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In-line volume; miss on realization and margin

United Breweries’ (UBBL IN) Q3 revenue was below estimated. In-line volume growth (8.0% YoY) was offset by subdued realization growth (1.5% YoY) due to negative state mix and scale in economy products. Premiumization shall aid long-term margin gain, but near-term investments (new bottles) and A&P spends may slower the path. Thus, we cut EPS estimates by 12.7%/9.2% in FY26E/27E to arrive at a pared TP of INR 2,200 (from INR 2,300), on 53x FY27E. We remain positive given the healthy runway for premiumization trend in beer – Maintain Accumulat

Favorable state policies, product mix key for growth: Overall volume growth (6.5% YoY, ex-Andhra Pradesh) was led by economy and premium (up 33% YoY), which would have been better if growth in the South (major market) had not been capped at 8% YoY – gains in Telangana/Andhra Pradesh were partially offset by a dip in Tamil Nadu/Kerala. Per our assessment, premium share was 12.3% (233bps YoY). Traction in the North (16% YoY – nine-quarter high) was led by Uttar Pradesh/Rajasthan. Realization per case grew at a muted 1.5% YoY, led by scale in economy products and unfavorable state mix. Karnataka hiked beer duties, which hit volume in January. EBPled price hike in Telangana may see a gestation period before consumers settle with new prices. Optimizing the state mix is key for volume growth in near term.

Margin recovery hinged on premiumization: EBITDA margin was 7.1% (8.0%, a year ago/ 10.7% in Q2) due to: a) strain on gross margin (down 86bps YoY led by scale in economy products) and b) elevated other expenses (27.7% of Q3 sales – seven-quarter high), led by A&P spend in festivals and investment in supply chain, ahead of the peak season. Improving gross margin via premium product mix augurs well in the long term. But nearterm gain could be sticky amid infusion of new bottles for premium products.

So, overall EBITDA margin gain could be slow. We cut our margin estimates – Expect 12.7%/13.5% EBITDA margin in FY26/27E. Traction in premium products, a sharp moderation in key input prices and favorable state policies are upside risk to margin gains. The Board approved INR 7.5bn capex to set up a brewery in Uttar Pradesh (UP; operational by FY27). Proposed capacity is 1.0-2.0mhl. UP offers healthy potential, accounting for ~17% of India’s population. Expect healthy traction from UP upon capacity addition.

Maintain Accumulate; TP pared to INR 2,200: UBBL posted robust volume growth, but state-led issues (price hike in Karnataka; EBP hike in Telangana and moderated share in Tamil Nadu) may slow down growth in near term even as the North is posting some traction. Given the low penetration of premiumization in beer (12.3% of mix) versus in spirit, we are positive on margin gains. So, optimized state mix, supply chain measure and premiumization-led margin improvement are encouraging but may demand a gestation period. Expect volume CAGR of 7.3% (8.5% earlier) in FY24-27E. We trim margins and lower EPS estimates by 12.7%/9.2% for FY26E/27E to arrive at a pared TP of INR 2,200 from INR 2,300, on 53x P/E FY27 EPS. Maintain Accumulate.

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