United Breweries' Q2FY20 results (Outperformer) - Weak 1H, expect recovery from 2H...
Q2FY20 result highlights
- Net sales grew by 3.4% yoy to Rs15.8bn (est: Rs16.1bn), EBITDA fell by 39.5% yoy to Rs1.9bn (est: Rs2.72bn), PBT was down 54% yoy to Rs1.16bn (est: Rs1.98bn) and PAT decreased by 38% yoy to Rs1.01bn (est: Rs1.7bn).
- Volume growth for the quarter stood at ~6.5% yoy, which was higher compared to industry growth of ~3%, indicative of market share gains.
- Gross margins declined by 350bps yoy (up 180bp qoq) to 52.1% impacted by higher input costs (barley/glass) and weaker state mix (weak performance in Karnataka & Maharashtra). Base quarter had better state mix & benign barley prices.
- Staff cost increased by 20% yoy, other expenses increased by 18% yoy due to higher rates & taxes and one of expenses of Rs120m. Resultant EBITDA margins declined by 870bps yoy to 12.2%.
- Depreciation was up 5% yoy. Other income was down 49% yoy. Interest cost was up 120% yoy due to higher working capital (receivables were up 14% yoy, payables declined by 30% yoy in 1HFY20) on account of delayed payment from state cooperatives.
Key positives: Ahead of industry volume growth.
Key negatives: Higher input cost & other expenses.
Impact on financials: Factoring weak 2Q, we have cut our FY20/21E earnings estimates by 14%/9%.
Valuations & view
Despite challenging demand environment and volume decline in key markets, UBL’s ~6% volume growth was better than expectation. However, one-offs resulted in sharp miss on the EBITDA for the quarter. 1HFY20 has been challenging with election & adverse monsoon impact coupled with higher input costs & one-off overhead costs impacting earnings. Going forward we believe, some of the pressures should start to ease with a) gradual recovery in key markets should aid volume growth as well as state mix and b) improvement in gross margin trajectory with high input cost coming in base coupled with better state mix. We are factoring 13% sales CAGR over FY20-22E (8% volume CAGR). Given UBLs execution capabilities & improving outlook, we maintain our Outperformer rating on the stock. Any correction in the stock should be used to add positions
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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