2020-06-25 11:23:00

MUMBAI: It’s not that United Breweries Ltd was having a great year before covid-19-led disruption in the March quarter. For the nine-month ended December, net revenues had increased by just 5% over the same period last year. During the same time frame, pre-tax earnings had dropped by about 34%. Factors that affected performance include elections during the June quarter, the general consumption slowdown, unfavorable policy changes in Andhra Pradesh and input cost increases.

Last quarter results came in below Street expectations. Revenues declined by 12.6% year-on-year and pre-tax profits fell as much as 48%, further weighing on financial year 2020 profits. For the March quarter, the covid-19 lockdown weighed on volumes.

It is encouraging that gross profit margins expanded marginally by about 40 basis points. According to the company, this was owing to a combination of positive price/mix and more stable input costs. However, despite a 12% drop in other expenses, which largely includes marketing/promotion spending, Ebitda margin contracted by 122 basis points to 9.3%. One basis point is one-hundredth of a percentage point. Ebitda is earnings before interest, tax, depreciation and amortisation; a key profitability measure for companies. Higher employee expenses also weighed on the margins.

Outlook for financial year 2021 volumes remains weak with the lockdown seen for good part of this quarter. Plus, consumers may shy away from visiting restaurants and pubs, fearing the risk of contracting the virus. This would eat into volumes as well.

Interestingly, in covid-19 times, the valuation gap between United Spirits and United Breweries has narrowed with the shares trading at 41 times and 47 times estimated FY22 earnings, according to Bloomberg.

According to Karan Taurani, analyst at Elara Securities (India) Pvt. Ltd, “One reason for the narrowing valuation gap is that the lockdown has eaten into a good share of beer volumes compared to spirits due to the seasonality factor. Beer sales tend to spike over April-June. Secondly, the closure of restaurants and pubs affected beer sales more than other alcoholic beverages.”

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