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Near-term demand concerns lower spirits of the United Breweries stock

If the covid lockdowns are extended and/or implemented in other states, the impact could be much higher as Q1 has historically contributed 35-45% to the United Breweries' full-year Ebitda. (Mint)Premium
If the covid lockdowns are extended and/or implemented in other states, the impact could be much higher as Q1 has historically contributed 35-45% to the United Breweries' full-year Ebitda. (Mint)

  • Barley price inflation of about 15% year-on-year, and the second wave of covid-19 in key beer season are near-term dampeners, said a Dolat Capital Market Pvt. Ltd report

Shares of United Breweries Ltd (UBL) are about 10% away from its pre-covid highs seen in February 2020. What’s more, valuations are not cheap. At Wednesday’s closing price of Rs1,206.65 apiece, the stock trades at 58 times estimated earnings for financial year 2022, based on Bloomberg data.

Additionally, the second covid-19 wave is likely to weigh on demand in the foreseeable future. Dolat Capital Market Pvt. Ltd said in a report on 28 April, “Barley price inflation (about 15% year-on-year) and second wave of covid-19 in key beer season are near-term dampeners." The brokerage has reduced its financial year 2022 estimates to factor the impact of covid in the half year ending September (H1FY22).

Analysts from Motilal Oswal Financial Services Ltd said, “Changes to the model have resulted in about 20%/ 7% cut in FY22/FY23E earnings per share as a result of ongoing lockdowns in three key states." They added, “If the lockdowns are extended and/or implemented in other states, the impact could be much higher as Q1 (the summer season) has historically contributed 35-45% to the company’s full-year Ebitda." Ebitda is short for earnings before interest, tax, depreciation and amortization; a key measure of profitability.

Of course, the actual impact on volumes would depend on the timelines and magnitude of localized lockdowns. As such, the above-mentioned factors are likely to weigh on the sentiments for the United Breweries’ stock in the coming days.

To be sure, recently announced March quarter financial results are not bad. The company’s Ebitda margin expanded by 170 basis points vis-à-vis the December quarter to 16.9%. One basis point is one-hundredth of a percentage point. This is despite the fact that gross profit margin has declined by 190 basis points during the same period. Ebitda margin performance was helped by a decline in other expenses as a percentage of revenues.

Overall volumes increased by 9% year-on-year in the March quarter, even though they have declined by 39% for the financial year 2021. Commenting on the quarter, United Breweries said, “All markets across the country witnessed good volume growth barring a few key markets such as Telangana, Odisha, and Delhi. The quarter witnessed double-digit growth in all regions barring the South, which recorded low single digit growth because of the sharp decline in Telangana due to covid excise taxation."

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