United Breweries to gain from volume recovery, easier regulations

Margins, however, could remain under pressure due to high barley, glass prices

The stock of India’s largest beer maker United Breweries (UBL) was up 6 per cent over the last two trading sessions. Robust recovery in sales volumes, easing regulatory policies and long-term growth triggers are expected to keep the revenue growth trajectory strong for UBL

Earlier in the week, its parent Heineken while announcing its global March quarter results said that UBL's beer volumes in India grew by a high-single-digit, outperforming the market. Heineken also highlighted that UBL experienced progressive growth during the quarter with the declining impact of the Covid omicron variant. The March quarter is expected to be the fifth consecutive quarter of positive growth with four of the last five registering double digit growth on a low base.

Even in the December quarter, United Breweries had reported 22.6 per cent sales growth on the back of a 19 per cent growth in volumes. It was the highest growth across large alcoholic beverage companies. Most brokerages have highlighted that volumes for alcoholic beverage companies currently are back at pre-Covid levels. The beer segment was the worst impacted across the alcoholic beverages sector during the pandemic given its bulkier and perishable nature, storage issues and need for refrigeration as compared to spirits.

Unlike the washout during the previous peak seasons due to multiple Covid disruptions, investors will be hoping it would be a disruption-free summer this time around. The June quarter accounts for over 40 per cent ot total beer volumes and United Breweries generates over 35 per cent of its operating profit during the year in this quarter.

What could be positive for United Breweries are regulatory changes and lower taxes. Say analysts led by Manoj Menon of ICICI Securities, “The new policies may aid better value growth in the medium term through rationalised tax/excise structures, better stores – walk-in facility, availability in mall outlets and online sales and home deliveries.” These new policies are also mindful of changing demographics, they add.

While there are multiple tailwinds on the revenue front, the company could face margin headwinds going ahead. Barley and glass bottles make up for 75 per cent of cost of goods for beer makers. Says Ronak Soni of Equirus India Equity Research, “Barley prices have spiked over the past 4-6 weeks since the Russia-Ukraine conflict. UBL generally books barley during the months of February-April to secure supplies for the full year. We expect margins to be impacted for UBL (for FY23) due to firm barley/glass prices which are up by 45 per cent and 18 per cent respectively on a y-o-y basis.” Margins in the March quarter are expected to contract by 340 basis points y-o-y to 13.6 per cent, according to Nirmal Bang Research.

With beer volumes expected to recover, analysts expect the market leader with 55 per cent share to be a key beneficiary. The segment is better placed as compared to spirits over the mid to long term driven by volume and mix levers; India’s beer share at 20 per cent is also among the lowest in the world suggesting a higher runway for growth, says Equirus. Despite strong competitive intensity, they expect UBL to maintain dominance in the beer segment. Investors should await volume growth/margin improvement before considering the stock.