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20 Aug

Home-delivery of alcohol will take time to build scale – United Breweries

Update on the Indian Equity Market:
On Wednesday, Nifty ended 0.2%, higher than the previous close at 11,408. The top gainers for Nifty 50 were Zee (+14.1%), GAIL (+5.0%), and Tech M (+2.2%) while the losing stocks were Bajaj Auto (-1.2%), ONGC (-1.2%), and Nestle (-1.0%). The sectoral gainers for the day were Media (+5.4%), PSU Bank (+2.4%) and Realty (+1.3%) while the losers were FMCG (-0.4%), Pharma (-0.4%), and IT (-0.3%).

Edited excerpts of an interview with Mr Rishi Pardal, MD & CEO, and Mr Debabrata Mukherjee, CMO, United Breweries Ltd; dated 17th August 2020 from Mint:

• The quarter that went by (April-June) was very unusual, impacted by the pandemic and lockdowns. For more than 50% of the quarter, the Company was physically shut. At the beginning of the pandemic, large increases in taxation also impacted demand.
• In quarter two, the story is mirroring the progression of the pandemic. As governments are easing restrictions they are starting to see a similar thing come into the business. But it’s a long road ahead. There are a lot of starts and stops. A sudden spike in local cases can shut the market for a few days, so it’s too early to talk of recovery right now, as per Mr Pardal.
• The Company’s focus is on managing costs. All discretionary expenses that can be avoided such marketing spends, which may be specifically driven towards either particular innovations or events that are not happening, are avoided. At the same time, they are a consumer products company, so they need to make sure that they cannot be silent or absent in the mind of the consumer.
• Beer is seeing a latent demand for United Breweries. If there is a physical fulfilment opportunity where a consumer can access the outlets, or the Company can encourage online order and home delivery, or look at reviving consumption in bars – the latent demand is there. The problem is more of a supply-side issue.
• Alcohol is a highly restricted category, with a lot of stringent rules. So the fact that a few state governments are now beginning to sort of consider the online sales and home delivery is really positive development for the Company.
• United Breweries is partnering with the online aggregators, with delivery services and people engaged in the space. But this will take time. This is a nascent opportunity. Over a period of time, more states will follow suit and the channel will build scale.
• 60% of channels have opened up.
• The Company is working with IPL teams to figure out how best they can leverage the change in venue opportunity. It will be using a sporting event of this nature to connect with their consumer. So the money outlay is based on that brand strategy requirement.

Consensus Estimate: (Source: market screener website)
• The closing price of United Breweries India was ₹ 1,016/- as of 19-August-2020. It traded at 423x/42x/37x the consensus EPS estimates of ₹ 2/24/28 for FY21E/FY22E/23E respectively.
• The consensus target price of ₹ 1,056/- implies a PE multiple of 38x on FY23E EPS of ₹ 27.7/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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05 Jun

Not looking at a huge change in distribution : Britannia

Update on the Indian Equity Market:

On Thursday, the indices ended lower after a six-day gaining streak. The Nifty ended slightly lower at 10,029. Among the sectors, Media (+4.1%), Pharma (+2.2%), and IT (+1.9%) were the top gainers. Private Bank (-3.1%), Financial Services (-2.6%), Bank (-2.6%) led the losers. VEDL (+7.7%), BHARTIARTL (+5.7%), and ZEEL (+5.5%) led the gainers while ASIANPAINT (-4.6%), BAJFINANCE (-4.0%), and HDFC (-4.0%) ended in the red.

Britannia recently declared its fourth-quarter results. In a post-result interview, Britannia Industries MD, Mr. Varun Berry discussed distribution network, market share, and margins. Here are the edited excerpts of his interview with ET Retail on 4th June 2020:

  • Britannia has a reach of about 5.5 million outlets. During the lockdown period, e-commerce has witnessed a massive 300% growth, which is about a percentage of their total sales. In the time to go, it is expected to grow from 1% to 2% to 5%.
  • Though e-commerce is growing exponentially, there is a huge base of the supply chain pyramid which has to be kept serving. Hence, he does not believe that distribution strategies are going to change in a hurry.
  • It will remain to be a situation where you will have to service kirana stores because they are so entrepreneurial in their way, they operate that they service their own markets wherever they are in a way e-commerce would do in a large city. As long as they have the infrastructure, kirana stores will be serviced by companies like Britannia.
  • There are some strong brands where they will prefer taking a pull strategy, rather than a push strategy. A couple of years back, they had adopted a modified pull strategy which has a disastrous impact.
  • Since they are not looking at adopting the strategy in a hurry, they will continue to have direct distribution to 2.5 million-odd retailers. The strategy of servicing the wholesalers will continue. There will be a disproportionate focus and nurturing of modern trade, e-commerce, and alternate channels, but the base strategy will not change.
  • A lot of freebies have been cut out due to the lack of availability. A lot of costs from the sales and marketing system have been cut down. They will continue doing that going forward.
  • Ad spends have been cut till now. Once a normal stocking of brands starts, normal ad spends will resume. This month itself, they will get back to advertising for some of the brands once they have enough product, which will be a temporary phenomenon.
  • They will continue to nurture and build brands for the future. Since it seems everyone is sitting at home and watching television, Mr. Berry is of the opinion that it is the right time to advertise and they will start doing that.
  • Investments will be made in creating new brands and launching new products. But there is the labor shortage issue. Since migrant workers have gone back, Britannia is operating at a lower capacity in every factory. Due to this, prioritization has become important and thus they are staying away from innovations. As soon as there are sufficient workers, they will start unleashing some of the innovative products.
  • Britannia is at the operating leverage cusp and has witnessed a disproportionate jump in margins in the last quarter results. However, its sustainability after a period of time will have to be looked at. The focus will be on unearthing opportunities and making the business efficient going forward.
  • From a 4% margin seven-eight years ago to around 15% now, operating margins have certainly improved. There will certainly be progress on the margin but in a slow and steady fashion.

Consensus Estimate: (Source: market screener website)

  • The closing price of Britannia was ₹ 3,458/- as of 4-June-2020. It traded at 51x/ 45x the consensus earnings estimate of ₹ 68.0/76.8 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 3,540/- implies a PE multiple of 46x on FY22E EPS of ₹ 76.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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