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EBITDA in line; material cost pressure to sustain in near term

* UBBL reported EBITDA in line with expectations. While sales were lower than expected, cost savings-led EBITDA margin beat estimates, even as gross margin pressures remained extremely high (500bp decline YoY).

* The management mentioned the likelihood of continuing pressures on margins in the near term.

* Industry volume performance has been flattish over a three-year period in 1HFY23 and UBBL’s volumes are up by 3%, significantly lower than the performance of other discretionary categories over this period. We reiterate our Sell rating on the stock.

Miss on sales; EBITDA in-line

* UBBL’s standalone net sales grew 17.8% YoY to INR16.8b (est. INR18.3b). EBITDA/PBT/adjusted PAT grew 32.3%/64.4%/66.4% YoY to INR2.2b/INR1.8b/INR1.3b, respectively (est. in-line/INR1.6b/INR1.2b).

* 2QFY23 volumes grew 23% YoY while volumes were 67% higher YoY in 1HFY23. Volume growth in the premium segment was 48% YoY – ahead of the overall market, indicating a gain of market share in this segment.

* Gross margin declined 510bp YoY to 46.7% (est. 46%) due to inflationary pressures witnessed in the prices of barley and packaging materials.

* As a percentage of sales, lower other expenses (-540bp YoY) and employee expenses (-110bp YoY) led to standalone EBITDA margin expanding by 140bp YoY to 13% (est. 12%).

* 1HFY23 net sales/EBITDA/adjusted PAT grew 61.8%/92.2%/165.4% YoY, respectively.

* The company remains debt free with a bank balance of INR7.2b.

Highlights of the management commentary

* Rajasthan, West Bengal, and Haryana were the key contributors to volume growth in 2QFY23. Delhi posted a decline due to frequent changes in policy.

* Price increase was 4% YoY on top of a 23% volume growth but a weak state mix led to ~9% negative mix impact.

* Volumes are -4% v/s pre-Covid levels in 2QFY23 and up 3% in 1HFY23. The beer market has been flat in volume terms over the past three years.

Valuation and view

* Results were in-line with our estimates and there has been no material change in the EBITDA forecasts for FY23. However, lower depreciation and higher ‘other income’ have boosted FY23 EPS by ~7% for the year. In FY24, we are expecting a gradual improvement in gross margin, owing to a new barley crop toward the end of FY23. And with lower-than-expected capex, our EPS estimate is up by 17% for FY24.

* Industry and UBBL volumes have been flattish in 1HFY23 over the corresponding pre-Covid period. Consequently, earnings are likely to be flat over FY19-FY23.

* The stock is expensive at 49.x FY24E EPS and ~30x FY24E EV/EBITDA.

* We reiterate our Sell rating on the stock with a TP of INR1,400 (25x Sep’24E EV/EBITDA).

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