Stock Review: United Spirits

The acquisition of Pioneer Distilleries will help the company increase its primary spirit distillation capacity

After gaining access to alarge brand portfolio through acquisition of Whyte & Mackay and Shaw Wallace, United Spirits seems to be focusing on ramping up its manufacturing capacity. By buying Pioneer Distilleries, it will be able to increase its in-house capacity of primary spirit distillation by 22.5 per cent, adding to the supplyside security.

United Spirits has been working aggressively towards augmenting its primary distillation and bottling capacities. It has planned a capex of `1,100 crore over the next three years. It aims to manage 35 per cent of the extra neutral alcohol (ENA) requirements through in-house production by FY13, as compared to the current level of 11 per cent. ENA is the primary ingredient for Indianmade foreign liquor. United Spirits wants to increase control and improve profitability by producing more ENA in-house. Pioneer can produce 160 kilolitre per day ENA and United Spirits will gain access to this output.

United Spirits has bought 54.7 per cent in Pioneer at `101 per share. This is almost 40 per cent higher than Pioneer's stock price on Tuesday, which was locked five per cent higher at the upper circuit. United Spirits will also have to make an open offer for an additional 20 per cent stake.

United Spirits will have to shell out `100 crore for the 74.7 per cent stake, which is not a matter of concern despite high debt, reckon analysts. The company is wellplaced as far as debt repayment and cash flows are concerned, say analysts at Prabhudas Lilladher. It has repayment obligations of £35 million each for FY11 and FY12, of which the FY11 obligations have already been deposited in an escrow account. The company has 8.3 million treasury shares amounting to `1,260 crore and had a net debt of `5,200 crore in June.

Analysts remain positive on the company, as they expect multiple triggers going forward. With retail licencing issues in Andhra Pradesh sorted out, volumes grew 20 per cent in July. Analysts project 12 per cent volume growth in FY11. There has been a price hike of about eight per cent in north Indian states, and another is expected in Tamil Nadu. Realisations are expected to improve five per cent in FY11E (two-three per cent from price hikes and the remaining from a change in product mix). Moreover, Whyte & Mackay is expected to give the company access to a global consumer base and better profitability. At a P/E multiple of 40 times estimated 2010-11 earnings, the stock is fairly valued.