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Volumes likely to recover faster

 * UBBL posted healthy EBITDA margins of 9.5% despite the lockdown impact. The company saw a significant reduction in overhead costs, aided by structural savings, which could mean a further margin improvement on a full recovery. Sales grew 120% yoy on low comparables (down 45% vs. Q1FY20).

* Commentary indicated a MoM recovery, aided by the easing of lockdown curbs across markets and strong traction in Uttar Pradesh, Rajasthan and West Bengal, which have reduced beer prices. UBBL expects a policy change in Delhi may favor larger players.

* Margin outlook stays positive. Management expects input price inflation in mid-single digits for the year. This should be offset by 1) higher volumes driving operating leverage, 2) increased supply of used bottles with reopening, and 3) its sharper focus on cost savings.

* UBBL remains our preferred pick in consumer and a strong recovery play. Faster volume recovery and structural cost savings can offer upsides to our estimates going ahead. We maintain Buy with a TP of Rs1,570, based on 27.5x Sep’23E EV/EBITDA.

Q1 hit by lockdowns; high volumes due to low comparables:

Sales growth was strong at 120% on low comparables. Sales were affected by longer and stricter lockdowns in Q1FY21. Volumes grew 115%, with 120%/61%/578%/86% growth in North/South/East/West markets. Weekend lockdowns and reduced operational hours affected the Q1 performance in key states. Management indicated Jun’21 recovery at 50% of Jun’19 level as the month was affected by lockdowns. Commentary indicated a sequential MoM improvement, aided by the easing of lockdown curbs and stronger traction in Uttar Pradesh and Rajasthan, which cut beer prices effective Apr’21. A change in Delhi’s policy is also expected to benefit larger players as new rules increase operational challenges for smaller players.

Inflation outlook moderate; margins to recover ahead:

Gross margins expanded ~170bps yoy on a low base. The sequential decline of 370bps was due to an adverse state mix and lower supply of used bottles due to lockdowns. Operating margins at 9% were ahead of estimates by +300bps, led by aggressive cost savings and a marginal dip in employee costs. UBBL expects input price inflation in mid-single digits for the year. It has effected marginal price hikes in few states. Structural cost savings have helped UBBL deliver better margins despite lower volumes in the last few quarters. Margin gains from operating leverage and normalization of availability of used bottles should offset inflation and drive further expansion going ahead.

Faster volume recovery and cost savings to drive upsides; retain Buy:

We believe that a faster volume recovery on re-opening, price reductions in key markets and sharp focus on cost savings can drive upsides going ahead. We retain our positive view on the stock and maintain Buy with a TP of Rs1,570, based on Sep’23 estimates.

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