Summer cheer for beer firm United Breweries as margins remain stable

Cheaper raw material prices and growth in premium segment expected to help company

United Breweries, India’s largest beer manufacturer, is expected to gain business as summer brings heat waves. The company will be a major beneficiary April to July, the period that contributes 40-45 per cent of its annual beer volumes. The T20 Cricket World Cup in June and the ongoing Indian Premier League will help volumes and should offset the negative impact of elections on sales.

While peak season sales are expected to be strong, the immediate trigger for United Breweries is its performance in the March quarter. The company is expected to increase its volumes in the quarter by 9 per cent year-on-year (Y-o-Y) on the back of market share in North India. Karan Taurani and Rounak Ray, analysts with Elara Capital, expect gross margins to be stable sequentially due to steady barley and glass prices. Operating profit margins could improve 100 basis points quarter-on-quarter to 9 per cent. The projection for operating profit is much lower than the pre-pandemic level of 13.4 per cent in Financial Year 2019-20 (FY20) as the company invests in supply chain initiatives to get better volume growth in the premium portfolio. The brokerage has a 'reduce' rating on the stock with a target price of Rs 1,725.

Brokerage Nuvama Research too expects United Breweries to improve volume growth, which is among the highest in the consumer goods sector in the March quarter. On the back of a volume growth of 10 per cent, the company expects net revenues to grow by 12 per cent Y-o-Y. Helped by new launches, the company has regained share in the Karnataka market: Rising to 44 per cent from 39 per cent earlier, said Nuvama.

Easing raw material prices would help all alcohol beverage makers, including beer companies. Kinjal Shah, vice-president and co-group head for corporate ratings at ICRA, said: “The operating profit margin for ICRA’s sample set companies is expected to increase by 50-100 basis points in FY25, owing to moderation in packaging material costs, coupled with price hikes approved by the state governments, partly offset by the increase in grain prices.”

ICRA expected working capital requirements (for the set of companies it analysed) to moderate in FY24 and FY25. Working capital requirements as on year end are largely for maintaining finished goods inventory in the peak season. A correction in packaging costs has reduced input prices, so funding requirements may be lower.

About raw material, analysts at Nuvama Research led by Abneesh Roy said that barley could continue to trade at lower levels and glass costs too could cool off. United Breweries’ operating and net profits could see a sharp jump due a low base, correction in key raw material and utilisation of higher-priced inventory. Operating profit is expected to improve by 214 per cent and net profit could grow 857 per cent over the year-ago quarter. United Breweries is a top buy for the brokerage in the consumer sector.