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MOSL: UNITED BREWERIES (Downgrade to Neutral)-Highly uncertain operating environment

​United Breweries: Highly uncertain operating environment leads to downgrade to Neutral

(UBBL IN, Mkt Cap USD3.3b, CMP INR792, TP INR830, 5% Upside, downgrade to Neutral)

• Net sales declined 8.4% YoY (est. of -4.7%) to INR11.1b (3.9% below estimate) in 4QFY17. During the quarter, the beer industry reported its sharpest volume fall in a decade (-13% YoY; UB declined 9%) due to the impact of demonetization, store closures ahead of the highway ban and higher excise.
  
• Gross margin contracted 230bp YoY to 51.3%. Staff costs increased 90bp YoY. Other expenses, however, declined 170bp YoY, restricting EBITDA margin contraction to 150bp (est. of +30bp) to 9.1% in 4QFY17. EBITDA declined 21.3% YoY (est. of -2%) to INR1.01b, 19% below estimate. Due to high depreciation and much lower other income, PAT declined 87% YoY.
  
• Full-year FY17 performance: Sales declined 2.2% YoY to INR47.34b. EBITDA declined by 7.3% YoY to INR6.4b and PAT by 23% YoY to INR2.3b. In FY17, industry volumes fell 5%, while UB reported a 2.5% decline.
  
• Management call takeaways: (a) Market is down by 10-15% YoY in April due to the highway ban. Kerala and Maharashtra have been affected more as licenses expired in March. (b) Management believes that the absolute worst impact due the highway ban may be over, but the operating environment remains tough.