United Spirits, which is still figuring its way to come out of the disruption created by general elections, with its margins under pressure, is staring at another tough period as its nearest competitor Pernod Ricard, the maker of Chivas Regal, recently reduced product prices, adding to the already struggling USL's challenges.
USL's margins have been under pressure due to higher raw material prices. The impact was visible in Q1FY20, with the gross margins falling to 47 percent compared to 50 percent in the same period last year.
Due to high government regulations and compliances, it is difficult for companies to take price hikes to offset higher costs.
Emkay and IIFL, in their recently completed channel checks, concluded that Pernod Ricard India has reduced the price of Royal Stag whisky in Maharashtra by 11 percent from Rs 190 to Rs 170 for 180ml despite having higher taxes.
The price cut is only for the 180ml packs, a direct competitor to USL’s McDowell’s No.1 whisky. USL’S McDowell's whisky is currently priced at Rs 150 for 180ml.
Maharashtra is one of the key markets for USL and volumes of McDowell's contributes 10 percent to USL’s Prestige and above segment. Also, ad spends were benign in this quarter due to weak demand and attempt to mitigate input cost impact.
Liquor ban in Andhra Pradesh and sale through only government channels in Telangana also remain as a concern.
What Brokerages Say
Brokerages expect moderate sales growth in Q2FY20 due to weak demand. Higher raw material prices and lower volumes will have an impact on EBITDA.
In Q1FY20, USL reported volume growth of 8 percent in Prestige and above segment. EBITDA was at 17.8 percent, improved from 10.1 percent on back of lower employee cost, marketing expenses and other expenditures.
“Valuations at 45x FY21E EPS appear rich given downside risks to earnings from rising competition, higher input prices and slower volume growth, said Emkay. It has a 'hold' rating with a target price of Rs 650.
“Our industry checks suggest QoQ weakness in alcohol demand in 2Q, given channel disruptions in the Andhra Pradesh/Telangana markets, liquidity issues in North India and one-off disruptions in scotch imports," IIFL said.
“Competitive intensity remains elevated reflected in Pernod's recent price cut in Royal Stag in Maharashtra," it added. IIFL has a reduce rating on the stock.
On Thursday, the stock fell 3.4 percent while it has fallen 7 percent in this month.