Expect cost inflation of 4-5% to continue – Diageo India (United Spirits)

Update on the Indian Equity Market:

On Tuesday, Nifty closed higher at 17,576 (+1.4%). METAL (+4.5%), PHARMA (+2.3%), and HEALTHCARE (+2.2%) were the top gainers while AUTO (-0.8%), OIL & GAS (-0.7%), and PSU BANK (-0.6%) were top losing sectors.

The top gainers were TATASTEEL (+7.5%), SUNPHARMA (+6.9%), and INDUSINDBK (+6.1%) while BPCL (-4.5%), IOC (-2.8%), and TATAMOTORS (-2.6%) were the top losers.

Edited excerpts of an interview with Ms. Hina Nagarajan, Managing Director, and Chief Executive Officer, Diageo, India with CNBC TV18 on 31^st January 2022:

• The company’s management is focused on sustaining the present demand momentum, and it is dedicated to providing a sustained double-digit growth rate in terms of volume.
• The management expects cost inflation of 4-5 percent to continue in the future. The company experienced 2.5 percent portfolio inflation, which was offset by a favorable product mix, and operational savings. The ethanol blending pricing strategy and grain price rises have had an influence on extra neutral alcohol (ENA), which was previously flat.
• The company is in the process of submitting price raise proposals to state governments in order to combat inflation.
• Through the value chain, revenue management levers of the mix, and trade efficiency, the organization is focusing on productivity.
• On the EBITDA margin front, which is now in the 16-17 percent range, management is sticking to its mid to upper teen guidance. In the long run, the company aims to achieve and maintain high teen margins.
• The company is confident in its ability to attain mid-high teen margins and is unwilling to accept any levels below those specified.
• In terms of competition, the company is doing well in their super-premium portfolio, but there is some aggressiveness from their competitors. However, management claims that the company is well-positioned to take advantage of the premiumization trend and that the portfolio’s innovation and renovations will drive growth for the category.
• Consumers have reacted well to their innovations and renovations in the signature and Blackdog categories, and the launch of Royal Challenger American Pride, an American bourbon-based whiskey, has received excellent feedback.
• The scotch category, which accounts for 20 to 24 percent of overall sales, is rapidly expanding. Scotch is expected to be a major growth driver in the future.

Asset Multiplier Comments

• We expect improving regulatory environment, investment in ad spends, adoption of home delivery trend will help bring in topline growth.
• Improved product mix due to premiumization and cost saving efforts will help achieve company’s EBITDAM guidance of mid to high teens.

Consensus Estimate (Source: market screener website)

•  The closing price of UNSP was ₹ 884 /- as of 1-February-2022. It traded at 68x/ 55x/ 44x the consensus earnings estimates of ₹ 13/ 16/ 20 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 954/- implies a P/E Multiple of 48x on FY24E EPS estimate of ₹ 20/-.

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