Nirmal Bang has upgraded its rating on United Spirits Limited (UNITDSPR) to ‘Buy,’ setting a new target price of ₹1,725, up from ₹1,505. The upgrade is based on several factors that could significantly boost the company’s topline and earnings in the near future.
Key Triggers Identified by Nirmal Bang:
- Favorable Regulatory Changes: Potential excise duty cuts in Karnataka, the largest market for spirits, and the possible resumption of sales in Andhra Pradesh under the new government could provide significant upside. Additionally, the India-UK Free Trade Agreement (FTA) may further boost volumes.
- Strong Demand Outlook: The Alcobev sector has shown robust consumer demand, which is expected to continue. United Spirits’ management anticipates faster growth in the second half of FY25, driven by stable excise duties and the ongoing trend of premiumization in the spirits market.
- Stable Input Costs: Contrary to earlier fears, inflationary pressures on Extra Neutral Alcohol (ENA) and other inputs have not materialized, leading to stable gross margins. The recent budget announcement excluding ENA from GST, thereby avoiding double taxation, also bodes well for the company’s cost structure.
- Premiumization and Strategic Investments: United Spirits’ focus on premium products is paying off, with 87% of value sales and 82% of volume sales in FY24 coming from the Prestige & Above (P&A) segment. The company has also made strategic investments in emerging brands, such as Nao Spirits and Inspired Hospitality, which are expected to drive long-term growth.
In its report, the company states that there is no change in their EPS forecasts or target multiple, which remains at 60x—a 5% premium to the 5-year average and a 25% discount to the 10-year average PE. However, they are adjusting from the June 2026 EPS estimate to September 2026. Additionally, they are assigning a value of ₹140 per share to the Royal Challengers Bangalore (RCB) cricket franchise, estimating the business at approximately ₹100 billion.
The company remains optimistic about the structural growth potential of United Spirits Limited (UNITDSPR), driven by ongoing premiumization in the spirits market, with around 87-88% of the company’s sales now coming from the Prestige & Above (P&A) category. Recent innovations, entries into new categories like tequila, and investments in local brands and start-ups are also expected to boost long-term growth.
The Alcobev sector offers better near-term visibility on strong earnings growth compared to most other consumption sectors, especially considering the likelihood of a K-shaped recovery continuing for the next couple of years rather than a broad-based revival. The company expects an earnings CAGR of approximately 16% over the next three years, slightly higher than the 14% CAGR achieved in the past five years. They have derived a new target price (TP) of ₹1,725, up from ₹1,505, and have upgraded UNITDSPR to a ‘Buy’ rating, anticipating a potential upside of 21%