United Spirits shares soar

Mumbai, Nov. 12: Shares of United Spirits Limited (USL) today soared nearly 35 per cent in a euphoric reaction to Diageo Plc striking a deal late last week to acquire a controlling 53.4 per cent stake in the largest spirits producer in the country.

The surge was arguably the biggest single-day gain that the United Spirits counter had seen in recent history, and it cranked up the company's market valuation by a third.

On the BSE, the share finished with a gain of 34.93 per cent, or Rs 474.90, at Rs 1,834.60. During intra-day trades, the stock zoomed 38 per cent to more than a four-and-a-half year high of Rs 1,877.15.

Market circles said the surge was fuelled by a strong feeling in the market that Diageo's entry would change the fortunes of the company.

In fact, the deal invited dramatic praise from the brokerage community. "The Diageo deal is a game changer for United Spirits,'' screamed a report from Jigar Shah, senior vice-president and head of research at Kimeng Securities India Pvt Ltd. According to Shah, the equity infusion of Rs 3,300 crore will pare the company's debt and increase its net profit 42 per cent to Rs 1,050 crore for 2012-13.

"For the medium term, upside to United Spirits will emerge from Diageo's premium global brands and export opportunity. With Diageo as its promoter, investor concern on corporate governance and debt will disappear, triggering a re-rating of the stock," Shah added as he upgraded the company to buy from hold.

Foreign brokerage CLSA shared the same view. In a note, Vivek Maheshwari and Bhavesh Pravin Shah said the acquisition would bring down the debt of United Sprits from over Rs 7,000 crore to around Rs 4,500 crore, apart from significantly boosting earnings and bringing financial discipline.

The analysts are of the view that upsides to the company from the deal come from various fronts. While it would reduce the group-related overhang (related to share pledges and Kingfisher related issues), the possible sale of certain assets such as Whyte and Mackay could further help in deleveraging the balance sheet and improve earnings.