United Breweries: Mid to higher single-digit growth rate expected for the beer industry

Update on the Indian market: On Friday, NIFTY went up 0.85% to 11,076. NIFTY traded in the positive on the back of favourable macro data. The Consumer Price Index (CPI) for August 2019 rose six basis points to 3.2 per cent YoY, within the range given by RBI. Core inflation for August 2019 remained broadly flat at 4.4 per cent MoM. The July Index of Industrial Production (IIP) data reported a 4.3 per cent YoY growth. In the Sectorial Nifty Indices, the Realty (+1.5%), Metal (+1.4%), Auto (+1.1%), Private Banks (+1.0%) and PSU Bank (+1.0%) were top gainers while Pharma (-0.9%) was the worst performer. Amongst the NSE 50, top gainers were BPCL (+6.4%), IOC (+4.8%), Titan (+3.5%) while the worst performers were Indiabulls HFC (-2.6%), Sun Pharma (-1.4%) and Dr Reddy’s (-1.4%).

Key takeaways from the interview of Mr Shekhar Ramamurthy, MD, United Breweries (UBL); dated 04 September 2019 with ET Now

• 1Q tends to be a strong quarter of the year. 1QFY20 was impacted by closures of outlets, restrictions in hours of production and dispatch due to elections.  UBL reported decent performance with a secondary sales growth of ~7% in volumes.
•  UBL expects a demand pickup in 2Q and 3Q, subject to the monsoon. Severe monsoons tend to impact the demand negatively. The beer industry is likely to grow at ~6-8% in the next 12-24 months.
• FY19 reported higher growth on a lower base of FY18 which was impacted due to the highway ban, extreme duty hikes in several states.
• The beer industry is facing margin pressures in the form of an increase in the price of glass bottles, barley, etc. ~65% of the industry supplies are to the state corporations, who control the prices. The state corporations are very reluctant to raise prices despite increases in the duties.
• UBL is experiencing a revival in the Bengal and UP markets v/s the slump in FY19 in these states. In Bengal, it witnessed double-digit growth. In the UP market, UBL is working on its capacity constraint to meet the growing demand.
• The market is very competitive but UBL is comfortably placed. The new launches cater to suit consumer preferences. UBL’s product portfolio include Heineken and Ultra (premium mild beers), Kingfisher Storm and Amstel (premium strong beers), Kingfisher Radler and Heineken Zero (non-alcoholic beers). It plans to add the imported portfolio brands from the Heineken portfolio. It will soon launch a version of wheat beer. The core brands, Kingfisher Premium and Kingfisher Strong continue to have a larger share of the revenues and allow UBL to introduce new brands.

Consensus Estimate (Source: market screener website)

• The closing price of UBL was Rs 1,277/- as of 13-September-19. It traded at 53x / 43x / 38x the consensus EPS for FY20E/ FY21E/ FY22E of Rs 24.0 / 29.7 / 33.8 respectively.
• Consensus target price of Rs 1,409/- implies a PE multiple of 42x on FY22E EPS of Rs 33.8/-