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United Breweries

Ashit Des

[email protected]

Tel. No. +91-22-4007 623

B&K SecuritieBatlivala & Karani B&K Securitie

Share Data

Market Cap. Rs. 45.3 bn (US$ 1,018.5 mn)

Price Rs. 209

Target Price Rs. 196

BSE Sensex 14130

Reuters UBBW.BO

Bloomberg UBBL IN

6m avg. daily turnover (US$ mn) 0.6

52-week High/Low Rs. 215/71

Issued Shares 216 mn

Valuation Ratios

Year to 31 March 2007E 2008E

EPS (Rs.) 5.5 6.5

+/- (%) 191.4 19.2

PER (x) 38.3 32.1

Dividend/Yield (%) 0.2 0.2

EV/Sales (x) 4.6 3.7

EV/EBITDA (x) 23.5 18.8

© B&K Securities 2007

All Rights Reserved

Attention is drawn to the disclaimer and

other information on Page 2

INITIATING COVERAGE

16th January 2007

Shareholding Pattern (%)

Promoters 75

FIs/MFs 2

FIIs 15

Public & Others 8

Market Performe

Relative Performance

Analyst Declaration : I, Ashit Desai, hereby certify that the views expressed in this report accurately reflect

personal views about the subject securities and issuers I also certify that no part of my compensation was, is

will be, directly or indirectly, related to the specific recommendation or view expressed in this report.

B&K Research is also available on Bloomberg <BNKI>, Thomson First Call & Investe

Brewing magicUnited Breweries with its flagship brand Kingfisher is a market leader with close

50% market share in the 104 mn cases domestic beer market. The company havin

the largest brewing capacity in India with a network of 14 owned and 11 contra

breweries has embarked on an aggressive expansion plan in order to benefit fro

the strong double-digit growth in the domestic beer industry.

We expect the company’s revenues to post a CAGR of 32% during FY06-09E d

to favourable demographic factors, increasing expenditure on personal consumpti

and deregulation in the northern markets driving strong volume growth.

The merger of its group companies and the acquisition of Karnataka Brewer

will see an increase in owned capacity which will increase operational efficienc

and meet the volume growth in the industry. We expect operating margins

improve from 17.3% in FY06 to 19.4% in FY07.

We have valued the company at 30x FY08E EPS of Rs. 6.5 which gives u

target price of Rs. 196. At the current price of Rs. 209, we feel the stock is rich

valued and fully captures the future growth prospects. We initiate coverage wi

a Market Performer rating. However, we feel the company has a strong growpotential and will continue to enjoy a significant premium due to its mark

leadership and rich brand equity in the domestic market.

Year to March FY06 FY07E FY08E FY09E CAGR (%

P&L Data (Rs. mn) FY06-09

Net Revenues 6,873 10,559 13,242 15,738 31

Operating Profit 1,187 2,051 2,597 3,090 37

Adjusted Net Profit 406 1,182 1,409 1,695 61.

Balance Sheet (Rs. mn)

Total Assets 9,304 11,452 13,784 15,845 19

Shareholders’ Funds 5,072 6,156 7,442 9,013 21

Per Share Data (Rs.)

Adjusted EPS 1.9 5.5 6.5 7.8 61.1

CEPS 2.8 6.6 8.2 9.8 51

Returns (%)

ROE 10.7 21.1 20.7 20.6 24

ROCE 17.7 23.3 23.7 23.8 10

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United Breweries L td (Actual)Sensex



UNITED BREWERIES

B&K R ESEARCH J ANUARY 2007

2

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dissemination is prohibited. This information does not constitute or form part of and should not be construed as, any offer for sale or subscription of or any

invitation to offer to buy or subscribe for any securities. The information and opinions on which this communication is based have been complied or arrived a

from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, correctness and are

subject to change without notice. Batlivala & Karani Securities India P Ltd and/ or its clients may have positions in or options on the securities mentioned in thi

report or any related investments, may effect transactions or may buy, sell or offer to buy or sell such securities or any related investments. Recipient/s shoul

consider this report only for secondary market investments and as only a single factor in making their investment decision. The information enclosed in the repor

has not been whetted by the compliance department due to the time sensitivity of the information/document. Some investments discussed in this report hav

a high level of volatility. High volatility investments may experience sudden and large fall s in their value causing losses when the investment is realized. Thos

losses may equal your original investment. Some investments may not be readily realizable and it may be difficult to sell or realize those investments, similarly

it may prove difficult for you to obtain reliable information about the value, risks to which such an investment is exposed. Neither B&K Securities nor any of its

affiliates shall assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein.

B&K Securities is the trading name of Batlivala & Karani Securities India Pvt. Ltd.

Index ...................................................................... Page No.

Investment arguments .................................................................................. 3

Investment concerns .................................................................................... 5Valuations ..................................................................................................... 6

Industry outlook ........................................................................................... 8

Company background ................................................................................ 14

Business analysis ......................................................................................... 15

Financials .................................................................................................... 19

Detailed financials....................................................................................... 21



UNITED BREWERIES


3

Investment arguments

Dominant player in the industry

United Breweries, a market leader in the 104 mn cases domestic beer market commands 40%

market share and its 50:50 joint venture with Scottish and Newcastle (S&N), known a

Millennium Alcobev commands another 10% market share. The company has the larges

network of breweries across India which helps it to increases its presence in the highly regulated

domestic alcohol market. We believe the company with its leadership position in the domesti

market and the strong presence of its Kingfisher brand will be the largest beneficiary of th

current boom in the domestic beer market which saw a growth of 14% in FY06.

Strong brand presence

Kingfisher , the company’s flagship brand enjoys a market share of more than 65% in the mil

beer segment and 27% in the strong beer segment. The company which sold more than 20 m

cases of Kingfisher Premium (mild beer) and close to 18 mn cases of Kingfisher Strong i

FY06 has seen strong beer as the major growth driver with sales of its strong beer increasin

at a CAGR of 34% since FY02. India where strong beer accounts for 65% of the total bee

market offers strong growth opportunity to the company which currently has only 27% marke

share in this segment.

Rising per capita income to drive consumption

The rapid growth in per capita income resulting from a growing Indian economy has led to

higher expenditure from the young middle-class population. With an increase in disposable

income we expect beer to become more affordable to a large set of consumers resulting in

strong volume growth. We expect the increasing western influence to change the perception o

alcohol among the youth resulting in a significant change in the consumption of alcohol in th

country. With the stigma on alcohol slowly disappearing among the youth we see larger proportio

of youth beginning to consume alcohol. The per capita consumption of beer in India which i

extremely low at 0.7 litres per annum compared to 75 litres in North America and 22 litres in

China offers strong growth prospects. Beer being an entry level drink with the lowest alcoho

content is expected to grow rapidly due to these favourable factors.

Key brands

FY06 Volumes Growth

(mn cases) (%)

Kingfisher Premium 20 13

Kingfisher Strong 18 36

UB Export 2 NA

Kalyani Black Label 2 NA

Per capita income expected to

grow above 10%

Growth in per capita income

Source: CMIE

Growth in personal disposable income

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UNITED BREWERIES


4

High entry barriers to benefit established players

A highly regulatory environment with high taxation, restrictions on inter-state movement o

alcohol, ban on advertising and difficulty in acquiring licences for greenfield breweries make

extremely difficult for new players to enter and establish their presence in India. Such

circumstances offer an advantage to the existing established players who have a significan

nationwide presence. We believe that these entry barriers will continue to benefit United

Breweries which enjoys the leadership position in the domestic beer industry.

Demographics favouring the industry

Beer, a low alcohol content drink largely finds favour among the young population in a country

India having more than 60% of its population in the age group of 15-59 years offers a favourabl

environment for the growth in beer consumption. Currently, beer consumption in India i

extremely low at 0.7 litres per annum. With the population in this age group expected t

increase we believe India offers a strong growth opportunity in this industry which is still at

very nascent stage.

Restrictions on advertising,

licences and inter-state

movement of alcohol to

benefit established players

Population aged 15-59

Source: UNPD

Recent consolidation to benefit large players

The recent consolidation in the industry has seen the major players gaining some pricing

power over the distributors, bottle and raw material suppliers. Since raw materials such a

barley, hops and yeast constitute close to 20% of the operating expenses and bottle cost

another 40% of the operating expenses we expect the increased economies of scale an

better bargaining power with the large players such as United Breweries will help improve it

margins from 17.3% in FY06 to 19.6% in FY08E.

Possibility of further deregulation to drive volume growth

The recent deregulation in the northern markets of Punjab and Haryana saw a change in

licencing system from auction to free market system. This deregulation along with a furthe

reduction in taxes on beer led to a drastic fall in beer prices resulting in volume growth o

above 300% in both states. The change in licencing system was beneficial to the industry a

well as the state governments whose revenues increased in spite of low taxes. Furthe

deregulation in other states resulting in lower prices of beer could see significant growth i

volumes as beer becomes more affordable than other spirits.

Volume growth of above 300%

in Punjab and Haryana due to

change in licencing system

0

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2000 2005 2010 2015

( i n ' 0 0 0 )

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61

62

63

( % )

Population (Age 15-59) ( in '000)

Proportion (%)



UNITED BREWERIES


5

Investment concerns

High tax incidence

The average tax incidence on beer in the domestic market which is imposed at state level i

extremely high at 42% compared to other international markets. Since the taxes on alcohol ar

one of the largest contributors to state revenue the segment continues to remain highly taxe

by the state governments.

Change in government policies

The industry is highly regulated with each state having it own taxation, pricing and distribution

policies. Alcohol being a state subject, any change in the government policy regarding pricing

taxation and distribution resulting in an increase in the price of beer would shift consume

preference towards other alcohol products thereby reducing the demand for beer.

Increasing raw material prices

With increasing consumption of beer, we expect the demand for barley to rise substantially

The increased demand and the continuous reduction of land under cultivation for barley wi

lead to a further hardening of prices of the commodity. The company also a buyer of larg

number glass bottles could face an increase in bottle prices resulting from an increase in crud

prices. Bottle costs constitute more than 40% of its total operating expenses, whereas barle

constitutes close to 12% of its operating expenses. The company could face margin pressur

due to increasing raw material prices against static selling prices.

Entry of new international players in the domestic market

Currently, SAB Miller with close to 33% market share is the only closest competitor of th

company in the domestic beer market. With the entry of Carlsberg, Cobra and Asia Pacifi

Breweries with its Tiger brand we see competition increasing in the domestic market resultin

in increased pressure on the company’s market share.

Alcohol being a state subject

faces risk from state policies

Entry of Carlsberg, Heineken

and Tiger to increase

competition



UNITED BREWERIES


6

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PER (x) Mean +1 s td dev -1 s td dev

ValuationsThe beer industry in India is expected to benefit from favourable demographic factors, rise in

per capita income leading to an increase in expenditure on personal consumption and wester

influences bringing about a change in lifestyle. The per capita consumption of beer in Indi

which currently is extremely low at 0.7 litres per annum is expected to see rapid growth due t

these favourable factors.

United Breweries, the largest player in domestic beer market with a 50% market share (includin

MAPL) continues to remain the prime beneficiary of the strong consumption growth in th

domestic beer industry. With further capacity expansions across India, acquisition of a ke

contract brewery in Karnataka (KBDL) and the expected turnaround of MAPL we se

significant growth in the companies’ revenues and profits.

PER Band 1-year forward EV/EBITDA Band

We expect the company to register a CAGR of 32% in net sales and 61% in adjusted net prof

during FY06-09E. The company has been re-rated post FY04 and currently enjoys a significan

premium due to its leadership position in the domestic market which promises strong growth

prospects. We have valued the company at 30x FY08E EPS of Rs. 6.5 which gives us a target pric

of Rs. 196. At the current price of Rs. 209, we feel that the stock is richly valued and fully capture

the future growth prospects. We initiate coverage with a Market Performer rating on the stock.

However, we feel that the company with a 50% market share in the domestic market wher

entry barriers are high and per capita consumption is extremely low at 0.7 litres per annum ha

a strong growth potential and will continue to enjoy a significant premium due to its marke

leadership and rich brand equity in the domestic market.

Source: Bloomberg, Company Reports

Peer comparison

Company EPS (US$) PE (x) Mcap Mcap/Sales (x) EV/EBITDA (x) ROE (%

CY05/FY06 CY06/FY07 CY07/FY08 CY05/FY06 CY06/FY07 CY07/FY08 US$ mn CY05/FY06 CY06/FY07 CY07/FY08 CY05/FY0

United Breweries 0.04 0.12 0.15 110.2 38.1 32.2 1,018 6.6 23.5 18.8 10.

SAB Miller 1.0 1.2 1.3 21.9 19.6 17.2 34,824 2.3 10.5 9.4 13.

Inbev 1.9 3.1 3.6 33.8 20.1 17.4 38,124 2.6 8.7 7.9 9.

Anheuser Busch 2.4 2.5 2.8 20.8 19.3 17.2 39,082 2.6 11.9 11.3 61.2

S&N 0.5 0.7 0.7 21.5 15.6 14.7 9,867 1.7 12.6 12.0 8.

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12.6x

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27.3x

34.7x

42.1x



UNITED BREWERIES


7

Probable triggers for upside

Possibility of further deregulation

The recent deregulation in the northern markets with a change in licencing system in Punja

and Haryana and a reduction of taxes on beer resulted in significant fall in beer prices whic

saw volumes increasing by more than 300%. This was beneficial to the industry as well as the

state governments whose revenues increased in spite of low taxes. We believe furthederegulation in other states would benefit the industry and the state governments resulting i

lower retail prices of beer driving strong growth in volumes which is currently not factored i

our estimates.

Delinking of beer from other spirits

The industry has been pushing the government to delink taxes on beer from those on othe

spirits as the alcohol content in beer is extremely low (less than 6% in mild beer and 6-8% in

strong beer) compared to other spirits (alcohol content 35-42%). Such a policy has bee

followed in most international countries in order to encourage consumption of low alcoho

drinks. The policy if adopted in India would see a significant decline in beer prices resulting in

high volume growth.

Turnaround of Millennium Alcobev (MAPL)

Millennium Alcobev (MAPL), a 50:50 joint venture between United Breweries and Scottish

and Newcastle (S&N) operates 4 breweries with brands including Sandpiper, Zingaro and

Kalyani Black Label Strong which enjoy a significant 10% market share in the domestic bee

market. The company due to high debt and low operational efficiency has substantia

accumulated losses. With savings from the recent debt restructuring expected to accrue from

3QFY07 and an improvement in operational efficiencies, the company could turnaround b

FY09. A faster turnaround of the company would see better contribution from MAPL to th

bottomline of United Breweries which is currently not factored in our estimates.



UNITED BREWERIES


8

Industry outlook The potable alcohol market in India is segmented into beer, Indian Made Foreign Liquor (IMFL

and country liquor. The country has the existence of a large unorganised sector i.e. the countr

liquor market which is estimated to be more than 60% of the total alcohol market in India. Currently

India has one of the lowest per capita consumption of alcohol in the world with beer at an abysma

low level compared to other countries at 0.7 litres per annum and IMFL at 0.82 litres per annum

Per capita beer consumption per annum

Source: Industry, B&K Research

Total size of beer market

The 104 mn cases Indian beer market which saw a CAGR of 8% since FY01 recorded a stron

growth of 14% in FY06. Beer sales have picked up post FY04 with a rapid growth in the Indian

economy resulting in higher disposable incomes among the youth, western influences resultin

in a change in perception of alcohol, and favourable demographics in the domestic marke

which have improved the prospects of this industry promising strong growth in future. Bee

which is considered to be the preferred entry level drink among the youth is expected to

benefit the most from these favourable factors.

Beer sales in India

Source: Industry, B&K Research

The domestic beer market is largely dominated by United Breweries which holds almost 50%

market share along with MAPL and SAB Miller with close to 33% after the acquisition o

Fosters brand in India.

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UNITED BREWERIES


9

Consumption pattern in India

The consumption of beer in the domestic market is highly skewed towards strong beer (alcoho

content 6-8%) than mild beer (alcohol content less than 6%) as against the international market

where mild beer enjoys significant presence. The share of strong beer in total sales which wa

62% in FY03 has increased to 65% in FY06. This high consumption of strong beer in India i

attributed to the consumer’s preference towards high alcohol content drinks and the possibility

that the high price of beer compared to other hard alcohol drinks makes strong beer a bette

value proposition. The domestic beer market which recorded a growth of 14% in FY06 saw

strong beer sales increasing by 16% whereas that of mild beer increasing by 9.4%.

Regional break-up

South

The southern region records the highest consumption of beer in India where the extremely ho

climate is favourable for the consumption of beer. The region consisting of Andhra Pradesh

Karnataka, Tamil Nadu and Kerala constitute 47% of the total beer sales in the country. Andhr

Pradesh records the highest consumption followed by Tamil Nadu, Karnataka and Kerala.

West

The west which constitutes 27% of the total sales records high consumption in Maharashtra

While Gujarat continues to remain a dry area where alcohol consumption is prohibited, Madhy

Pradesh and Goa contribute very little to the volumes in the region. However, the per capit

consumption in Goa is among the highest in India.

North

The northern region which faces extremely cold weather during the winter season traditionall

prefers spirits to beer with the demand for beer coming mainly during the summer months. Th

region which currently constitutes around 20% of the volume sales is expected to grow rapidl

due to change in reforms in Punjab, Haryana and Chandigarh which are seeing growth in excesof 300%. Rajasthan and Uttar Pradesh remain the largest consumers in the northern region.

East

The eastern region currently constitutes only 6-7% of the total beer sales and is expected t

see moderate growth in future mainly due to the poor socio-economic condition of the states

While other cheap spirits are the preferred drink in the region, the strong beer leads the bee

segment with more than 80% of the total demand for beer in the region.

South continues to lead the

market with a 47% market

share

Break-up of beer market by beer strength

Source: Company, B&K Research

State-wise consumption of beer (FY06)

65%

35%

Strong beer Mild beer

20%

47%

6%

27%

North South East West



UNITED BREWERIES


10

Regulatory environment

The Indian alcohol market is highly regulated and highly taxed by state governments. Alcoho

policy in India remains a state subject with each state having full control of alcohol legislation

state excise rates and the organisation of production and sale of alcohol. There are restriction

on inter-state movement of alcohol which has resulted in the presence of small inefficient unit

in each state reducing operational efficiencies. In fact, the restriction on movement of alcoho

between states has resulted in the domestic alcohol industry to function like 28 different countrie

There are also restrictions on brand entry, advertising, pricing and acquiring licences fo

greenfield breweries which result into further entry barriers for players planning to enter th

Indian beer market. These restrictions help the existing players as these entry barriers make i

extremely difficult for new players to establish their presence and compete with the curren

well established brands in the domestic market.

Distribution structure

The distribution of alcohol in the country is also a matter of state policy and follows one of th

three models listed below.

Government distribution– In this market the state government undertakes the pricing and

distribution under its territory. Around 65% of the domestic alcohol market (in volume term

follows this model of distribution. In this model a representative body of the state governmen

(e.g. TASMAC in Tamil Nadu) purchases alcohol from the manufacturer and distributes i

through its own retail network.

The states of Delhi, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala follow the governmen

distribution model.

Auction market system – Under this system, the state government auctions licences for th

sale of alcohol in a particular geographical territory. The highest bidder (contractor) the

becomes the sole distributor of alcohol in that territory and distributes the products throug

its own retail network. Around 15% of the domestic alcohol market (in volume terms) follow

this model of distribution.

Auction markets are present in Rajasthan, Bihar and Himachal Pradesh. These auctions howeve

lead to monopolies and cartels which results in high prices of beer driving down its consumption

Free market system – This system is beneficial for both the alcohol companies and the en

consumers as the pricing is market determined. Under this system the government sells license

to applicants for a fee which entitles them to sell beer in the market. It represents more tha

20% of the domestic alcohol market (in volume terms). The states of Maharashtra, Utta

Pradesh, Goa and Madhya Pradesh follow this distribution model. Recently, the change in

policy in Punjab and Haryana has seen the government changing the licencing system from

auction system to the free market system driving strong demand for beer in these regions.

Majority of states follow the

government distribution model

Alcohol – a state subject with

high restrictions



UNITED BREWERIES


11

Key players – Market share

Source: Company

The Indian beer market is highly dominated by United Breweries controlling close to 50%

market share (including MAPL) and SAB Miller with around 33% market share after th

takeover of Shaw Wallace brewing business and Fosters India operations. These two player

dominate the domestic market with more than 80% of the market share.

United Breweries currently owns 14 breweries across India with a brewing capacity of close to

3.5 mn hectolitres compared o SAB Millers 11 breweries (including Fosters Aurangabad facility

with a total capacity of ~2.6 mn hectolitres. The other players such as Mohan Meakins an

Mt. Shivalik have regional presence in the domestic market.

United Breweries and SAB

Miller control 80% of the

domestic market

Key brands

UB SAB Miller Mohan Meakins Mt. Shivalik

Kingfisher Mild Castle Lager Golden Eagle Thunderbol

Kingfisher Strong Haywards 2000 Golden Peacock

UB Export Haywards 5000

Kalyani Black Label Knock Out

Sandpiper* Royal Challenge

Zingaro* Fosters

*Brands of MAPL – joint venture of UB and S&N

United Breweries with its flagship brand Kingfisher holds 67% market share in the mild bee

segment and 27% in the strong beer segment. The company has managed to garner a 27%

market share in the strong beer segment within just five years of the launch of its strong bee

“Kingfisher Strong”. On the other hand, SAB Miller the company’s closest competitor enjoy

a significant presence in the strong beer segment with its Haywards and Knock Out brands.

Recent consolidation to benefit market leaders

United Breweries acquisition of Karnataka Breweries and Distilleries (KBDL) and its merge

of the brewing division of Associated Breweries and Distilleries (ABDL) and Mangalor

Breweries and Distilleries (MBDL) with itself and further increasing its stake to 50% in MAPL

– a joint venture with S&N has seen the company consolidating its position in the India

market. Further, the second biggest brewing company in India – SAB Miller’s acquisition o

Acquisitions at a significant

premium

47.5%

32.9%

3.6%

5.4%

10.6%

UB Group

SAB Miller

Mt. Shivalik

Mohan Meakin

Others



UNITED BREWERIES


12

the brewing business of Shaw Wallace and its recent acquisition of the Indian operations o

Fosters has led to the beer market being dominated by these two players. The recent acquisition

in the domestic market have been at a significant premium which indicates the underlyin

potential of the domestic market. We expect this consolidation to benefit the big players i

terms of improved bargaining power with the distributors and bottle manufacturers.

Recent acquisition details

Year Mergers Equity Amount Market Key Brands

and Acquisitions Stake (%) (Rs. mn) Share (%)

August 2006 SAB Miller – Fosters 100 5,400 2.3 Fosters, Amberro

May 2005 SAB Miller – 50 1,580 ~30 Haywards 2000, Haywards 5000

Shaw Wallace Knock Out, Royal Challenge Premium

May 2005 S&N – 17.5 2,173 40 Kingfisher Premium, Kingfisher Strong

United Breweries UB Export

Increase in raw material and bottling costs

Barley, a key raw material for the manufacture of beer constitutes around 12% of the raw

material expenses of the company. A reduction in cultivable land for barley and the increasin

demand for malt has created a shortage of barley resulting in an increase in prices. Goin

forward, we expect barley/malt price to increase further due to the increasing demand fo

malt against a stagnant production of barley.

Barley production in India

Source: CSO, Ministry of Commerce and Industry

WPI of barley (Base: 1993-94)

Glass bottles, another important raw material for the company constitutes more than 40% oits operating expenses. Since the process used to manufacture glass bottles is highly energ

consuming an increase in crude prices could result in an increase in the bottle prices. W

believe the industry would continue to face margin pressure due increasing raw materia

prices. However, large players which enjoy flexible sourcing arrangements and bargainin

power over distributors and raw material suppliers would continue to maintain their margin

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200

400

600

800

1000

1200

( ' 0 0 0 h e c t a r e s )

Production (in '000 tonnes)

Area under cultivation (in '000 hectares)

150

160

170

180

190

200

210

220

230

J a n - 0 3

A p r - 0 3

J u l - 0 3

O c t - 0 3

J a n - 0 4

A p r - 0 4

J u l - 0 4

O c t - 0 4

J a n - 0 5

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0 6

A p r - 0 6

J u l - 0 6

( x )



UNITED BREWERIES


13

Entry of new players to increase competition

• Danish brewer Carlsberg has planed to build a brewery in the state of Rajasthan in a join

venture with a group of investors. The brewery expected to be operational by the firs

quarter of 2008 would have an annual capacity of 450,000 hectolitres. Carlsberg will hol

45%; Denmark’s Industrialisation Fund for developing countries would hold 10%, whil

the remaining 45% will be owned by a group of investors, led by Carlsberg’s partner in Sr

Lanka, The Lion Brewery Ceylon Ltd.

• Asia Pacific Breweries (APB) has acquired an initial 76% stake in Aurangabad Brewerie

Limited (AUBL) which owns 2 breweries in Maharashtra and Goa, for about US$ 18 mn

The deal includes an entitlement for APB to increase its stake in AUBL to 100% by the end

of 2008. Tiger and Heineken are its flagship brands.

• APB has further invested in India’s largest beer consuming state, Andhra Pradesh, throug

a joint venture partnership with Jaipuria Beverages & Food Industries Private Limited

APB hold 67% in the joint venture called Pearl Breweries Private Limited (PBPL) and wil

build a greenfield brewery with an initial brewing capacity of 250,000 hectolitres jus

outside Hyderabad. The brewery is expected to commence operation by end 2007. The

initial investment in PBPL is estimated to be US$ 15 mn (approximately S$ 24 mn) out o

which the equity contribution is estimated not to exceed US$ 10 mn (approximately S$ 1

mn), which will be contributed by APB and Jaipuria in proportion to their respectiv

shareholdings. APB’s contribution will be funded through a combination of interna

resources and external borrowings.

• Cobra beer another new entrant will be setting up a greenfield facility at Hyderabad an

has planned an investment of US$ 10 mn for promoting its brand and distribution networ

in India. Cobra beer started by Karan Billimoria is one of UK’s fastest growing bee

brands.

The entry of major international players will see global beer brands such as Carlsberg, Heineke

and Cobra being launched in the country. However, the high regulations in the domestic

market would remain a challenge for the new players to establish their presence in India

Fosters, which entered the Indian market in 1998 was able to achieve only 2.3% market shar

by 2006.

Carlsberg, Cobra, Heineken

and Tiger to enter India by 2008



UNITED BREWERIES


14

Company backgroundUnited Breweries came into existence upon de-merger of the beer business from the erstwhil

United Breweries Ltd. The resulting United Breweries became the main brewing company o

the UB Group while the latter was renamed as United Breweries (Holdings) Limited. Th

company has been associated with brewing for over five decades and commands a marke

share of around 40% in the domestic market. Its flagship brand Kingfisher continues tremain the largest selling beer in the mild and strong segments.

The company is a part of the US$ 2 bn UB Group which is the leader in the domestic alcoho

market through its flagship companies “United Breweries” in the beer segment and “United

Spirits” in the IMFL segment. The group headed by Mr. Vijay Mallya has diversified interest

in aviation, pharmaceuticals, fertilisers, media and infrastructure. With aggressive acquisition

and expansions in the domestic market, the UB Group currently holds the largest number o

breweries in India.

Strategic alliance with Scottish and Newcastle (S&N)

The company has tied up with Scottish and Newcastle which hold 37.5% equity stake in thcompany. This alliance has helped both the companies to benefit from significant management

technical and marketing benefits. The tie-up with S&N has also brought in substantial fund

which have helped the company repay its debt. S&N is one of the leading beer companie

which owns or has an interest in over 50 breweries internationally, producing more than 5

million hectolitres (mhl) per annum. The company enjoys market leading positions in 15

countries across Europe and Asia.

Joint venture with S&N – Millennium Alcobev Ltd. (MAPL)

The company also has a 50:50 joint venture with S&N known as Millennium Alcobev Pvt. Ltd

The company manufactures brands such as Sandpiper, Zingaro and Kalyani Black Label whichtogether account for a 10% market share in the domestic beer market. MAPL having 4 breweries

1 each in Tamil Nadu, Maharashtra, Haryana and Andhra Pradesh meets almost 33% of th

capacity requirements of United Breweries. United Breweries along with MAPL togethe

accounts for almost 50% market share in the domestic brewing industry.

Kingfisher – the largest selling

beer in India

Company structure

Millennium Alcobev Ltd.

(MAPL)

UB Group

Scottish & Newcastle

(S&N)

United Breweries

Stake: 37.5%

Stake: 37.5%

Stake: 50%

Stake: 50%



UNITED BREWERIES


15

Business analysis

Break-up of revenue (FY06) – Rs. 9,246 mn

Source: Company

The company recorded a 33% increase in net sales to Rs. 6.87 bn in FY06 on the back o

strong growth of Kingfisher Strong which registered a 36% growth in FY06. The company

receives 87% of its revenues from the sale of beer from its owned breweries whereas close t

11% of its revenue is received from contract breweries which manufactures and sell beer in

the name of UB brands in regions where UB does not have a brewery or adequate capacity

The company has 14 owned breweries and has another 11 contract breweries which accoun

for more than 20% of its volume sales.

A network of 14 owned and

11 contract breweries across

India

A large network of breweries

87%

11% 2%

Sales

Income from Services

Other Income

Source: Company



UNITED BREWERIES


16

The company has clearly outperformed the industry in the last five years with volumes growin

at a CAGR of 14% since FY02 against the industry average of 8%. The last year has seen

pick-up in the consumption of beer due to increasing disposable income resulting from

growing economy making beer more affordable and due to some policy changes in the north

resulting in low price of beer driving such growth. The company recorded strong growth i

volumes at 19.2% in FY06, whereas the domestic beer industry grew at 13%. We expect th

company to outpace the industry growth in the coming years mainly due to the strong growth

expected in the strong beer segment through its Kingfisher Strong brand.

The company will continue to

outperform industry

Growth in UB vs. Industry


Strong brand portfolio

The company has a strong brand portfolio in both the mild and strong beer segments. Though

Kingfisher continues to be the highest selling brand in India, its other brands such as UB

Export and Kalyani Black Label have significant share selling around 2 mn cases per year. Th

other brands have regional presence and are expected to grow in line with the industry. The

company also manufactures three other brands namely Taj Mahal, Maharaja and Flying Hors

which are mainly exported to other countries. However, the volume sale of these brands i

very negligible.

Brand portfolio

Key brands Category Alcohol content (%

UB

Kingfisher Premium Mild <6

Kingfisher Strong Strong 6-8

UB Export Lager Mild <6

London Pilsner Strong 6-8

Kalyani Black Label Mild <6

UB Premium Ice Mild <6

Millennium Alcobev

Sandpiper Mild <6

Zingaro Strong 6-8

Kalyani Black Label Strong Strong 6-8

0

20

40

60

80

100

120

FY02 FY03 FY04 FY05 FY06

m n c a s e s

0%

5%

10%

15%

20%

25%

UB Industry Growth % - UB Growth % - Industry



UNITED BREWERIES


17

Brand Kingfisher – A success story

The company’s flagship brand Kingfisher contributes close to 90% of the total volume sales o

the company. It leads the domestic market in the mild beer segment with its Kingfisher Premium

brand which commands more than 65% market share. The mild beer industry in India has als

seen a pick-up in the last year which saw consumption increasing by 9.4% in FY06. The company

outperformed the industry with a 13% growth in the mild beer segment in FY06.

65% market share in mild beer

segment

Kingfisher – Volume growth


Kingfisher Strong to drive volume growth

The company continues to remain the dominant player in the mild beer segment with around

65% market share. Its entry into the strong beer category with the successful launch of th

Kingfisher Strong beer has helped it to garner 27% market share in FY06 since its launch i

1999. The company has outperformed the strong beer industry with its Kingfisher Strong

brand which has seen a 34% CAGR since FY02 and 36% in FY06 against an industry growth

of 16% in FY06. Its other strong beer brands include Kalyani Black Label Strong and Zingar

from MAPL which are also seeing increasing volumes resultng in a turnaround of MAPL. Th

deregulation in the northern regions of Punjab and Haryana which are more aligned to stron

beer will further drive growth in this segment. Overall India largely remains a strong bee

market with more than 65% of the consumption coming from this segment. We believe th

company which currently commands only 27% market share in this segment will see substantia

growth of Kingfisher Strong in the coming years.

Kingfisher Strong to be the

main driver of growth

Market share of UB in the Strong Beer segment


0

5

10

15

20

25

FY02 FY03 FY04 FY05 FY06

( m n c a s e s )

-10%

0%

10%

20%

30%

40%

50%

KF Mild KF Strong

Growth % - KF Mild Growth % - KF Strong

0%

5%

10%

15%

20%

25%

30%

FY03 FY04 FY05 FY06



UNITED BREWERIES


18

Other brands

The company’s other brands include UB Export Lager, London Pilsner, Kalyani Black Labe

Premium and UB Premium Ice which have regional presence and sell about 5 mn cases

Among these only Kalyani Black Label and UB Export have significant volumes with eac

selling around 2 mn cases. Due to its regional presence and low brand recognition we expec

these brands to grow in line with the growth in the respective states.

Millennium Alcobev Pvt. Ltd.

Millennium Alcobev Pvt. Ltd. (MAPL) is a 50:50 joint venture between United Breweries and

Scottish and Newcastle which operates 4 breweries, 1 each in Tamil Nadu, Maharashtra

Haryana and Andhra Pradesh. The company’s brands include Sandpiper, Zingaro and Kalyan

Black Label Strong which enjoy a 10% market share in the domestic beer market. The company’

products have regional preference and are priced lower compared to other brands resultin

into lower margins. It has been in losses since it was formed in FY04 and has a very high

proportion of debt. Though, the company has a negative net worth it accounts for a 10%

market share in the domestic market and meet almost 33% of the capacity requirements o

United Breweries. It has also recently undergone a debt restructuring and savings from this ar

expected to accrue from 2HFY07. Though, the company is expected to turnaround by nex

year, we do not see it contributing significantly to the bottomline of United Breweries.

Expansions and other developments

The company has planned a capex of Rs. 4 bn (besides the acquisition of KBDL) in the nex

three years in order to increase its capacity across India to meet the strong growth in demand

• It has planned to set up two greenfield units in the state of Orissa and Rajasthan at a co

of Rs. 920 mn. The Orissa brewery will have a capacity of 1.5 mn cases and the Rajasthan

brewery will have a capacity of 7.2 mn cases. These projects are expected to be completed

by 2007.

• It has also planned to increase capacity of its existing plants by 22% at an estimated cost o

Rs. 1,410 mn in order to meet the increase in demand particularly in North. The expansion

are expected to be completed before April 2007.

• The company’s recent acquisition of the brewing division of Karnataka Breweries an

Distilleries Ltd. (KBDL) for Rs. 1.86 bn has further increased its capacity by 1 mn hectolitre

KBDL which was previously a contract brewer of United Breweries will be merged with

United Breweries and is expected to add significantly to its topline and bottomline.

• The company has planned to launch a new premium brand which will be branded a

Kingfisher Ultra to fight the competition from the entry of new international players in th

domestic market.

Other brands of UB

Brands Mn cases (FY06)

UB Export 2

Kalyani Black Label 2

Others 1

Total capacity to increase to

around 7 mn hectolitres post

expansions



UNITED BREWERIES


19

Financials

Growth in net sales

The company, a major beneficiary of the increasing consumption of beer in the domesti

market is expected to post a CAGR of 32% in net sales during FY06-09E. We expect realisation

to increase by 3% each year due to price increases across key states. The Indian beer marke

where per capita beer consumption is extremely low at 0.7 litres per annum is set to benefi

from a growing economy and favourable demographic factors. Further, the company’s recen

acquisition of KBDL and the expansion of capacities across India will contribute significantly

to the growth in net sales.

Net sales to increase

significantly due to

acquisitions and capacity

expansions

Growth in net sales


Improving operating margins

With better operational efficiencies expected from the merger of ABDL and MBDL and pric

increases across key states we see margins improving from 17.3% in FY06 to 19.6% in FY09EThough, margin pressure continues to remain due to increasing barley prices and bottle costs

we expect the company with flexible sourcing arrangements and significant bargaining powe

over distributors and raw material suppliers to be less impacted by the increase in barley price

and bottle costs. Further, with an increase in owned capacity, we expect the increased economie

of scale to maintain operating expenses under control.

Increase in owned capacity to

improve margins

Margins to improve marginally


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY05 FY06 FY07E FY08E FY09E

( R s . m

n )

0%

10%

20%

30%

40%

50%

60%

Net Sales (Rs. mn)

Growth %

0

500

1,000

1,500

2,000

2,500

3,000

3,500


( R s . m n )

0%

5%

10%

15%

20%

25%

( % )

EBITDA EBITDA margins %



UNITED BREWERIES


20

Growth in net profit

The high growth in beer sales resulting from an increase in consumption in the domesti

market, the rapid capacity expansion and a marginal improvement in margins will see a significan

growth in the company’s bottomline. We expect the company’s adjusted net profit to post a

CAGR of 61% from Rs. 406 mn to Rs. 1,695 mn during FY06-09E.

Adjusted net profit to post a

CAGR of 61%

Growth in net profit


Return ratios to see significant improvement

The ROE and ROCE of the company increased from 9.7% and 12.8% in FY05 to 10.7% an

12.8%, respectively, in FY06. With a rapid capacity expansion, higher capacity utilisation an

increasing profitability we expect the ROE and ROCE of the company to improve significantl

to 20.6% and 23.8% in FY09E.

Growth in ROE and ROCE


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


( R s . m n )

0

1

2

3

4

5

6

7

8

( R s . )

Adjusted Net Profit (Rs. mn) Adjusted EPS (Rs.)

0.0

5.0

10.0

15.0

20.0

25.0


( x )

ROE % ROCE %



UNITED BREWERIES


21

Income Statement

Yr. ending 31st Mar (Rs. mn) FY04 FY05 FY06 FY07E FY08E FY09E

Gross sales 5,584 6,319 9,061 13,893 17,423 20,70

Excise duty (1,047) (1,165) (2,188) (3,334) (4,182) (4,970

Net sales 4,537 5,154 6,873 10,559 13,242 15,73

Operating expenses (4,200) (4,834) (5,686) (8,508) (10,644) (12,648

Raw material consumed (1,683) (1,956) (2,446) (3,924) (4,998) (5,983

Purchase of finished goods (574) (482) (249) (375) (462) (538

Decrease/(Increase) in stocks 32 62 (11) 81 59 5

Power & fuel (185) (197) (291) (445) (549) (642

Employee expenses (299) (338) (472) (637) (765) (918

Selling & Distribution expenses (882) (1,102) (1,569) (2,390) (2,979) (3,541

Administrative expenses (17) (153) (10) (11) (12) (13)

Other operating expenses (593) (668) (637) (807) (939) (1,068

Operating profit 336 319 1,187 2,051 2,597 3,090

EBITDA 336 319 1,187 2,051 2,597 3,090

Depreciation (67) (106) (209) (254) (356) (428

Other income 129 417 185 203 223 24

EBIT 399 631 1,163 2,000 2,465 2,908

Interest paid (325) (379) (239) (262) (331) (366

Pre-tax profit 74 252 924 1,738 2,134 2,54

(before non-recurring items)

Non-recurring items (32) 0 (305) 0 0

Pre-tax profit 42 252 619 1,738 2,134 2,54

(after non-recurring items)

Tax (current + deferred) (14) (112) (425) (471) (640) (763

Net profit 28 140 194 1,266 1,494 1,779

Adjusted net profit 60 140 406 1,182 1,409 1,695

Preference dividend 0 0 (93) (84) (84) (84

Net income 28 140 101 1,182 1,409 1,695

Detailed financials



UNITED BREWERIES


22

Balance Sheet


Current assets 3,836 4,263 6,579 7,646 9,009 10,87

Cash & bank 156 173 1,287 200 150 34

Debtors 742 997 1,300 1,930 2,323 2,76

Inventory 392 485 736 1,173 1,485 1,77

Loans & advances 2,546 2,609 3,255 4,342 5,050 6,00

Other current assets 0 0 1 1 1

Non-current assets 2,288 2,630 2,724 3,806 4,775 4,96

Investments 1,092 1,465 591 590 590 59

Fixed assets (Net block) 1,110 1,138 2,104 3,187 4,156 4,348

Gross block 1,084 1,357 2,597 3,727 4,852 5,32

Less: Depreciation (156) (259) (580) (835) (1,191) (1,618

Add: Capital WIP 183 40 88 295 495 645

Other non-current assets 86 27 29 29 29 2

Total assets 6,124 6,893 9,304 11,452 13,784 15,845

Current liabilities 1,676 1,462 1,589 2,003 2,400 2,78

Creditors 1,629 1,411 1,456 1,778 2,150 2,54

Dividends payable 0 0 91 183 208 20

Other provisions 47 51 42 42 42 4

Non-current liabilities 4,083 2,911 2,643 3,293 3,943 4,04

Total debt 3,968 2,760 2,507 3,157 3,807 3,90

Short-term debt 777 950 3 3 3

Long-term debt 3,191 1,810 2,504 3,154 3,804 3,90

Other non-current liabilities 115 151 136 136 136 13

Deferred tax liabilities 75 108 109 109 109 10

Other deferred liabilities 40 43 27 27 27 2

Total liabilities 5,759 4,373 4,232 5,296 6,342 6,83

Total shareholders’ funds 365 2,521 5,072 6,156 7,442 9,013

Paid-up capital 178 2,315 2,685 2,685 2,685 2,68

Reserves & surplus 188 206 2,387 3,470 4,757 6,32

Share premium 240 161 2,297 2,297 2,297 2,29

Retained earnings (52) 45 90 1,174 2,460 4,03

Less: Misc. expenditure (1) (1) 0 0 0

Shareholders’ funds 365 2,521 5,072 6,156 7,442 9,013

Total equity & liabilities 6,124 6,893 9,304 11,452 13,784 15,845



UNITED BREWERIES


23

Cash Flow Statement


Pre-tax profit 42 252 619 1,738 2,134 2,54

Depreciation 66 103 321 254 356 42

Chg in debtors 5 (255) (303) (630) (394) (438

Chg in inventory (71) (93) (251) (437) (312) (289

Chg in loans & advances (1,562) (63) (646) (1,086) (709) (952

Chg in other current assets 0 (0) (1) 0 0

Chg in current liabilities (246) (218) 45 323 372 38

Chg in provisions (11) 4 (9) 0 0

Chg in other deferred liabilities 40 3 (17) 0 0

Total tax paid (3) (20) (427) (471) (640) (763

Cash flow from operations (a) (1,741) (286) (669) (310) 807 91

Capital expenditure (337) (131) (1,287) (1,337) (1,325) (620

Chg in investments (231) (373) 874 1 0

Cash flow from investing (b) (568) (505) (413) (1,336) (1,325) (620

Free cash flow (a+b) (2,309) (791) (1,082) (1,645) (518) 29

Equity raised/(repaid) 0 2,059 2,506 0 0

[incl. chg in share premium]

Debt raised/(repaid) 2,351 (1,208) (252) 650 650 10

Dividend (incl. tax) 0 (44) (57) (91) (183) (208

Cash flow from financing (c) 2,351 807 2,196 559 467 (108

Net chg in cash (a+b+c) 42 16 1,115 (1,087) (51) 190



Balance Sheet

Yr. ended 31 Mar. (Rs. m) FY06 FY07E FY08E FY09E

Cash and Marketable sec. 1,287 200 150 340

Other current assets 5,292 7,445 8,859 10,538

Investments 591 590 590 590

Net fixed assets 2,104 3,187 4,156 4,348

Other non-current assets 29 29 29 29

Total assets 9,304 11,452 13,784 15,845

Current liabilities 1,589 2,003 2,400 2,789

Total debt 2,507 3,157 3,807 3,907

Other non-current liabilities 136 136 136 136Total liabilities 4,232 5,296 6,342 6,832

Share capital 2,685 2,685 2,685 2,685

Reserves & surplus 2,387 3,470 4,757 6,328

Shareholders’ funds 5,072 6,156 7,442 9,013

Total equity & liabilities 9,304 11,452 13,784 15,845

Capital employed 7,715 9,448 11,385 13,056

Income Statement


Net sales 6,873 10,559 13,242 15,738

Growth (%) 33.4 53.6 25.4 18.9

Operating expenses (5,686) (8,508) (10,644) (12,648)

Operating profit 1,187 2,051 2,597 3,090

EBITDA 1,187 2,051 2,597 3,090

Growth (%) 271.7 72.8 26.6 19.0

Depreciation (209) (254) (356) (428)

Other income 185 203 223 246

EBIT 1,163 2,000 2,465 2,908

Interest paid (239) (262) (331) (366)

Pre-tax profit 924 1,738 2,134 2,542

(before non-recurring items)

Non-recurring items (305) 0 0 0

Pre-tax profit 619 1,738 2,134 2,542(after non-recurring items)

Tax (current + deferred) (425) (471) (640) (763)

Net profit 194 1,266 1,494 1,779

Adjusted net profit 406 1,182 1,409 1,695

Growth (%) 188.9 191.4 19.2 20.3

Preference dividend (93) (84) (84) (84)

Net income 101 1,182 1,409 1,695

Cash Flow Statement


Pre-tax profit 619 1,738 2,134 2,542

Depreciation 321 254 356 428

Chg in working capital (1,182) (1,831) (1,042) (1,290)

Total tax paid (427) (471) (640) (763)Cash flow from oper. (a) (669) (310) 807 917

Capital expenditure (1,287) (1,337) (1,325) (620)

Chg in investments 874 1 0 0

Cash flow from inv. (b) (413) (1,336) (1,325) (620)

Free cash flow (a+b) (1,082) (1,645) (518) 297

Equity raised/(repaid) 2,506 0 0 0

Debt raised/(repaid) (252) 650 650 100

Dividend (incl. tax) (57) (91) (183) (208)

Cash flow from fin. (c) 2,196 559 467 (108)

Net chg in cash (a+b+c) 1,115 (1,087) (51) 190

Valuations

Yr. ended 31 Mar. (x) FY06 FY07E FY08E FY09E

PER 111.6 38.3 32.1 26.8

PCE 73.7 31.5 25.6 21.3

Price/Book 8.9 7.4 6.1 5.0

Yield (%) 0.1 0.2 0.2 0.2

EV/Net sales 6.8 4.6 3.7 3.1

EV/EBITDA 39.1 23.5 18.8 15.8

Key Ratios

Yr. ended 31 Mar. (%) FY06 FY07E FY08E FY09E

EPS (Rs.) 1.9 5.5 6.5 7.8

EPS growth 138.3 191.4 19.2 20.3

Book NAV/share (Rs.) 23.5 28.5 34.4 41.7

Dividend payout ratio 13.7 8.3 8.7 7.3

EBITDA margin 17.3 19.4 19.6 19.6

EBIT margin 16.9 18.9 18.6 18.5

ROCE 17.7 23.3 23.7 23.8

Net debt/Equity 24.1 48.0 49.1 39.6

Du Pont Analysis – ROE

Yr. ended 31 Mar. (x) FY06 FY07E FY08E FY09E

Net margin (%) 5.9 11.2 10.6 10.8

Asset turnover 0.8 1.0 1.0 1.1

Leverage factor 2.1 1.8 1.9 1.8

Return on equity (%) 10.7 21.1 20.7 20.6


Documents

United breweries limited Batlivala & Karani