United Breweries (UBBL) has planned a slew of new launches in FY18, which is encouraging. After the successful launch of its premium strong beer brand Kingfisher Storm in early May 2017, the company plans to come up with five premium brands from the Heineken stable. Highway ban and GST implementation are expected to adversely impact the company’s near-term sales and margins. Premiumisation and zero-based budgeting strategies are being employed to mitigate the impact on margins. Efforts on water sustainability are commendable, with 40% of water requirement at end- FY17 being met by rain water harvesting and water shed management. The company is targeting to be water-positive by 2025, which is remarkable for a company that uses water as key ingredient in manufacturing. We see strong long-term volume and earnings growth opportunity (FY17 PAT at $36m) for UBBL – India’s largest beer player – given the strong barriers to entry in the form of distribution, brewery reach, scale and brands.
However, the operating environment over the next year is expected to be challenging, both due to the highway ban and the margin hit on account of GST. Owing to limited upside to our target price of `850, target multiple at 33x June 2019E cash EPS), we maintain ‘neutral’ rating on the stock.
So far, Kerala and Maharashtra have witnessed a high impact of the Supreme Court’s (SC) ban on the sale of alcoholic beverages along highways.
Some highway stretches in Mumbai have been denotified to get around the ban, but the rest of the state has been affected. In several other states (including Karnataka, Telangana and Andhra Pradesh), the ban will be imposed from 1 July 2017. These states will have more time to prepare and take necessary measures, Karnataka is reportedly looking to denotify highways, to minimize the impact of the ban, unlike states like Maharashtra and Kerala which had just one-day notice. Another SC hearing is expected in the first half of July after the restaurant community requested to relax norms for onsite consumption. Beer may be affected more than spirits from the highway ban.