Market share gain, volumes flat for the quarter
Disappointing top line growth: Net sales declined 3.1% YoY to INR 10.4b. Volumes in 2QFY17 were flat YoY against industry volume decline of 5%. EBITDA declined by 10.3% YoY to INR 1.2b. Adjusted for impact of Maharashtra Local Body Tax impact of likely INR 100m-INR 150m, EBITDA was flattish and EBITDA margins were actually up YoY despite high base as well as flat volumes, demonstrating strong margins resilience. We reckon that Maharashtra is ~15% of national volumes. Due to a very steep decline in non-operating income YoY, PAT declined by 52% YoY to INR270m in 2QFY17 compared to 10% reported decline in EBITDA. 2Q is traditionally a weak quarter contributing only around 15% of yearly profits.
Flat volumes for UB in 2QFY17: Net sales declined 3.1% YoY to INR 10.4b (IND AS). Volumes in 2QFY17 were flat YoY against industry volume decline of 5%. Extended monsoons have led to tepid growth in the soft drinks and beer segment. Coca Cola India reported 4% volume decline in India last week. For 1HFY17, industry volumes were flat while UB grew volumes by 3%. Barring the West, where industry and company declined on volumes, UB reported healthy volume growth in other regions in 1HFY17. Management is hopeful of recovery in the West going forward.
Adjusted margin performance healthy:EBITDA margins declined YoY by 90 bp YoY off an unusually high base of 12.6% in 2QFY16. Decline was mainly led by gross margins. Reported EBITDA declined by 10.3% YoY to INR1.2b and adjusting for LBT impact on EBITDA which won’t be there in subsequent quarters because of price increase taken in Maharashtra effectively from October, EBITDA was flat YoY despite sales decline.
Valuation and view:EPS forecasts have been reduced by 3-4% owing to low volume growth and steep other income decline in 2QFY17. IND AS adjustments have been made based on limited data available from FY16 onwards. Long term volume and earnings growth opportunity (FY16 PAT at USD 44m) is immense for India’s largest beer player with strong barriers to entry in the form of distribution, brewery reach, scale and brands. Maintain BUY rating with target price of INR1,088 (INR1,120 earlier). We continue to value the company on 35x September 2018 cash EPS.
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