Re-entry Into Andhra Pradesh And New Product Launches Will Strengthen Future Prospects

Key Takeaways

• Re-entry in Andhra Pradesh and innovative launches like the X Series are crucial for top-line growth and premiumization efforts.
  
• Productivity improvements across the value chain are poised to enhance net margins and overall earnings.
  
• Challenging consumer environment and structural inflation may hinder revenue growth and suppress margins amid sales disruptions and rising operating expenses.

Catalysts

Engages in the manufacture, sale, and distribution of alcoholic beverages and other allied spirits in India and internationally.

• Opening of the Andhra Pradesh market after a five-year hiatus is expected to boost revenue growth, serving as a catalyst for future top-line expansion.
  
• The launch and scaling of new innovations and renovations such as the X Series, Don Julio, and Godawan are anticipated to drive revenue growth and premiumization.
  
• Increased focus on premiumization, specifically within the P&A segment, is expected to contribute to double-digit revenue growth aspirations and enhance net margins through improved price mix.
  
• Expectations of a buoyant festive season aligned with strong commercial plans and innovation launches are projected to enhance revenue in the short term, supporting double-digit growth targets.
  
• Costs and margin improvements are expected due to ongoing productivity initiatives across the value chain, thus potentially increasing net margins and overall earnings.

United Spirits Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Spirits's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.4% today to 14.5% in 3 years time.
• Analysts expect earnings to reach ₹23.2 billion (and earnings per share of ₹29.48) by about December 2027, up from ₹14.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹19.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.2x on those 2027 earnings, down from 79.1x today. This future PE is greater than the current PE for the IN Beverage industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 3.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

United Spirits Future Earnings Per Share Growth

Risks

• The consumer environment remains challenging with a slowdown particularly in the premium and luxury segments, which could impact future revenues.
  
• Ongoing disruptions in key northern states may continue to negatively affect sales growth and revenue.
  
• Route-to-market challenges and macroeconomic factors such as inflation can affect demand, potentially harming revenue and net margins.
  
• The growth in operating expenses during the early festive season could pressure profit margins if the anticipated sales uplift does not materialize.
  
• While commodity inflation remains benign, structural inflation in essential raw materials could impact cost of goods sold and suppress net margins.

Valuation

• The analysts have a consensus price target of ₹1529.55 for United Spirits based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1720.0, and the most bearish reporting a price target of just ₹998.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹159.9 billion, earnings will come to ₹23.2 billion, and it would be trading on a PE ratio of 73.2x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹1579.6, the analyst's price target of ₹1529.55 is 3.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.