United Spirits Share of Breweries & Distilleries

According to media reports, prices of extra neutral alcohol (ENA), a major input, shot up by over 40% in a year. Operating margin before depreciation fell 70 basis points to 17.6% in the first half of FY12.

ENA prices are likely to remain firm in the coming months, despite bumper sugarcane crop, due to higher exports of ENA from Maharashtra. One of the factors that has restricted the company’s ability to raise prices often is price control by the state governments in Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. Together, these states account for nearly two-thirds of the total liquor consumption in the country and a delay in price revision in these regions impacts profitability significantly.

The company has also been spending more on advertising and promotions. In a recent report, Nomura Equity Research highlighted that United Spirit’s operating profit before depreciation (EBITDA) per case (a case with 12 bottles of 750ml liquor each) is lower than smaller peers, including Radico Khaitan and Tilaknagar Industries, due to higher focus on advertising. The effect of such expenditure will be long term in nature while it would impact margins in the short term.
What can also be disconcerting for investors is the fact that over 89% of the promoter stake in the company is pledged. Past experience shows that promoters of companies with high level of pledged holdings tend to lose control over operations. This, along with operating factors, may restrict the company’s stock performance in the near term.
Source - Economic Times

United Spirits Ltd (updated - 09 Jan 2012)
Liquor major United Spirits has lost half of its value on bourses in the past six months. Concerns such as lower profitability due to higher input costs, mounting debt, and restructuring woes related to the group company Kingfisher Airlines are expected to mar its performance.

The company’s stock did gain 14% in the three trading sessions ended January 4, but failed to retain the lead on Thursday when it declined by 5.7%. An immediate upward jump in its valuations looks limited in the absence of any major triggers in the near term. The owner of brands such as McDowell’s, Signature, Royal Challenge and White Mischief has sustained a growth of over 12% in sales volumes, which touched 112.2 million cases in FY11.

However, profitability has been hit since the company has not been able to pass on the rising costs of raw materials and packaging to consumers.

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