>UNITED BREWERIES LIMITED (INDIABULLS)

TP raised but Maintain Sell

United Breweries Limited (UBL)’s Q1’10 net sales grew by 17.2% yoy, above our expectation, to Rs. 5.6 bn primarily on the back of improved market share. However, EBITDA margin dropped slightly by 70 bps yoy to 12.8%. This was largely due to rise in packaging and advertising cost.
Considering the improved market share, we have revisited our revenue growth estimates and revised our Target Price (TP) on the stock to Rs. 102. However, due to expensive valuation, we maintain our Sell rating on the stock.

Target priced raised on upgrade in market share: UBL has displayed strong performance in last 2-3 quarters in improvement in its market share. In Q1’10 the Company achieved the market share of 51% (ex- Andhra Pradesh) as it strengthened its product portfolio through new launches. Subsequently, we upgrade our market share estimates for FY10 and FY11 to 49.3% and 48.4%, respectively from 48.4% and 46.6% earlier. We revise the target price for UBL from Rs. 78 to Rs. 102.

However, stock appears overpriced: Although we have raised our DCF based target price, we maintain our sell rating on the stock as it more than discounts UBL’s brand equity through Kingfisher, and market leadership position. When compared to FMCG companies, which command far superior ROE of 60-65% compared to UBL at 8%, the stock appears expensive at current P/E of 58x (vs. 26x for FMCG companies). Moreover, UBL’s Free Cash Flow per share is likely to remain at negative Rs. 1.34 in FY10 and at low Rs. 2.38 in FY11 on account of heavy capex plans, which represents a tiny FCF yield of 1.6% for FY11.

To see full report: UNITED BREWERIES