The impact of the highway alcohol sale ban, GST, and alcohol prohibition in a few states has been nowhere as bad as feared. The company performed well in 1QFY18 despite the highway ban becoming effective, with sales, EBITDA and PAT all increasing in the range of 7-10%. While Maharashtra and Kerala had a severe impact on sales (had less time to prepare for the highway ban; deadline was April 1, 2017), other key states like Karnataka, Telangana and Andhra Pradesh saw much less impact (had more time to prepare; were granted an extended deadline). Besides, the recent Supreme Court judgments have offered some relief. The GST impact on margins was expected to be 200 bp in FY18. Encouragingly, it is now likely to be less than half of that. Demand appears to be on the cusp of revival. Kingfisher Storm (launched in 1QFY18) has been witnessing good response. The company has also launched a spate of brands from the Heineken stable in FY18, which is expected to support
The company has also launched a spate of brands from the Heineken stable in FY18, which is expected to support growth of the premium and super-premium segments, boosting gross margin potential. The company has also gained market share in both FY17 and 1QFY18. The stock has been the worst performer within our coverage universe since the month post demonetisation. While there has been a sharp rally in alcohol peer UNSP’s share price (led by better news flow in recent months), UBBL has remained at the same price level since we downgraded it to ‘Hold’ after 4QFY17 results.
With receding fears, improving prospects and strong moats (brewery in every state, distribution across outlets selling beer, brand strength, scale benefits, efforts on water sustainability), the medium- to long-term earnings growth prospects appear promising. PAT of $37 m in FY17 for India’s largest beer company is miniscule, in our view, and can potentially be several times higher over the medium to long term. We thus upgrade our rating to ‘Buy’.
