Investors shouldn't ignore downside risks, high valuations of UBL

Loss of peak season sales suggests tough recovery

The stock of United Breweries (UBL), the maker of popular beer Kingfisher, has gained 25 per cent since its March lows, underperforming the 38 per cent rise in shares of United Spirits (USL) during the same period. Though the long-term growth story of UBL and USL remains intact, near-term recovery for UBL's pandemic-hit sales is likely to be tougher as compared to USL. Thus, the UBL stock, which is trading at a price-to-earnings multiple of over 100 times its FY21 estimated earnings (double USL's valuation), could witness higher pressure as seen in the past few trading sessions.

To begin with, while winter is a peak season for spirits, beer consumption is skewed more towards summer. The June quarter typically accounts for over 30 per cent of UBL’s annual sales and operating profits, estimate analysts. Therefore, the estimated business loss in the June 2020 quarter would sharply weigh on UBL's overall performance in FY21.

According to analysts at Kotak Institutional Equities: “Near-zero sales in April and a 70 per cent-odd decline in volumes in May, as indicated by the company, means that the most important months of the year are now lost.” Analysts at ICICI Direct estimate around 71 per cent year-on-year (YoY) fall in UBL’s revenue in the June 2020 quarter, resulting in an Ebitda loss of Rs 36.1 crore, while Motilal Oswal Securities (MOSL) has estimated an Ebitda loss of Rs 75 crore and net loss of Rs 147 crore, based on 65 per cent fall in revenue. UBL had posted Rs 329-crore Ebitda in Q1FY20. USL, too, is expected to post 58 per cent fall in revenue and Ebitda loss of Rs 101 crore, as per MOSL (versus Rs 397 crore Ebitda in the year-ago quarter).

UBL’s management, during its March quarter earnings call, had eluded that though June saw some improvement, the situation was far from normalcy.

 

 

Further, from a consumer's perspective, the consumption cost of beer is higher, given lower alcohol content (4-6 per cent) compared to spirits (up to 40 per cent). Its shelf life is also relatively lower. While income uncertainty could hurt offtake of both spirits and beer, some experts say that since beer is used more for social events — which are fewer now — as compared to spirits, its sales could see a higher impact.

A tax overhang caused by the deteriorating financial health of state governments amid Covid-19 and restrictions on restaurants, pubs, bars, etc, are other concerns, not just for UBL but the entire liquor industry.

Therefore, even though key raw material (barley and glass) prices are softening, to what extent they would support the overall earnings of UBL, given expectations of a dismal top line, needs to be seen.