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Management Speak: United Breweries (Outperformer) - Near term challenges more transient in nature

We met the management of United breweries (UBL), following are the key takeaways:

Demand environment remains challenging – Inline with other alcoholic beverage players, UBL too indicated towards tapering of volume growth on account of weak consumer sentiment, adverse monsoons coupled with a high base (17% vol growth in 2QFY19). The capacity constraint issues which were seen in 1QFY20 are now behind; however, adverse monsoons did impact the performance in the key market of Karnataka.

Focus on core & plugging portfolio gaps – From Heineken's perspective, India remains one of the key markets globally and it remains committed to invest behind driving growth in the India business given the long term potential of the market. Management highlighted that apart from driving growth in core brands, UBL is also taking initiatives to plug gaps & expand portfolio. Some of the key initiatives to drive growth are - a) scale up super premium portfolio with introduction of brands from Heineken's portfolio, b) launch/entry into craft beer in 2HFY20E and c) scale up non-alcoholic beverage (Radler/Heineken 0.0) piece.

Input cost environment stable incrementally – Key input costs (barley & glass), though at higher levels on yoy basis, have not seen further inflation & are largely stable on qoq basis. UBL continues to focus on cost mitigating programmes like ZBB coupled with initiatives taken especially on curtailing glass costs (increased local sourcing of bottles/collecting more bottles for reusage, downsizing of bottle weight), to mitigate the impact of input cost inflation.

Our view

FY20E will be a challenging year for UBL due to election led disruption in its key summer quarter, muted consumer sentiment and high input costs. While near term earnings are likely to remain under stress, we believe the extent of margin contraction is likely to reduce from 3QFY20E onwards as high input cost comes in base & state mix improves, which coupled with some recovery in volumes will improve earnings trajectory. Any weakness in stock over the near term should be looked into as an entry point. We believe the current issues are more transient in nature and overall long term outlook (UBL’s execution, focus on portfolio expansion) remains intact. Factoring near term weakness we have cut our FY20/21E EBITDA by 5%/4%, however, benefit of corporate tax rate drives EPS upgrade by 7%/9% for FY20/21E.Maintain OP, with revised target price of Rs1,455 (25x Sep’21 EBITDA).