United Spirits shares rise 4% as gross margins above estimates in Q2; Jefferies sees up to 27% upside

The brokerage said the company's performance in the premium and above (P&A) segment remained weak compared with peers, with volumes declining around 1 percent as momentum in Smirnoff and J&B was offset by headwinds in Maharashtra. Regular segment volumes fell 30 percent. However, an improved product mix and higher productivity helped expand gross margin by 88 basis points year-on-year to 48 percent.

Higher advertising and promotion (A&P) expenditure, which rose 57 percent, weighed on profitability, with EBITDA margin declining 146 basis points to 19.7 percent. EBITDA and profit after tax fell 4 percent and 10 percent, respectively. Jefferies noted that operating cash flow and free cash flow generation remained strong at Rs 1,100 crore and Rs 1,000 crore, respectively, in the first half of the fiscal year.

CLSA, meanwhile, maintained a 'hold' rating on the stock with a target price of Rs 1,303 per share. The brokerage said P&A volumes declined 1.6 percent year-on-year in the September quarter, or 1.2 percent after reclassification of McDowell's No. 1 brandy. This was below its expectation of 0.5 percent growth. Volumes in the popular category also declined more sharply than estimated. Net sales grew 2.8 percent year-on-year, against CLSA's estimate of 5 percent and the consensus estimate of 5.6 percent.

Gross margin expanded by 88 basis points year-on-year, exceeding CLSA's estimate by 157 basis points and the consensus estimate by 173 basis points. However, EBITDA margin declined 146 basis points as advertising and promotion expenditure remained elevated. Diageo-controlled United Spirits reported a 7.75 percent decline in consolidated net profit to Rs 428 crore in the September quarter of FY27, compared with Rs 464 crore in the corresponding period last fiscal, according to an exchange filing. Revenue from operations fell 2.56 percent to Rs 7,014 crore in the quarter under review, from Rs 7,199 crore in the year-ago period.