 "United Breweries kingfisher")
Despite peak summer season around the corner, the United Breweries (UB) stock is down about 15 per cent since February, due to a weak third quarter (Q3) and regulatory worries. Margins may stay under pressure given the excise duty hike in Karnataka and the decision to absorb the hike.
The alcoholic beverages segment saw some demand in the third quarter of financial year 2025 (Q3FY25), driven by the festival season, and the reopening of the Andhra Pradesh market. The Prestige & Above (P&A) segment continued to show momentum, with premium volume growth at 18 per cent for United Spirits, 33 per cent for United Breweries, and 18 per cent for Radico Khaitan. The mass segment saw marginal recovery.
Inflation in neutral alcohol spirit (ENA) remains high, though ethanol production from FCI rice may ease costs, while glass prices are stabilising after declines. But barley showed an inflationary trend and may lead to more margin pressures. Policy reforms in UP and Telangana, including UP’s new excise policy with e-lottery and composite shops (beer and foreign liquor) and Telangana’s 15 per cent beer price hike may lead to market efficiency and pricing power.
The United Breweries management says visi cooler expansion (10,000 visi coolers added in Q3FY25) is a welcome move and improvement in Telangana and policy changes in UP are good news. Summer could be a strong period and Q1 generally accounts for 35-40 per cent of the annual operating profit.
UB’s Q3FY25 performance saw net sales at ₹1,990 crore, up by 10 per cent year-on-year (Y-o-Y) with volume growth of 8.4 per cent Y-o-Y. Gross margin was down by 86 basis points Y-o-Y at 43.1 per cent while operating profit margin saw a contraction of 90 basis points at 7.1 per cent and operating profit was down 3 per cent to ₹140 crore.
Adjusted net profit (APAT) decreased by 32.4 per cent to ₹57.3 crore. The bull case assumes a jump in operating profit margins to around 12 per cent in Q1FY26, with a possibility of operating profit of over ₹1,200 crore.
In the long-term, per capita consumption remains low in the beer category and volume growth may be targeted. Currently, Karnataka sales are adversely impacted by duty structure change and UB has decided to absorb the duty increase on the Kingfisher brand.
Urbanisation seems to play a big role in driving premiumisation and UB is under-represented in the P&A segment. In terms of footprint, UB has a competitive advantage. The company has focussed on manufacturing, feet-on-street and marketing to accelerate volume growth and premiumisation. This, coupled with regulatory headwinds, could compress margins in the near to medium term and analysts are cutting earnings estimates to adjust for this.
UB is making progress on volume share and premiumisation, but policy changes such as Telangana’s 15 per cent hike on the ex-brewery price of beer (versus UB’s ask for 25-30 per cent hike) could have a negative impact after offsetting excise. Karnataka recently hiked excise duty on beer and UB intends to absorb the excise duty rise on premium brands (5-10 per cent) to aid premiumisation.
UB started Q4 on a weak note. Karnataka has suffered volume loss and Telangana saw supply halted for 15 days and policy changes in Orissa and Jharkhand led to availability issues. The top priority remains driving top line and volume growth. Investments in the premium portfolio, supply chain capabilities, visi-coolers, advertising and promotion spends, absorption of price hikes, can add to margin pressure. UB has announced a capex of ₹750 crore toward setting up a new greenfield unit in UP. This could be one of the largest breweries globally with a target to commission by CY27-end.
The alcoholic beverages industry offers appealing long-term growth, but it is a volatile and complex market. Analysts remain divided on the prospects of the market leader.
