Analysts predict a big jump in the stock price of United Spirits following Vijay Mallya’s exit as chairman and non-executive director in of the company and from the boards of other group companies Royal Challengers Sports and Four Seasons Wines.

Respite from legal tangle The average target price of four brokerages, namely, JP Morgan, Motilal Oswal, Edelweiss Securities and IIFL works out to ₹3,659.

This implies an upside potential of 50 per cent from the current market price of ₹2,432.95.

Edelweiss has a sector outperformer rating on USL. “The deal will provide USL shareholders respite from any legal battle; it will also help the board focus on (its) core business. USL’s prestige and above segment clocked five quarter high volume growth of 15 per cent year-on-year in Q3FY16 reflecting premiumisation focus,” it said.

JP Morgan is overweight on USL. “This agreement brings closure to the concerns and uncertainty related to USL’s governance as well as ambiguity related to certain historical transactions. The relationship with banks will be strengthened as USL gets disassociated with Mallya who has been declared a wilful defaulter by certain banks,” it said. Besides, USL is a structural play on the Indian liquor space and has attractive long-term growth prospects led by favourable demographics, low per capita consumption and significant benefits from premiumisation. The company enjoys a strong portfolio of brands (supported further by Diageo’s brands), and a focused strategy toward profitability by the new management could lead to meaningful gains on the margin front (from current depressed levels), it added.

Motilal Oswal also welcomes the development as it believes it will provide visibility on non-core divestment. IIFL pointed out that termination of related-party transactions will reduce contingent liability by ₹190 crore and sale of 13 properties valued at over ₹290 crore will improve the balance sheet only marginally given company’s net debt of ₹3,900 crore.

The deal Besides exit from the group, Diageo’s agreement with Mallya includes a five-year global non-compete, non-interference and standstill arrangement, payment of $75 million over a five-year period ($40 million immediately, rest over five years in equal instalments) to Mallya and continuation of Smirnoff’s sponsorship of the Force India Formula 1 team of which Mallya is team principal and part-owner for the next five seasons (at a cost of $15 million a season), among others.

Why still down 9% However, the stock is still trading down 9 per cent despite the news. Chandan Taparia, Derivative Analyst at Anand Rathi, said the stock rallied in response to its reinduction in the futures & options segment from February 26 followed by profit-booking. The stock rose about 5 per cent since the news came out on February 7.

Related Topics