Diageo is taking over management control of USL, the market leader in Indian spirits. Expect new management to focus on premiumisation and lowering working capital, which should drive margin expansion, reduce leverage and improve return ratios. USL has seen a sharp deterioration in profitability in the past five years.
Credit Suisee in a report said
...see favourable risk reward as the downside is limited by Diageo’s need to acquire further stake while the upside could come from quicker-than-expected margin gains and the optionality of further equity infusion and sale of non-core assets. United Spirits (USL) will likely undergo a significant transformation as management control moves to Diageo in FY14. Over the next six-eight years, we expect USL’s EBITDA margins to move up from 13%-14% to 20%, while balance sheet improvements alone should drive a 60% earnings CAGR over FY12-15
United Spirits Stock Price Target by FIIsWhile the stock has moved up sharply in 2012 (after a sharp fall in 2011), which prices in the balance sheet improvement, we see potential for the stock to double over four-five years as margins and return ratios gradually move towards steady state.
United Spirits is expected to Report an EPS of Rs 50 For FY 2014 and has a Target Price of Rs 2,400
