Broker’s Call: United Breweries (Sell)

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Target: INR 1,190

CMP: 1,395.95

The company’s results for the fourth quarter of fiscal year 2013 were disappointing across all measures.

Volume growth was only 3 percent; However, when adjusted for road-to-market changes, it was at 17 percent. The administration indicated that demand was negatively affected in the northern region due to the off-season rains.

Gross margin came in at just 38.6 percent, which is at its lowest point. It was negatively affected by the high costs of malt, packaging and adverse state mixes. The company has begun buying new malts but is expected to experience price pressures through Q1 FY24, due to the impact of higher cost purchases made earlier.

Packaging cost pressure is expected to continue into the second quarter of FY24 due to supply shortages.

Although unlike other discretionary categories, the demand trend for Alcobev’s businesses hasn’t deteriorated much, the 3/4-year sales compound annual growth rate of 7.4%/2% at the end of the fourth quarter of fiscal 2013 remains weak.

We cut our FY23 estimates sharply to account for gross margin pressure and cut our FY24 earnings estimates by about 3%.