United Breweries Rating: Reduce; A robust show by the company in FY19

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Published: September 3, 2019 7:06:24 AM

Return ratios rose though capex hurt FCF generation; a good long-term story but valuations are very rich; ‘Reduce’ maintained

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UBBL’s FY2019 was marked by – (i) sustenance of momentum gained starting Q2FY18; (ii) a generally favourable pricing-taxation equation; (iii) favourable mix delta on both state and product mix; and (iv) benign RM environment and continued overhead rationalisation. The outcome was a strong 26% growth in Ebitda and 43% growth in recurring PAT as Ebitda/case hit a new high of `63.

Pre-tax RoCE moved up sharply to 28%+. Poor recent Q1FY20 print notwithstanding, we continue to like UBBL’s long-term potential. Rich valuations capture the positives, however; we continue to await a better entry price.

FY2019 P&L roundup – solid print, top to bottom

UBBL’s net revenues grew a strong 16% y-o-y to `62 bn in FY2019 led by—(i) 13% growth in volumes to around 181 mn cases, and (ii) 2.6% growth in net realisations. We note that excise/ case was down marginally y-o-y, for the first time in many years, reflecting (i) generally benign taxation environment, as well as (ii) favourable mix movement, both state-mix and product-mix. We wish the company disclosed more on the mix element, at least on an annual basis. Mix is among the most critical variables in the business and more disclosures on this would be quite useful. Gross margins expanded 40 bps y-o-y driving a 16% y-o-y growth in gross profit. A subdued 2% y-o-y growth in other operating income weighed on GM expansion a tad.

Ebitda grew at 26% y-o-y to `11.4 bn. Ebitda margins expanded 150 bps y-o-y to 17.6% on the back of GM expansion, operating leverage kicker and sustained overheads rationalisation. Other expenses per case declined for the third consecutive year. Adspend/case has declined from `27 to `19 in the past three years. Ebitda per case has increased a sharp 40% cumulative in the past two years to `63/case after staying in a flattish `43-46 range from FY2014-17.

EPS grew 43% y-o-y to `21.3/share. We would look at the FY2014-19 EPS CAGR of 20% as a better reflection of the underlying trend. This five-year phase saw some pressures in the interim, with the highway ban being the big one. It also saw what could potentially have been a big negative (GST implementation) eventually turn out to be a net positive development as the industry used the stranded taxes argument very well to get higher-than-usual price increases from states.

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Return ratios rise; sharp jump in capex hurts FCF generation
Return of strong volume growth resulted in a surge in capex to a multi-year-high `4.37 bn as the company invested in capacity expansion in three large states —Telangana, Karnataka and Rajasthan. The capex surge weighed on FCF, which declined 43% y-o-y to `2.1 bn and stood at 18% of Ebitda/37% of PAT. Strong operating profit growth and flattish working capital cycle did aid healthy improvement in return ratios—RoE improved to 19.2% (+350 bps) and pre-tax RoCE jumped to 28.3% (+590 bps), both multi-year highs.

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