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United Breweries: Re-opening of bars, cash reserves augur well for the stk

The key catalyst for the stock could be the reversal of tax increases along with re-opening of bars and restaurants
Shares of liquor-maker United Breweries extended its gains into second straight day, adding 3.6 per cent in the intra-day trade, to quote at Rs 1,008.6 apiece on the BSE on Tuesday. In two days, the stock has rallied nearly 5 per cent on the BSE, as against 1.6 per cent gain in the benchmark S&P BSE Sensex.

The stock eventually settled 3.2 per cent higher, at Rs 1,004, on the BSE. In comparison, the S&P BSE Sensex ended 477 points, or 1.26 per cent, higher at 38,528 level.

On Friday, August 14, the Bengaluru-based firm posted a consolidated net loss of Rs 114.50 crore for the first quarter ended June 30, as against a net profit of Rs 164.69 crore in the year-ago quarter, on account of decline in sales due to the pandemic. Moreover, its revenue from operations slipped 73.17 per cent to Rs 1,262.82 crore during the quarter under review, as against Rs 4,708.42 crore in the corresponding period previous fiscal.  

"During the first quarter, we were impacted by physical closure of stores because of the lockdown. In addition, higher taxation also impacted us in certain markets. Bars continue to remain closed," Rishi Pardal, managing director of United Breweries told Business Standard in an interview. 

Despite the dip in profit, most analysts remain bullish on the company; here's why:

Emkay Global Financial Services, in a report dated August 17, noted that while the company's Q1FY21 performance was weak, it was largely in-line with expectations. "Q1 operational performance was largely in line, with sales falling 75 per cent and an EBITDA loss of Rs 9.6 crore. Volumes fell 77 per cent due to the loss of a peak period during the lockdown, coupled with continued shutdown of on-premise channels and increase in taxes... But these should reverse as volumes/utilisations improve. Input outlook remains benign, while the cost reduction has been strong," it noted.

The key catalyst for the stock could be the reversal of tax increases (already done in Delhi/Odisha /J&K) along with re-opening of bars and restaurants which, the brokerage says, will drive a stronger recovery. "UBL is well placed to emerge stronger and gain share from the competition. Cost reduction and reduced competition along with volume recovery can drive strong margin gains," it said. It maintains 'Buy' call on the stock with a taregt price of Rs 1,225 (earlier Rs 1,160) rolling forward to Sept-22 EPS. 

Analysts at ICICI Securities, on the other hand, believe that apart from the economy limping back to normalcy and the subsequent business revival in the medium-to-long term, the company's virtual debt-free status and higher level of liquidity provides comfort.

"Although the pandemic saw the beer sector getting impacted more than the liquor sector, within the beer sector, microbreweries segment and few private startups (mainly into fast growing premium beer) are seeing mounting financial troubles. UBL, on the other hand, has a comfortable financial position and with its wide array of portfolio & distribution reach, can capture the potential void in the sector, as and when consumption behaviour normalises," the broekrage said in its recent report. The brokerage, too, has 'buy' call on the stock with a target price of Rs 1,120.

Among other positives, stable market shares for the quarter; stable working capital situation with no pressure as such on the receivables side; and encouraging results in the non-alcoholic beverage space are the factors that Kotak Institutional Equities bank on, with an 'Add' call on the stock with a fair value of Rs 1,120.

Spark Research, meanwhile, remains positive on the stock on the medium-term outlook on back of the huge growth runway potential for beer market in India due to favourable young demographics, rising disposal income, warm climate and lower per capita consumption besides UBBL’s ability to maintain leadership position capitalising on its strong and wider product portfolio. They have 'add' rating on the stock with a target price of Rs 1,060.

Key concerns

Despite the above mentioned positives, uncertainty with respect to normalcy and capital intensive nature of the business could act as key overhangs, analysts say.

"The Alcohol segment is being affected by a series of events such weak demand; very sharp excise increases by state governments; the unlikelihood of bars and restaurants re-opening anytime soon; and worsening state finances potentially pressuring working capital... The capital-intensive nature of the business (depreciation at ~23 per cent of EBITDA even in FY20) implies the PAT impact would be even sharper than the sales and EBITDA impact," said analysts at Motilal Oswal Financial Services. "Steep ROCE decline from already unimpressive levels of 12.8 per cent in FY20 and a weak earnings outlook, combined with expensive valuations of 82x FY22 EPS and 32.7x EV/EBITDA, have led us to maintain a Sell rating on the stock, with TP of Rs 820 (targeting 24x Sep’22 EV/EBITDA, a 20 per cent discount to peers)," they said.



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