IDirect UnitedBreweries IC

December 23, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Heineken brews heady growth!!! United Breweries (UBL), the market leader in the Indian beer market with ~51% market share, is well poised to benefit from the unprecedented opportunity arising from the impending growth in per capita consumption and an ever enlarging base of population in the legal drinking age. The company is equipped with a strong portfolio of brands and the largest distribution network in India, which is difficult to emulate for new global brands entering the Indian market. Further, with a leaner organisation structure and higher operational control in the hands of global major Heineken, the financials are expected to see a gradual improvement. We expect revenue and PAT to grow at a CAGR of 19.5% and 32.5%, respectively, with RoE and RoCE improving from 13.2% and 14.3% to 19.3% and 21.6%, respectively, over FY14-17E. Nascent market provides huge growth potential The Indian beer market has grown at a CAGR of 8% over FY10-14. Per capita consumption of beer in India remains low at 1.9 litre compared to 64.5 litre, 76.1 litre and 34.5 litre in Brazil, Russia and China, respectively. Favourable demographics, greater social acceptance & higher disposable income are expected to propel growth in per capita consumption of beer from ~ 2 litres per annum to 5 litres over the next decade. Pan-India presence, strong brand recall to sustain market leadership UBL, with 18 owned and 10 contract manufacturing facilities, has a pan India presence. Also, the company has a strong distribution network, which enables it to capture the major market in India. UBL with its 14 major brands enjoys strong patronage and commands a market share in excess of 50%. Though competition is rising from other global companies, we believe UBL would be able to sustain its market leadership as it would be difficult for competitors to emulate the reach of UBL due to the complexity of the liquor business model in India. Resilience to competition, nascent industry translate to premium valuations UBL’s resilience to competition together with the tutelage of Heineken, positions the company as the numero uno player in the industry. UBL’s revenue, EBITDA and PAT are expected to grow at 19.5%, 21.7% and 32.5% CAGR, respectively, over FY14-17E due to nascent state of the industry. Further, in more mature markets, global peers of UBL trade at nearly 2.2x FY17E Mcap to sales. Subsequently, we assign a multiple of 2.1x FY17E to arrive at a target price of | 950 and recommend BUY. Exhibit 1: Key Financials

FY13 FY14 FY15E FY16E FY17E

Net Sales (| crore) 3898.7 4229.7 5037.6 6075.1 7173.1

EBITDA (| crore) 476.9 588.1 706.1 875.4 1053.5

Net Profit (| crore) 172.1 226.0 305.6 408.6 521.3

EPS (|) 6.5 8.5 11.6 15.5 19.7

P/E (x) 124.7 95.0 72.8 54.5 42.7

Price/Book (x) 14.2 12.6 11.3 9.9 8.2

EV/EBITDA (x) 47.3 38.0 32.6 26.4 21.7

RoCE (%) 10.9 14.3 17.1 19.8 21.5

RoE (%) 11.4 13.2 15.5 18.1 19.2

Source: Company, ICICIdirect.com Research

United Breweries | 814

Rating matrix

Rating Buy

Target | 950

Target Period 12-15 months

Potential Upside 17%

YoY Growth (%)

FY14 FY15E FY16E FY17E

Net Sales 8.5 19.1 20.6 18.1

EBITDA 23.3 20.1 24.0 20.4

Net Profit 31.3 35.2 33.7 27.6

EPS 31.3 35.2 33.7 27.6

Valuation summary FY14 FY15E FY16E FY17E

PE(x) 95.0 72.8 54.5 42.7

Target PE(x) 102.7 76.0 56.8 44.5

EV to EBITDA(x) 38.0 32.6 26.4 21.7

Price to Book (x) 12.6 11.3 9.9 8.2

RoNW (%) 13.2 15.5 18.1 19.2

RoCE (%) 14.3 17.1 19.8 21.5

Stock data Bloomberg/Reuters UBBL:IN/ UBBW.NS

Market Cap (| cr) 21469.28

Debt FY14 (| cr) 1016.49

Cash FY14 (| cr) 142.61

EV (| cr) 22343.16

52 week H/L (|) 1006/615

Equity Capital (| Cr) 26.44 Price movement

300

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Dec-14Mar-14Jul-13Oct-12Jan-12

2,000

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UBL (R.H.S) Nifty (L.H.S)

Research Analyst’s name

Bharat Chhoda [email protected]

Soumojeet Kr Banerjee [email protected]

Page 2ICICI Securities Ltd | Retail Equity Research

Company background

United Breweries Ltd (UBL), with more than 50% market share and 14 brands, is the largest brewery company in India. UBL sells nearly 138.7 million cases of beer, growing at ~8.3% CAGR in 2010-14. The company was founded by Scotsman Thomas Leishman. Vittal Mallya was elected the first Indian director in 1947. UBL commenced with five breweries in South India in 1915. Over the years, it acquired multiple breweries in the region to augment its production. Currently, the company has 18 owned breweries and 10 contract manufacturing units to cater to growing demand. UBL has robust quality management systems strictly adhering to quality guidelines laid down in ISO 9000. Besides, the beer from market shelves is periodically scrutinised on 40 different parameters as per the standard laid down by the European Brewery convention. Flagship brand “Kingfisher” is an internationally recognised brand while Kingfisher Premium Lager Beer is available in 52 countries. In 2006, Scottish & Newcastle (S&N) acquired ~37.5% in UBL as a strategic investment in a deal worth | 940 crore. S&N acquired 17.5% through a preferential allotment @ | 575/share while the rest was acquired through public open offer at a similar price. However, in 2008, Heineken acquired S&N and, thereby, acquired a stake in UBL. Subsequently, Heineken increased its stake in UBL to 39%.

Exhibit 3: Chronology of United Breweries

1915 1944-48 1950-60 1970-80 1990-00 2001-02 2002-09

UBL forays into brewing with five breweries in South India

First bottled beer under thelabel "Export Beer". VittalMallya became the first IndianChairman

Kalyani Breweries set up. Kesarwal Beverage set up in Goa

High range breweries set up in

Chertalla in Kerala. UB exported

beer to Aden and Middle East.

Canned beer introduced

Acquires Empee Breweries. Enters into strategic alliance with Scottish & Newcastle in 2006. Heiniken acquires UBL shares via S&N takeover

2010-14

Acquires GMR Vasavi, MP Breweriesand 41% share of Inertia Industries,total 65% share of AssociatedBreweries and 97% of MangaloreBreweries & Distilleries Ltd

Over the years, Heinekenincreased its stake to 39% from37.5%. Further, UBL plans to setup a greenfield brewery in Bihar& Rajasthan. Bihar brewery isready with initial capacity of500,000 to 700,000 cases amonth and scalable up to1000000

Acquires Associated Breweries & Distilleries and Mangalore Breweries & Distilleries


Exhibit 2: Shareholding pattern Q2FY15 Shareholder's Category Holding (%)

Promoters 74.8

Institutional Investors 19.6

General Public 5.6

19.5 19.3 19.5 19.2 19.3

0.3 0.3 0.2 0.3 0.30.0

5.0

10.0

15.0

20.0

25.0

Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14

%

FII DII



Management Profile

Vijay Mallya: (Chairman) Dr Vijay Mallya is a two time Member of Parliament and Chairman of The UB Group, one of India’s largest conglomerates with diverse interests in brewing, distilling, pharmaceuticals, aviation, real estate, engineering, fertilisers, biotechnology and information technology. He was born in 1955 and became the Chairman of The UB Group at 28 following his father’s demise. Kalyan Ganguly: Kalyan Ganguly, the President & Managing Director of United Breweries, has been heading the beer business of the UB Group since 1995. He joined the group on February 1, 1979. Prior to joining the UB Group, he was with Reckitt & Colman. He is a graduate of Presidency College, Kolkata and completed his post-graduation diploma in Business Management from XLRI, Jamshedpur. Mr Ganguly has been on the Board of UBL since March 30, 2002. He is also on the board of other companies like Maltex Malsters Ltd, Indian Premier Football Association Ltd and Kingfisher East Bengal Football Team Pvt Ltd. AK Ravi Nedungadi: A trained chartered and cost accountant, Mr Nedungadi joined the UB Group in 1990 as the corporate treasurer. Within two years, he became the Group Finance Director of the group’s international business managing the businesses of UB International, which included the paint giant Berger Jenson and Nicholson with operations spanning 27 countries. He was instrumental in listing the Berger Group companies on the London and Singapore bourses. Other boards in which he is a member are Sanofi India and Bayer Crop Sciences. Duco Reinout Hooft Graafland: Duco Reinout Hooft Graafland studied business administration at Erasmus University in Rotterdam and finished his post-graduate studies to become a chartered accountant. He started his career as a management trainee with Heineken Nederland in 1981 and became brand manager for Vrumona, Heineken’s soft drink company. He continued as area export manager for Central and West Africa. Mr Hooft Graafland has been on the Board of UBL since December 2009. Roland Pirmez: Mr Pirmez was appointed President of Heineken Asia Pacific Pte. Ltd in June 2013. Prior to that, he had been the CEO of APB since 2008. He has an engineering degree in agriculture and masters degree in brewing from the University of Louvain-la-Neuve in Belgium. Mr Pirmez, with 27 years experience in the beer industry, was previously CEO of Heineken Russia, a position he held from 2002 to 2008. He was general manager of APB’s associate, Thai Asia Pacific Brewery Co, for four years in 1998-2002. Prior to Thailand, Mr Pirmez held different positions in Africa and joined Heineken as Managing Director, Angola, in 1996. His expertise in the specific functional areas includes extensive experience in the beer industry, brewing beer and general management. Mr Pirmez has been on the Board of UBL since September 13, 2013. Henricus Petrus van Zon: Henricus Petrus van Zon, is an MSc in business economics and post graduate in accountancy from Erasmus University, Rotterdam, Netherlands. He has also completed various executive development programmes from IMD-Lausanne, Switzerland and Insead-Fontainebleau, France. In 2007, he joined Brau Holding International Gmbh and Co. KgaA, a joint venture between Schorghuber UG and Heineken NV as Executive Director and CFO. During his tenure, he has also been operationally responsible as the Chairman of the Management Board and CFO of Kulmbacher Brauerei AG.


Investment Rationale Beer market geared to grow on flamboyant lifestyle!!! The Indian beer industry remains at an infancy stage with 270 million cases of beer being consumed in the country in FY14. The beer segment grew at a steady rate of ~8% CAGR over FY10-14. India remains one of the fastest growing beer markets in the world with abysmally low per capita consumption (pcc) of 1.9 litres per annum against 34 litres in China and a whopping 65 litre per annum in Brazil. The beer industry in India can be largely segregated into mild and strong beer segments with the latter having a greater market share (40:60 ratios). Growth in urbanisation and change in lifestyle with increasing acceptance towards alcohol consumption is expected to buoy beer volumes significantly. Also, beer’s positioning as a milder drink compared to liquor bodes well with the young crowd (age group 15-24 years), which forms nearly 20% of the population and grew at a CAGR of 2% over the last decade. Further, as India’s “demographic dividend” improved, the dependency ratio declined significantly over the past decade, thereby leading to higher disposable income. Consequently, we anticipate beer industry volumes will grow at a steady rate of ~6.5% over 2014-17.

The Beer story: Long way to go

The beer industry in India grew at a steady ~12% over 2004-14. The industry can be largely segregated into mild and strong beer with the latter garnering a larger market share (60%). The Indian beer industry is quintessentially covered by three to four major players with United Breweries in pole position (51%) followed by SABMiller (27%) and Carlsberg (6%). With nearly 60% of the population in the drinking age (15-59 years) and low per capita consumption of 1.9 litre/year, India provides huge scope for growth. Any minor change in the consumption pattern would provide a huge delta owing to the significant population base.

Exhibit 4: Alcohol industry

Alcohol Industry

Beer Distilled Spirits Wine

Indian Beer(260-270 mn cases)

Imported Beer(<3 mn cases)

IMFL(305 mn cases)

Imported Spirits(<3 mn cases)

Country Liquor(280-285 mn cases)

Indian Wine(1.7 mn cases)

Imported Wine(<0.5 mn cases)

Source: ICICIdirect.com Research


Exhibit 5: Growth in beer volume over past years

156 166 187 225 235 263 270

1092

0

200

400

600

800

1000

1200

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY30

Milli

on C

ases

CAGR 10%

CAGR 9%

Source: Technavia Report, ICICIdirect.com Research

Exhibit 6: India: fastest growing market in APAC region

Beer market growth CAGR (2011-20) PCC in Litres

India 8% 1.9

Singapore 2% 28.8

Indonesia 2% 0.9

Malaysia 2% 7.6

Papua New Guinea 6% 12

Japan 0% 45.8

Australia 0% 78.4

Thailand 5% 26.4

China 4% 35.9

South Korea 2% 37.3

Taiwan 1% 21.9

Vietnam 6% 29.5

Mongolia 7% 27.7

Source: UB presentation, ICICIdirect.com Research

Exhibit 7: Per capita consumption remains one of the lowest in the world

64.576.1

35.9

1.90

10

20

30

40

50

60

70

80

Brazil Russia China India

PCC

in L

itres

per

Ann

um (L

PA)

Per Capita Beer Consumption

Source: UB Presentation ICICIdirect.com Research

The beer segment posted healthy volume growth of ~8% over FY10-14. Buoyed by growth in disposable income coupled with a growing young population and a change in perception towards drinking, we anticipate beer volumes will post a steady CAGR of ~9% over FY14-30

The Indian beer market is the fastest growing one in the Asia Pacific (APAC) region with one of the lowest per capita consumption. This provides enormous scope for the brewing industry in India as India with PCC of 1.9 litres per annum and average population growth of ~1.1% in the next decade provides tremendous scope for growth

Despite being one of the largest and fastest growing beer markets, India has one of the lowest per capita consumption of alcohol across the globe. Drinking habits in India are influenced, to a large extent, by religious sentiments and attached taboo rather than climatic conditions as similar tropical countries like Brazil have higher per capita consumption. An alteration in drinking habits will provide a significant delta to industry volumes The per capita consumption of beer in China grew at ~13% CAGR over 1965-2005 whereas over the last decade it grew at a CAGR of 4%. In contrast, in India, the PCC grew at a paltry 4.6% over 1965-2005 while in the past decade it grew at nearly 26%


Exhibit 8: Steady growth in per capita consumption for domestic market

2.1 2.2 2.3 2.4 2.5 2.7 2.8 3.0 3.2 3.5 3.74.1

4.4 4.85.2

5.76.2

1.2 1.5 1.7 1.8 1.9 2.0

0.0

1.0

2.0

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2008

2010

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E

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E

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2028

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2030

E

PCC

in L

PAPer capita Beer Consumption


Exhibit 9: Per capita consumption of beer remains lowest among beverages in India

5 5 6 6 7 6 6 7 8 9

56 56 58 58 59 59 60 60 61 62 62

1.51.31.21.10.90.80.70.60.60.60.5

11

4746454443424241414139

0

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20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per C

apita

Con

sum

ptio

n in

Ltrs

Beer Soft Drinks Milk Hot Drinks


Beer consumption in India remains abysmally low compared to other countries. Indians prefer hot drinks and are the largest consumers of milk in the world. However, over 2000-10, beer consumption per capita has tripled whereas that of other beverages has remained mostly constant. Beer consumption is expected to gain in the future with changes in lifestyle and a shift in preferences

Driven by a change in lifestyle and growth in disposable income, per capita consumption of beer is expected to grow to 2.5 litre in 2018 from 1.2 litre in 2008. Further, according to our assumption, we expect industry volumes to grow at a CAGR of ~8% over FY15-30. Consequently, per capita consumption is expected to improve to 6.2 litre during the same period. Growth in beer consumption together with demand for novelty in the segment pushes premiumisation of beer and consumption in the country


Urbanisation, enriched lifestyle to ramp up beer volumes

Indian urbanisation is gathering pace rapidly with nearly 68 cities expected to have more than one million populations from the current 42 cities by 2030. Some of the key states to experience such rapid growth are Karnataka, Maharashtra and Tamil Nadu. These states are some of the highest beer consuming states/regions with strong distribution networks and consumption patterns. Further, as GDP growth improves, cities (Tier I & Tier II) will account for a larger pie vis-à-vis rural areas. Consequently, beer industry volumes are expected to get a leg up as more people move to urban areas.

Exhibit 10: Urbanisation picking up in key states

5344 44

37 36

67 6658 57 52

01020304050607080

Tam

il N

adu

Guja

rat

Mah

aras

htra

Karn

atak

a

Punj

ab

% P

opul

atio

n

2008 2030

Source: McKinsey report, ICICIdirect.com Research

Exhibit 11: States with high beer consumption

30 18 9 13

35

2110

16

43

22

1020

0

20

40

60

80

100

120

Andhra Pradesh Karnataka Kerala UP

Beer

Cas

es (I

n M

illion

)2010-11 2011-12 2012-13

Source: ICICIdirect.com Research

The beer industry is largely concentrated in South India where the market share is nearly 50%. Also, states in the region like Tamil Nadu, Karnataka, Kerala and Andhra Pradesh are expected to see a robust rise in urban population of nearly 51%, 83%, 63% and 94%, respectively, by 2030, thereby supporting beer industry volumes. Exhibit 12: Beer market region-wise segmentation

South49%

West37%

East2%

North12%

Source: UB Presentation, ICICIdirect.com Research

Demography, lower dependency favour buoyant lifestyle

India has a very favourable demographic proposition with ~60% population in the age group of 15-59 years, up 3.4% on a decadal basis. As a result, nearly 730 million people lie in the legal drinking age while another 83 million are likely to be added by CY17. Furthermore, there is a growing trend of social acceptance of alcohol on account of improved lifestyle together with demand for milder alternatives to buoy beer volumes. However, the country’s per capita consumption continues to


remain low at ~1.9 litre per annum. Any increase in per capita consumption is expected to alter the industry growth significantly on account of the large population base.

Also, as the dependency ratio over the past decade has declined nearly 100 bps, an improvement in lifestyle on account of elevated per capita income (from $540 in FY07 to $1140 in FY13) will significantly boost discretionary expenditure, thereby improving the demand for beer and other alcoholic products.

Exhibit 13: Entry of increasing number of households in higher income group

91 10195

9350

1121

33

10

0

25

50

75

100

125

150

Globals (>1000) Strivers (500-1000)

Seekers(200-500) Aspirers(90-200) Deprived(<90)

No

of H

ouse

hold

(Milli

on)

2005 2025

Source: McKinsey Report, ICICIdirect.com Research, Household income in |1000

Exhibit 14: Consumer expenditure on alcohol

59,850

52,29050,400

58,59057,330

55,440

45,000

50,000

55,000

60,000

65,000

2012 2013 2014 2015E 2016E 2017E

| cr

ores

| Crs

Source: Radico Khaitan presentation , ICICIdirect.com Research

Consumer expenditure on alcohol is expected to grow at a CAGR of 3.5% over 2013-17. Increased disposable income has led to growth in discretionary items fuelling growth for beer and other alcoholic products

By 2025, the number of households earning | 200,000-500,000 is expected to increase from 11 million to 93 million whereas that earning between | 500,000-10,00, 000 is anticipated to go up to 33 million from 2 million. Therefore, by 2025, nearly 117 million people are expected to be added to the upper and middle income groups. Their consumption is expected to grow ~12.5 x. This structural shift is expected to provide a fillip to discretionary expenditure and make beer affordable to a larger number of people as this category forms the largest chunk of aspiration buyers


Exhibit 15: Per capita disposable income

0

200

400

600

800

1000

1200

1400

19

92-9

3

1993

-94

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94-9

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1995

-96

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(Pop

ulat

ion

milli

on)

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20000

30000

40000

50000

60000

70000

(|) P

er C

apita

Dis

posa

ble

Inco

me

Population (Million) Per capita/disposable income (|)

Source: RBI handbook , ICICIdirect.com Research

Beer: Alternative to spurious/poisonous liquor

With thousands of deaths in the past decade due to spurious liquor, the impetus has been on providing safer alternatives. Beer, due to its inherent way of preparation (5-8% alcohol content) is less harmful for consumption compared to cheap liquor. Also, its basic ingredients of barley, water, hops and yeasts along with minerals and anti-oxidant properties, provides a healthier option.

Exhibit 16: Death due to spurious liquor

14501202

1435

731

0

200

400

600

800

1000

1200

1400

1600

2009 2010 2011 2012

No

of D

eath

s

Source: NCRB , ICICIdirect.com Research

Further, compared to hard liquor, beer is taxed quite heavily, thereby making it inaccessible to a larger number of people who then rely on cheap substitutes like country or local liquor that is more harmful.

Disposable income has increased at a CAGR of ~11.5% over the past decade, thereby increasing the expenditure capacity of individuals

Due to consumption of better category alcohol such as beer and Indian made foreign liquor (IMFL) deaths due to alcohol have seen a decline over the years

29

75

0

10

20

30

40

50

60

70

80

Bagpiper Kingfisher Premium

Units

Beer is 2.6x more expensive in per unit of pure alcohol terms compared to hard liquor

Source: Company, ICICIdirect.com Research As beer is more expensive on a per unit of pure alcohol basis, it discourages a shift towards beer, thereby leading to a greater flourishing of the illicit liquor business. If the government changes the taxation policy based on alcohol content it would make beer accessible to people, thereby reducing health hazards


Kingfisher: Ubiquitous beer in India

With more than 138 million cases in FY14 and ~51% market share, Kingfisher is synonymous with beer in India. UBL, together with Heineken, has nearly 15 brands covering various price points right from the economy (London Pilsner) to the super-premium category (Heineken). Over the years, UBL’s volume grew at a CAGR of ~8.3% in FY10-14 driven by its strong distribution network pan-India and availability at various price points. The beer industry in India is skewed towards strong beer vis-à-vis lighter ones. Consequently, much of the beer brands in UBL’s stable belong to the strong category. With Heineken as joint promoter of UBL post its acquisition of Scottish & Newcastle (S&N) in 2008, it acquired 37.5% of UBL and increased its share to 39% in FY14. Also, Heineken put three members on the UBL board including the CEO, thereby taking over the reins of the company. Further, Heineken is expected to introduce better technology in beer manufacturing in India along with innovative schemes for promotion, thereby augmenting UBL’s volume. Going ahead, as the industry is expected to grow at a CAGR of 6.5% over FY14-17, UBL is expected to gain market share and increase its volume at a CAGR of ~7.3% over the same period.

Kingfisher: Synonymous with Indian beer

The Kingfisher brand is synonymous with beer in India with a brand market share more than double the nearest competitor. Given the strong brand recall and pull in the market, UBL’s volumes grew at a CAGR of 8.3% over FY10-14 vis-à-vis industry volume growth of 7.8%, thereby gaining and maintaining a superior market share of more than 50% in as many years. UBL is a market leader in both the domestic premium lager and domestic standard lager beer segments with a market share of ~63% and 36%, respectively.

Exhibit 17: Industry volume vis-à-vis UBL volumes

156 166187

225 235263 270

75.3 82.4101

125 133 139 138.7

0

50

100

150

200

250

300

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Mill

ion

Case

s

Volume (Industry in Million Cases) UB volume (million cases)

Source: Company , ICICIdirect.com Research

UBL mainly has eight products under the brand name “Kingfisher” catering to various price points and beverage preferences i.e. strong or mild besides strong brands such as Kalyani Black Label, Zingaro and London Pilsner. UBL, together with Heineken, forms one of the most formidable players in the Indian beer industry. With more than 54,000 outlets, Kingfisher beer is available across India making it a much sought after beer brand in the country.


Resilient to competition, maintaining market share

As UBL’s competitive dynamics are strong it braved competition to remain the leading brewery company in the country. In the past years, even with the entry of new players, the company has been able to maintain its market share owing to strong brand recall and its near omnipresence through robust distribution and logistics management. Over the years, SABMiller lost its market share to Carlsberg, though UBL’s share was not hampered, to a large extent. Going ahead, with 14 brands in its quiver and their popularity coupled with tutelage of Heineken, we expect UBL to gain market share from smaller/regional players in the growing Indian brewery market.

Exhibit 18: Market share movement vis-à-vis other players

05 2 0

4

35

14 2 2 4

27

3 4 2 18

5 4 2 18

27

5 4 2 16 4 3 1

84 3 1

8

5037

5351

56

25

7

57

7

53

27

51

23

0

10

20

30

40

50

60

UB SAB Carlsberg MohanMeakin

MountShivalik

Budwiser Others

Mar

ket S

hare

(%)

2007 2008 2009 2010 2011 2012 2013


Advantage UBL: Heineken to edge out global competition

The UB group as a part of its strategic investment divested nearly 37.5% of United Breweries to the Scottish & Newcastle (S&N) Group in 2005. However, post the acquisition of S&N by Heineken; it acquired 37.5% of UBL. With Heineken’s premium image, UBL is able to position itself against international players such as Carlsberg, Tuborg and Stella Artois.

Heineken: Needs no introduction

Heineken is the world’s third largest brewer with nearly 9% market share and producing over 172 million hectolitre of beer annually. The company is also one of the largest producers of cider/perry since its acquisition of Scottish & Newcastle in 2008. Heineken has modified its global footprint significantly in the last decade by pruning its exposure in the slow growing Western Europe region to 29% in 2010 against 53% in 2001. The company is consciously focusing on emerging markets like Latin America where it draws ~25% of its volume in 2010 vs. 6% in 2001. It is in the Asia-Pacific (APAC) region that Heineken lacks a significant presence, drawing a mere 3% volume share. In the APAC region, the company mostly operates through joint ventures (Asia Pacific Breweries China and United Breweries India). Further, as the slowdown in Europe continues, prime markets like East & West Europe with more than 50% volume share for Heineken drag its growth. Consequently, the next focus region for Heineken is APAC as the region with China and India is one of the largest beer markets in the world and offers it lucrative growth opportunities.

UBL is present at multiple price point’s right from London Pilsner in economy segment to the “Heineken” in the super-premium category. With addition of Heineken, UBL has been able to position itself against the likes of Corona, Peroni and Stella Artois and has been able to garner significant market share.

Super PremiumBrand:Heineken@ PI- 170

PremiumBrand: Kingfisher Ultra @ PI- 135

MainstreamBrand: Kingfisher Premium @ PI- 100

Economy Brands: London Pilsner @ PI- 80

PI= Price Index


Exhibit 19: Global players beer volume

356

173 172109 106 80 58 56 55 44

0

75

150

225

300

375

Anhe

user

-Bu

sch

Inbe

v

Sabm

iller

Hein

eken

Chin

aRe

sour

ces

Ente

rpris

e

Carls

berg

Grou

p

Tsin

gtao

Mol

son

Coor

sBr

ewin

g

Mod

elo

Yanj

ing

Brew

ery

Kirin

Gro

up

Mill

ion

Hect

olitr

esMillion Hectolitre


Exhibit 20: Volume share for Heineken region wise

26

10 11

20

53

2 5 7

15

34 35

25

3 6

14

2229

0

10

20

30

40

50

60

Latin America Asia-Pacific North America Africa & MiddleEast

Eastern Europe WesternEurope

% V

olum

e Sh

are

2001 2005 2011


Heineken a laggard compared to global peers

Compared to its global peers such as Anheuser-Busch InBev and SABMiller, Heineken’s exposure in the Asia-Pacific region is very restricted. Heineken through Asia Pacific Breweries in China and United Breweries in India has boosted its presence in the region. Heineken’s presence has been weak in the region, especially China, as Heineken mainly brewed premium lager (higher alcohol content of ~6-8%) against standard larger. However, this can be of significant interest to India as India is mostly a premium larger market and growing at a more rapid pace.

Exhibit 21: Comparable financials of Global Peers (Million $)

Peers 1999 2014 1999 2014 1999 2014 1999 2014 Revenue EBITDA PAT

Anheuser Busch 4632.6 43195.0 805.5 17188.0 17.4 39.8 245.5 16518.0 16.0 22.6 32.4

Sab Miller 2752.0 16704.0 629.0 5720.0 22.9 34.2 340.0 3650.0 12.8 15.9 17.1

Heineken 6570.3 25507.6 1352.4 5492.6 20.6 21.5 580.2 2108.0 9.5 9.8 9.0

Carlsberg 3575.4 11853.3 438.6 2443.1 12.3 20.6 171.1 1059.9 8.3 12.1 12.9

PAT CAGR (1999-2014)Revenue EBITDAEBITDA Margin (%)

Source: Company Presentations , ICICIdirect.com Research

Asia is the fastest growing region in the world with ~5% growth rate YoY in terms of volume. Heineken with its two acquisitions in the region is trying to catch up with its peers both in terms of volume and market share

34

53

1 0.5

3

0123456

Glob

al

Afric

a

Asia

LatA

m

Nor

th A

m

Wes

t Eur

ope

East

Eur

ope

% G

row

th


Exhibit 22: Asia at the beginning stage of PLC

Source: Heineken , ICICIdirect.com Research

The Indian beer industry volumes grew at a CAGR of ~13% over FY04-14. However, in the global space, the Indian beer industry is still at the beginner stage in its product life cycle (PLC). Hence, it provides significant scope for players like Heineken to expand their product portfolio in India considerably.

Improvement in corporate structure post Heineken

Post Heineken, UBL has unified its highly complex corporate structure, thereby bringing better transparency in its operations. UBL merged Millennium Alcobev Pvt Ltd (MAPL) and Chennai Breweries Pvt Ltd (CBPL). The mergers provided better efficiency in running operations and optimising cashflows. The mergers improved the brewing capacity of UBL in Southern India, which accounts for nearly half of the total beer consumed in the country.

As Asia-Pacific region is one of the fastest growing regions in the world, the internal market dynamics in terms of Product Life Cycle (PLC) is also very favourable in the region. As Heineken has lagged vis-à-vis its peers to enter into these markets with dynamics still remaining favourable it is expected to improve market share in the region. Consequently, through United Breweries in India; Heineken is expected to employ push strategy thereby improving market share for UBL.


Exhibit 23: Change to leaner corporate structure

Pre-2010

Promoter Group

Heineken UB Group

UB Nizam UB Ajanta Chennai Breweries

Public UBL

ABDLMAPL

UMBL Empee MBIL

100% 100% 100%

25%

75%

100%

40% 50%

10%

100% 100% 89%

Present

UBL(with all merged entities)

Promoter Group

Heineken UB Group

Public

75%

25%



Robust distribution network ensures countrywide footprint

In the Indian alcohol industry, ~75% of the distribution is handled by government corporations, 21% by distributors and the remaining 4% from direct sales. As it is a state subject, alcohol is complex in terms of distribution and logistics with multiple counterparties as each state acts as a different entity, thereby limiting economies of scale. However, UBL, with its 18 owned and 10 contract breweries, covers all the major markets in the country and streamlines distribution. Further, its established distributor network coupled with pioneering cold chain management provides UBL the distinction of availability across the country along with freshness being intact in beer.

Exhibit 24: Industry’s channel wise break down of sales

4%

21%

75%

Government Corporations Distributors Direct Sales


Exhibit 25: Distribution mechanism in various states

Government Corp Distributors Direct Sales

Andhra Pradesh Maharashtra CSD

Kerala Goa BSF

Odisha Daman CRPF

Karnataka Puducherry

Delhi Mahe

Tamil Nadu West Bengal

Rajasthan Sikkim

Chhattisgarh Assam Source: Company, ICICIdirect.com Research

Exhibit 26: Location of distilleries


With its leadership in cold chain management, UBL manages a huge distribution network. Consequently, with higher point of sale visibility, the Kingfisher brand gets enormous thrust across the country In terms of number of distilleries and presence across states; UBL leads its nearest competitor by ~3x and 1.6x, respectively. Consequently, it is able to muster nearly twice the market share than its prime competitor SABMiller

PlayerNo of Distilleries No of States

United Breweries 28 15

Sabmiller 10 9

Carlsberg 7 7


Financials Revenues to grow at steady pace

UBL’s volumes had grown at 23% CAGR over FY09-11 while the revenue per case had increased at 4.5% CAGR. During this period, beer industry volumes grew at 16% CAGR while the market share of UBL expanded from 44% in FY09 to 53% in FY11. In FY11-14, industry volume CAGR declined to ~9% as volume growth was impacted owing to a sharp increase in excise duty in FY11-14. UBL’s volumes increased at a CAGR of just 3.5% over FY11-14 leading to a decline in market share to 50% in FY14 while the revenue per case increased at a CAGR of 11.5%. The sluggishness in volume growth for UBL can be attributed to slower industry growth coupled with global MNCs aggressively entering the Indian market and denting UBL’s market share, to some extent. Indian beer industry volumes are expected to grow at ~8% in the next decade. We expect UBL to grow in tandem with the industry and gradually reclaim its lost market share primarily driven by a strategic change in the product mix due to more operational control vesting in the hands of Heineken.

Exhibit 27: UBL volume trend

125.0 133.0 139.0 138.7 146.7160.8 171.2

0

50

100

150

200

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Milli

on C

ases

Volume (Mn cases)


Exhibit 28: UBL revenue per case trend

355423 447

492541

595655

0100200300400500600700


|

Revenue per case


Exhibit 29: Net revenue trend

30603559 3899 4230

50386075

7173

010002000300040005000600070008000


| cr

Revenue


Exhibit 30: Excise duty as percentage of gross revenue

34.839.9 42.4 44.5

0

10

20

30

40

50

FY11 FY12 FY13 FY14

%

Exise duty as % of Gross revenue



Exhibit 31: UBL volume and realisation growth rates

23.2

3.57.3

4.5

11.5 10 8.4 7.0

0

5

10

15

20

25

Volume CAGRFY09-11

Volume CAGRFY11-14

Assumed volumeCAGR FY14-17

Realisation CAGRFY09-11

Realisation CAGRFY11-14

Assumedrealisation CAGR

FY14-17

Industry volumeCAGR FY09-11

Industry volumeCAGR FY11-14

%

Volume CAGR FY09-11 Volume CAGR FY11-14 Assumed volume CAGR FY14-17 Realisation CAGR FY09-11

Realisation CAGR FY11-14 Assumed realisation CAGR FY14-17 Industry volume CAGR FY09-11 Industry volume CAGR FY11-14


EBITDA margin to continue gradual improvement

During FY09-14, UBL’s EBITDA margin was in the range of 10.3% (FY10) to 12% (FY13). In FY14, the EBITDA margin showed an improvement of 170 bps YoY to 13.9%. The improvement in EBITDA margin despite flattish volume growth in FY14 was achieved on the back of price increases in open markets, better product mix and control on input costs. Further, the company is planning to reduce the packaging cost by continuing to infuse patented bottles into the market. Since the bottles are patented and the name and logo of the company is embossed on the bottles, they cannot be used by other brewers and are necessarily supplied back to UBL. This strategy is showing positive results as the cost of recycled patented bottles is significantly lower than the earlier system of buying “industry” bottles. Also, the company is exploring the idea of reducing power consumption by conversion of organic waste into energy to obtain savings in energy costs. Consequently, we expect the EBITDA margin to gradually improve ~70 bps over the next two years to 14.7% in FY17 with EBITDA posting 15.7% CAGR in FY14-17E to | 1054 crore.

Exhibit 32: Expenses as percentage of sales

14.5 15.8 15.8 15.6 15.1 15.1 15.0

31.1 29.6 26.4 25.3 25.2 25.2 25.0

28.0 28.1 27.4 27.8 26.8 26.4 26.6

13.6 14.9 18.2 17.4 18.9 18.9 18.8

0.0

20.0

40.0

60.0

80.0

100.0


%

RM cost Packing cost Selling & promotion exp Other Exp


Exhibit 33: EBITDA & EBITDA margin trend

390 412 477 588 706 875 1054

14.714.414.013.912.211.6

12.8

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

| Cr

0.02.04.06.08.010.012.014.016.0

%

EBITDA EBITDA Margin (%)



Exhibit 34: Average yearly barley price index

111124 130

153 151 158178

202 213 220

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Average yearly barley price Index


PAT margin to perk up

UBL has been able to improve the net profit margin from 2.3% in FY09 to 5.3% in FY14. The improvement has been brought about by a reduction in interest and depreciation cost. The interest cost as a percentage of EBITDA has declined from 46% in FY09 to 14% in FY14 while the depreciation charge as percentage of EBITDA has reduced from 40% to 34%. An improvement in EBITDA in FY14-17E along with control on fixed costs would enable UBL to improve its PAT margin to 7.3% by FY17E. Even from the perspective of quality of earnings, UBL is expected to see an improvement with profitability growth being driven by the operational performance and share of other income in net profit coming down from 10.8% in FY14 to 6% in FY17E.

Exhibit 35: Lower fixed cost to boost PAT margin

2417 14

36 34

25 22

11

8101120

283634

58

31

677

23

0

10

20

30

40

50

60

70


%

Interest cost as % of EBITDA Depn as % of EBITDA Other income as % of PAT


Bottling and malt forms the largest component of the packaging and raw material charges. However, over the years bottling charges have been controlled due to embossed and reusable bottles utilised by UBL % to Sales FY11 FY12 FY13 FY14

Malt 7.0 8.7 9.0 8.4Brewing Material 4.9 4.6 4.9 4.5

Bottle 20.9 20.1 17.2 16.4Packing Material 9.3 9.4 9.2 9.0Other material 3.5 2.5 1.9 2.7


Exhibit 36: PAT & PAT margin (%) trend

127 173 226306

409521

147

7.36.7

6.15.3

4.4

3.6

4.8

0

100

200

300

400

500

600


| Cr

s

0

1

2

3

4

5

6

7

8

%

PAT PAT margin


Debt equity and return ratios to improve

An improved operating performance along with lower fixed cost would enable UBL to improve its profitability at the net level. We expect the RoNW and RoCE to improve from 13.2% and 14.3% in FY14 to 19.3% and 21.6%, respectively, in FY17E. Also, we expect the debt-equity ratio to improve from 0.6x in FY14 to 0.4x in FY17E. Exhibit 37: RoE, RoCE expected to improve further

13.511.9 10.9

14.3

19.821.5

11.49.3

11.4

18.1 19.2

17.1

13.2 15.5

0

5

10

15

20

25


%

ROCE RONW


Exhibit 38: Debt-equity ratio expected to stabilise, going ahead

0.5

0.6

0.9

0.60.5 0.5

0.4

0.00.10.20.30.40.50.60.70.80.91.0


Debt Equity



Valuation The beer industry in India grew at a CAGR of ~13% over 2004-14 and is further expected to grow at ~8% CAGR over the next decade. As the industry is in a nascent stage with per capita consumption of 1.9 litre per annum, it provides significant scope to grow as a change in lifestyle and increased disposable income boost consumption of beer. UBL, with its leading market share of ~51% and strong brand recall, is the foremost player in the segment. The company is expected to further expand its market share in the industry.

As the Asia-Pacific region and, more specifically, India remains one of the fastest growing beer markets in the world, we expect UBL to be well placed and be the prime beneficiary to capture the opportunity. Subsequently, we anticipate UBL will post significantly robust growth with gross sales posting a CAGR of ~18% with EBITDA and PAT growing at a CAGR of ~22% and 32%, respectively, over FY14-17. Globally, along with Heineken, its competitors such as Anheuser-Busch InBev and SABMiller, which operate at more mature markets, trade at an average of nearly 2.2xs FY17E market cap to sales. Consequently, for UBL, with its largest market share and strong brand portfolio coupled with favourable demographics, we assign 2.1xs Mcap/gross sales multiple to arrive at a target price of | 950 and arrive at a BUY recommendation for the stock.

Exhibit 39: Global peer valuation

Company Two year forward Mcap to Sales Multiple

Anheuser Busch Inbev 2.9

Sabmiller 2.2

Heineken 1.6

Average 2.2

Source: Bloomberg, ICICIdirect.com Research

Exhibit 40: Valuation

PE RoNW RoCE

EPS (|) (x) (%) (%)

FY13 3898.7 9.5 6.5 35.8 124.7 3.3 11.4 10.9FY14 4229.7 8.5 8.5 31.3 95.0 3.0 13.2 14.3FY15E 5037.6 19.1 11.6 35.2 72.8 2.6 15.5 17.1FY16E 6075.1 20.6 15.5 33.7 54.5 2.2 18.1 19.8FY17E 7173.1 18.1 19.7 27.6 42.7 1.9 19.2 21.5

Sales (|Cr)Sales

Growth (%)EPS

Growth (%)Mcap/Sale

s (X)



Risks and concerns Highly regulated sector and severe increase in excise duty to hurt volume

The liquor distribution business in India is subject to strict regulations. The rules and regulation vary in different states. Any change in policies by the respective state governments with regard to production, distribution or marketing of beer can impact the operational performance of the company. Also, constant increase in excise duty and other levies by the state government can impact the volume growth as well as the financial performance of the company.

Increase in raw material and packaging costs

Barley prices have always maintained their uptrend, thereby leading to cost pressures. Further, another major cost component is glass bottles. Any change in government policy on glass bottles (like the Maharashtra government banned the reuse of old bottles) will have a significant impact on the financials of the company.

Inability to take price hikes

In majority of the states, price hikes are decided by the government. If the company is not granted price hikes or the price hike is insufficient to cover for increased input cost, it can impact the margins of the company.

Pledging of promoter holding

As on September 30, 2014, the promoter holding in UBL stood at 74.8%. In this, Heineken’s share was 39% while the share of the Indian promoter was 35.8%. Of the Indian promoter’s share, nearly 54% is pledged with various lenders whereas none of the shares of the foreign promoter are pledged. If the stock price declines significantly, the promoters may be required to pledge more shares to maintain the margin requirement. In case of a default either in margin maintenance or interest payments, the lenders have to offload the shares in the market, which can impact the stock price negatively. Exhibit 41: Share pledging trend of UBL (Indian promoter)

21.9

14.8

29.8

54.8 65

.4

64.1

61.9

54.0

53.9

0

10

20

30

40

50

60

70

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14

% P

ledg

ed


31.9 33.1 34.839.9 42.4 44.5

9.4 6.4 4.5-0.2

23.822.6

-10

0

10

20

30

40

50

FY09 FY10 FY11 FY12 FY13 FY14

Excise duty as % of sales

Volume growth (%)


Financial Summary (Consolidated) Exhibit 42: Profit & Loss (| Crore)

(Year-end March) FY14 FY15E FY16E FY17ERevenue 4,229.7 5,037.6 6,075.1 7,173.1Growth (%) 8.5 19.1 20.6 18.1Cost of materials consumed 637.1 714.0 861.0 1,008.7Consumption of Packaging Material 1,071.5 1,269.3 1,530.7 1,793.3Change in Inv, WIP & stock in trade 23.4 47.6 57.4 67.2Employee benefit expense 264.1 317.3 382.7 448.3Selling & promotional expenses 1,174.6 1,348.7 1,602.5 1,905.3Other expense 470.9 634.7 765.4 896.6EBITDA 588.1 706.1 875.4 1,053.5Growth (%) 23.3 20.1 24.0 20.4Depreciation 197.8 197.5 218.8 230.4EBIT 390.2 508.6 656.6 823.2Finance Cost 79.5 79.7 84.5 88.5Other Income 24.4 20.6 28.8 31.9Exceptional Item 0.0 0.0 0.0 0.0PBT 335.1 449.5 600.9 766.6Tax 108.7 143.8 192.3 245.3Reported PAT 226.4 305.6 408.6 521.3Adjustments 0.4 0.0 0.0 0.0Adj. Net Profit 226.0 305.6 408.6 521.3


Exhibit 43: Balance Sheet (| Crore)

(Year-end March) FY14 FY15E FY16E FY17ESource of FundsEquity Capital 100.5 100.5 26.4 26.4Reserves & Surplus 1,606.7 1,874.2 2,231.7 2,687.8Shareholder's Fund 1,707.2 1,974.7 2,258.1 2,714.3Long term Loan Funds 527.6 474.8 427.3 384.6Provisions 5.5 5.5 5.5 5.5Total Current Liabilities 1,576.5 1,706.2 2,070.7 2,441.2Short term borrowings 488.9 521.6 629.1 721.6Trade payables 209.7 217.3 262.1 307.1Other current liabilities 785.6 869.4 1,048.5 1,259.0Provisions 92.3 97.8 131.1 153.5Source of Funds 3,898.1 4,242.5 4,843.0 5,626.9

Application of FundsGross Block 2,815.3 3,020.3 3,310.3 3,460.3Less: Acc. Depreciation 1,207.4 1,404.9 1,623.8 1,854.1Net Block 1,607.9 1,615.4 1,686.6 1,606.2Capital WIP 82.3 65.8 52.7 42.1Goodwill 24.2 24.2 24.2 24.2Investments 174.7 206.5 314.5 368.5Inventories 544.1 608.6 760.1 890.5Debtor 958.6 1,065.0 1,297.5 1,596.7Cash 142.6 237.4 176.3 477.3Loan & Advance, Other CA 358.1 414.1 525.5 615.7Total Current assets 2,003.4 2,325.0 2,759.4 3,580.2Application of Funds 3,898.1 4,242.5 4,843.0 5,626.9



Exhibit 44: Cash flow (| Crore)

(Year-end March) FY14 FY15E FY16E FY17EProfit after Tax 226.0 305.6 408.6 521.3Add: Depreciation 197.8 197.5 218.8 230.4Cash Profit 423.8 503.1 627.4 751.6Increase/(Decrease) in CL 170.3 129.7 364.5 370.5(Increase)/Decrease in CA -232.4 -226.8 -495.5 -519.8CF from Operating Activities 290.6 406.0 496.5 602.3Purchase of Fixed Assets -185.1 -188.5 -276.8 -139.5(Inc)/Dec in Investments -35.4 -31.8 -108.1 -53.9Others 61.5 0.0 0.0 0.0CF from Investing Activities -159.0 -220.3 -384.9 -193.4Inc/(Dec) in Loan Funds -215.6 -52.8 -47.5 -42.7Inc/(Dec) in Sh. Cap. & Res. 0.0 0.0 -74.1 0.0Others 23.3 0.0 0.0 0.0CF from financing activities -222.5 -91.0 -172.6 -107.9Op. Cash and cash Eq. 233.5 142.6 237.4 176.3Cl. Cash and cash Eq. 142.6 237.4 176.3 477.3


Exhibit 45: Ratios

(Year-end March) FY14 FY15E FY16E FY17EPer share data (|)Book Value 64.6 74.7 85.4 102.7Cash per share 5.4 9.0 6.7 18.1EPS 8.5 11.6 15.5 19.7Cash EPS 16.0 19.0 23.7 28.4DPS 1.0 1.4 1.9 2.5Profitability & Operating RatiosEBITDA Margin (%) 13.9 14.0 14.4 14.7PAT Margin (%) 5.3 6.1 6.7 7.3Fixed Asset Turnover (x) 2.4 2.6 2.9 3.2Inventory Turnover (Days) 29.1 28.0 29.0 29.0Debtor (Days) 51.3 49.0 49.5 52.0Creditors (Days) 11.2 10.0 10.0 10.0Return Ratios (%)RoE 13.2 15.5 18.1 19.2RoCE 14.3 17.1 19.8 21.5RoIC 15.1 18.6 21.3 25.1Valuation Ratios (x)PE 95.0 72.8 54.5 42.7Price to Book Value 12.6 11.3 9.9 8.2EV/EBITDA 38.0 32.6 26.4 21.7EV/Sales 5.3 4.6 3.8 3.2Leverage & Solvency RatiosDebt to equity (x) 0.6 0.5 0.5 0.4Interest Coverage (x) 4.9 6.4 7.8 9.3Debt to EBITDA (x) 1.7 1.4 1.2 1.0Current Ratio 1.3 1.4 1.3 1.5Quick ratio 0.9 1.0 1.0 1.1



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[email protected]


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Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

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