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* The company’s 4QFY23 results were disappointing across all metrics. Volume growth was only 3%; however, when adjusted for route-to-market changes, it was at 17%. The management indicated that the demand has been adversely impacted in the northern region due to unseasonal rainfall.

* Gross margin came at just 38.6%, and is at its lowest level. It was adversely impacted by high barley and packaging costs and adverse state mix. The company has started procuring new barley but it is expected to face pricing pressure until 1QFY24, due to the impact of the high-cost purchases made earlier. Bottling cost pressure is expected to continue till 2QFY24 on account of short supply.

* We have sharply reduced our FY23 estimates to account for gross margin pressure and FY24 earnings estimates is reduced by ~3%. We reiterate our SELL rating on the stock.

Huge miss in overall performance

* UBBL’s standalone net sales remained flat YoY at INR17.6b (est. INR18.6b). EBITDA declined 79.5% YoY to INR535m (est. INR2.1b). PBT before exceptional items fell 93.9%YoY to INR132m (est. INR1.7b), while adjusted PAT declined 94% YoY to INR97m (est. INR1.3b).

* 4QFY23 volumes grew 3% YoY, while FY23 volumes rose 31% YoY.

* Gross margin declined 10.1% YoY/320bp QoQ to 38.6% (est. 43.5%), due to high costs of barley and packaging materials.

* As a percentage of sales, higher employee expenses (up 170bp YoY) and higher other expenses (up 50bp YoY) led to standalone EBITDA margin contraction of 12.3% YoY to 3.0% (est. 11.1%).

* FY23 net sales grew 28.5% to INR75b, while EBITDA/adjusted PAT declined 11.5%/10% YoY to INR6.2b/INR3.3b.

Highlights of the management commentary

Volume growth was 3% in 4QFY23. It continued to face RTM headwinds. Volume growth was 17% ex-RTM headwinds (ex-Delhi, Chhattisgarh, AP, and Tamil Nadu).

* Gross margin is under pressure due to barley and packaging costs, and the adverse impact of state-mix.

* The company is experiencing pressure on bottling costs, which is expected to persist, primarily due to a shortage of supply in the market.

* New barley crop is of good quality; however, there is a bit of moisture.

* The company has lost market share in Karnataka due to the growth of economic segment. Additionally, due to the recent elections, there have been some administrative and supply issues in the region.

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