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Consumer- Alcoholic Beverages Sector Update | 8 March 2019 Consumer- Alcoholic Beverages Risk/reward now favors UNSP compared to UBBL Upgrading UNSP to Buy, Downgrading UBBL to Neutral UNSP - Financial & Valuation (INR b) The Alcoholic Beverages (Alcobev) segment in India remains an attractive investment Y/E March 2019E 2020E 2021E candidate driven by healthy earnings growth and improving ROCEs. Sales 92.2 106.5 121.5 Yet, despite these improving metrics, FY19E PAT of USD108m/USD87m for UNSP/UBBL EBITDA 13.5 17.0 21.0 is still low and indicates strong multi-year growth opportunities ahead. Adj. PAT 7.5 10.3 13.5 Adj. EPS INR 10.3 14.2 18.5 While we have historically had a preference for UBBL over UNSP, we believe, a EPS Gr. (%) 53.3 37.4 30.3 combination of potentially slower earnings growth for UBBL from FY20 onwards RoE (%) 24.2 26.3 25.5 compared to the preceding years, potential headwinds to earnings emerging now, and RoCE (%) 16.5 22.2 37.2 fair valuation after a best-of-breed stock price run-up means that upside is limited P/E (x) 54.2 39.4 30.3 from a one-year perspective. EV/EBITDA (x) 31.5 24.4 19.3 On the other hand, UNSP offers stronger earnings growth opportunity compared to UBBL (34% CAGR v/s 20% CAGR over FY19-21), and would consequently have better UBBL - Financial & Valuation (INR b) ROCE expansion compared to UBBL. UNSP trades at a ~10% discount to sector P/E Y/E March 2019E 2020E 2021E Sales 64.9 73.3 84.3 multiples and is at ~25% discount to UBBL’s P/E multiple. Our DCF-based target price EBITDA 12.1 13.9 16.3 of INR700 gives an upside of 25% for UNSP compared to an upside of only 7% for Adj. PAT 6.1 7.1 8.5 UBBL. Adj. EPS INR 23.0 26.8 32.0 We are therefore changing our recommendation for UNSP from Neutral to BUY and EPS Gr. (%) 54.0 16.6 19.5 on UBBL from BUY to Neutral. RoE (%) 20.6 20.1 20.1 RoCE (%) 18.9 18.4 18.5 P/E (x) 60.3 51.8 43.3 Investability potential in the alcobev segment is increasing: In terms of EV/EBITDA (x) 30.4 26.5 22.6 investability, the Alcobev segment has gained significance. Market Capitalization of UNSP is around USD5.8b, with free float MCap of USD2.5b. Market Capitalization of UBBL is around USD5.3b, with free float Mcap of USD1.4b. Market Cap CAGR growth over a 15-year period has been spectacular for both UNSP and UBBL, with the former reporting 39.4% CAGR growth and the latter reporting an even better 43% CAGR growth. This was led by UBBL moving from loss to profit over the last 15 years and witnessing an extremely strong PAT CAGR between 22-30% over a 3/5/10-year period. ROCEs for UBBL have improved from mid- single-digits 10 years ago to around 19% now. In case of UNSP, PAT CAGR was 27% over the past 15 years and ROCE has increased to ~16% in FY19E from ~4% (15 years ago). Yet, despite these improved metrics, FY19E PAT of USD108m/USD87m for UNSP/UBBL, India’s largest spirits/beer company, respectively, is still a very low number. This indicates a strong multi- year earnings growth opportunity, going ahead. Outperformance of UBBL is likely to be in the past: Since we upgraded United Breweries (UBBL) in Sept’17, it has been the best performing stock in our Consumer universe, and the second best among Consumer and Retail stocks under our coverage. UBBL’s stock price has yielded ~73% returns since our upgrade, second only to Jubilant Foodworks, which has seen its stock price appreciate ~90% over the same period. UBBL’s stock price appreciation is favorable v/s ~19% average return from Consumer stocks under our coverage/ ~14% from the BSE FMCG index/ ~9% from the Nifty/ ~14% from the Sensex and just ~9% from its alcohol peer — United Spirits (UNSP). Krishnan Sambamoorthy – Research Analyst ([email protected]); +91 22 6129 1545 Vishal Punmiya – Research Analyst ([email protected]); +91 22 6129 1547 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Consumer Large part of earnings momentum at UBBL has been already witnessed: There are several factors which have led to UBBL’s outperformance like strong volume led topline growth, premiumization, market share gains and improving return ratios. We, however, believe that a large part of its earnings momentum led by the category tailwinds have already come through. The company’s own efforts will contribute to earnings growth, but will potentially have a much lower incremental impact than the past two years, in our view. Some headwinds that are likely over the short- to medium-term are election related disruptions right in the middle of the peak season for beer in India, capex revival leading to higher depreciation going forward, the Anti-Trust Case overhang and raw material inflation (barley and glass). What will work for UNSP? After its underperformance over the last 1.5 years, UNSP is now trading at a ~25% discount to UBBL and at 10% discount to its Consumer sector peers (38.5x FY20 EPS), despite no deterioration in its structural earnings growth trajectory. UNSP’s premiumization trend remains strong; its costs saving initiatives are in progress and raw material costs despite spiking a bit recently, remain at low levels compared to historical average. Its debt reduction trend still has plenty of steam left, unlike UBBL, where the capex cycle is expected to pick up now. Valuation & view: After nearly a year and half of preferring UBBL over UNSP, we are Downgrading UBBL to Neutral (Buy earlier) and Upgrading UNSP to Buy (Neutral earlier). While we remain positive on the longer-term earnings growth opportunity in UBBL, we believe there is moderate room for an upside over the next one year with rich valuations at 50x FY20 EPS. Earnings growth is likely to be slower in FY20 and FY21 at ~18% compared to 63% CAGR between FY17- FY19E. We value UBBL at 25x Dec 2020 EV/EBITDA and get a target price of INR1,480 (~10% discount to peers), implying just 7% upside. UNSP not only offers better earnings growth opportunity over the next two years (34% CAGR over FY19E-FY21E) with strong ROE expansion as well, but at 40x FY20, it is also over 20% cheaper in terms of valuations to UBBL and at 10% discount to its consumer sector peers. Our DCF-based target price of INR700 gives an upside of 25%. Exhibit 1: UNSP now trades at a discount to UBBL UNSP Prem/(Disc) to UBBL (%) 51 43 47 36 37 38 31 32 34 32 25 25 29 28 18 19 23 22 14 12 16 12 5 8 7 4 8 7 (1) 4 (10) (8) (6) (10) (24) (27)(22) Jul-18 Jul-17 Jul-16 Jan-19 Jan-18 Jan-17 Jun-18 Jun-17 Jun-16 Oct-18 Oct-17 Oct-16 Apr-18 Apr-17 Apr-16 Feb-19 Sep-18 Feb-18 Sep-17 Feb-17 Feb-16 Sep-16 Dec-18 Dec-17 Dec-16 Aug-18 Aug-17 Aug-16 Nov-18 Nov-17 Nov-16 Mar-18 Mar-17 Mar-16 May-18 May-17 May-16 Source: Company, MOFSL 8 March 2019 2 Consumer United Breweries – Downgrade to Neutral Reasons for upgrading UBBL In our note dated 21st Sept’17, we upgraded the UBBL stock to Buy due to the following reasons: The impact of the highway alcohol sale ban, GST, and alcohol prohibition in a few states was not as bad as feared. Stock Info The company performed well in 1QFY18 despite the highway ban coming into Bloomberg UBBL IN Equity Shares (m) 264 effect, with sales, EBITDA and PAT increasing in the range of 7-10%. M.Cap.(INRb)/(USDb) 366.4 / 5.2 The GST impact on margins was expected at ~200bp in FY18. Subsequently, it 52-Week Range (INR) 1494 / 908 was revealed that due to various factors (including rate on barley at 0%), the 1, 6, 12 Rel. Per (%) -4/8/25 impact was likely to be less than half of the initial fears. 12M Avg Val (INR M) 822 Demand appeared to be on the cusp of a revival. Free float (%) 42.3 The company launched a spate of brands in 1QFY19, which was expected to UBBL - Financial & Valuation (INR b) support growth of the premium and super-premium segments, boosting gross Y/E March 2019E 2020E 2021E margin potential. Sales 64.9 73.3 84.3 The stock was the worst performer within our coverage universe since the EBITDA 12.1 13.9 16.3 Adj. PAT 6.1 7.1 8.5 month post demonetization. While there was a sharp rally in its peer UNSP’s Adj. EPS INR 23.0 26.8 32.0 share price, UBBL was languishing at the same price level since we downgraded EPS Gr. (%) 54.0 16.6 19.5 it to Hold after the 4QFY17 results. RoE (%) 20.6 20.1 20.1 RoCE (%) 18.9 18.4 18.5 P/E (x) 60.3 51.8 43.3 What has happened since then? EV/EBITDA (x) 30.4 26.5 22.6 Strong topline growth — UBBL’s stock outperformance has been led by strong results and continued market share gains.
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