Neutral United Breweries Ltd For Target Rs.2,000 by Motilal Oswal Financial Services Ltd
Premiumization trend continues; uncertainty on margins
* United Breweries (UBBL) delivered revenue growth of 10% YoY (est. 12%), aided by policy changes in Andhra Pradesh (AP). Volume growth was 8% YoY (est. 6%). The Premium portfolio continued to deliver strong performance, posting 33% YoY growth (27% in 2QFY25).
* North, West, East and South regions reported volume growth of 16%, 4%, 3% and 8%, respectively. Volume growth was mainly driven by Telangana, AP, Uttar Pradesh, Maharashtra and Rajasthan. Meanwhile, Goa, West Bengal, Tamil Nadu and Kerala reported weak performance.
* GM contracted 90bp YoY/70bp QoQ to 43.1% (est. 43.8%). EBITDA margin contracted 90bp YoY to 7.1% (est. 9.1%). The company is strengthening its local brewing capabilities for premium products and improving the bottle recovery rates, supporting long-term margin growth. We estimate EBITDA margin of 11.6% in FY26 and 13% in FY27.
* The company remains focused on volume-led growth, along with share gain in the premium portfolio. It is planning to invest INR7.5b in a greenfield brewery in UP, which will produce both mainstream and premium brands, including Heineken, in cans and bottles. The facility will add 1.0-2.0 MHL capacity, which is expected to be ready by 4QFY27. We estimate a 13% revenue CAGR during FY25-27, led by high-single-digit volume growth.
* We maintain our Neutral rating on the stock with a TP of INR2,000 (based on 55x Dec’26E EPS).
Healthy revenue growth; weak operating margins
* Premium portfolio continues to shine: UBBL’s standalone net sales grew by 10% YoY to INR20.0b (est. INR20.4b). Volume growth was 8% YoY (est. 6%), with premium segment volume growing strongly by 33% YoY.
* Growth across the regions: North, West, East and South regions reported volume growth of 16%, 4%, 3% and 8%, respectively. Volume growth was mainly driven by Telangana, AP, Uttar Pradesh and Rajasthan, partially offset by Tamil Nadu and West Bengal. A positive price mix is driven by price increases in multiple states and mix from premiumization, partially offset by growth in the economy segment and a negative state mix.
* Contraction in margins: Gross margin declined 90bp YoY and 70bp QoQ to 43.1% (est. 43.8%, 43.8% in 2QFY25). Employee expenses grew 6% YoY, while other expenses rose 11% YoY, led by investments in supply chain ahead of the peak season. EBITDA margin contracted 90bp YoY to 7.1% (est. 9.1%, 10.7% in 2QFY25).
* Decline in profitability: EBITDA declined by 3% YoY to INR1.4b (est. INR1.9b). Higher depreciation (+18%) and lower other income (-58%) resulted in a 25% YoY fall in PBT. There was an exceptional item of INR258m on account of severance pay to employees on separation. APAT fell 24% YoY to INR640m (est. INR1,124m). Reported PAT declined 55% YoY to INR383m.
* In 9MFY25, net sales, EBITDA and APAT grew by 10%, 18% and 13%.
Highlights from the management commentary
* UBBL indicated that it has lost market share in West Bengal, as beer has become expensive (from INR135 to INR160) after the recent duty increase. In addition, it has also lost market share in Rajasthan and Tamil Nadu.
* The 15% price increase in Telangana is not enough to cover the entire costs, as per UBBL. The company is pushing for tax restructuring, as currently the entire price increase is passed on to consumers. Furthermore, UBBL expects its outstanding receivables to be paid by the government soon.
* With the revised UP excise policy, effective Apr’25, liquor stores can sell both beer and IMFL, thus UBBL can now reach 17,000 stores vs. 6,000 earlier.
* UBBL introduced Kingfisher Flavours with two new variants, Lemon Masala and Mango Berry Twist, to target young customers. Currently, they are launched only in Goa and Daman and will be gradually scaled up. Management stated that the initial traction has been encouraging.
Valuation and view
* Owing to a consistent miss in margin, we cut our EPS estimates by 13%/5% for FY25/FY26 despite our estimates being lower than the Bloomberg consensus.
* The company is facing numerous challenges, including stiff competition from both local and international brands in India and regulatory issues in the industry.
* UBBL posted 8% volume growth in 3QFY25 (+6% in 9MFY25), while its premium volume grew 33% (+35% in 9MFY25), maintaining its robust growth momentum. We estimate a CAGR of 13%/36%/45% of revenue/EBITDA/adj. PAT over FY25- 27.
* We estimate EBITDA margin recovery in FY26 and FY27; any delay in margin recovery can potentially lead to further earnings cuts. We maintain our Neutral rating on the stock. Our TP of INR2,000 is based on 55x Dec’26E EPS.
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