In a postal ballot document shared with exchanges, UNSP has given detailed contours of its proposed arrangement to manufacture, import and distribute Diageo brands in India. Following are the key highlights from the same and our interaction with the management.

1. Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar (Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
28 October 2014
Update | Sector: Consumer
United Spirits
CMP: INR2,677 TP: INR3,000 Buy
UNSP to operate Diageo brands in India
Enters into four key agreements with Diageo entities
In a postal ballot document shared with exchanges, UNSP has given detailed contours of its proposed arrangement to manufacture, import and distribute Diageo brands in India. Following are the key highlights from the same and our interaction with the management.
Four agreements between UNSP and Diageo entities
1. License to manufacture and sell Bottled in India (BII bulk) brands of Diageo Brands BV (VAT 69, Haig Gold Label, and Black & White): Under this, UNSP will purchase and import bulk spirit from Diageo Brands BV at mutually agreed prices.
2. License to manufacture and sell Bottled in India (manufactured in India) brands of Diageo North America Inc and Diageo Scotland Limited (Smirnoff and related variants, Captain Morgan Rum): Under this, UNSP will manufacture these brands by procuring raw materials from entities other than the brand owners. It will pay royalty to Diageo on a quarterly basis. Royalty will consist of two components – (i) a fixed component, which will be fixed at the commencement of the agreement, and (ii) a variable component, which will be set at the start of each year. The amount of royalty will be calculated as a percentage of the net sales for a particular year and will be mutually agreed between UNSP and the brand owners from time to time.
3. Agreement to distribute Bottled in Origin (BIO) products in India: Under this, UNSP will exclusively import and distribute Diageo brands (Johnnie Walker and related variants, J&B, Ciroc, Baileys, Lagavulin, and Talisker). UNSP will purchase these products from Diageo entities at mutually agreed prices and will undertake, at its own expense, all marketing/promotion activities necessary to distribute these brands.
4. Cost sharing agreement with Diageo India: This pertains to proportionate sharing by UNSP and Diageo India (DIPL) of the expenses incurred by DIPL during the transition period for advertising, marketing and promotion activities for Diageo-owned brands.
The first three agreements are for an indefinite period while timelines for the cost sharing agreement will differ from state to state and will extend from January 2015 to July 2015 or later.
BSE Sensex
S&P CNX
26,881
8,028
Stock Info
Bloomberg
UNSP IN
Equity Shares (m)
145.3
52-Week Range (INR)
2,941/2,226
1, 6, 12 Rel. Per (%)
11/-23/-26
M.Cap. (INR b)
389.0
M.Cap. (USD b)
6.3
Financial Snapshot (INR Million)
Y/E Mar
2015E
2016E
2017E
Net Sales
85,078
96,268
110,452
EBITDA
8,578
11,472
14,378
Adj PAT
3,583
6,397
9,034
EPS (INR)
24.7
44.0
62.2
Growth (%)
-375.2
78.5
41.2
BV/Sh.(INR)
234.7
278.7
338.5
RoE (%)
10.5
15.8
18.4
RoCE (%)
13.2
17.0
20.2
P/E (x)
108.6
60.8
43.1
P/BV (x)
11.4
9.6
7.9
Shareholding pattern (%)
As on Jun-14 Mar-14 Jun-13
Promoter 33.0 38.6 21.1
DII 0.1 4.0 6.0
FII 11.5 40.7 42.4
Others 55.4 16.7 30.5
Note: FII Includes depository receipts
Stock Performance (1-year)
2,0002,4002,8003,2003,600 Oct-13Jan-14Apr-14Jul-14Oct-14 United SpiritsSensex -Rebased
Investors are advised to refer through disclosures made at the end of the Research Report.

2. United Spirits
28 October 2014 2
Takeaways from management interaction
 Subsequent to the execution of these agreements, Diageo India will remain a legal entity while all operating activities (manufacturing, distribution, etc) currently undertaken by Diageo will be transferred to UNSP.
 UNSP is not assuming any of Diageo India’s assets/liabilities on its books, but only undertaking licensing for manufacturing/importing and distributing Diageo brands for a fee.
 UNSP expects 10% EBIT contribution from these additional revenues (Diageo India did a turnover of ~INR7b in FY14).
 UNSP will not be making any additional investments except for the required working capital to conduct the additional business.
 Diageo India does not have any owned manufacturing facility. UNSP will manufacture some of the Diageo brands in its facility and for the rest of the brands, it will continue with the existing arrangement of leased facilities.
Management believes transactions are value accretive: According to the management, “the agreements are value accretive for the company and are consistent with the company’s strategy to build and extend its competitive advantage in the ‘Premium and Above’ market segments”. It believes UNSP has developed into an institution with efficient systems, competent management practices and stringent operational control processes and the agreements are a part of the company’s three year strategic plan to deliver the long term vision of becoming “the most admired, respected and best performing consumer goods company in India”.
Big opportunity unfolding; maintain Buy
We believe the current agreements address the overarching concern voiced by some investors pertaining to Diageo operating two subsidiaries in India. Notwithstanding near-term challenges – moderation in industry growth, inflation in RM costs, slower than expected pace of margin expansion, etc – the long-term IMFL opportunity in India is solid. With Diageo gaining majority control and bulk of balance sheet clean-up behind, we expect underlying P&L and margin improvement to commence.
In our recently released note (“Paradigm Shift: Beginning of a new era” dated 22 September 2014) we outlined our detailed bullish thesis on UNSP. We also highlighted the case study of six consumer companies with dominant market positioning and quality management generating 25%+ CAGR over the past decade. With new management and better controls in place, we believe UNSP offers a unique multi-year play on the IMFL growth story. Buy with a DCF-based target price of INR3,000. Regulation and taxation, policy-related risks, and spike in raw material cost constitute key risks.
Please refer to our note “Paradigm Shift: Beginning of a new era” dated 22 September

3. United Spirits
28 October 2014 3
Financials and valuation
Income statement (INR Million)
Y/E Mar
2012
2013
2014
2015E
2016E
2017E
Net Sales
86,372
98,524
99,116
85,078
96,268
110,452
Change (%)
25.9
14.1
0.6
-14.2
13.2
14.7
EBITDA
10,603
10,037
8,711
8,578
11,472
14,378
EBITDA Margin (%)
11.5
9.6
8.3
9.4
11.2
12.2
Depreciation
1,474
1,784
2,026
1,472
1,642
1,809
EBIT
9,129
8,253
6,685
7,106
9,830
12,570
Interest
7,773
8,861
12,771
4,508
3,306
2,413
Other Income
2,106
1,446
7,550
2,750
3,025
3,328
PBT
3,461
838
1,463
5,348
9,548
13,484
Tax
1,481
1,781
2,762
1,765
3,151
4,450
Tax Rate (%)
42.8
212.4
188.8
33.0
33.0
33.0
Reported PAT
1,872
-1,050
-44,888
3,583
6,397
9,034
Adjusted PAT
1,988
-904
-1,302
3,583
6,397
9,034
Change (%)
-42.6
-145.5
44.1
-375.2
78.5
41.2
Min. Int. & Assoc. Share
7
38
-3
0
0
0
Adj Cons PAT
1,988
-904
-1,302
3,583
6,397
9,034
Balance sheet (INR Million)
Y/E Mar
2012
2013
2014
2015E
2016E
2017E
Share Capital
1,259
1,259
1,453
1,453
1,453
1,453
Reserves
45,359
46,614
28,869
32,450
38,844
47,536
Net Worth
46,764
47,984
30,330
34,103
40,497
49,190
Debt
75,231
72,517
81,563
41,563
36,063
30,063
Deferred Tax
-592
-589
-967
-879
-721
-499
Total Capital Employed
121,403
119,911
110,927
74,787
75,839
78,754
Gross Fixed Assets
29,620
31,026
35,317
31,317
35,317
39,317
Less: Acc Depreciation
-9,432
-10,721
-13,413
-14,884
-16,527
-18,335
Net Fixed Assets
20,188
20,305
21,905
16,433
18,791
20,982
Capital WIP
1,080
1,312
1,097
500
500
500
Investments
2,358
2,179
2,380
2,380
2,380
2,380
Current Assets
75,729
82,059
87,129
71,160
75,296
83,635
Inventory
27,548
25,112
29,351
23,732
25,357
28,980
Debtors
17,737
24,170
22,652
18,736
21,131
25,116
Cash & Bank
3,632
2,816
7,047
5,561
4,860
3,778
Loans & Adv, Others
26,812
29,960
28,078
23,132
23,948
25,760
Curr Liabs & Provns
36,570
44,330
36,683
35,785
41,227
48,841
Curr. Liabilities
34,119
40,517
30,542
29,228
34,936
41,860
Provisions
2,451
3,812
6,141
6,557
6,291
6,981
Net Current Assets
39,159
37,729
50,447
35,375
34,070
34,793
Total Assets
121,403
119,911
110,927
74,788
75,839
78,754
E: MOSL Estimates

4. United Spirits
28 October 2014 4
Financials and valuation
Ratios
Y/E Mar
2012
2013
2014
2015E
2016E
2017E
Basic (INR)
EPS
16.2
-7.4
-9.0
24.7
44.0
62.2
Cash EPS
28.3
7.2
5.0
34.8
55.3
74.6
Book Value
382.0
392.0
208.7
234.7
278.7
338.5
DPS
2.5
2.5
2.5
0.0
0.0
2.0
Payout (incl. Div. Tax.)
15.4
-33.9
-27.9
0.0
0.0
3.2
Valuation(x)
P/E
164.9
-362.6
-298.8
108.6
60.8
43.1
Cash P/E
94.7
372.3
537.3
77.0
48.4
35.9
Price / Book Value
7.0
6.8
12.8
11.4
9.6
7.9
EV/Sales
4.6
4.0
4.1
4.3
3.7
3.2
EV/EBITDA
39.6
41.8
49.2
45.2
33.3
26.2
Dividend Yield (%)
0.1
0.1
0.1
0.0
0.0
0.1
Profitability Ratios (%)
RoE
4.3
-1.9
-4.3
10.5
15.8
18.4
RoCE
9.3
8.1
12.8
13.2
17.0
20.2
Turnover Ratios (%)
Asset Turnover (x)
0.8
0.9
0.9
1.2
1.4
1.5
Debtors (No. of Days)
70.5
84.7
78.7
75.0
75.0
78.0
Inventory (No. of Days)
109.5
88.0
102.0
95.0
90.0
90.0
Creditors (No. of Days)
75.4
60.7
54.1
60.7
67.5
74.1
Leverage Ratios (%)
Net Debt/Equity (x)
1.6
1.5
2.7
1.2
0.9
0.6
Cash flow statement (INR Million)
Y/E Mar
2012
2013
2014
2015E
2016E
2017E
OP/(Loss) before Tax
3,461
838
1,463
5,348
9,548
13,484
Depreciation
0
0
0
0
0
0
Others
-2,106
-1,446
-7,550
-2,750
-3,025
-3,328
Interest
7,773
8,861
12,771
4,508
3,306
2,413
Direct Taxes Paid
-1,481
-1,781
-2,762
-1,765
-3,151
-4,450
(Inc)/Dec in Wkg Cap
-156
614
-8,487
13,585
605
-1,806
CF from Op. Activity
7,384
6,978
-48,153
18,926
7,284
6,314
(Inc)/Dec in FA & CWIP
-16,736
-1,406
19,211
19,597
-4,000
-4,000
(Pur)/Sale of Invt
-814
179
-201
0
0
0
Others
-448
0
-1
1
0
0
CF from Inv. Activity
-17,998
-1,227
19,009
19,597
-4,000
-4,000
Inc/(Dec) in Net Worth
3,303
2,611
27,278
189
-3
-3
Inc / (Dec) in Debt
8,124
-2,714
9,047
-40,000
-5,500
-6,000
Divd Paid (incl Tax)
-379
-379
-41
0
0
-339
CF from Fin. Activity
7,876
-6,568
33,374
-40,010
-3,985
-3,396
Inc/(Dec) in Cash
-2,738
-816
4,231
-1,487
-701
-1,082
Add: Opening Balance
6,370
3,632
2,816
7,047
5,561
4,860
Closing Balance
3,632
2,816
7,047
5,561
4,860
3,778
E: MOSL Estimates

5. United Spirits
28 October 2014 5
N O T E S

6. United Spirits
28 October 2014 6
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Disclosure of Interest Statement UNITED SPIRITS LTD
 Analyst ownership of the stock No
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