Chart : Why Mallya's United Spirits stock can double

United Spirits, the liquor company of the well known Kingfisher promoter Vijay Mallya, continued its north ward journey as its stock rose by 3.4 percent to Rs 601 per share on the exchange today. This is after the stock has already gained 15 percent on the exchange in the last three trading sessions.

News about the company planning to raise $225 million through the foreign currency convertible bonds (FCCB) route set the pace for the upward movement in the stock. According to a report in the Business Standard, the company plans to complete the process before the end of April 2012.

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The money raised is expected to help the company reduce its humongous debt . The company’s management told BS that if they raise $175 million , $100 million (Rs500 crore) of that would be used to pay down a part of the their Rs 7,700 crore debt while if they raise $225 million, around $ 150 million (apprx Rs750 crore) would be used to restructure debt.

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A quick back end calculation shows that if the company uses $150 million (Rs 750 crore), then it’s debt would be substantial reduced and this would give a tremendous boost to its bottomline as the current interest cost eats away 48 percent of the company’s operating profit.

Kotak Securities is bullish on the stock with a price target of Rs 900 per share vis its current price of Rs 600 per share as it believes that its current price captures in all the negatives. (The stock is trading at a ten year low valuation)

For the nine months ended December 2011, the company’s financial performance was clearly disappointing as it was marred due to three factors- sales disruption in Tamil Nadu due to the government policy, steep excise increase in Maharashtra and West Bengal which impacted volumes and higher advertising spend due to new launches like Signature Premier, Vladivar Vodka and White Mischief Vodka. No wonder, the company posted a muted 2.2 percent growth in net profit to Rs332.76 crore on top of a 19 percent jump in sales to Rs 5,680 crore.

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Kotak expects the company’s profits to increase by 17 percent and sales to rise by 10 percent for the financial year ended March 2013.