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18,412 512 443 13.4 614/208 13,205 272 255 1 UBBL IN UBBW.BO 532478 UBL
We initiate coverage on United Breweries (UB) with a SELL reco primarily due to expensive valuation. Price apart, we remain positive on the underlying businessUB dominates the annual >200mn case Indian beer industry with overall ~54% share. Led by the ubiquitous Kingfisher brand, it enjoys >45% share of the strong beer market (~75% of beer industry vols). A slew of well-known factors- negligible per capita consumption, favourable demographics and an enduring brand should support ~13% volume cagr over next 2 years. FY11-13 EBIDTA growth @~21% would outpace revenues as savings from proprietary bottle usage reduce packaging costs and drive ~160bps OPM expansion. Though deserved to an extent, we believe current valuation at 25x FY13 EV/E packs in too much of a premium and is more than double of that ascribed to global brewers. SELL with 9-mth TP of Rs443. Vast untapped opportunity; UB controls >50% market That the domestic beer market is under-penetrated would be an understatement. With a per capita beer consumption of just 2ltrs, compared to an avg of >60ltrs for other emerging markets like China and Brazil, the market presents a vast growth opportunity. Moreover, alcohol basket is skewed towards spirits like whisky and vodka, in contrast to emerging markets wherein beer share is >85%. UB, with FY11 sales of ~140mn cases (post merger of all entities), enjoys 54% market share. It has built up an unmatched distribution muscle with owned/tie-up units in virtually every state, an advantage difficult to replicate for any newcomer. Await better entry point; initiate with SELL United Breweries is cushioned by the twin bulwarks of near-secular demand and high entry barriers. Although demand has been a robust ~15-25% yoy in the past 3 quarters, we built in a conservative 13% volume cagr over FY11-13. Stable raw material costs and control over packaging expenses through patented bottle initiative would drive margin expansion. Even with an allowance for some deserved premium, we believe valuation appears expensive at ~25x EV/EBIDTA. SELL with 9mth TP Rs443. Financial highlights
Y/e 31 March (Rs m) Revenues yoy growth (%) Operating profit OPM (%) Pre-exceptional PAT Reported PAT yoy growth (%) EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) Debt/Equity (x) ROE (%) ROCE (%) FY10 22,755 17.9 2,342 10.3 642 896 96.6 3.7 137.2 10.1 55.5 0.7 9.1 8.2 FY11E 31,363 37.8 3,889 12.4 1,584 1,584 76.8 6.0 85.5 10.8 36.7 0.6 15.4 14.5 FY12E 35,588 13.5 4,662 13.1 1,982 1,982 25.1 7.5 68.3 10.7 30.5 0.6 17.7 17.1 FY13E 40,332 13.3 5,646 14.0 2,541 2,541 28.2 9.6 53.3 9.0 25.2 0.5 19.1 20.0
Shareholding pattern March ' 11 Promoters Institutions Non promoter corp hold Public & others Performance rel. to sensex (%) UB 1m (7.3) 3m 10.4 1yr 115.5 (%) 74.1 15.6 2.3 8.0
UB
Sensex
Jun11
Research Analyst
research@indiainfoline.com
Bhavesh Gandhi
United Breweries
Domestic beer volumes have seen 17% cagr over past 4 years
Beer - vast untapped potential on offer Domestic beer market volumes have witnessed a robust 17% cagr over the past 5 years to reach ~230mn cases in FY11. However, such growth has to be viewed in the context of the overall share of beer in the alcohol consumption basket. Spirits (whisky, vodka etc) account for 78% of alcohol beverages consumed in the country with beer share at just 22%. A key determinant for such a skewed distribution is the taxation structure; all alcoholic beverages are taxed uniformly irrespective of their alcohol content. Hence domestic preference for spirits is much higher, given that it has higher alcohol content at a similar price. Globally, levies on beer are typically at half the rates applicable for spirits. In other emerging markets, beer is the mainstream alcoholic beverage. We believe domestic beer market growth would be propelled not only by increased per capita intake but also a bigger share of the consumption pie. Strong beer dominates domestic industry volumes Beer in India is classified into mild beer (<5% alcohol) and strong beer (5-8% alcohol). Strong beer dominates domestic market with a share of ~74% and is growing at a faster pace compared to mild beer. Spirits dominate alcohol basket
Spirits 100 80 % Beer Wine
Globally, levies on beer are at half the rates applicable for spirits, creating an incentive towards low alcohol beverages Strong beer accounts for ~75% of the total beer volumes sold in the country
75
Company Report
United Breweries
UB group beer volumes recorded ~21% cagr over past 4 years; co towers over the industry with a 54% share
UB towers over industry with ~54% share UB group recorded a robust ~21% volume cagr over the past four years. Since MABL and Chennai Breweries are merged with UB, we estimate the company ended FY11 with total volume sales of 140mn cases. Over a 4-5 year period, UB believes 15% volume cagr could be sustainable, despite a rising base. The companys flagship brand Kingfisher (strong beer) accounted for just over 50mn cases in volumes in FY10, a near 3x growth in the past 4 years. Also, the umbrella brand Kingfisher sells nearly thrice as much as its nearest rival, Haywards. Company posted a robust 27% growth in strong beer and a healthy 16% rise in mild beer sales, far ahead of mild beer industry growth of 9% in FY11. Kingfisher brand sales ~3x nearest rival
Kingfisher, 37%
UB posted a robust 23% volume growth in strong beer and a healthy 16% in mild beer sales in FY11
Others, 21%
SABMiller, 25%
UBL, 54%
Others, 50%
7.0 30 0.0 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 0
FY11E
FY12E
Source: Company, India Infoline Research Note: Q4 volumes adjusted for merger of Empee, Millenium-Alcobev & Associated Breweries & Distilleries
Company Report
FY13E
FY07
FY08
FY09
FY10
United Breweries
UB merged MABL with itself wef April 2010; MABL has 10% of domestic brewing capacity
Organization restructure to stream line operations UB has merged its 50% JV Millennium Alcobev (MABL) wef April 1, 2010. MABL owns ~10% of Indias brewing capacity (FY10) with a brewing capacity of 33mn cases across 4 states. In addition, UB would also merge Chennai Breweries (capacity ~13mn cases) wef March 31, 2011. This would consolidate all the brewing assets in a single company and help streamline organizational structure. UB organizational structure
Promoter Group UB Group
Heineken
100% UB Nizam Chennai Breweries is the erstwhile brewery unit of Balaji Distilleries and currently wholly owned subsidiary of United Spirits UB to offer 17 shares in exchange for 30 shares of Chennai Breweries About 6mn shares of UB are held as treasury stock valued at Rs3.1bn at CMP
Public
25%
UBL
100% UMBL
100% Empee
89% MBIL
Heineken
Public
Company Report
United Breweries
UB owns or has tied up with contract units to establish a brewery in virtually every state, an advantage unlikely to be easily replicated
Unmatched distribution reach UB has over the years built up significant scale in distribution, aided by brewery assets, owned or contracted units in virtually every state. Such a wide asset presence is required since alcohol is a highly regulated industry with state governments exerting control on movement of beer across state borders. A robust distribution network and an umbrella Kingfisher brand impart advantages that would be difficult to replicate in our view. An unmatched presence, especially across key states
Company Report
United Breweries
Near-secular demand and dominant market share to drive ~13% vol cagr over FY11-13 UB to incur Rs3bn capex in FY12 of which 50% would be on greenfield unit in Karnataka
Expect ~13% vol cagr over FY11-13 Post the merger of Millenium Alcobev (MABL) and Chennai Breweries (wef March 2011) we expect FY11 total sales at ~140mn cases. Given the dominant market share and secular nature of demand, we factor in ~13% vol cagr over FY11-13, which in turn would drive a 13% revenue cagr over same period. UB has guided FY12 capex of Rs3bn of which 50% to be spent on a greenfield unit in Karnataka while rest on land acquisition in Bihar for another greenfield unit + expand capacity of various units. Standalone volumes & realizations (% yoy)
20.0 16.0 12.0 6.0 8.0 4.0 0.0 FY11E FY12E FY13E FY08 FY09 FY10 3.0 Volumes % Realizations % 12.0
9.0
0.0
Source: Company, India Infoline Research Note: excludes tie-ups, MABL and Chennai Breweries
Millenium Alcobev owns 10% of domestic brewing capacity MABL, which has been merged into UBL, owns 4 breweries with a capacity of 33mn cases spread across 4 states; the company owns 10% of domestic brewing capacity (FY10) and as a standalone entity would be Indias third largest brewer behind UB and SABMiller.
MABL volume break-up mn cases FY09 Own brands 7.9 UBL brands 13.4 Contract 0.9 Total 22.2
MABL as a standalone producer would rank as Indias third largest brewer behind UB and SABMiller
Company Report
United Breweries
Bottle costs may be lower in FY12 as company accelerates the use of proprietary bottles, mitigating the need to inject (high price) new bottles;
Proprietary bottle initiative to cut packaging costs UBL has taken steps to contain its packaging costs (~27% of net sales) through roll out of patented bottles. In FY11, UB has infused its proprietary bottles in half the states. But since it has not fully switched to owned bottles, it was impacted by higher bottle prices in the peak summer season. UB has invested Rs800-900mn on this initiative and expects 7-8% savings on packaging costs. For instance, in the peak demand season, normal bottles cost up to Rs8 each, whereas UB would source its patented bottles at only Rs3.5-4/bottle, which implies significant savings of Rs4-4.5/bottle. Lower bottling costs to support margin expansion As discussed above, UB would save on bottling costs in FY12/13 and with stable raw material costs, we built in a 160bps margin expansion over FY11-13. Promotion expenses may rise to an extent as company plans to launch Heineken brands, probably by the end of year. The launch would be at the premium end of mild beer market (~25% of beer volumes) and initially restricted to the top metros. OPM to expand 160bps over FY11-13
15.0 12.0 9.0 6.0 3.0 0.0 FY11E FY12E FY13E FY07 FY08 FY09 FY10 %
3.0
FY11E
FY12E
FY13E
FY07
FY08
FY09
FY10
0.0
FY11E
FY12E
Company Report
FY13E
FY07
FY08
FY09
FY10
United Breweries
Dominant market share, high entry barriers and growing demand lend a coveted stability to business; however given expensive valuations, we wait for a better entry point
Sound business but price not rightjust yet A dominant market share and growing demand lends a coveted stability to UBs business. In addition, high entry barriers ensure beer market remains a duopoly in the foreseeable future. Although demand has been a robust 15-25% in the past 3 quarters, we built in a conservative ~13% volume cagr over FY11-13. Stable raw material costs and control over bottling expenses would support a 160bps margin expansion. Even after allowance for some deserved premium given the intrinsic attractiveness of business, we believe the price is not right at ~25x FY13 EV/EBIDTA and 53x FY13 PER. Globally, large brewers trade at almost half the FY13 EV/EBIDTA multiples commanded by UB. We await a better entry point and initiate coverage with SELL and a 9-mth target price of Rs443. Key risks to our reco would include higher than expected volumes/realization growth. 1-yr fwd EV/EBIDTA bands
180,000 Rs mn EV 24 12 30 18 36
Large global brewers like SAB Miller, Fosters trade at roughly half or even less 2013 EV/EBIDTA multiples currently commanded by UB
120,000
60,000
0 Apr-06 Jul-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Source: Company, India Infoline Research
480
320
160
0 Apr-06 Jul-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Source: Company, India Infoline Research
Company Report
United Breweries
Financials
Income statement
Y/e 31 Mar (Rs m) Revenue Op.profit Depreciation Interest exp. Other inc. PBT Taxes Adj. profit Extra items Net profit FY10 22,755 2,342 (1,040) (411) 323 1,214 (572) 642 254 896 FY11E 31,363 3,889 (1,221) (677) 339 2,329 (745) 1,584 1,584 FY12E 35,588 4,662 (1,467) (636) 356 2,915 (933) 1,982 1,982 FY13E 40,332 5,646 (1,652) (632) 374 3,737 (1,196) 2,541 2,541
Key ratios
Y/e 31 Mar Growth matrix (%) Revenue growth Op profit growth EBIT growth Net profit growth Profitability ratios (%) OPM EBIT margin Net profit margin RoCE RoNW RoA Per share ratios EPS Dividend per share Cash EPS Book value per share Valuation ratios (x) P/E P/BV M Cap/Sales EV/EBIDTA Payout (%) Dividend payout Tax payout Liquidity ratios Debtor days Inventory days Creditor days Leverage ratios Interest coverage Net debt / equity Net debt / op. profit FY10 17.9 3.1 (1.8) 96.6 FY11E 37.8 66.0 85.1 76.8 FY12E 13.5 19.9 18.1 25.1 FY13E 13.3 21.1 23.0 28.2
Balance sheet
Y/e 31 Mar (Rs m) Equity capital Preference capital Reserves Net worth Debt Def tax liability Total liabilities Fixed assets Intangible assets Investments Net working cap Inventories Sundry debtors Cash Other curr assets Sundry creditors Other current lia Misc.exp Total assets FY10 240 2,936 9,052 12,228 7,962 236 20,437 8,882 2,271 490 7,888 2,204 6,695 927 3,128 (4,794) (271) 895 20,437 FY11E 264 2,469 9,839 12,573 8,162 243 20,989 10,753 2,106 490 7,640 2,921 7,905 788 4,030 (5,843) (2,162) 20,989 FY12E 264 741 11,700 12,705 7,662 250 20,629 12,189 1,941 490 6,009 3,315 8,775 739 2,263 (6,630) (2,453) 20,629 FY13E 264 741 14,119 15,124 7,612 258 23,006 12,710 1,776 490 8,030 3,757 9,945 439 4,183 (7,514) (2,780) 23,006
15.7 47.1
7.7 32.0
6.1 32.0
4.8 32.0
107 35 77
92 34 68
90 34 68
90 34 68
Du-Pont Analysis
Y/e 31 Mar (Rs m) Tax burden (x) Interest burden (x) EBIT margin (x) Asset turnover (x) Financial leverage (x) RoE (%) FY10 0.46 0.75 0.07 0.98 2.61 6.2 FY11E 0.64 0.77 0.10 1.17 2.76 15.4 FY12E 0.67 0.82 0.10 1.21 2.66 17.7 FY13E 0.67 0.86 0.11 1.28 2.39 19.1
Company Report
Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between -10% to +10% Sell Absolute return below -10%
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