While the enterprise value of 595 million pounds may seem expensive for the acquisition of Whyte & Mackay by United Spirits, the fact remains that scotch is in short supply globally and there aren't too many companies up for sale.
So an EV/EBITDA multiple of around 21 times for FY06 is probably justified though it may put a strain on the United Spirits balance sheet in the near term.
While W&M has not been in good shape financially -- the company reported only a marginal profit before restructuring costs for FY06 -- it nonetheless had reasonably good operating margins, which can be improved.
The demand for scotch whisky continues to be strong in India as also China, which are two big markets that United Spirits plans to focus on, apart from Russia. The acquisition gives United Spirits some strong scotch whisky brands, the missing link in its liquor portfolio.
Scotch whisky prices are increasing at 10 per cent a year and are expected to remain firm. W&M's bulk scotch inventories of 115 million litres will help improve revenues.
As income levels and aspirations rise in India, the demand for Scotch whisky is estimated to be growing at 30 per cent annually higher than the overall demand for liquor at 12 per cent.
Scotch whisky is also used in blended whisky, and with consumers trading up to premium whisky, domestic demand is likely to remain strong. With some strong brands from the W&M portfolio, United Spirits will be able to gain significant presence in the domestic Scotch market.
For its blended whisky, United Spirits had imported 18 million litres of bulk scotch last year. W&M fits well here as 70 per cent of its revenues are estimated to be bulk sales.
If United Spirits can sell more of W&M's branded whisky, margins will improve. At Rs 895, the stock trades at 26 times estimated FY08 earnings and while the valuations are not cheap, the stock should be an outperformer.
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