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Healthy volume growth; GM recovery below expectation

* United Breweries (UBBL) delivered better-than-expected sales in 4QFY24 but continued to fall short on our margin estimate. Revenue grew 21% YoY (est. +12%), fueled by a healthy 11% YoY volume growth. The premium portfolio clocked 21% YoY volume growth. Apart from strong summer-led demand, a part of higher volumes in 4Q would have also been for preelection channel filling. Thereby, 1QFY25 volume growth will be critical to understanding underlying demand.

* The west region posted flat volume growth due to weak performance in Goa. Conversely, the south and east regions registered healthy volume growth of 21%, and 10%, respectively. Price hikes of 5% in Rajasthan, Karnataka and Andhra Pradesh were well accepted and supported UBBL’s revenue growth in 4QFY24.

* GM was up 300bp YoY but down >200bp QoQ at 41.7% (FY24 margin at 43% vs. 52% in FY21). We expected a sequential improvement in margin after the softening of barley prices and a partial shift in the mix toward old and new glass bottles. However, consistent slippages in margin recovery and a higher mix of new bottles further impacted margin in 4Q. EBITDA margin at 6.7% was below our expectation of 8.9%, mainly due to lower-thanexpected GM.

* We model margin (both GM and EBITDA) revival in FY25/FY26, but recovery uncertainty still hovers around earnings. Despite modeling healthy growth and margin recovery, the stock trades at ~62x FY26E EPS. We maintain our Sell rating on the stock with a TP of INR1,650 (50x FY26E EPS).

Double-digit volume growth; miss on margins

* Volume-driven sales growth: UBBL’s standalone net sales grew by 21% YoY to INR21.3b (est. INR19.7b), led by strong volume growth and strong pricing. In 4QFY24, volumes rose 11% YoY, with premium segment volume up 21% YoY, mainly driven by the south and east regions. Volume growth was 21% in the south region, 10% in the east, 3% in the north and flat in the west. We believe partial volume was to fill channel inventory ahead of election-led supply challenges.

* Lower-than-expected margin expansion: Gross margin improved 310bp YoY to 41.7% (est. 45%). As a percentage of sales, lower employee expenses (-80bp YoY to 8.2%) and higher other expenses (+30bp YoY to 26.9%) led to standalone EBITDA margin expansion of 360bp YoY to 6.7% (est. 8.9%).

* Healthy growth on a favorable base: EBITDA/PBT/APAT grew 166%/724%/ 731% to INR1.4b/INR1.1b/INR0.9b (est. INR1.8b/INR1.4b/INR1.1b). The growth trajectory saw a significant uptick due to a low base quarter.

* FY24 performance: Net sales/EBITDA/APAT grew by 8%/13%/25% YoY. Volume/Premium volume rose 2%/3% YoY.

Highlights from the management commentary

* Net sales increased 21%, driven by an 11% rise in volume across diverse markets, including Tamil Nadu, Telangana, Andhra Pradesh, Orissa and Uttar Pradesh, partially offset by a decline in Haryana.

* Premium volume remained strong, with a 21% surge, particularly driven by Kingfisher Ultra, Ultramax and Heineken.

* In 4Q, gross margin expansion was lower than expected due to a significant increase in the use of new bottles in the mix. Over the medium term, there will be an improvement in margins.

* Beer affordability is a concern due to high taxation in many markets, limiting availability to around 95,000 stores. Pricing controls also restrict premiumization opportunities.

* Beer industry to grow at 6-7%, and UBBL aims to grow volume at 8-9% on gaining market shares.

* UBBL has faced challenges due to extensive interstate exports, particularly in navigating the complex regulatory environment. This practice can introduce uncertainties, particularly during elections, potentially leading to logistical and regulatory issues

Valuation and view

* We cut our FY25E EPS by 3% and keep FY26E EPS unchanged.

* UBBL posted 2% volume growth in FY24 after weak seasonal demand in 1QFY24. Though the company’s premium portfolio has been growing strongly, the pace of growth was slower than that of the other premium brands for majority of FY24.

* GM recovery remained the key monitorable, as it was down 600-800bp vs. FY21- FY22 levels. The soft barley prices and the recent price hikes should bridge the gap in FY25E, but glass prices remained elevated. EBITDA margin of 8% was significantly low as compared to the mid-teens level margin prior to FY21.

* We model margin (both GM and EBITDA) revival in FY25/FY26, but recovery uncertainty still hovers around earnings and the stock. We value UBBL at 50x FY26E EPS to arrive at our TP of INR1,650. We maintain our Sell rating on the stock.

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