United Breweries: Higher Heineken stake sentimentally positive

However, high stock valuations indicate a limited upside, feel analysts for now

The Street reaction to Tuesday’s move by Heineken raising stake in United Breweries (UBL) to a little over 42 per cent partly explains the road ahead for the latter's shareholders. On a day when markets were down 1.5 per cent due to global worries, the UBL stock ended nearly flat, protecting the 15 per cent gains it has seen in the past six sessions.

 

In 2005, the UB group had divested 37.5 per cent stake to the Scottish & Newcastle (S&N) group, making it an equal partner in UBL. While the acquisition of S&N made the Dutch beer giant the co-promoter in UBL, Heineken had also acquired another 1.35 per cent stake from the open market in December 2013, taking its stake to 38.85 per cent.

On Tuesday, as part of its plan to monetise non-core assets, United Spirits (a company Vijay Mallya once owned but majority-sold to Diageo in 2012) sold its entire 3.21 per cent holding in UBL to Heineken for Rs 872 crore. As a result, Heineken’s stake has increased further to 42.06 per cent, significantly higher than the UB group’s 32.94 per cent. However, so far, none of the promoters have announced anything pertaining to a change in the management control of UBL.

From the market’s perspective though, the Street is positive on UBL’s prospects in the light of Heineken’s higher shareholding. While the latest transaction was at an average price of Rs 1,030 a share (slightly higher than Monday’s closing one of Rs 1,025), it also reflects the confidence and commitment of Heineken in the Indian operations, say analysts.

“The transaction affirms our investment rationale of Heineken’s intention to increase its footprint in India by means of higher control in UBL. With Heineken’s higher control over the company, we believe UBL would be well placed to grow in the premium beer segment,” say Bharat Chhoda and Ankit Panchmatia of ICICI Securities.

Heineken’s premium image should help UBL position itself against global players like Carlsberg, Tuborg and Stella Artois, among others.

“With the development, we increase our market cap to sale multiple by 50 basis points (bps, 100 of which make a per cent) and assign a multiple of 4.5x vis-à-vis the previous 4x, to arrive at a target price of Rs 1,150, with a 'Buy' recommendation on the stock,” said Chhoda and Panchmatia.

Heineken is the world’s third largest brewer, with nearly nine per cent market share. As India has a high growth potential and is a large market, it's little surprise that the beer giant wants a larger share of this pie.

“India is clearly the brightest star for all multinational corporations. In the past, Unilever and GlaxoSmithKline have also raised stakes in their Indian arms. Clearly, MNCs want to have more of India, as it will be the fastest growing from a 3-5-7-year perspective,” says Abneesh Roy, associate director, Edelweiss Securities.

In the case of UBL, Roy says stake has not been an issue in the past. So, the increase will not have much impact. Anyway, Heineken had already brought in brands, giving them more control. However, there are areas of concern as well, which can keep the stock under check in the near term.  

“The basic dynamics of the business are unlikely to change in the near future,” says P Phani Sekhar, fund manager, portfolio management services, at Karvy Stock Broking, who as a result is not so enthused by the latest development.

There are headwinds the company faces in terms of volumes and, thereby, growth in revenues and profitability. Analysts believe as of now, the full-year forecast of 18 per cent sales growth appears at risk. The June quarter (summer season) has been disappointing in volume terms and analysts at Nirmal Bang say UBL’s performance is also likely to be muted in the crucial summer season, with both sales and profits expected to increase only 13 per cent year-on-year.

The lone saving grace could be the price rise granted after many years in the key erstwhile Andhra Pradesh market, they say. The company got permission for a 10-12 per cent price increase in Andhra Pradesh in March and a similar price increase in Telangana in April. The two states contribute 16-17 per cent to UB’s revenues.

Thus, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin are estimated to improve by 30 bps to 17.8 per cent, led by gross margin improvement of 54 bps over the year-ago period.  While analysts at IDFC Securities remain neutral, with a target price of Rs 976, those at Nirmal Bang have more a bearish stance with a target price of Rs 615. For now, the upside might be limited.