Volume gains ahead for United Breweries, but investors should be cautious

United Breweries has been one of the worst affected companies since the start of the Coronavirus (Covid-19) pandemic. The lockdown and social distancing norms, higher taxes by some state governments and closure of bars led to a steep decline in beer volumes and revenues for the market leader. 

The poor operational performance and muted investor expectations led to the stock’s underperformance as compared to its mid-cap peers as well as the benchmark. While the Sensex and BSE 200 indices are each up 32 per cent over the last six months, United Breweries has barely budged gaining about 1.8 per cent during the period. In fact, from its highs in September, the stock has shed 16 per cent. 

While the September quarter could be another washout, there are some positive triggers which could lead to demand improvement. One such is the recent measure by the West Bengal government to cut taxes. As part of its new excise taxation policy, the state has cut the price of mild beer by 25-40 per cent while for the stronger variants the price cut is around 15-20 per cent. 

 

The move to withdraw the 30 per cent additional value added tax comes on the heels of similar measures taken by Delhi, Odisha and Jammu and Kashmir. While states had sharply hiked taxes during the lockdown to shore up their revenues, the result was the exact opposite as volumes tanked by half due to taxes and closure of bars. Ashit Desai of Emkay Research expects volumes in West Bengal to recover and believes the move may encourage neighbouring states of Assam, Jharkhand and Odisha to cut rates further. 

The other trigger is the gradual reopening of bars and restaurants across the country. Key states such as Maharashtra, Karnataka, Delhi and West Bengal have reopened bars and restaurants which will help improve volumes. Maharashtra and Karnataka are not only the top markets for beer in the country, but are also the most lucrative given higher realisations. 

While these steps are positive, the recovery could take time as the peak season for beer was lost during the lockdown. Further, sales of premium beer will also be impacted given the muted footfalls in pubs and malls. While there are multiple triggers for the stock in the medium term such as lower per capita consumption, new launches by Dutch parent Heineken NV and strong balance sheet, investors should be cautious given the near term pressure on volumes and margins.