Sell United Breweries; target of Rs 443: IIFL

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Sell United Breweries; target of Rs 443: IIFL

IIFL is bearish on United Breweries (UB) and has recommended sell rating on the stock with a target of Rs 443 in its June 28, 2011 research report.

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IIFL is bearish on United Breweries (UB) and has recommended sell rating on the stock with a target of Rs 443 in its June 28, 2011 research report.

"United Breweries (UB), we initiate coverage on the stock with a Sell reco primarily due to expensive valuation. Price apart, we remain positive on the underlying business-UB dominates the annual >200mn case Indian beer industry with overall ~54% share. Led by the ubiquitous Kingfisher brand, it enjoys >45% share of the strong beer market (~75% of beer industry vols). A slew of well-known factors- negligible per capita consumption, favourable demographics and an enduring brand should support ~13% volume cagr over next 2 years. FY11-13 EBIDTA growth @~21% would outpace revenues as savings from proprietary bottle usage reduce packaging costs and drive ~160bps OPM expansion. Though deserved to an extent, we believe current valuation at 25x FY13 EV/E packs in too much of a premium and is more than double of that ascribed to global brewers."

"The domestic beer market is under-penetrated would be an understatement. With a per capita beer consumption of just 2ltrs, compared to an avg of >60ltrs for other emerging markets like China and Brazil, the market presents a vast growth opportunity. Moreover, alcohol basket is skewed towards spirits like whisky and vodka, in contrast to emerging markets wherein beer share is >85%. UB, with FY11 sales of ~140mn cases (post merger of all entities), enjoys 54% market share. It has built up an unmatched distribution muscle with owned/tie-up units in virtually every state, an advantage difficult to replicate for any newcomer."

"United Breweries is cushioned by the twin bulwarks of near-secular demand and high entry barriers. Although demand has been a robust ~15-25% yoy in the past 3 quarters, we built in a conservative 13% volume cagr over FY11-13. Stable raw material costs and control over packaging expenses through patented bottle initiative would drive margin expansion. Even with an allowance for some deserved premium, we believe valuation appears expensive at ~25x EV/EBIDTA. Sell with 9 months target price of Rs 443, says IIFL research report.

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To read the full report click on the attachment