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Results better than expected; path to normalcy to take longer

* The lockdown severely impacted 1QFY22 on-trade sales (usually around 25% of total sales) and home delivery was not permitted in some states throughout the quarter. Given these factors, results were better than expected, with sales 45% lower than 1QFY20 sales (up 121% YoY over the low base of 1QFY21). Nevertheless, in a capital-intensive business, EBITDA/PAT declined 71%/83% v/s 1QFY20 levels.

* Jun’21 volumes were 50% lower v/s Jun’19 levels and restrictions on ontrade sales (low working hours, weekend lockdowns, etc) have persisted in Jul’21 in many states. As a result, the path to normalcy would be gradual, unlike for other discretionary players.

* 1Q typically contributes 35–40% to full-year EBITDA, which was once again severely impacted by the lockdowns. Thus, normalcy is expected to return only in FY23. Consequently, EPS growth would remain flat over FY19–23E., The Alcobev segment has not benefitted from the various factors that have aided other discretionary categories. (1) No sharp recovery, owing to pentup demand, has been observed (unlike in paint companies); recovery is likely to be gradual. (2) There are no gains from unorganized/smaller peers as the top three players control over 85% of the Beer market – this is unlike paint companies, Titan, Pidilite, and Page. (3) There has been no increase in the post-COVID opportunity v/s pre-COVID levels (unlike for QSRs). Consequently, valuations of 65.7x FY23E EPS and 33.2x FY23E EV/EBITDA appear extremely expensive for UBBL. Maintain Sell.

Better-than-expected sales drive operating profit beat

* Standalone net sales grew 121% YoY to INR11.2b (est. INR10.1b). EBITDA stood at INR954m (est. INR370m). PBT stood at INR425m (est. -INR360m). Adjusted PAT stood at INR308m (est. -INR269m).

* Volumes fell 50% and sales declined 45% from 1QFY20 levels.

* The gross margin expanded 160bp YoY to 48.3%, but fell 370bp QoQ.

* The standalone EBITDA margin stood at 8.5% (est. 3.7%) in 1QFY22 v/s - 18.9% in 1QFY21.

Highlights from management commentary

* Jun’21 volumes were still half that of Jun’19 levels, and restrictions and weekend lockdowns continue for most markets even in Jul’21, affecting the on-trade business.

* A weak state mix and lower proportion of used bottles in 1QFY22 were two key factors that affected the sequential gross margin. Lower contribution from high-realization markets led to lower sales growth v/s volume growth.

* Outlook on key RMs – Barley costs are up 15% since the last harvest and the quality is subpar. With used bottles from the market being returned, the inflation in glass costs may be offset going forward.

Valuation and view

* Better-than-expected results have led to a ~33%/17% increase in our FY22/FY23E EPS estimate.

* However, Jun’21 volumes were 50% lower v/s Jun’19 levels and restrictions on on-trade sales (low working hours, weekend lockdowns, etc.) have persisted in Jul’21 in many states. As a result, the path to normalcy would be gradual, unlike for other discretionary players.

* EPS over FY19–23E is, therefore, likely to remain flat, making the stock extremely expensive at 65.7x FY23E EPS and 33.2x FY23E EV/EBITDA.

* Furthermore, the recent increase in Heineken’s stake from ~47% to 62% does not alter the medium to longer term growth prospects, in our view.

* The historical pre-COVID PBT CAGR in the five years ended FY20 was just ~8.5%. Hence, even post normalcy, earnings are unlikely to witness strong growth. Return ratios even in UBBL’s best year (FY19) were at 18–19% levels, much lower than the Consumer peer average of over 30%. Maintain Sell, with TP of INR1,130/share, implying a 20% downside (targeting 25x Sep’23E EV/EBITDA).

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