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CCI order to provide headwinds in the near term

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

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

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

Event: CCI has imposed a penalty of |752 crore on UBL besides imposing penalties on certain individuals

In culmination of an investigation into alleged Cartel behavior (period spanning 2009- 18), Competition Commission of India has penalized UBL, Carlsberg (|121 cr) and AIBA (|6 lakh), while providing respite to AB-InBev. The commission has held two former MDs, Chief Sales Officer and Head of Strategic Planning and Analytics of UBL liable for anticompetitive conduct.

Impact: CCI has directed UBL to deposit the said amount within 60 days of the receipt of present order

UBL and the beer industry in general, has been facing unfavourable macro-climate since 3 years (Q1 disruption). With still stressed beer sales, UBL would have to shore up further debt (|115 cr LTD in FY21) to deposit the penalty. The scenario if undertaken, is expected to create near and medium term challenges for the company. UBL can however, appeal to the Supreme Court of India within 60 days from the date of communication of CCI decision.

What should investors do?

Inspite of the challenges faced by the company and sector in general (Covid disruption, high taxation, price control in 60% of markets, CCI order etc), beer sector (of which UBL commands 52% of market share) remains underpenetrated (12% of total alcohol consumed) with improving beer portfolio (addition of super-premium beer, craft beer etc) and is preferred by young consumers

* Owing to the uncertainty related to the steps management would undertake to deal with the CCI order, we change our Hold stance to Reduce

Target Price and Valuation: We value the stock at |1400 i.e. 50x P/E on FY23E EPS

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