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United Breweries' Q3FY20 results (Outperformer) - Weak quarter, pace of volume recovery key monitorable

Q3FY20 result highlights

• Net sales grew by 0.1% yoy to Rs14.5bn (est: Rs14.8bn), EBITDA fell by 11% yoy to Rs2.21bn (est: Rs1.8bn), PBT was down 21% yoy to Rs1.41bn (est: Rs1.04bn) and PAT decreased by 2.6% yoy to Rs1.06bn (est: Rs0.91bn).
• For the quarter, volumes declined by 7% yoy. Excluding impact of Andhra Pradesh, volumes were flat for the quarter. Flat revenue growth was aided by benefit of price increases. We note that Carlsberg too saw ~7-9% volume decline in the quarter.
• Gross margins declined by 60bps yoy (up 60bp qoq) to 52.7% impacted by higher input costs (barley/glass).
• Staff cost increased by 13% yoy, other expenses increased by 1% yoy due to lower variable expenses and one-off reversal of Rs150m. Resultant EBITDA margins declined by 190bps yoy to 15.2%.
• Depreciation was up 10.5% yoy. Other income was up 64% yoy. Interest cost was up 59.5% yoy due to higher working capital on account of delayed payment from state cooperatives.

Key positives: QoQ improvement in gross margins.

Key negatives: Decline in volumes.

Impact on financials: Factoring weakness in volumes, we have cut our FY20/21/22E EBITDA by 3%/7%/2%.

Valuations & view

UBL’s volume performance was below estimate, however, benefit of price/mix, lower variable expenses and one-off tax reversal resulted in better than estimated EBITDA/PAT. Disruption in AP significantly impacted the industry volumes and it is likely to continue in the near term. However, ex-AP, management remains cautiously optimistic, with disruptions in key markets now behind. Further, input cost scenario is expected to be stable to moderate, which coupled with favourable base, gradual recovery in state mix (with uptick in Karnataka/Maharashtra), and step up in cost savings will continue to aid gross/EBITDA margins in coming quarters. Given its execution capabilities, we believe UBL is best placed to navigate near term challenges & will be a key beneficiary once industry volumes recover. With consistent market share gains & improving outlook, we maintain our Outperformer rating on the stock. Any correction in the stock should be used to add positions. Key risk – any adverse regulations/ steps in upcoming state budgets.