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UBS Investment Research
United Breweries
R egulatory issues and RM costs affect Q1
Revenues +22% YoY, Volumes +16% YoY
United Breweries (UBL) grew revenues 22% YoY, while underlying volumes
grew 16% YoY. COGS at 50.6% to sales in Q1FY12 (47.3% in Q1FY11) due to
barley costs being higher by 27% YoY. Ad/sales ~17% in Q1FY12 compared to
16.5% in Q1FY11 due to high intensity advertising during the IPL-cricket season.
EBITDA declined 2% YoY and PAT declined by 7%.
Operating environment was tough
While volumes grew lower than expectation due to regulatory interventions in
Andhra Pradesh and logistics issues in Tamil Nadu. The price increases in
Maharashtra have affected consumer uptake in the short term till consumers adjust
to the new higher prices. Capacity expansions across greenfield and brownfield
plants are on track. The management has reiterated their ~15% CAGR volume
base-case growth for 5 years –disruptions could dampen near term growth.
UBL remains one of the best exposures to young consumption
We continue to retain our Buy rating on the stock as we believe it provides one of
the best exposures to rising disposable income and changing social norms in India.
It deserves to trade at a premium, in our view, because of: 1) high price elasticity
of beer (1.7x), 2) dominant market share3) Heineken and UB Group’s
complimentary ownership.
Valuation- Buy rating and a price target of Rs650.00
We derive our price target from a DCF-based methodology and long-term
valuation drivers using UBS’s VCAM tool. We assume a WACC of 12.4%,
interim growth rate of 14%. At our PT, UBL trades at 23.8x FY13E EV/EBITDA.
Key takeaways from conference call
The operating environment has been difficult with election-led disruption in
Tamil Nadu, and higher prices in Maharashtra. The summer was mild this year,
and hence that has also had an impact on volume growth.
The 6% consolidated volume growth for the combined entity (financials are for
standalone) have come on the back of a 32% volume growth in the base quarter
– a high base while there was a 16% volume growth in the stand-alone entity
(which don’t include bottling units).
Gross margins got affected equally as the consolidation of toll manufactured low
margin volumes in the consolidated financials have worsened the revenue mix
and raw material inflation.
Barley prices have been up 27% YoY, which is a Rs4 per case increase. Glass
prices are up 6% QoQ which includes 17% increase in new bottle prices, and
50% increase prices in old bottle prices.
UBL has increased spends on advertising (up 25% YoY), predominantly in
above the line spends especially during the IPL cricketing season this year–
where the advertising was more intense compared to last year.
Interest cost has gone up (+79% YoY) due to the repayment of the preference
shares and rising interest rates. Net debt end of the year was Rs 8bn. Post
June ’11, UBL monetized treasury stock to raise Rs 2.85bn which will aid the
reduction in interest cost going forward.
Investments in the new greenfield in Karnataka and Bihar are on track and the
brownfield expansion in Orissa and Mumbai for capacity expansion.
Working capital was higher due to the consolidation of bottlers, and higher
inventory cost of barley for the full year.
The benefits of right-sizing of individual units are still to flow through – which
the management is confident, will come through in the year.
Heineken was launched in Mumbai and Pune last week and national roll out is
under execution in the Sept quarter. The maximum retail price of Heineken is
Rs 100 for a 330 ml bottle at a 20% premium to Kingfisher but at Rs 170 vs.
Ultra’s Rs 125 for the 650ml bottle – a premium of 36%.
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
R egulatory issues and RM costs affect Q1
Revenues +22% YoY, Volumes +16% YoY
United Breweries (UBL) grew revenues 22% YoY, while underlying volumes
grew 16% YoY. COGS at 50.6% to sales in Q1FY12 (47.3% in Q1FY11) due to
barley costs being higher by 27% YoY. Ad/sales ~17% in Q1FY12 compared to
16.5% in Q1FY11 due to high intensity advertising during the IPL-cricket season.
EBITDA declined 2% YoY and PAT declined by 7%.
Operating environment was tough
While volumes grew lower than expectation due to regulatory interventions in
Andhra Pradesh and logistics issues in Tamil Nadu. The price increases in
Maharashtra have affected consumer uptake in the short term till consumers adjust
to the new higher prices. Capacity expansions across greenfield and brownfield
plants are on track. The management has reiterated their ~15% CAGR volume
base-case growth for 5 years –disruptions could dampen near term growth.
UBL remains one of the best exposures to young consumption
We continue to retain our Buy rating on the stock as we believe it provides one of
the best exposures to rising disposable income and changing social norms in India.
It deserves to trade at a premium, in our view, because of: 1) high price elasticity
of beer (1.7x), 2) dominant market share3) Heineken and UB Group’s
complimentary ownership.
Valuation- Buy rating and a price target of Rs650.00
We derive our price target from a DCF-based methodology and long-term
valuation drivers using UBS’s VCAM tool. We assume a WACC of 12.4%,
interim growth rate of 14%. At our PT, UBL trades at 23.8x FY13E EV/EBITDA.
Key takeaways from conference call
The operating environment has been difficult with election-led disruption in
Tamil Nadu, and higher prices in Maharashtra. The summer was mild this year,
and hence that has also had an impact on volume growth.
The 6% consolidated volume growth for the combined entity (financials are for
standalone) have come on the back of a 32% volume growth in the base quarter
– a high base while there was a 16% volume growth in the stand-alone entity
(which don’t include bottling units).
Gross margins got affected equally as the consolidation of toll manufactured low
margin volumes in the consolidated financials have worsened the revenue mix
and raw material inflation.
Barley prices have been up 27% YoY, which is a Rs4 per case increase. Glass
prices are up 6% QoQ which includes 17% increase in new bottle prices, and
50% increase prices in old bottle prices.
UBL has increased spends on advertising (up 25% YoY), predominantly in
above the line spends especially during the IPL cricketing season this year–
where the advertising was more intense compared to last year.
Interest cost has gone up (+79% YoY) due to the repayment of the preference
shares and rising interest rates. Net debt end of the year was Rs 8bn. Post
June ’11, UBL monetized treasury stock to raise Rs 2.85bn which will aid the
reduction in interest cost going forward.
Investments in the new greenfield in Karnataka and Bihar are on track and the
brownfield expansion in Orissa and Mumbai for capacity expansion.
Working capital was higher due to the consolidation of bottlers, and higher
inventory cost of barley for the full year.
The benefits of right-sizing of individual units are still to flow through – which
the management is confident, will come through in the year.
Heineken was launched in Mumbai and Pune last week and national roll out is
under execution in the Sept quarter. The maximum retail price of Heineken is
Rs 100 for a 330 ml bottle at a 20% premium to Kingfisher but at Rs 170 vs.
Ultra’s Rs 125 for the 650ml bottle – a premium of 36%.
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.
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