United Breweries' Q3FY18 results (Outperformer) - Volume surprise continues; market standing improving!
Q3FY18 result highlights
- United Breweries’ (UBL) net sales increased by 17% yoy to Rs11.9bn (est Rs10.9bn), EBITDA increased by 19% yoy to Rs1.5bn (est Rs1.46bn), Reported PAT was down by 2% at Rs474m. Adjusting for one off other income of Rs300m in 3QFY17, PAT was up 62% yoy.
- Overall volumes grew by 12% yoy led by low base and market share gains (industry volume growth of 6% yoy).
- Gross margins declined 140bps yoy to 52.4% due unfavourable state mix (low contribution from Maharashtra), higher input costs and impact of GST. Operating leverage benefits (overheads up 12%) resulted in EBITDA margins improving by 20bps to 12.7%.
- Interest cost declined by 39% yoy due to debt reduction and lower short term interest rates. Other income was down 98% yoy as the base quarter had a one off income of Rs300m due to receipt of government subsidy for the Aurangabad facility.
Key positives: Ahead of industry volume growth
Key negatives: Decline in gross margins
Impact on financials: We have marginally reduced our FY18/19/20E earnings estimate by 2%/1%/1%.
Valuations & view
In spite of challenges in two key states, Maharashtra and West Bengal, UBL has delivered a strong quarter reflecting its improving competitive position and cost management capabilities. We believe Q4FY18 volume growth will be stronger than Q3Fy18 led by a normalized situation in Maharashtra and West Bengal and a continued low base. We factor a conservative 7% volume growth in FY19 as UBL will benefit from a low base of the highway ban and the Maharashtra issue. Further, continued cost reduction benefits, an improving market standing and continued reduction in interest costs will drive earnings; we factor 23% earnings CAGR over FY18-20E. We prefer United Breweries over United Spirits in the large cap alcoholic beverages space; Maintain Outperformer.
United Breweries is an alcoholic brewing company based in India. Co. is engaged in the manufacturing and marketing of beer made from malt and allied products. Co.'s brewery products include Kingfisher, UB Premium Ice Beer, Charger Extra Strong Beer, Kalyani Black Lable, Kalyani Export Special, Kalyani Black Label Strong, Bullet Super Strong Beer and UB Export. Co. is also engaged in manufacturing of liquors, beer, leather shoes, organic and inorganic petrochemicals, ciprofloxacin, amitriptylene, and ibuprofen. Co.'s other activities include publishing and printing newspaper and journals; selling and servicing of Hitech Medical equipment; operation of a cable television network and others.
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