United Spirits shares at record high! Can the momentum sustain?

Shares of United Spirits Limited (USL) rose 7.75 per cent to hit an all-time high of Rs 963 on the Bombay Stock Exchange (BSE) in an otherwise weak market today. The stock has been gaining after posting a healthy set of numbers for the quarter ended September 2021.
 
USL on Wednesday reported a 113 per cent rise in its standalone net profit to Rs 273.4 crore in Q2 FY22 from Rs 128.4 crore in Q2 FY21. USL’s PAT margin stood 11.2 per cent in the said period.
 
Net sales jumped 14 per cent year-on-year (YoY) to Rs 2,447 crore in Q2 FY22, reflecting a strong quarter.
 
The stock ended 6.09 per cent higher at Rs 948.15 against the previous close of Rs 893.70 on BSE. Market cap of the firm rose to Rs 68,896.25 crore. The shares stand higher than 5-day, 20-day, 50-day, 100-day, and 200-day moving averages.
 
According to Marwadi Financial Services, the company’s focus on premiumisation, de-focussing of popular category brands, debt reduction, digital push, cost optimization, better product mix and supply chain management are well reflected in the higher margins and superior growth rate of the company.
 
“The company activated 2,000 outlets for Scotch over the last one year. Due to this initiative, it expects a significant part of this demand to sustain once overseas travel returns to normalcy. We initiate our coverage on United Spirits with a ‘BUY’ rating with a target price of Rs 995 per share,” it added.
 
“The outlook appears promising with: a) on-trade channel returning to normalcy; b) increased occasions for home indulgence; c) the ongoing strategic review of half of the popular portfolio to be concluded by Dec’21, which would offer further primacy to the Prestige & Above (P&A) segment; d) potential success in the P&A segment in terms of growth and margin (24-25 per cent EBITDA margin already demonstrated by Pernod Ricard in India); e) strong focus on double-digit topline growth under the new CEO, even as the margin target was maintained at the earlier stated mid-to-high teen level; and e) faster-than-expected deleveraging,” Motilal Oswal said in a research report.
 
The research and broking firm has a ‘Buy’ rating with a target price of Rs 1,025 per share. While its valuations (~58x FY23E EPS) are not cheap, they are at a sharp discount to its discretionary peer range (in our coverage) of 70-80x FY23E EPS, it said.
 
Commenting on the results, Hina Nagarajan, CEO, USL said, “We have delivered a strong quarter and the performance underpins improved momentum across the business. The business has emerged stronger from the pandemic and our people have responded with pace, agility, and creativity to seize the opportunities in the marketplace.”
 
“We are focused on sustaining the growth momentum while working on revenue management and productivity initiatives across the value chain to counter the rising inflation trend being experienced while exiting the quarter,” he added.