Analyst Corner – United Breweries: Beer volume recovery tracking well; FV raised to Rs 1,260

Beer volume recovery is tracking well with opening of on-trade; we expect return of growth in the next 1-2 quarters as normalcy restores. Several states have rolled back Covid taxes to support recovery in Alcobev volumes; it remains to be seen if states focus on the optimal tax regime going forward with an objective to drive growth in industry volumes as well as tax collection. Two key states are contemplating a structured online sales model. Cost savings along with soft RM prices augur well. We expect UBBL’s new CEO to step up focus on market share defence in value segment and gain share in the premium segment. We raise estimates and FV to Rs 1,260.

Beer was one of the most impacted consumption categories amid the Covid crisis due to high on-trade salience and high urban salience; both these segments were severely hit, some loss of share to spirits as consumption moved in-house; consumers avoided cold products (chilled beer) during the pandemic and opted for spirts. Also, spirits offer better value in terms of cost per unit of alcohol, migration of white-collar workforce, students from metros to smaller towns impacted beer consumption. We expect sharp recovery in beer volumes as we continue to move towards normalcy in lifestyle/ environment. Our checks suggest continued month-on-month improvement in beer demand with opening of on-trade channel (from 70% recovery in September to 80-85% recovery in Oct and Nov). We have increased our FY2022/23E volumes to 187/211 m cases from 173/189 m cases.

It remains to be seen if key states focus on optimal taxation regime going forward with an objective to maximize industry and the state’s tax revenues as against excessive tax increases over the past few years. Further, we gather that home-delivery/online sales may continue beyond Covid at least in a few states— Maharashtra and WB are contemplating structured direct-to-home sales. Covid compelled UBBL to cut costs aggressively; some of these costs savings may sustain even as volumes normalize. RM prices have softened with modest inflation in glass bottles and deflationary trends in barley.