United Breweries (UBBL) shares have underperformed this year after delivering positive returns in CY21 and CY22. The stock experienced a 6.33% decline in January and a subsequent 9.12% fall in February. Although the shares experienced a recovery in the following months, they remain down by 12% from their all-time high of ₹1,806 apiece.
Despite the company’s shares underperforming this year, domestic brokerage firm Nuvama Institutional Equities has remained optimistic about the firm’s long-term prospects. It has a ‘buy’ rating on the stock with a target price of ₹1,935 apiece, indicating a 22.31 percent upside.
The brokerage points out that the company has been dominating the beer market, with its share consistently above 50%. Many players have forayed into the beer market in recent years, piggybacking the launch of innovative drinks such as craft beer. United Breweries has coped well with the new entrants by launching its own set of craft beers and other innovative products in order to compete and retain its market share.
The brand power of Kingfisher is very strong, while the innovation pipeline of Heineken is still under-leveraged. Given a new team along with growth opportunities in the beer category, it can be a space to watch out for, for more innovations, the brokerage underscored.
Huge room for growth in India
According to the brokerage, per capita of beer consumption in India (as per alcohol concentration) is about 4.8 litres a year. This figure is five–six times higher in most markets in Asia and 20–30 times higher in Western markets. The average beer consumption in India is extremely low in comparison with other global markets.
The contribution of beer within alco-beverages (as per alcohol consumption by volume in CY21) in India is currently 41%, versus the world average of 63%. In countries such as Germany, China, the USA, Brazil, and Russia, this number is more than 75% each.
Wine and beer are expected to gain a larger share of the Indian market, both through market expansion and by nibbling market share away from spirits, the brokerage stated.
Regulations recalibration benefiting alco-beverages
Beer (which contains 5–6% alcohol) gets taxed at the same rate as other spirits that have over 40% alcohol, implying less value for money for consumers.
However, the brokerage said that the growing awareness, acceptance in society, and input from industry are leading to a recalibration of regulations to consider low-alcohol-content drinks as a separate entity from spirits.
For instance, the Jammu & Kashmir administration (in October 2022) approved a proposal to authorise departmental stores to sell beer and other ready-to-drink (RTD) beverages in urban areas, Nuvama noted.
New launches and innovation to remain competitive
UBBL launched Heineken Silver in India in September 22. The product successfully entered the Indian market with disruptive launches in Bangalore, Mumbai, and Goa, which caught the attention of consumers, customers, and internal stakeholders.
Margins to return from scrapping the barrel
Key raw materials have begun to soften; with this, Nuvama expects the company’s gross margins to improve gradually in FY24. It expects gross and EBITDA margins to expand to 48% and 16.5% by FY26 from 43% and 8.2% in FY23. With the margin profile improving, it anticipates RoE to jump to 23% by FY26E (versus 8.5% in FY23).
Outlook and valuation
The stock is currently trading at 47x PE on FY25E (historically, it has traded at valuations of 50–60x). With better earnings visibility, a new leadership, increasing acceptance of beer, and favourable policies by a few state governments, the brokerage valued United Breweries at 50x LTM Q2FY26E, initiating a ‘buy’ rating on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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Updated: 13 Oct 2023, 05:32 PM IST