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Diageo deal sends United Spirits shares to 4.5 year-high

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United Spirits shares surged nearly 40 per cent to a more than 4-1/2 year high on Monday after several brokerages upgraded the stock post the $2.1 billion deal with U.K. based Diageo plc. Investors bet the deal to sell a majority stake to Diageo would boost the Indian liquor maker's profitability and reduce its debt levels.

United Spirits shares closed 35 per cent higher at Rs 1,834.60, after earlier hitting a session high at Rs 1,877.15, its highest since April 2008.

On Friday, Diageo agreed to buy a 53.4 per cent stake in United Spirits controlled by Vijay Mallya by first acquiring 27.4 per cent from its founders at Rs 1,440 per share, and then launching a mandatory offer for the remainder.

Varun Lochab of Religare Capital Markets said the stock is likely to witness continuous accumulation from long only names.

Religare has a "buy" rating on United Spirits with a target of Rs 2,100.

"So far long only funds were staying away from the stock because of promoter group concerns, but now those concerns have been addressed," Mr Lochab said.

"Diageo PLC taking stake is a significant positive for minority shareholders... Upgrade FY14/FY15 earnings by ~50 per cent each and revised Septeber’13 target price of Rs 2,100 per share," Religare said.

JPMorgan upgraded the stock to "overweight" with a target of Rs 1,645 saying Diageo’s move to acquire controlling interest in United Spirits (USL) is a significant positive.

Morgan Stanley also raised its rating on United Spirits to "overweight" from "equal-weight", saying the $2.1 billion deal priced the company "significantly higher" than its base case value.

"USL is now a stock for every portfolio, we believe," Morgan Stanley analysts wrote in a note on Monday, while also raising its price target to Rs 1,905 from Rs 1,000.

CLSA said the downside in USL is Rs 1,440, and investors have nothing to lose. United Spirits can now become a part of most India portfolios, it added.

IDFC said USL is set to start a new phase of re-rating with Diageo’s acquisition.

Nomura has a "neutral" call on the stock with a target of Rs.675. Debt will come down substantially and that will lead to significant reduction in interest costs, Nomura said.


(With inputs from Reuters)

Story first published on: November 12, 2012 11:32 (IST)

Tags: Diageo, United Spirits

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