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About the stock: United Breweries (UBL) is the biggest beer player in the domestic market (~50% market share), a sector largely dominated by MNCs (~85% of market).

              * On-trade sales comprise ~10% of revenues (rest 90% is off-trade)

             * Heineken, one of the world’s largest beer companies, holds 72.7% stake in United Breweries

Q4FY23 Results: COGS inflation and negative operating leverage impacted profits.

            * Revenues remained flat YoY at | 1766 crore, led by volume growth of 3% • Absolute EBITDA de-grew 80% to | 54 crore (EBITDA margins fell 1226 bps to 3%)

            * Subsequently, PAT came in at | 10 crore, below our estimate of | 164 crore

What should investors do? Going ahead, margins are expected to remain impacted in key months in Q1 and with lower probability in Q2 (55-60%) of sales happening during these months. Then, supply-side uncertainty due to General Elections hangs in FY25 (Q1FY25 disruption with a medium probability due to historical trends). Reversal in Tamil Nadu volumes in the medium term would be a key monitorable

            * Due to higher volatility in operational performance in FY24 and FY25, we change our stance from BUY to HOLD rating on the stock

Target Price & Valuation: We value the stock at | 1500 i.e. 50x P/E on FY25E EPS

Key triggers for future price performance: Quick reversion to mean volumes, in spite of losing share to liquor companies for the past three years, point to the inherent strength in the beer segment, its appeal with young customers and an association with social occasions.

          * Newer excise regimes continue to stay stable. The management expects further price hikes in several states to mitigate inflationary impact

          * Strong fundamentals (b/s, cash flow), to help UBL further consolidate its leadership position

Alternate Stock Idea: Apart from UBL, we remain positive on United Spirits.

        * United Spirits (USL) manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan

       * We have a BUY rating on the stock, with a target price of | 900

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