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Recovery delayed but to bounce back strongly on full unlocking

* Sales continued to recover and grew 8% yoy to Rs15.5bn, largely in line, led by 9% volume growth on low comparables (21% decline in Q4FY20). Operating margins were up 760bps, resulting in EBITDA/Adj PAT growth of 97%/260% - above estimates by 25%/41%.

* Sales were 5% lower than peak Q4FY19 sales while volumes were lower by 14%. In our view, excluding AP/Telangana, volume have recovered in rest of India to peak FY19 levels. Recent lockdowns will impact Q1/FY22 but should see strong recovery on full unlocking given improved affordability from price corrections and benign taxation across markets.

* Margin improvement from cost savings has been impressive. While we expect some of the gains to reverse, margin trends indicate possible upsides on full recovery in sales. We forecast FY23/24 operating margins at 17.5%/17.8% vs. 17.6% in FY19.

* Stock trades at 23x FY23E EV/EBIDA and offers good entry opportunity post the recent correction. Lockdown impact is likely to be temporary and benign taxation/pricing correction are expected to be major positives, driving strong growth on full unlocking. Retain Buy with a TP of Rs1,450, rolling forward to 27x Jun-23E EV/EBITDA..

* Sales/volumes grow 8-9% with 95%/86% recovery to peak Q4FY19 levels:

Sales recovery continued across markets, resulting in a sequential improvement and a 9% volume growth for the quarter albeit on lower comparables. Volumes grew in Q4 across markets, excluding Telangana, Odisha and Delhi. North/West/East grew in double-digits, whereas growth in South was largely impacted by the steep decline in Telangana on higher Covid taxes. Category recovery has been encouraging in H2 and improves visibility of volumes recovering strongly on full unlocking. While Q1 remains uncertain due to lockdowns and will impact FY22 growth, volume outlook for FY23 based on full unlocking remains intact which can see upside risk from recent price reductions in Rajasthan and Uttar Pradesh and benign taxation across most markets

* Margins surprise positively:

Gross margins improved 110bps to 52% on pricing and state mix. EBITDA margins surprised positively with 760bps yoy gain to 16.9% - the highest-ever Q4 margins. The margin gain was driven by a 12% decline in overhead costs (24.9% of sales vs. 32.6% of sales). UBBL has displayed solid cost savings in previous quarters but the sharp reduction in overhead costs may also be partly due to the temporary cut in ad spends as well as one-off savings. Despite a difficult year, UBBL has generated higher cash flows, driven by working capital reduction, and has turned net cash positive.

* Reduce assumptions for FY22 but maintain for FY23; retain Buy:

The stock trades at 23x FY23E EV/EBIDA and offers good entry opportunity post the recent correction. We have reduced FY22E EPS by 35% but maintained FY23 EPS. The lockdown impact is likely to be temporary and benign taxation/pricing correction are expected to be major positives, driving strong growth on full unlocking. Retain Buy with a TP of Rs1,450 (from Rs1420) based on 27x Jun-23 EV/EBITDA.

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