Will United Spirits stock get high anytime soon?

Market


In recent quarters, elevated raw material costs have kept the spirits of investors in the United Spirits Ltd stock low. Shares of the liquor-maker ended 2022 down 2%, against 3% returns of the Nifty 500 index.

Increased costs of key inputs such as glass and extra neutral alcohol (ENA) have hampered the company’s operating performance. These two components are estimated to contribute around 60% to the company’s cost of goods sold.

Under pressure

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Under pressure

Unfortunately, as things stand, there isn’t much for investors to cheer on this front.

“We may see some respite on packaging cost due to easing of crude and natural gas prices, which may flow to Ebitda margins, but this may not benefit significantly in Q3,“ Ajay Thakur, research analyst, Anand Rathi Share and Stock Brokers Ltd, said.

In this backdrop, the trajectory in price increases become crucial for the company’s earnings performance. However, in this case, maximum retail price hikes are contingent on government approvals, so gross margin pressure may persist for a few quarters. In Q3FY23, the company’s gross margins may contract by around 350 basis points (bps) and 250-450bps year-on-year in 3QFY23 and FY23, with further downside risks, Ambit Capital said in a report.

In its Q2FY23 earnings call, the company’s management retained its mid to high-teen margin guidance for the medium-term. However, in the next few quarters, it expects margins to be at the lower end of this target range.

Apart from movement in raw material costs, the rollback of Delhi’s excise policy could also weigh on the company’s near-term earnings performance, cautioned analysts.

On the positive side, urban centric demand in the premium liquor segment continues to be healthy. Also, after the covid lull, demand is likely to get a boost from the weddings season. That said, due to high overall inflation hurting the purchasing power of consumers, demand for its lower Prestige segment has not been very robust lately.

In an attempt to sharpen its focus on the Prestige & Above segment, United Spirits sold its business undertaking associated with 32 brands in the Popular segments to Inbrew Beverages Pvt. Ltd. It also gave the franchise of select Popular brands to Inbrew for five years. While this move is likely to yield results over a period of time, lower royalty in the initial part of the agreement is unlikely to aid operating margins on an immediate basis, said analysts at Nirmal Bang Institutional Equities in a report on 27 December.


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