UBL: Despite subdued Q1, growth prospects over medium term look positive

Supportive demographics and low beer penetration indicates strong growth opportunity for the beer market leader

Despite beer major United Breweries (UBL) reporting a lacklustre performance in the June quarter (Q1) and its near-term outlook looking hazy because of the Covid-19 pandemic’s spread, its stock price has risen about 8 per cent since the result announcement on August 14. During this period, the BSE Sensex has risen 1.5 per cent.

Good growth prospects over the medium term, led by supportive demographics and low penetration of beer, is keeping the Street positive on the stock.

“Notwithstanding the near-term impacts, we remain positive on the medium-term outlook of UBL on the back of the huge growth potential for the beer market in India due to favourable young demographics, rising disposable incomes, warm climate and lower per capita consumption,” analysts at Spark Capital said in their report.

Vishal Punmiya, analyst at Nirmal Bang, shares a similar view. “We remain optimistic on the medium-to-long-term opportunity,” he said in his Q1 report. Punmiya has a ‘buy’ rating on the stock.

There is little doubt that UBL’s leadership in the domestic beer market, with around 52 per cent market share, would help the company reap the benefits of a likely rise in beer penetration. Many analysts expect beer to lead the race over spirits in the long run. The stock’s underperformance in the past year, along with expectations of better long-term business outlook, has helped UBL outperform United Spirits on the bourses in recent times.

UBL’s business performance is expected to remain under pressure in the near term amid local lockdowns and a likely tax increase. Additionally, on-trade share (20 per cent of revenue) would hurt offtake of premium portfolio as pubs/malls could see subdued footfall even if the lockdown is fully lifted. This, along with lower operating leverage, would weigh on its bottom line. In Q1, too, a 77 per cent volume decline resulted in 75.3 per cent year-on-year plunge in net revenue to Rs 507 crore. The company reported Ebitda (earnings before interest, taxes, depreciation, and amortisation) loss of Rs 95.7 crore and loss before tax of Rs 151.9 crore.

On the whole, the trend in the company’s growth from FY22, when analysts see a sharp recovery, would be crucial. Early signs of improvement should be visible in a few quarters. Missing expectations could hurt sentiment given the stock’s pricey valuation of 46 times its FY22 estimated earnings.