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Reiterate Buy as best exposure to rise in disposable incomes
We maintain our Buy rating on United Breweries (UBL) as we believe it remains
the best exposure to rising disposable incomes and changing social norms in India.
We expect the healthy volume growth momentum to continue through FY12,
especially with the launch of Heineken in the Indian market. We expect volume
growth to remain a key catalyst for the stock.
ROE improved
The company’s ROE has improved from negative returns in FY02 to 15.6% in
FY11, due to better asset efficiency and net income margins. While net income
margins improved from -10% in FY02 to 6% in FY11, asset turnover improved
from 67% in FY02 to 102% in FY11.
Improving profitability—key catalyst
We expect UBL’s profitability to improve as: 1) breweries achieve scale; 2) the
revenue mix improves, 3) the contribution from profitable states increases; and 4)
the company increases its focus on the premium segment. We think it deserves to
trade at a premium to consumer peers because of: 1) the high price elasticity of
beer (1.7x); 2) its dominant market share; and 3) the complementary ownership by
Heineken and the UB Group.
Valuation: maintain Buy rating and 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%.
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 beer prices
for consumers. We expect young people in India to move from drinking spirits
to drinking beer and softer beverages. The risk is that this change could be
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 �� ��
Reiterate Buy as best exposure to rise in disposable incomes
We maintain our Buy rating on United Breweries (UBL) as we believe it remains
the best exposure to rising disposable incomes and changing social norms in India.
We expect the healthy volume growth momentum to continue through FY12,
especially with the launch of Heineken in the Indian market. We expect volume
growth to remain a key catalyst for the stock.
ROE improved
The company’s ROE has improved from negative returns in FY02 to 15.6% in
FY11, due to better asset efficiency and net income margins. While net income
margins improved from -10% in FY02 to 6% in FY11, asset turnover improved
from 67% in FY02 to 102% in FY11.
Improving profitability—key catalyst
We expect UBL’s profitability to improve as: 1) breweries achieve scale; 2) the
revenue mix improves, 3) the contribution from profitable states increases; and 4)
the company increases its focus on the premium segment. We think it deserves to
trade at a premium to consumer peers because of: 1) the high price elasticity of
beer (1.7x); 2) its dominant market share; and 3) the complementary ownership by
Heineken and the UB Group.
Valuation: maintain Buy rating and 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%.
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 beer prices
for consumers. We expect young people in India to move from drinking spirits
to drinking beer and softer beverages. The risk is that this change could be
slower than we anticipate. Another risk is increasing health consciousness
among consumers.
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