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Heineken stake increase a positive

* Heineken’s expected stake increase by 15% to 61.5% is a positive and indicates its commitment and interest in UBBL and the Indian beer market. SEBI approval exempts Heineken from making an open offer. In our view, this implies a similar treatment when the remaining 11% UB Group pledged stake is sold by banks in future.

* The increase in ownership may drive higher involvement and support from Heineken. But UBBL is an efficiently run company with market leadership, stronger profitability vs. peers and access to Heineken’s portfolio. Hence, we don’t see material benefits in medium term.

* Post Covid, UBBL seems to be in a stronger position and remains an attractive recovery play. Annual report indicates sustained investments in brands, increased footprint for premium brands, impressive savings in fixed costs, and initiatives for water conservation and reducing carbon footprint.

* We marginally tweak estimates, factoring in annual report details. Q1 will be weak due to lockdown but expect a faster recovery vs. FY21 given benign taxation, earlier on-trade reopening and ongoing vaccination. Maintain Buy and raise TP to Rs1,570 from Rs1,450, rolling forward to Sept-23E.

* Heineken to inrease stake to 61.5%: Heineken has been given approval to acquire 14.99% stake held by DRT, thereby increasing its stake in UBBL from 46.5% to 61.5%. Heieneken has been given an exemption to make an open offer as the stake sale has been considered a promoter-to-promoter sale (DRT being a transferror) with the acquirer already having a controlling stake. In our view, this may also exempt Heineken from an open offer, if it intends to acquire the balance 11% UB Group stake pledged with banks, whenever it is approved for sale. The higher stake may result in higher involvement and support from Heineken. However, UBBL is an efficiently run company with access to Heineken’s global portfolio. Hence, we don’t see any material benefits immediately.

* Post Covid UBBL seems in a stronger position; improved portfolio, cost structure and balance sheet: Despite the steep sales decline in FY21, driven by Covid restrictions, UBBL has made sustained investment behind brands (ad spends at 5% of sales vs. 5.6% in FY20) and increased footprint for premium brands. The annual report also indicates investments in value brands to grow the category, substantial savings in fixed costs and increase in initiatives for water conservation and carbon footprint reduction.

Attractive play on recovery; Buy: Factoring in annual report details, we marginally tweak our estimates. While Q1 will be weak due to the lockdown impact, we see a faster recovery than the first lockdown given benign taxation, earlier re-opening of on-premise and ongoing vaccination. Valuations at 49x FY23 EPS are still attractive given upsides risks to earnings from faster recovery and positive regulatory changes. Maintain Buy and raise TP to Rs1,570, rolling forward to Sept-23 estimates.

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