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Excise Reforms: Beer Story Re-Rating

As per draft excise policy of Karnataka (final policy awaited over near term ), the state may shift to an alcohol -in -beverage (AIB) excise structure and may reverse aggressive duty hikes that had hit beer volumes 20 -25% in CY25. This is very positive for United Breweries ( UBBL IN) . The economy segment, where in UBBL holds ~ 45% market share, stands to benefit the most with an expected 25 -30% price correction. At our base case of 25% volume growth in Karnataka , we estimate 3%/7% revenue and EPS uplift for UBBL. Factoring this in, we upgrade UBBL to Accumulate (from Reduce) with a raised TP of INR 1,900 (from INR 1,700), valuing it on 53x FY28E EPS .

State excise rehaul in Karnataka amid challenging collection: Karnataka accounts for ~13% of India's beer consumption (~52mn cases out of ~400mn). However, the state's aggressive duty hikes on beer post -COVID —three increases in under two years (AED climbing from 175% to 205%) – has severely backfired , with beer volumes contract ing ~20 -25% in CY25 and excise collection falling short by ~INR 30bn (c.8%) in FY25 . So, Karnataka has been forced to revise FY25 excise revenue target down to INR 365bn (from INR 385bn) . To arrest this drop , the government has now overhauled its taxati on framework, shifting to an alcohol -in -beverage (AIB) based excise structure. As per our primary checks, the detailed taxation framework is expected to be notified by the end of this week or early next week .

Economy segment to benefit: The new policy will have an asymmetric impact . Economy beer is set for the sharpest correction , and we expect a 25 -30% price reduction in regular/economy brands . This is crucial as economy segment is the volume engine of KA ’s beer market. U BBL commands ~ 45% market share in this segment. We estimate be er volume in the economy segment to grow ~30 -45% from the current base and the overall beer category to grow 25%. Player such as SOM Distilleries may benefit in the economy segment . Price differential between mild and strong beer under the current regime is modest at INR 5-10 per bottle , and is expected to widen to INR 10-15 per bottle , making mild beer competitive on price. 

UBBL may see 6% EPS tailwinds: UB BL commands ~45% market share in Karnataka (~23mn cases out of ~52mn). Karnata ka, being a high -margin state, operates at a premium state -level realization and gross margin . At our base case , expect 25% volume growth, and ~6mn cases volume delta (2.7% uplift) , ~ INR 3.4bn additional revenue (3.2% topline uplift) , resulting in ~INR 505mn PAT (c.6.7% EPS uplift ). We assume UBBL to maintain its share in the state.

Upgrade to Accumulate; TP raised to INR 1,900: The excise policy in Karnataka may result in 2.7% delta on volume, and ~ 7% delta in EPS given higher realization and gross margin. With two -way duty intervention : a) shif t to AIB excise and b) changes in price slab , the economy segment may benefit more than the regular. Factoring this in, we expect 6.5% volume CAGR in FY27 E -28E, and thus , we upgrade our revenue/EPS estimates by 3.2% each in FY27 E /28E and 6. 7%/5.4% in FY27 E /28E respectively . So, we upgrade UBBL to Accumulate (from Reduce) with TP raised to INR 1 ,900 (from INR 1 ,700) as we value UBBL at 53x FY28E EPS (from Dec -27E )

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