Investing In New Breweries And Flavors Will Meet Future Demand

Key Takeaways

• Investment in new brewery and product launches targets increased capacity and market share, capitalizing on emerging consumer preferences and favorable policies.
  
• Operational improvements and strategic pricing initiatives aim to enhance efficiency, boost margins, and prepare for anticipated higher demand.
  
• Profitability challenges arise from continued investments, cost issues in Telangana, price increase limitations, and uncertainties in long-term projects affecting future earnings.

Catalysts

Engages in manufacture, purchase, and sale of beer and non-alcoholic beverages in India and internationally.

• The planned investment in a greenfield brewery in Uttar Pradesh, driven by expected category growth and positive government policies, is aimed at meeting future capacity requirements. This could enhance production efficiency and increase market share, positively impacting future revenue.
  
• The launch of new products, such as Kingfisher flavors (Lemon Masala and Mango Berry Twist), targets younger consumers with evolving tastes, creating opportunities for revenue growth through premium pricing in the long term.
  
• The productivity program initiated in Q3, intended to improve efficiency and competitiveness, is expected to deliver annual gross savings of around ₹50 crores starting in 2025. This would potentially increase net margins through cost reductions.
  
• Strategic investments in breweries and supply chain improvements are aimed at preparing for higher future demand, particularly around the anticipated peak summer season in 2025. This could lead to higher earnings through increased production capacity and improved operational readiness.
  
• Focused efforts to resolve structural profitability issues, such as negotiating price increases in key states like Telangana, suggest margin improvement through better pricing strategies and reduced losses in underperforming regions.

United Breweries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Breweries's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ₹9.8 billion (and earnings per share of ₹37.41) by about March 2028, up from ₹4.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹11.7 billion in earnings, and the most bearish expecting ₹8.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 78.4x on those 2028 earnings, down from 118.4x today. This future PE is greater than the current PE for the IN Beverage industry at 33.8x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

United Breweries Future Earnings Per Share Growth

Risks

• The EBIT for the quarter was significantly lower than the previous year due to continued investments and a one-time exceptional cost, potentially impacting net margins.
  
• Telangana operations remain EBIT negative even after a 15% price increase, posing ongoing profitability challenges in that state.
  
• The pricing environment, particularly in Telangana and Karnataka, shows challenges as price increases may not compensate for the lost margin, potentially impacting revenue and net margins.
  
• There are concerns about beer becoming less affordable compared to spirits in certain markets due to excise duty increases, which could impact overall revenue growth.
  
• There are uncertainties related to the execution of long-term plans, such as the greenfield brewery in Uttar Pradesh, which might not yield immediate financial returns, impacting future earnings.

Valuation

• The analysts have a consensus price target of ₹2034.857 for United Breweries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2610.0, and the most bearish reporting a price target of just ₹1216.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹117.8 billion, earnings will come to ₹9.8 billion, and it would be trading on a PE ratio of 78.4x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹1904.15, the analyst price target of ₹2034.86 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.