused on sustaining the present demand momentum, and it is dedicated to providing a sustained double-digit growth rate in terms of volume.
  • The management expects cost inflation of 4-5 percent to continue in the future. The company experienced 2.5 percent portfolio inflation, which was offset by a favorable product mix, and operational savings. The ethanol blending pricing strategy and grain price rises have had an influence on extra neutral alcohol (ENA), which was previously flat.
  • The company is in the process of submitting price raise proposals to state governments in order to combat inflation.
  • Through the value chain, revenue management levers of the mix, and trade efficiency, the organization is focusing on productivity.
  • On the EBITDA margin front, which is now in the 16-17 percent range, management is sticking to its mid to upper teen guidance. In the long run, the company aims to achieve and maintain high teen margins.
  • The company is confident in its ability to attain mid-high teen margins and is unwilling to accept any levels below those specified.
  • In terms of competition, the company is doing well in their super-premium portfolio, but there is some aggressiveness from their competitors. However, management claims that the company is well-positioned to take advantage of the premiumization trend and that the portfolio’s innovation and renovations will drive growth for the category.
  • Consumers have reacted well to their innovations and renovations in the signature and Blackdog categories, and the launch of Royal Challenger American Pride, an American bourbon-based whiskey, has received excellent feedback.
  • The scotch category, which accounts for 20 to 24 percent of overall sales, is rapidly expanding. Scotch is expected to be a major growth driver in the future.

Asset Multiplier Comments

  • We expect improving regulatory environment, investment in ad spends, adoption of home delivery trend will help bring in topline growth.
  • Improved product mix due to premiumization and cost saving efforts will help achieve company’s EBITDAM guidance of mid to high teens.

Consensus Estimate (Source: market screener website)

  •  The closing price of UNSP was ₹ 884 /- as of 1-February-2022. It traded at 68x/ 55x/ 44x the consensus earnings estimates of ₹ 13/ 16/ 20 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 954/- implies a P/E Multiple of 48x on FY24E EPS estimate of ₹ 20/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

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