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Management Speak: United Breweries (Outperformer) - Strengthening competitive position

Key takeaways from the management of United Breweries Ltd (UBBL):

 

Volume trajectory to remain healthy in Q4FY18: Route to market (RTM) change in West Bengal and no supply of key brands in Maharashtra due to lack of clarity on revised pricing on beer impacted UBBL’s Q3FY18 volume growth. While disruption in West Bengal has increased due to lack of clarity on pricing, primary volumes in Maharashtra are back on track, led by channel restocking. Overall, the company is hopeful of healthy volume growth trajectory in Q4FY18, also benefitting from a low base.

Early signs of rationalizing competitive intensity: Competitive intensity has increased in last 2-3 years, backed by aggressive spend by Carlsberg on ground. Management highlighted that competitive intensity is now getting rational, which is indicative of Carlsberg joining hands with UBBL to stop supplies in Maharashtra in Q3FY18. We believe continuing rationalization in competitive intensity could translate into cost savings and trigger margins, going forward.

Market share gains could continue: Integration issues of SAB Miller with AB Inbev and challenges faced by regional players in dealing with the highway ban and GST have resulted in market share gains for UBBL and Carlsberg. We believe that while there is some room for UBBL to drive share gains from regional players (currently UBBL enjoys ~53% market share), SAB-AB Inbev’s challenges will also determine incremental opportunities for market share gains.

Input cost environment: Gross margins in Q3FY18 (apart from a onetime adverse mix due to lower sales in Maharashtra) had been impacted by higher input costs, especially barley. The supply demand mismatch in the domestic market resulted in UBBL importing expensive barely, which impacted gross margins to some extent.

Healthy growth outlook; attractive valuations: We expect strong double-digit volume growth for UBBL over the next two quarters, given its low base. Further, we believe that a beneficial competitive environment for UBBL will drive the company’s volume growth ahead of the industry. Further, benefits from operating leverage and continued debt reduction will drive earnings growth. We factor strong 23% earnings CAGR for UBBL over FY18-20E and believe that valuations at 24xFY20E EBITDA provide a good entry point. Maintain Outperformer. Any significant change in the regulatory environment remains a key risk.