Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
United Breweries
G ood times ahead
�� Kingfisher: India’s No.1 beer; best exposure to rising disposable income
We initiate coverage of United Breweries (UBL), the maker of India’s most
popular beer— Kingfisher—with a Buy rating and a price target of Rs650.00. We
believe UBL provides one of the best exposures to rising disposable income and
changing social norms in India.
�� Changing dynamics are key triggers
We estimate the price elasticity of beer is 1.7x, based on the impact of changes in
price and volume in 2009, when tax increases resulted in sales fluctuations. In
April 2011, the government of Karnataka raised the tax on spirits while
maintaining tax on beer—the first time there were different tax rates on different
alcoholic beverages. We believe the lower tax rate for beer will be the catalyst for
growing consumption and, like Titan, UBL should benefit from rising consumption
in India.
�� Improving fundamentals
We expect UBL’s profitability to increase as its breweries achieve scale. UBL’s
revenue mix is improving, with increasing contributions from profitable states and
faster sales of premium products. We forecast a PAT CAGR of 52% for FY11-14.
We believe UBL deserves to trade at a premium to its peers, because of: 1) high
price elasticity; 2) its dominant market share (56%); and 3) Heineken and UB
Group’s complementary ownership.
�� Valuation: Buy rating and a price target of Rs650.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
12.4% and an interim growth rate of 14%. At our price target, the stock trades at
23.8x FY13E EV/EBITDA.
Investment Thesis
We initiate coverage of United Breweries (UBL) with a Buy rating and a price
target of Rs650.00. We believe UBL provides one of the best exposures to India’s
young population and their increasing incomes and changing social norms.
With a 56% share, UBL is the market leader in the beer category in India. The
company’s brand, Kingfisher, is the world’s #1 Indian beer brand. United
Spirits, a spirits manufacturer and a group company, strengthens UBL’s
distribution network as both spirits and beer are retailed through the same
distribution network.
With 1.7x price elasticity (our estimate), beer is sensitive to state level tax
increases. A few states in south India have liberalised retail beer licences
recently and this has led to an increase in the number of retail outlets that stock
beer. Further, in April 2011, the state government of Karnataka raised the tax on
spirits, while maintaining the tax on beer at the same level—the first time a state
government has imposed different tax rates on different alcoholic beverages.
Lower tax rates for beer will be a key catalyst for beer consumption in India, in
our view.
Heineken owns 38.7% of UBL—the fastest growing associate company within
the Heineken group. We believe Heineken helps UBL with its superior brewing,
marketing and logistics expertise; a good fit with UB Group, given the latter’s
capabilities.
We expect UBL to benefit from: its pricing power (because of its dominant
market share); the issuance of more licences in some states; and the rising
propensity to spend—factors that are driving the sale of premium products.
Based on our comparison of beer consumption in China and India over the past
decade (34.2 litres/pa in China compared with 1.4 litres/pa in India), we believe
there is scope for exponential volume growth in India.
Key catalysts
Maintaining high volume growth: We expect strong growth in UBL’s beer
sales volume because of improving affordability and discretionary spending and
favourable demographics in India. UBL dominates the beer segment in India and
its portfolio includes products with different prices. Our India beer market model
suggests a sales volume CAGR of 15% over the next five years.
Better product mix and margins: UBL’s Kingfisher Ultra and Kingfisher
Premium brands are targeted at customers in the high and middle income group.
The growing numbers of consumers in the higher price segments would enhance
the product mix. Further, UBL’s performance in the states of Andhra Pradesh
Karnataka, Maharashtra, and Tamil Nadu are key to higher profitability, as these
states together account for around 32% of UBL’s sales volume.
Liberalisation of prices and retail distribution by state governments: A few
states in south India have liberalised retail beer licences and this has led to an
increase in the number of retail outlets that stock beer. Further, in April 2011, the
government of Karnataka increased the tax on spirits, while maintaining the tax rate
on beer, the first differentiation of its kind. Different taxation rates for different
alcoholic beverages will be a key catalyst for beer consumption, in our view.
Positive response to Heineken in India: According to UBL management,
Heineken beer will be launched in India in Q2. The beer will be priced at a
premium to Kingfisher Ultra—UBL’s premium product. We believe a successful
launch of Heineken beer will be a positive catalyst for UBL’s share price, as it
will help establish the Heineken-UB partnership at different price levels in the
beer market.
Softening energy price: While UBL’s margins are highly sensitive to volume
growth, a reduction in the price of glass bottles will have a meaningful impact
on margins. Glass constitutes 42% of COGS, and a 10% reduction in energy
prices would lower the cost of glass by 4-5%.
Risks
We believe the risks to our estimates include: 1) government intervention;
2) unreasonably high competition; 3) a limited target market; 4) substitution by
spirits; and 5) high debt at the group level; and 6) consumers’ increasing health
consciousness.
Valuation and basis for our price target
We initiate coverage of UBL with a Buy rating and a 12-month price target of
Rs650.00. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are a WACC of 12.4%, beta of 1.09, and an interim growth rate
of 14%.
United Breweries
United Breweries has a 56% share of the beer market in India. Heineken holds
38.7% of United Breweries and UB Group 37.5%. The company's flagship
brand 'Kingfisher' is the most popular Indian beer brand globally. As state
governments do not allow the inter-state movement of alcoholic beverages, UBL
owns 18 breweries and operates nine contract manufacturing facilities.
Statement of Risk
State governments can increase taxes on beer and this could make a significant
difference to business dynamics, as taxes constitute around 45% of the price for
beer consumers. We expect the youth in India to move from drinking spirits to
drinking beer and softer beverages. The risk is that this change is slower than we
anticipate. Another risk is increasing health consciousness among consumers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
United Breweries
G ood times ahead
�� Kingfisher: India’s No.1 beer; best exposure to rising disposable income
We initiate coverage of United Breweries (UBL), the maker of India’s most
popular beer— Kingfisher—with a Buy rating and a price target of Rs650.00. We
believe UBL provides one of the best exposures to rising disposable income and
changing social norms in India.
�� Changing dynamics are key triggers
We estimate the price elasticity of beer is 1.7x, based on the impact of changes in
price and volume in 2009, when tax increases resulted in sales fluctuations. In
April 2011, the government of Karnataka raised the tax on spirits while
maintaining tax on beer—the first time there were different tax rates on different
alcoholic beverages. We believe the lower tax rate for beer will be the catalyst for
growing consumption and, like Titan, UBL should benefit from rising consumption
in India.
�� Improving fundamentals
We expect UBL’s profitability to increase as its breweries achieve scale. UBL’s
revenue mix is improving, with increasing contributions from profitable states and
faster sales of premium products. We forecast a PAT CAGR of 52% for FY11-14.
We believe UBL deserves to trade at a premium to its peers, because of: 1) high
price elasticity; 2) its dominant market share (56%); and 3) Heineken and UB
Group’s complementary ownership.
�� Valuation: Buy rating and a price target of Rs650.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
12.4% and an interim growth rate of 14%. At our price target, the stock trades at
23.8x FY13E EV/EBITDA.
Investment Thesis
We initiate coverage of United Breweries (UBL) with a Buy rating and a price
target of Rs650.00. We believe UBL provides one of the best exposures to India’s
young population and their increasing incomes and changing social norms.
With a 56% share, UBL is the market leader in the beer category in India. The
company’s brand, Kingfisher, is the world’s #1 Indian beer brand. United
Spirits, a spirits manufacturer and a group company, strengthens UBL’s
distribution network as both spirits and beer are retailed through the same
distribution network.
With 1.7x price elasticity (our estimate), beer is sensitive to state level tax
increases. A few states in south India have liberalised retail beer licences
recently and this has led to an increase in the number of retail outlets that stock
beer. Further, in April 2011, the state government of Karnataka raised the tax on
spirits, while maintaining the tax on beer at the same level—the first time a state
government has imposed different tax rates on different alcoholic beverages.
Lower tax rates for beer will be a key catalyst for beer consumption in India, in
our view.
Heineken owns 38.7% of UBL—the fastest growing associate company within
the Heineken group. We believe Heineken helps UBL with its superior brewing,
marketing and logistics expertise; a good fit with UB Group, given the latter’s
capabilities.
We expect UBL to benefit from: its pricing power (because of its dominant
market share); the issuance of more licences in some states; and the rising
propensity to spend—factors that are driving the sale of premium products.
Based on our comparison of beer consumption in China and India over the past
decade (34.2 litres/pa in China compared with 1.4 litres/pa in India), we believe
there is scope for exponential volume growth in India.
Key catalysts
Maintaining high volume growth: We expect strong growth in UBL’s beer
sales volume because of improving affordability and discretionary spending and
favourable demographics in India. UBL dominates the beer segment in India and
its portfolio includes products with different prices. Our India beer market model
suggests a sales volume CAGR of 15% over the next five years.
Better product mix and margins: UBL’s Kingfisher Ultra and Kingfisher
Premium brands are targeted at customers in the high and middle income group.
The growing numbers of consumers in the higher price segments would enhance
the product mix. Further, UBL’s performance in the states of Andhra Pradesh
Karnataka, Maharashtra, and Tamil Nadu are key to higher profitability, as these
states together account for around 32% of UBL’s sales volume.
Liberalisation of prices and retail distribution by state governments: A few
states in south India have liberalised retail beer licences and this has led to an
increase in the number of retail outlets that stock beer. Further, in April 2011, the
government of Karnataka increased the tax on spirits, while maintaining the tax rate
on beer, the first differentiation of its kind. Different taxation rates for different
alcoholic beverages will be a key catalyst for beer consumption, in our view.
Positive response to Heineken in India: According to UBL management,
Heineken beer will be launched in India in Q2. The beer will be priced at a
premium to Kingfisher Ultra—UBL’s premium product. We believe a successful
launch of Heineken beer will be a positive catalyst for UBL’s share price, as it
will help establish the Heineken-UB partnership at different price levels in the
beer market.
Softening energy price: While UBL’s margins are highly sensitive to volume
growth, a reduction in the price of glass bottles will have a meaningful impact
on margins. Glass constitutes 42% of COGS, and a 10% reduction in energy
prices would lower the cost of glass by 4-5%.
Risks
We believe the risks to our estimates include: 1) government intervention;
2) unreasonably high competition; 3) a limited target market; 4) substitution by
spirits; and 5) high debt at the group level; and 6) consumers’ increasing health
consciousness.
Valuation and basis for our price target
We initiate coverage of UBL with a Buy rating and a 12-month price target of
Rs650.00. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our
key assumptions are a WACC of 12.4%, beta of 1.09, and an interim growth rate
of 14%.
United Breweries
United Breweries has a 56% share of the beer market in India. Heineken holds
38.7% of United Breweries and UB Group 37.5%. The company's flagship
brand 'Kingfisher' is the most popular Indian beer brand globally. As state
governments do not allow the inter-state movement of alcoholic beverages, UBL
owns 18 breweries and operates nine contract manufacturing facilities.
Statement of Risk
State governments can increase taxes on beer and this could make a significant
difference to business dynamics, as taxes constitute around 45% of the price for
beer consumers. We expect the youth in India to move from drinking spirits to
drinking beer and softer beverages. The risk is that this change is slower than we
anticipate. Another risk is increasing health consciousness among consumers.
No comments:
Post a Comment