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MOSL: UNITED BREWERIES (Sell)-Profitability to remain muted despite healthy volumes

• While UBBL's 1QFY23 sales came in better than our expectation, the 410bp YoY and 440bp QoQ contraction in gross margin led to a miss of 9%/16% on forecasted EBITDA/adjusted PAT.
• When compared to pre-COVID levels, volumes are up by only 8% from 1QFY19 levels (14% when adjusted for the change in the Andhra Pradesh state government’s excise policy).
• As indicated in our note, rising commodity cost pressures for AlcoBev companies, given the lack of free pricing in a majority of states, is likely to negatively affect the pace of earnings growth, even in a strong demand environment.
• We retain our Sell rating on the stock, given its expensive valuation (~64.4x FY24E P/E).

 

Sales beat; input cost pressures adversely impact profitability

• Standalone net sales grew 117.9% YoY to INR24.4b (est. INR21b). EBITDA grew 196.1% YoY to INR2.8b. PBT/adjusted PAT grew 452%/424% YoY to INR2.3b/INR1.6b (est. INR2.6b/INR1.9b).
• Volumes grew 121% YoY in 1QFY23. The same was 8% higher than 1QFY20 levels. Record volumes were achieved, despite a number of supply-chain restrictions in the peak season.
• Gross margin fell 410bp YoY to 44.3% (est. 48.5%) due to inflationary pressures seen in the prices of barley, packaging materials, and crude oil.
• As a percentage of sales, lower other expenses (down 240bp YoY) and employee expenses (down 480bp YoY), adjusted for one-off severance payments, led to standalone EBITDA margin expanding by 310bp YoY to 11.6% (est. 14.8%).

 

Highlights from the management commentary

• The management is targeting 6-8% volume growth on a steady-state basis in coming years.
• In addition to input costs, margin in 1QFY23 was impacted by a weak state mix.
• Raw material (including packaging) inflation remains very high. Barley prices are up ~70%, while the cost of new glass bottles remains elevated.
• Consumer price increases have been in the 3-7% range, with Maharashtra and Karnataka seeing increases at the lower end of the range. Markets, where price hikes have been granted, account for two-thirds of UBBL’s countrywide volumes. States typically grant price increases in the first quarter of every fiscal.
• Higher input costs will impact 2Q, even more than 1Q, but the full extent of price hikes granted in 1QFY23 will offset some of that impact.