The year 2019 hasn’t started on a very cheerful note for United Breweries Ltd (UBL). After six quarters of strong double-digit growth in beer volumes, it slowed to 9% in Q4 FY19. Under normal circumstances, such a drop should have led to a dip in the stock price. But on the contrary, the stock gained about 4% after the results were announced. It seems the market continues to tank up on the beer consumption story.
Normally, summers are good for beer makers. In Q4 FY18, beer volume growth had surged 24% year-on-year. While that was partly because of a low base in the year-ago period, the high base of last year has evidently had its effect on growth this year.
Beer sales took a hit due to tax hikes in Maharashtra and West Bengal, and capacity constraints in Uttar Pradesh.
It also appears that beer guzzlers are purchasing lower-priced products, since gross revenue growth has come in lower than volume growth. Raw material prices of barley and hops have also been rising over the past quarter, affecting margins. “Mix deterioration and rising raw material pressure also reflect in a sharp 224 basis points decline in gross margins to 52.9%; we had expected a 100bps increase," said Kotak Institutional Equities in a note to clients.
The net result is that UBL’s Q4 Ebitda (earnings before interest, tax, depreciation and amortization) margin shrank to 10.5%. This seems to be a sizeable contraction from the 14.2% clocked in Q4 FY18. This further squeezed net profit, which dipped 25.2% year-on-year to ₹67.9 crore. Analysts were expecting more than twice the amount as net profit for the quarter.
But that has not dampened the spirits of investors willing to hang on to the stock. Most are seemingly ignoring the lower volume possibilities expected in FY20 and, instead, looking at volume growth in FY21. That said, the beer industry is under-penetrated with about 90,000 outlets serving the alcoholic drink across the country, according to Icicidirect.com. Further, UBL has undertaken capacity expansion that is coming on stream next year.
Nevertheless, the UBL stock has gained 25% in the past year, and quotes at a stiff price-earnings multiple of about 55 times one-year forward earnings estimates. While volume growth may continue to shine in the long run, it still does not justify such high prices.
“We are positive on UBL’s stiff volume-growth prospects. Short-term EPS (earnings per share) forecasts could move up and down depending on the short-term direction of variables such as the mix, RM (raw material) prices, etc. Our long-term FCF (free cash flow) growth assumptions reflect our optimism. Rich valuations underpin the REDUCE rating," said Kotak in its note.