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On-trade channels gradually recovering…

About the stock: United Breweries (UBL) is the biggest beer player in the domestic market (~52% market share), a sector largely dominated by MNCs (~85% of market).

* On-trade sales comprise ~25% of revenues (rest 75% off-trade)

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

Q2FY22 Results: UBL’s performance was below I-direct estimates on profitability.

* Revenues grew 58% YoY to | 1426 crore, led by volume growth of 49%

* Absolute EBITDA came in at | 166 crore vs. | 40 crore in Q2FY21

* PAT came in at | 81 crore vs. | 4 crore in Q2FY21

What should investors do? The beer sector has been at the receiving end for the past three years (national polls, followed by two lockdowns) during its peak period (April-June); with revival in on-trade channels the sector is expected to gain traction.

* With the recent run-up in the stock and revival in the beer sector still a few quarters away, we maintain our HOLD stance

Target Price & Valuation: We value the stock at | 1700 i.e. 64x P/E on FY23E EPS.

Key triggers for future price performance: Beer stays an underpenetrated segment (12% market share in alcohol consumed), a preferred choice of ready to drink product for the youth and, thus, has long term growth potential (in a landscape historically dominated by liquor).

* Newer beer excise regimes (lower excise than liquor), to help in market share gains for the beer sector over the liquor sector

* 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) is India’s leading alcoholic beverage company and a subsidiary of global leader Diageo plc. It 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 | 1050

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