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Growth momentum to sustain
* Our channel checks suggest volume growth momentum for beer continues to remain strong, with industry volumes across top five states rising ~11% in Q4FY19. This along with market share gains offers visibility of a strong volume performance from United Breweries (UBL).
* As against the street expectations of election disruptions in Q1FY20, we note that polling in most large markets will be over in April, which should drive strong recovery from May onward and hence, have a limited impact on UBL’s Q1FY20 performance.
* Input prices, particularly glass and barley have increased 10-15%. However, with most of the glass requirements met through recycled bottles, we expect the overall impact to be marginal and should be offset by modest price increases.
*UBL remains our top pick. Maintain Buy with a revised TP of Rs1635 (from Rs1550). Valuations at 41x FY21E EPS and 22x EV/EBITDA still attractive vs. peers, given strong volume momentum, market share gains and an improvement in ROCE (now at 30%).
* Volume trends remain strong:
Beer volume trends across the top five markets (~50% of the industry and UBL volumes) indicate continued strong growth momentum, as per our channel checks. Despite lower procurement since mid-March due to elections and higher comparables across the top five markets, growth in this quarter has been in double digits (11% in Q4FY19 vs. 14% in Q3FY19), led by double-digit growth in Karnataka, AP and Telangana. In our view, reported growth should be marginally impacted by high base (trade restocking in Maharashtra in Q4FY18), while may benefit positively from lower comparables in West Bengal (supply discontinuation in Q4FY18).
* Election disruptions to be short lived; growth to sustain in Q1FY20:
As against the Street expectations of severe election disruptions, we believe the impact on UBL’s Q1FY20 performance should not be significant as polling in most large markets will be completed in April and lower procurement could drive re-stocking after April. Moreover, benign tax increases across most states should continue to benefit the category growth.
* Margins likely to be steady on modest price hikes and strong premiumization trend:
Input inflation has inched up, largely due to rise in glass prices by ~10% and barley by ~15%. However, we expect limited margin impact as large part of glass requirements is met through recycled bottles and modest price hikes should offset this inflation. Strong growth in premium brands and plans to scale up its manufacturing in more states should further drive margin expansion from savings in logistic costs and taxes.
* Outlook & valuation; UBL remains top pick:
Valuations at 41x FY21E earnings and 22x EV/EBITDA still look attractive, given UBL’s strong volume performance, market share gains and an improvement in ROCE to ~30%. Scale benefits in fast-growing premium brands and operating leverage should drive further margin expansion, in our view. We reiterate Buy with a revised TP of Rs1635, rolling forward to FY21E earnings. Key risk: Adverse state regulations.
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