United Breweries' outperformance unlikely to sustain in the near term

Loss of business in peak season, higher consumption cost and lower shelf life to make recovery tougher than United Spirits

While there is little doubt that volume recovery would be challenging for the liquor segment, investors seem to be in favour of beer than whiskey if the stock performance of the two listed alcoholic beverage companies has anything to go by. The stock of United Breweries (UBL) has gained 4 per cent in the last one month versus 0.5 per cent rise in the stock of United Spirits (UNSL). 

However, the UBL’s outperformance is unlikely to sustain in the near term as it is expected to lag UNSL in terms of recovery.

To start with, while winter is a peak season for spirits, beer consumption is skewed more toward summer. June quarter typically accounts for over 30 per cent of UBL’s annual sales and operating profits. Therefore, likely significant business loss in June 2020 quarter (Q1) would have sharp impact on the overall performance of UBL in FY21.

According to analysts at Kotak Institutional Equities, “Near-zero sales in April and a 70 per cent odd decline in volumes in May, as indicated by the company, essentially means that the most important months of the year are now lost.” In fact, as UBL’s March quarter earnings call, last month, though June saw some improvement, it is far away from normalcy.

Further, higher consumption cost of beer given lower alcohol content (4-6 per cent) compared to spirits (up to 40 per cent) and its lower shelf life would further hurt offtake in the current situation where income level is likely to be lower and there is no or very limited social events. As per some experts, beer is more used for social events than spirits. With about 15 per cent downward revision in UBL’s FY21 top-line estimates post Q4 results, analysts at Motilal Oswal estimates 30 per cent fall in revenue.

What’s more. Tax overhang with deteriorating financial health of state governments amid Covid-19 and closure of restaurants, pubs, bars, etc. are other concerns not only for UBL but for the entire liquor segment.

Though key raw material (barley and glass) prices are softening, to what extent it would support the overall earnings of UBL given the dismal top-line performance needs to be seen.

In the above backdrop, UBL’s very rich valuations’ may see some corrections. UBL is currently trading at over 100 times its FY21 estimated earnings, compared to 47 times that of UNSL.