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CCI penalty a significant sentiment dampener

The Competition Commission of India (CCI) has imposed penalties of INR7.52b on United Breweries (UBBL) and INR1.22b on Carlsberg India (CIPL, unlisted). No penalty has been imposed on Anheuser-Busch InBev (AB InBev)/SABMiller as it is the whistleblower.

* The penalty comes on the back of a detailed probe ordered four years ago with regard to alleged cartelization and price fixing by all the three major Beer players that came to light when AB InBev (after its global acquisition of SABMiller) came to acquire the business of SABMiller India.

* The period of cartelization is considered to be from CY07 to at least 10th Oct’18, with CIPL joining in from CY12, and the All India Brewers Association (AIBA) serving as a platform facilitating such cartelization since CY13.

* The companies were found to have exchanged commercially sensitive information and colluded to fix beer prices in Andhra Pradesh, Karnataka, Maharashtra, Odisha, Rajasthan, West Bengal, National Capital Region of Delhi, and the Union Territory of Puducherry.

* UBBL had cash and cash equivalents of INR4.7b (net cash of INR3.54b) at the end of FY21. As per our current forecasts, it may have the net cash to pay the penalty of INR7.52b by end of FY22 (assuming that is the timeline) or else it may have to raise debt.

* UBBL has stated in its press release that it is reviewing the order in consultation with its legal advisors and will evaluate further legal options. Given the lack of clarity on the timeline for payment of the said penalty and the company’s statement, we have not made changes to our numbers yet.

* We maintain our SELL rating on the stock.

The penalty

*  The CCI has imposed penalties of INR7.52b/INR1.22b on UBBL/CIPL. There is no penalty on AB InBev-SAB Miller as it is the whistle blower (Source).

Background and details

* The penalty comes on the back of a detailed probe ordered four years ago with regard to alleged cartelization and price fixing by all the three major Beer players that came to light when AB InBev (after its global acquisition of SABMiller) came to acquire the business of SABMiller India.

* AB InBev used CCI’s leniency program to disclose that it had detected a cartel while integrating SABMiller's operations in India.

* The period of cartelization is considered to be from CY07 to at least 10th Oct’18, with CIPL joining in from CY12, and AIBA serving as a platform facilitating such cartelization since CY13.

* The companies were found to have exchanged commercially sensitive information and colluded to fix beer prices in Andhra Pradesh, Karnataka, Maharashtra, Odisha, Rajasthan, West Bengal, National Capital Region of Delhi, and the Union Territory of Puducherry.

* Besides, they were found collectively restricting the supply of beer to Maharashtra, Odisha, and West Bengal, ‘sharing’ the market in Maharashtra, as well as coordinating the supply of beer to premium institutions in Bengaluru.

* The fair trade regulator also found co-ordination among UBBL and AB InBev in the purchase of second-hand bottles.

* Subsequently, AB InBev became a whistleblower alleging collusion between SAB Miller, UBBL, and CIPL in the past.

* These three players have a share of 88% of the Beer market, with UBBL being the market leader with over 50% market share.

* The 24th Sep’21 order has directed the companies, association, and individuals to ‘cease and desist’ from anti-competitive practices in the future.

* An official release said the companies and other entities have been found to be "indulging in cartelization in the sale and supply of beer to various states and Union Territories in India, including through the platform of AIBA".

* The order grants benefit of a reduction in penalty: 100% to AB InBev and its individuals, 40% to UBBL and its individuals and 20% to CIPL and its individuals.

* Articles from a few years ago (source) had indicated a total penalty of USD250m (~INR18.52b) as against INR8.73b of penalty declared on 24th Sep’21.

Why we think this case is different from CCI penalties imposed on Cement players in CY16, which the companies have not yet paid

* In this case, AB InBev has acted as a whistleblower, providing insider details of the happenings, as opposed to the Cement case in which a complaint was lodged by a third party (Builders Association of India).

* As per reports (source), UBBL and CIPL also filed leniency applications in CY18, which would explain the lower than expected penalty imposed.

* It is possible that the penalty will have to be paid even if UBBL and CIPL appeal to higher authorities.

Valuation and view

* There are no changes to our forecasts as we await clarity on the timeline for penalty payment as well as the management’s eventual decision on whether to appeal against the penalty.

* UBBL had a cash of INR4.7b (net cash INR3.54b) at the end of FY21. As per our current forecasts, it may have a net cash to pay the penalty of INR7.52b by the end of FY22 (assuming that is the timeline) or else it may have to raise debt.

* As we have highlighted in recent years, an adverse CCI decision is a key investment risk.

* EPS over FY19-23E (no change to our earlier estimates as we have not factored the impact of the penalty) is likely to remain flat, making the stock extremely expensive at 74.4x FY23E EPS and 37.5x FY23E EV/EBITDA.

* The recent increase in Heineken’s stake to 62% from ~47% does not alter its medium-to-long term growth prospects.

* The historical pre-COVID PBT CAGR in the five years ended FY20 was ~8.5%. Even post normalcy, earnings are unlikely to witness strong growth. Return ratios even in UBBL’s best year (FY19) were at 18-19% levels, much lower than the average of its Consumer peers of over 30%. We maintain our SELL rating with a TP of INR1,170/share, implying a 27% downside (targeting 25x Dec’23E EV/EBITDA).

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