Published on 25/02/2020 11:04:45 AM | Source: Emkay Global Financial Services Ltd

Buy United Breweries Ltd For Target Rs. 1,500 - Emkay Global

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Margins improving; await volume recovery

* UBL posted improved margins, resulting in lower-than-expected 10% EBITDA decline and 3% earnings decline, 25% and 40% above estimates. Revenue growth was flat, with volumes declining 7%. Realization increase of 7% was surprisingly strong.

* Concerns about cost pressures are reducing now, given the sequential improvement in gross margins (+40bps qoq; -70bps yoy). Excluding Rs150mn one-off reversal, operating margins were still better, led by cost savings, which offer better margin visibility ahead.

* Tax hikes by states remain an overhang which could impact volumes. While a recovery in AP is still not visible, favorable comparables (election impact in Q4/Q1) may help in improving volumes, and margin recovery should result in higher earnings growth in FY21E.

* We increase margin assumptions but trim volumes by 2% resulting in a 6% cut in earnings. Valuations at 41x FY22E EPS appear relatively attractive. Maintain Buy / OW in EAP with a TP of Rs1,500, rolling forward to Mar-22E EPS.


Volume growth impacted by Andhra Pradesh disruption and tax increases in other markets: While sales were flat, in line with our expectations, volumes declined 7%. Excluding Andhra Pradesh, volumes for the quarter were flat. Realizations improved by 7% (8% qoq) due to state/price mix as per management, which was surprising given the lack of price hikes in the quarter and volume declines in Karnataka and Maharashtra. Excluding East which grew 19%, volumes were down in North/South/West by 4%/13%/7%.

* Margin concerns receding; cost savings were a positive: Gross margin decline was only 70bps in Q3 vs. 350bps in H1, and we believe that lower comparables and sequential improvement in gross margins (up 40bps qoq and 230bps from Q1) point to an improvement starting from Q4FY20. With glass supply being secured for the near term and barley production expected to be higher this year, it expects a stabilization in prices. In addition, overhead cost savings were higher than expected (flat yoy), providing a better margin outlook going ahead.

* Await volume recovery; maintain Buy: We trim our volume assumptions to 8% CAGR vs. 10% earlier, but higher cost savings provide better margin outlook, resulting in 6% earnings cut over FY21-22E. Adverse state policies may have an impact in the near term, but UBL’s solid franchise with strong execution still provides significant growth opportunities with a scope for margin improvement. Maintain Buy/OW in EAP with a TP of Rs1,500. Key risk: adverse state policies impacting beer volumes.



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