Royalty payments to accrue over the next 5 years – UNSP

Royalty payments to accrue over the next 5 years – UNSP

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,628 (0.6%), led by RELIANCE (+3.6%), BAJAJFINSV (+3.4%), and SUNPHARMA (+2.7%). APOLLOHOSP (-5.0%), HEROMOTOCO (-3.5%), and EICHERMOT (-1.7%) were few of the laggards. Among the sectoral indices, OIL & GAS (+2.3%), IT (+1.8%), and METAL (+1.1%) led the gainers, and AUTO (-0.6%) and FINANCIAL SERVICES (-0.3%) led the losers.

Excerpts of an interview with Ms. Hina Nagarajan, MD & CEO, Diageo India with CNBC-TV18 on  30th May 2022:

  • UNSP has sold 32 popular brands which include Haywards and White Mischief for Rs 820 crores to Inbrew. The deal is expected to close in 3-4 months by 30th September 2022. The surplus will be invested prudently in the short term. The deal is ROCE accretive. This accelerates UNSP’s journey towards dividend distribution.
  • Ideally, the company would have liked to do a full slump sale in one go and take the money upfront. As part of the contract, the company has signed a 5-year franchise deal with Inbrew limited for Rs 12,930 mn, company has paid all the underlying interest. Royalty payments will accrue over the next 5 years and they will be higher in later years.
  • UNSP to focus on premium brands.
  • The company has reiterated guidance of sustained double-digit revenue growth with mid to high teen margins. The company has also cautioned about EBITDA margin pressures due to inflation and other short-term supply pressures which would be mitigated by productivity initiatives and product mix by including premium brands in the mix thus improving the pricing mix.
  • The company has stepped up advocacy with states on price increases. Assam which contributes about 7-8% of the business, MP, and Rajasthan have given some price increases.
  • UK- India FTA is being negotiated concerning the customs duty reduction on scotch imports. The company is optimistic that the deal will come through. However, it’s uncertain how much benefit the company will get, as the quantum and the timing are not known. If the import duty were to come down depending on the quantum, the range of momentum the brands could get would be between 7-15% and consumer prices would be reduced, thus increasing volumes.

Asset Multiplier Comments

  • This deal is a step forward to the UNSP’s premiumization strategy as the company sees potential in the premium/luxury segment. This will help the company to focus on the Prestige and Above segment where the core competencies of the company lie.
  • We remain positive on the premiumization trend in the liquor industry, however, state-wise pricing actions and portfolio reshuffle benefits will remain the key monitorable in the near term.

Consensus Estimates: (Source: market screener website)

  • The closing price of UNSP was ₹ 801/- as of 02-June-2022.  It traded at 53x/ 45x the consensus earnings estimate of ₹ 15/ 18 – for FY23E/FY24E respectively.
  • The consensus target price of ₹ 918 /- implies a P/E Multiple of 51x on the FY24E EPS estimate of ₹ 18/-.

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.”

 

Share this post