Published on 21/09/2019 9:51:34 AM | Source: Motilal Oswal Services Ltd

Neutral United Breweries Ltd For Target Rs.1,370 - Motilal Oswal

Margins shrink significantly, prompts sharp earnings cut

* Standalone net sales were up 9.8% YoY to INR20.5b (our estimate: INR20.4b) in 1QFY20. EBITDA declined 17.8% YoY to INR3.3b (our estimate: INR3.8b), while adj. PAT was down 25.9% YoY to INR1.6b (our estimate: INR2b). Volumes were up 5% YoY. There was no comment on market share, which is unusual.

* According to the press release, UBBL faced challenges in the form of restricted supplies, production and dispatch curtailments over April-May amid the general elections, and sharp increases in barley and glass costs (which led to cost pressures that could not be passed on). While we had largely factored in the impact on sales from the aforementioned factors, the extent of EBITDA margin contraction YoY was surprisingly much steeper than anticipated.

* Standalone gross margin shrank 380bp YoY to 50.3% in 1QFY20. Employee costs were up 30bp YoY to 6%, while other expenses increased 140bp YoY to 28.3%. Consequently, the standalone EBITDA margin contracted by a higher 540bp YoY to 16.1% (our estimate: 18.5%). As mentioned earlier, this was disappointing as we were factoring in a 300bp YoY dip in the EBITDA margin.

* Valuation and view: We cut our FY20/21 EPS estimate by 20.6%/12.5% to factor in the significant miss in the 1QFY20 performance and also the weak outlook. We had downgraded the stock to Neutral in Mar’19, citing the likely sharp moderation in near-term earnings growth after two stellar years of EPS growth (72% in FY18 and 43% in FY19). Even the EPS estimate cuts now have exceeded our prior expectations. While the structural story remains strong, rising barley costs and ongoing high capex intensity will likely restrict EPS CAGR to 8% over FY19-21. Valuing the company at 25x Jun’21E EV/EBITDA, we derive a target price of INR1,370. Maintain Neutral.


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