Outlook remains poor
* United Breweries (UBBL)’s results were worse than our expectations. Its outlook remains weak, with: (a) June volumes down 57% YoY, (b) lockdown in various urban centers thus far in 2QFY21, (c) no repeal of excise duty increase in the majority of the states (which saw a steep excise increase in May), and (d) the continued likelihood of closure of on-trade sales for a few more months.
* As highlighted in our Alcobev downgrade note in May’20, we expect FY20– FY22 to be ‘lost years’ for alcobev players, which are severely affected by a weak demand environment in FY21. Moreover, recovery in FY22 is also unclear due to: (a) an unprecedented steep excise duty increase threatening both net sales growth and profitability for the next few quarters and (b) the risk of weak state finances leading to delay in payments, thereby increasing receivables.
* Its stock is the most expensive in our coverage universe at 82x FY22 EPS, with ROCE at ~10% even in FY22. Maintain Sell, with TP of INR820.
Performance worse than expected
* Standalone net sales declined 75.3% YoY to INR5.1b (v/s est. INR7.2b). EBITDA loss stood at INR957m (v/s est. INR750m loss and EBITDA profit of INR3.3b in 1QFY20). PBT loss stood at INR1.5b (in-line) v/s PBT profit of INR2.6b in 1QFY20. Net loss stood at INR1.1b (v/s est. INR1.5b loss and net profit of INR1.6b in 1QFY20).
* Gross margins contracted 370bp YoY to 46.7%.
* With higher employee costs and other expenses as a percentage of sales, standalone EBITDA margins stood at -18.9% in 1QFY21 (v/s est. -10.5% and +16.1% in 1QFY20).
Highlights from management commentary
* UBBL expects demand recovery to take time particularly with Karnataka – a large state in terms of demand – witnessing lockdown. Additionally, restrictions being imposed and repealed in various other states even in 2QFY21 is creating further volatility.
* Gross margins declined due to weak state mix and lower on-trade sales.
Valuation and view
* As highlighted in our Alcobev sector downgrade report in May, the Alcohol segment is being affected by a series of events, such as: (a) weak demand, (b) very sharp excise increases by state governments, (c) the unlikelihood of bars and restaurants re-opening anytime soon, and (d) worsening state finances potentially pressuring working capital.
* The capital-intensive nature of the business (depreciation at ~23% of EBITDA even in FY20) implies the PAT impact would be even sharper than the sales and EBITDA impact.
* Steep ROCE decline from already unimpressive levels of 12.8% in FY20 and a weak earnings outlook, combined with expensive valuations of 82x FY22 EPS and 32.7x EV/EBITDA, have led us to maintain a Sell rating on the stock, with TP of INR820 (targeting 24x Sep’22 EV/EBITDA, a 20% discount to peers).
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