Stellar year, but dark clouds gathering
We pored over United Breweries’ (UBBL) annual report. Key takeaways:
* FY19 was another stellar year for UBBL, with sales/volumes growing in double digits for the second consecutive year, EBITDA increasing by 26.1% (FY18: +34.1%) and PAT rising by 42.7% (FY18: +71.6%). EBITDA margin and net margin were the highest ever at 17.6% and 8.7%, respectively, with RoE/RoCE nearing 20% for the first time in the company’s history.
* Premiumization trend continues to be strong, with 30% CAGR in the superpremium segment of the market. Several of the company’s products are performing well in this segment, with ‘Kingfisher Ultra’ and ‘Kingfisher Ultra Max’ together reaching over 5m cases, ‘Kingfisher Storm’ crossing 3m cases within just two years of launch and ‘Amstel’ (launched in May’18) attracting a good response. UBBL also forayed into non-alcoholic beverages in FY19 with ‘Kingfisher Radler’ and launched ‘Heineken 0.0’ recently. It is also preparing to launch products in the ‘craft’ and ‘variety’ beer segments.
* Working capital continued to improve for the second straight year, led by receivable days. However, ‘other assets’ increased surprisingly by 40% led by ‘balance with statutory/ government authorities’. Other assets to total assets at 15.4% were at the highest level since FY12.
* UBBL continued with its remarkable efforts on both renewable energy and water sustainability with 21% of electricity requirement for owned breweries now being met by renewable sources, creating recharge potential of up to 84% of production needs of water and reducing the amount of water per liter of beer to 3.24 liters from 6 liters a decade ago.
* Capex intensity has increased (and is likely to be elevated), more than doubling from a range of INR2-INR2.4b in FY16, FY17 and FY18 to INR4.4b in FY19. This, along with an increase in other assets, meant that free cash flows were negative, despite the stellar operating performance
Valuation and view:
Although FY19 as a whole was good, the performance was seen weakening toward the latter part of the year and the trend continued into 1QFY20 as well. As a result, PAT declined by 25%+ over the past two reported quarters. Moreover, muted demand, a sharp increase in material costs and significant ongoing capacity addition pose challenges to the earnings growth outlook. Against this backdrop, after holding a positive view on the stock for a long time, we downgraded our rating to ‘Neutral’ (refer report) in Mar’19. While we appreciate the longer-term volume growth prospects and the significant potential for premiumization, the weak medium-term earnings outlook (we estimate 10% EPS CAGR over FY19-21), the likely consequent deterioration in the already lesser than consumer peers’ RoCEs and RoEs (~200bp reduction over the next two years in both metrics) and the expensive valuations (51.4x FY21E EPS –nearly 40% premium to both FMCG universe multiples and alcobev peer UNSP multiple) prompt us to maintain our Neutral stance.
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