Telangana 15% Beer Price Hike: Analysts are expecting a sharp revival in the share trajectory of United Breweries, known for beer brands like Kingfisher and Heineken, as Telangana has imposed a price hike of 15% on the beverage.
This move comes after a long brawl between the beer company and state distributor, Telangana Beverages Corporation Limited (TGBCL). Just last month, United Breweries announced that they are putting an immediate halt on the sale of beer in Telangana after the state distributor failed to pay back the unpaid dues which amounted to Rs 658.95 crore as per the excise ministry of the state.
However, the company later rolled back its decision as TGBCL assured it would look into the issue of outstanding dues in a timely manner. This eventually resulted in a 5% surge in the share prices of United Breweries.
Now, the recent hike of 15% will mark the very first hike imposed by the government since FY20. The company commands a dominant market share of nearly 70% in the state and generates 15% of its total revenue from the region. This makes it quite evident that any disruption in beer sales in Telangana could hit United Breweries' bottom line hard, eventually impacting its share price.
Analysts are viewing the Telangana government's recent move as a major sentiment booster for investors.
"This (15% price hike)and strong seasonal demand (on a lower base), cost-saving steps and consistent capability-building efforts augur well for the company's future...We expect revenue/ margins to rise 2% or 200bps due to this price hike," Anand Rathi brokerage firm stated.
Steady growth with minor bumps
The share price road of United Breweries has witnessed a steady road. The company witnessed double-digit gains in its share price last year. In the last 3 years, the shares have jumped by nearly 30%. The domestic alcobev industry has witnessed major growth in the past few years which has in-turn impacted the share price of major alcohol companies, but not without temporary speedbumps.
Akriti Mehrotra, research analyst at StoxBox pointed out that although the price hike is lower-than-expected it will have a healthy impact on the United Breweries' earnings.
"This price hike is expected to improve UBL’s topline, expand its margins, and reduce losses, and hence, a positive outlook is anticipated from the investors. However, the final impact will depend on the customer's response and how the company deals with the delayed payment issue," she said.
Reports are also prompting a warmer summer this time, which means beer sales are expected to start strong this year. Last year, sales were disrupted due to central and state elections, but that won’t be a problem this time. That means companies can make the most of peak demand, and analysts are betting on an 11.5% annual revenue growth for United Breweries from FY25 to FY27.
High on Cost-cuts
The company is incurring certain expenses earlier (in FY25) as part of its cost-saving measures for the future. While these upfront costs are expected to weigh on earnings in the short term (FY25), the long-term efficiency and profitability continue to stay intact, as per analysts.
Anand Rathi Brokerage has retained a BUY rating on the stock, with a 12-month target price of Rs 2,610 based on a 65x FY27 EPS valuation.
"United Breweries is undertaking cost-saving initiatives (with some associated costs being front-loaded in FY25), which would yield an annualised 1.5–3% fixed cost savings. Thus, factoring in the above and the Telangana price hike, we expect a 380 basis points Ebitda-margin expansion, driving a 36% earnings CAGR over FY25-27," the brokerage house said.
As for the previous dues, the government has already started clearing the pending payments. The beer company has received Rs 130 crore in the last 40 days and the rest is expected to be settled in installments as per reports.
While the stock outlook remains optimistic, any adverse directives by the state or higher cost of inputs can act as potential headwinds for the alcobev company.
