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Good volume growth; margin disappoints

Q4 revenue grows 20.8% YoY, led by healthy volume growth

United Breweries (UBBL IN) reported INR 21,315mn in net sales, higher than our estimates of INR 19,906mn, up 16.9% QoQ and 20.8% YoY. FY24 net sales stood at INR 81,154mn, up 8.3% YoY. Q4 gross margin was up 312bp YoY at 41.7% but down 227bp QoQ. FY24 gross margin contracted 38bp YoY to stood 42.6%. UBBL continues to invest in brands, capability along with revenue management and cost initiatives.

Likely healthy volume with improved margin

UBBL could continue to report momentum on volume growth, led by 1) gains in the premium beer market, 2) market share gains in select regions for the Kingfisher portfolio, and 3) rising temperatures this Summer; we expect a volume CAGR of 9.5% during FY24-26E; the company’s investment plans may continue via marketing spends and pushing category growth in India, which may help the latter report growth ahead of industry average. Profitability woes persist, as gross margin was down by 890bp in FY24 and EBITDA margin by 490bp vs pre-COVID levels (FY20); however, there are levers available for margin expansion, such as: 1) price hike in Telangana, 2) reuse of old bottles, 3) stable inflationary environment, and 4) better realization growth due to premium beer offtake. We expect a steady EBITDA margin improvement, which could lead to an expansion of 370bp over a period of two years towards 12.3% in FY26E.

Valuation: upgrade to Accumulate with a higher TP of INR 2,120

The stock has moved up 26% in the past six months after factoring in an improved volume trajectory. It is trading at fair valuations of 58.5x FY26E P/E; management focus remains on driving volume growth with steady margin improvement. We believe consistent outperformance of volume growth vs industry average in the next two years, and execution of steady margin improvement, will remain key monitorables in the medium term. We raise our revenue by 4.9% for FY25E and 6.9% for FY26E; however, we keep our earnings estimates largely unchanged, due to a cut in EBITDA margin (guidance for a steady margin improvement). We increase our TP to INR 2,120 from INR 1,725 as we  roll over to September 2025E. Our new TP is based on 53x (from 50x) one-year forward P/E. We upgrade to Accumulate from Reduce based on: 1) volume outperformance vs market average, 2) focus on premiumization, and 3) potential market share gains in the beer segment, which, in turn, would share price performance over the medium term. In the near term, upside potential remains limited.

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SEBI Registration number is INH000000933