Bottles of United Spirits Ltd.’s McDowell’s No. 1 whiskey in a liquor store in New Delhi (Photographer: Prashanth Vishwanathan/Bloomberg)

Goldman Sachs Says Cheers To United Spirits  

Goldman Sachs upgraded United Spirits Ltd. to ‘Buy’ from its earlier ‘Neutral’ rating citing continuously improving margins and a lower working capital outlay in FY17.

The global brokerage house also increased its 12-month price target on the stock to Rs 2,738 per share from Rs 1,857 – a potential upside of 22 percent from Friday’s close.

The target price is a blend of 85 percent organic and 15 percent inorganic growth.

Here’s what the brokerage house had to say:

  • EBITDA margin may expand 750 basis points (or bps) to 18.7 percent through FY20E.
  • Strategy of franchising low gross-margin popular brands in non-core geographies brands to yield better margins and returns.
  • Expect company to deliver 33 percent earnings compound annual growth rate over FY17-20E.

Regaining Market Share

  • Relaunch of Royal Challengers leading to improvement in incremental market share (brand gained 40 bp volume market share in 2016, while Pernod’s Royal Stag lost 20 bp)
  • Similar brand focused campaign will lead to improvement in mix within the prestige segment, thereby improvement in profit delivery.

Valuations Picture

The liquor maker at a price-to-earnings multiple of 53.4 times and an EV/EBITDA multiple of 28.5 times seems lacklustre compared to its local and global peers. However, the brokerage house said this picture may change in coming days.

We believe that there is a case for the price/sales multiple to move in the direction of its global peers as United Spirits demonstrates margin and returns delivery.”
Goldman Sachs Report

Goldman listed sustainability of the franchise agreements and regulatory overhangs as key risks for the company.