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Stock Data

Sector Breweries & Distilleries

Face Value (Rs.) 1.00

52 wk. High/Low (Rs.) 211.00/87.75

Volume (2 wk. Avg.) 37217

BSE Code 532478

Market Cap (Rs.mn.) 48960.00

Financials (Rs. in mn.) FY08 FY09 FY10E FY11E

Net Sales 13408 16725 19065 21925

EBIDTA 1972.7 2675.3 2835.2 3357.4

PAT 624.7 625.0 937.2 1187.5

EPS 2.89 2.60 3.91 4.95

P/E 70.54 78.34 52.24 41.23

United Breweries Ltd

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SYNOPSIS

We initiated the coverage of United Breweries Ltd and set a target price of Rs.240.00

United Breweries (UBL) is a flagship company of UB Group. The company is engaged in manufacturing and marketing of beer.

The company announced that during the financial year ended March 31, 2010, the combined brewing entities of United Breweries Ltd. have sold more than 7.8 million hectoliters of beer which is equivalent to over 100 million cases.

United Spirits (USL), the flagship company of United Breweries Groups' (UB) has considerably reduced its total debt.

United Breweries Holding (UBHL) and United Breweries (UBL) have entered into a new shareholding agreement with Heineken N.V. in order to lead the Indian beer market.

The company’s net sales and net profit are expected to grow at a CAGR of 18% and 24% over FY08 to FY11E.

1 Year Comparative Graph

United Breweries BSE SENSEX

V.S.R. Sastry

Equity Research Desk

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

C.M.P: Target Price: Rs.204.00 Rs.240.00

Share Holding Pattern

April 15, 2010

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Table of Content

Content Page No.

1. Peer Group Comparison 03

2. Investment Highlights 03

3. Company profile 06

4. Financials 08

5. Charts & Graph 10

6. Outlook and Conclusion 12

7. Industry Overview 13

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

United Breweries Ltd 204.00 48960.00 2.29 47.91 5.82 30.00

United Spirits Ltd 1301.80 163498.70 29.62 40.91 5.23 20.00

Radico Khaitan Ltd 134.00 13790.10 0.64 42.54 6.27 15.00

Empee Distilleries Ltd 131.50 2480.70 5.32 0.00 1.05 50.00

Investment Highlights

Results Updates (Q3 FY10)

For the third quarter, the top line of the company increased 20%YoY and stood at Rs.4466.00mn against Rs.3734.60mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs.212.60mn from Rs.14.70mn of the corresponding period of the previous year i.e. an increase of 1346%YoY.

EPS of the company for the quarter stood at Rs.0.89 for equity share of Rs.1.00 each.

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Expenditure for the quarter stood at Rs.4005.30mn, which is around 18% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 12% of the sales of the company and stood at Rs.554.70mn. Consumption of Packing Materials stood at Rs.1155.20mn from Rs.868.50mn. and accounts for 26% of the revenue of the company for the quarter i.e., an increase of 33%YoY.

OPM and NPM for the quarter stood at 15% and 5% respectively from 13% and 0.39% respectively of the same period of the last year.

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• United Breweries Limited achieves milestone of 100 million cases

The company announced that during the financial year ended March 31, 2010, the combined brewing entities of United Breweries Ltd. have sold more than 7.8 million hectoliters of beer which is equivalent to over 100 million cases. This growth is an increase of more than 20% over the previous financial year.

• United Spirits reduces its debt

United Spirits (USL), the flagship company of United Breweries Groups' (UB) has considerably reduced its total debt. In the last three quarters of the fiscal the company has reduced its debt from Rs 7,360.8crore in to Rs 5,509.4crore.

USL while acquiring the Scottish whisky maker, Whyte and Mackay in 2007 took a $625 million loan. The acquisition debt with recourse to USL has been trimmed from Rs 3,143crore in March 2009 to Rs 433crore in December 2009 post the sale of treasure stock worth Rs1,050crore and a $350 million qualified institutional placement in the latter half of 2009. The lower debt brings down interest costs substantially.

United Breweries Group recently exited its holding in Aventis Pharma (sanofi-aventis) by selling a 10.27 per cent stake in the company, in a deal worth Rs 414.11crore. Mallya will use the proceeds of this sale to retire a part of the Rs 1,600crore debt in UB Holdings Limited, which holds significant stakes in United Breweries, United Spirits and Kingfisher Airlines.

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• United Breweries and UBHL to lead the Indian beer market with Heineken N.V.

United Breweries Holding (UBHL) and United Breweries (UBL) have entered into a new shareholding agreement with Heineken N.V. in order to lead the Indian beer market. Consequently the companies have resolved their difference and have decided to withdraw the litigations initiated by them.

Under the agreement, Heineken will be active in India solely through UBL. Further, the alliance will offer consumers the best portfolio of national and international brands in India, which includes Kingfisher and Heineken.

The parties have agreed upon the key commercial terms for the production of the Heineken brand in India. This will allow Heineken and UBL to reinforce the development of the Heineken brand and accelerate the growth of the premium beer segment throughout India. At the same time UBL will work with Heineken to expand the international presence of the Kingfisher brand through Heineken’s global footprints. One in two beers sold in India is a UBL brand while every day about 25 million glasses of Heineken are consumed across the globe.

• Dividend

During the year under review the board of Directors of the company declared an interim dividend @ 15% on Equity Shares of Re.1 each. The Board of Directors take pleasure in declaring a final dividend @ 15% to make a total equity dividend distribution of 30% for the year ended March 31, 2009.

Company Profile United Breweries (UNITEDBREW), incorporated on May 13, 1999, is engaged in manufacture, purchase and sale of beer including licensing of brands which constitutes a single business segment. Earlier known as UB Beer, it got its present name on Aug. 7, 2002. The company forms the beer division of the UB group, a diverse company with business interests in beverage alcohol, aviation, fertilizers, international trading and infrastructure. Aventis Pharma, Herbertsons, Mangalore Chemicals & Fertilizers, UB Engineering, United Breweries (Holdings), Mangalore Breweries and Distilleries, United Racing & Bloodstock Breeders, and UB Electronic Instruments are some of the other group companies. The company offers leading brands such as Kingfisher, UB Export, London Pilsner, Premium Ice and Kalyani Black Label. Innovation with the introduction of 5-liter kegs of Kingfisher draught beer and a four-pack of London Pilsner has already gained the company a domestic market share of over 50%. With 11 own and more than 15 contract manufacturing facilities, the company has no capacity constraints for increasing production. A joint venture company Millennium Alcobev (MABL) with Scottish & Newcastle Plc. (S&N) having manufacturing locations in critical markets, the company has increased capacity considerably. In August 2007, the UB group planned to pump in INR 12 billion in capacity expansion of its breweries across the

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country, which will consist of setting up Greenfield projects in Andhra Pradesh, Uttar Pradesh, Madhya Pradesh and Tamil Nadu. After expansion, the group`s beer manufacturing capacity will increase to 130 million cases from the current 100 million by 2010. A strategic alliance with Scottish & Newcastle Plc (S&N), taken over by Sunrise Acquisitions early in 2008, would allow the company to market S&N`s international brands in India and would leverage S&N`s global network to further globalize the Kingfisher brand. Some of MABL`s popular brands include Zingaro, Sandpiper, Bullet and Marco Polo. The subsidiaries of the company include Associated Breweries & Distilleries, London Draft Pubs, and London Pilsner Breweries. United East Bengal Football Team is an associate of the company. The Kingfisher beer is currently available in 52 countries worldwide. Subsidiaries

• Associated Breweries & Distilleries Limited (ABDL)

• Maltex Malsters Limited (MML) Associate:

• United East Bengal Football Team Private Limited (UEBFTPL) Joint Venture:

• Millennium Alcobev Private Limited (MAPL) Subsidiaries of the Joint Venture:

• Empee Breweries Limited (EBL)

• United Millennium Breweries Limited (UMBL)

• Millennium Beer Industries Limited (MBIL)

The company’s leading brands

• Kingfisher

• UB Export

• London Pilsner

• Premium Ice

• Kalyani Black Label

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Financials Results 12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 13408.00 16725.30 19065.60 21925.44

Other Income 255.80 493.00 788.06 945.67

Total Income 13663.80 17218.30 19853.66 22871.11

Expenditure -11691.10 -14543.00 -17018.43 -19513.64

Operating Profit 1972.70 2675.30 2835.23 3357.47

Interest -428.30 -896.40 -569.68 -626.65

Gross profit 1544.40 1778.90 2265.55 2730.82

Depreciation -612.30 -762.10 -855.72 -958.40

Profit Before Tax 932.10 1016.80 1409.84 1772.42

Tax -307.40 -391.80 -472.63 -584.90

Net Profit 624.70 625.00 937.20 1187.52

Equity capital 216.00 240.00 240.00 240.00

Reserves 3427.60 8106.40 9043.60 10231.13

Face Value 1.00 1.00 1.00 1.00

Total No. of Shares 216.00 240.00 240.00 240.00

EPS 2.89 2.60 3.91 4.95

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E

Description 3m 3m 3m 3m

Net sales 5564.50 4122.50 4466.00 4912.60

Other income 188.90 155.40 206.40 237.36

Total Income 5753.40 4277.90 4672.40 5149.96

Expenditure -4854.00 -3753.30 -4005.30 -4405.83

Operating profit 899.40 524.60 667.10 744.13

Interest -132.20 -163.60 -133.60 -140.28

Gross profit 767.20 361.00 533.50 603.85

Depreciation -204.90 -207.40 -216.30 -227.12

Profit Before Tax 562.30 153.60 317.20 376.73

Tax -207.30 -36.50 -104.60 -124.23

Net Profit 355.00 117.10 212.60 252.50

Equity capital 240.00 240.00 240.00 240.00

Face Value 1.00 1.00 1.00 1.00

Total No. of Shares 240.00 240.00 240.00 240.00

EPS 1.48 0.49 0.89 1.05

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Key Ratio

Particulars FY08 A FY09 A FY10 E FY11 E

EBIDTA % 15% 16% 15% 15%

PAT % 5% 4% 5% 5%

P/E ratio (x) 70.54 78.34 52.24 41.23

ROE - % 17% 7% 10% 11%

ROCE - % 15% 13% 12% 13%

EV/EBIDITA (x) 20.00 9.96 19.34 18.23

Debt Equity Ratio 1.44 0.74 0.73 0.71

Price/Book Value 10.83 5.87 5.27 4.68

Charts:

• Net sales & PAT

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• P/E Ratio (x)

• P/BV (X)

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• EV/EBITDA(X)

Outlook and Conclusion

At the market price of Rs.204.00 the stock is trading at 52.21 x and 41.23 x for FY10E and FY11E respectively.

On the basis of EV/EBDITA, the stock trades at 19.34 x for FY10E and 18.23 x for FY11E.

Price to book value of the company is expected to be at 5.27 x for FY10E and 4.68 x for FY11E respectively.

EPS of the company is expected to be at Rs.3.91 and Rs.4.95 for the earnings of FY10E and FY11E respectively.

United Breweries has recommended payment of an additional dividend of Rs 0.15 per equity share of Re 1 each.

The company announced that during the financial year ended March 31, 2010, the combined brewing entities of United Breweries Ltd. have sold more than 7.8 million hectoliters of beer which is equivalent to over 100 million cases. This growth is an increase of more than 20% over the previous financial year.

United Spirits (USL), the flagship company of United Breweries Groups' (UB) has considerably reduced its total debt. In the last three quarters of the fiscal the company has reduced its debt from Rs 7,360.8crore in to Rs 5,509.4crore.

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United Breweries Holding (UBHL) and United Breweries (UBL) have entered into a new shareholding agreement with Heineken N.V. in order to lead the Indian beer market.

We recommend ‘BUY’ this stock with a target price of Rs.240.00 for medium to long term investment.

Industry Overview Globally, over 133 billion litres of beer is sold each year. In comparison, the Indian beer Industry contributes a meagre 1.28% of the global sales. The industry has been witnessing on an average, a steady growth of about 10% per year over the last ten years with volumes crossing 172 million cases in 2008-2009 from 70 million cases in 2002. With a relatively younger population and income levels on the rise, India is seeing an increase in the popularity of beer. Consumption of beer in India is also constrained by lack of adequate market infrastructure. In China for instance, there is one outlet for every 300 persons. In contrast, India has one outlet for every 21,000 persons hampering free availability of beer. Total consumption of beer in China grew by 33.56% between the years 2000 and 2006 to reach a total market volume of 30.47 billion litres. With a per capita consumption of 22 litres, China is one of the largest beer consuming nations in the world. Though beer is a milder form of alcohol, it is taxed by most states on the same basis as Spirits. The charge is on absolute alcohol basis. Globally on a per unit of alcohol basis, beer bears approximately 50% of levies imposed on Spirits whereas in India taxation is regressive on beer. India is predominantly a hard liquor market and beer has a minority preference amongst those who consume alcohol. The per capita consumption of beer constitute a meagre 3% of global average. Typically the size of beer volumes in most countries is 7 to 10 times larger than spirits, whereas in India, spirits is larger. The alcoholic beverage industry in India operates under a very complex regulatory environment which is the biggest challenge. In addition to restrictions on advertising, distribution infrastructure and retailing, varied tax structures, controlled pricing and licensing make operations more complex, consequently leading to higher costs, though providing entry barriers for new entrants as well. The Indian beer market is dominated by strong beer which accounts for 74% of the total beer sale. The market for alcoholic beverages has been growing consistently. 'The Future of Wine', a report on the state of the wine industry over 50 years, suggests that the market for wine in India was growing at over 25 per cent per year.

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