Lower taxes, opening of channels to aid volume recovery at United Breweries

Falling input prices, cost cuts to improve margins

After two quarters of muted volume growth, United Breweries (UB) is expected to witness a recovery in sales in the December quarter of financial year 2020-21 (Q3FY21). In addition to opening up of trade channels, roll back of Covid-19 taxes by several states, price hike in some markets and cost cuts are expected to help the company improve its volumes and profitability.

Says Ashit Desai of Emkay Research, “UB’s Q3 performance should see a marked improvement in comparison with the first half of FY21 (H1FY21) with sales and operating profit recovering to about 90 per cent of the year-ago level.” Volume data from state corporations and channel checks indicate month-on-month recovery and market share gains for the company, he added.

Beer was one of the most impacted segments in H1FY21, given its dependence on urban markets and trade channels, both of which were hit by the pandemic and the subsequent nationwide lockdown. Within the alcohol sector, it lost market share as consumers avoided chilled products and in-house consumption tilted towards spirits.  

The company posted a volume decline of 77 per cent in Q1 and 48 per cent in Q2. With conditions normalising and urban markets opening up, the beer segment is expected to get into positive territory gradually over the next couple of quarters.

Uttar Pradesh became the sixth state after Delhi, Odisha, West Bengal, Jammu and Kashmir, and Andhra Pradesh to announced a reduction in excise duty or reversal in tax hikes. With UP reducing excise duty from 280 per cent to 200 per cent from April this year, consumer prices are expected to fall by 15 per cent. Haryana has also modified taxes with lower rates for beer than spirits due to lower alcohol content.

This, coupled with rise in beer prices in Kerala, is expected to improve the firm’s profitability. UP and Kerala, according to Desai of Emkay Research, account for about four-five per cent of UB’s volumes.

What will be critical for the health of the sector and the company is whether states opt for lower taxation in FY22. Say Jaykumar Doshi and Aniket Sethi of Kotak Institutional Equities, “It remains to be seen if key states focus on optimal taxation regime going forward (especially in the upcoming state budgets) with the objective to maximise industry and the state’s tax revenues as against excessive tax increases over the past few years.”

Lower taxes have been a key volume trigger in the past. They also expect online sales to continue beyond the Covid-affected period with Maharashtra and West Bengal looking at structured direct-to-home sales.

Given these triggers, most brokerages have raised their volume estimates by 6-11 per cent in FY22 and FY23. Volumes, which are expected to fall to about 110 million cases in FY21 from 175 million cases in FY20, could recover to pre-pandemic levels in FY22 on the back of lower prices. They are expected to cross the 200 million cases mark by FY23, brokerages believe.

In addition to higher revenues led by volumes, gains in the premium segment, lower raw material (barley) prices, and cost-cutting exercise undertaken by the company should translate to improved profitability. Analysts expect margins to nearly double in FY22 from higher single digits in FY21.

Gradual recovery in volumes and expectations of further gains have led to a 41 per cent rise in stock’s price from November and factors in near-term gains. The stock is trading at 54 times its FY22 earnings estimates and could be looked at on corrections.