CLSA upgrades United Spirits to 'buy'; sees 40% upside in 1 year

NEW DELHI: Even though United Spirits reported loss in its quarterly results of iQFY15, the Asia focused broker, CLSA, today upgraded United Spirits to 'buy' from 'underperform' citing fiscal discipline to aide recovery.

CLSA expects margin to recover going ahead and earnings growth trajectory to improve post weak FY15. Along with change in rating, CLSA also raised its 12-month target price to Rs 3560, which represents an upside of nearly 40 per cent from Monday's closing price of Rs 2553.20.

United Spirits Ltd (USL) has started the process of balance sheet deleveraging as the board has accorded an in-principle approval to monetise surplus assets.

While no details have been provided, we note that USL has investments in cricket IPL, a stake in United Breweries which could aggregate to over Rs10bn based on our estimates, CLSA said in a note.

After the sale of Tamil Nadu unit (Rs1.25bn) which is on-going, the board has approved sale of two more units (in Andhra Pradesh and Kerala) which should help in working capital reduction, added the report.

USL reported a 53 per cent YoY drop in Ebitda to Rs 130 crore with margins at 6.8 per cent. Interest costs were down 7 per cent QoQ to Rs 150 crore.

CLSA is of the view that while the volatility may continue near-term, but the margins are close to bottoming out and expect a gradual recovery in the coming quarters. Write-off however may continue but would have no cashflow impact and hence, not a big concern.