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Buy United Breweries, target Rs 1,550: Emkay Global

Emkay Global Financial Services has given a buy recommendation on United Breweries with a target price of Rs 1,550.

Shares of United Breweries traded at Rs 1,348.4 around 2:55 pm on 14 June, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

“We continue to like UBL given stronger volume opportunity, market share gains and improving ROCEs. UBL remains a high-conviction buy with OW position in EAP,” said the brokerage, adding, “our target price of Rs 1,550, based on 25 times Mar-21E EV/Ebitda offers 15 per cent upside,” said the brokerage.

“Our channel checks suggest steady volume trends after the election impact in April, which was temporary and restricted to a few states,” the brokerage added.

Extended summer and lower comparables in West Bengal, Kerala and Maharashtra still offer strong volume growth outlook.

Margins in fourth quarter were affected due to higher glass bottle prices, and weak state mix due to lower volumes in Karnataka (manufacturing restrictions) and Maharashtra (trade upstocking after two months of supply discontinuation).

“We see high input prices particularly, for barley and glass, along with the price reduction in West Bengal and lower growth in Karnataka, to have an impact on gross margins. However, better input sourcing (barley imports), use of recycled bottles and savings from increased production of premium brands can still sustain current operating margins and drive modest improvements ahead,” the brokerage said.

Except for Andhra Pradesh (AP), policies of most key states around alcohol have remained stable. In addition, AP prohibition will be challenging given large revenue share from alcohol (nearly 23 per cent of state tax revenue).

“Even in a worst-case scenario of full prohibition in 5 years, we estimate annualised impact on UBL to be less material (at nearly 1.5 per cent each year; current volume share at nearly 8 per cent). Competitive intensity also remains benign and ABInbev’s Asia business listing is unlikely to drive increased aggression in India given its tiny share (6 per cent of Asia volumes),” said the brokerage.

Slowdown in volume growth momentum and adverse regulations are the two risks for the stock that the brokerage highlighted.

Source: Economic Times