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MOSL: UNITED BREWERIES (Neutral)-Volumes disappoint, expensive valuations limit upside

UNITED BREWERIES: Volumes disappoint, expensive valuations limit upside

(UBBL IN, Mkt Cap USD4.9b, CMP INR1320, TP INR1364, 3% Upside, Neutral)

 

• United Breweries’ (UBBL) 7% volume decline in 3QFY20 was a disappointment; however, margin impact was restricted. Thus, despite EBITDA declining 10.6% YoY, it was in line.
• Rich valuations, the CCI price fixing issue overhang and uncertainty over it further worsening in Andhra Pradesh (AP) due to prohibition fears prevent us from turning constructive on the stock. Maintain Neutral. 

Sales and volumes disappoint, EBITDA in line

• 3QFY20 standalone net sales were flat at 0.3% YoY to INR14.5b (v/s est. INR15.8b). EBITDA declined 10.6% YoY to INR2.2b (v/s est. INR2.2b). PBT declined 20% YoY to INR1.4b (v/s est. INR1.4b). Adj. PAT was down 2% YoY to INR1.07b (v/s est. INR1.02b).
• In 9MFY20, sales/EBITDA/PAT grew 4.9%/-23.1%/-21.9% YoY.
• 9MFY20 domestic volumes grew 2%, implying a decline of ~7% in 3QFY20. Management has attributed the volume decline and flat sales to (a) the overall economic slowdown, and (b) impact of the new excise policy in AP (in effect from Oct’19), which significantly affected the industry/company negatively.
• Gross margins declined 50bp YoY to 52.9%.
• Employee costs were up 110bp YoY to 8.7% of sales while other expenses were up 30bp to 28.9%. Consequently, standalone EBITDA margins for 3QFY20 were down 190bp YoY to 15.2% (v/s est. 14.1%).