United Breweries: Input costs, TN show key to profitability
The sharp rise in the stock has helped investors to more than recover from the 15% loss in the value of the stock over the past month until last Wednesday.
While the company has reported a sustained demand despite higher product prices in several states in the country, the future profitability will hinge on the trend in input costs, status of the distribution in Tamil Nadu which has impacted its volumes adversely and the overall economic climate in the country, which will impact overall consumer demand.
The company has been able to grow sales volumes by 5% in the 2013 financial year despite a slowdown in offtake in Tamil Nadu, one of the biggest states in India in terms of consumption of alcoholic beverages.
The trend, however, may not sustain in the near term. "The growth figures that we have seen in the previous years will be tempered a little bit," said the company's CFO, Hans Van Zon in an analyst conference call after the March 2013 quarter results.
One reason for the pressure on volumes is the gradual upward revision in the duty structure by various states in the country. For instance, Maharashtra raised the excise duty on strong beer in March 2013 to 60 per litre from 42 per litre.
The state accounts for the second largest consumption of beer in India after Andhra Pradesh. Given that the beer sector has seen a higher volume growth in the strong beer segment relative to mild beer, the move is expected to dampen volumes for the quarter to June 2013.
The volatility in prices of inputs including malt and barley could be another concern though the company was able to keep costs under check in the 2013 financial year. The cost of raw materials as a percentage of revenue fell to 42% from 45% recorded in the last year. This reflects better inventory management by the company.
The management claimed during the conference call that it registered sustained growth in the premium beer segment, which includes brands such as Kingfisher Blue and Kingfisher Ultra. The focus on higher value brands helped the company grow revenue at a faster pace compared to the growth in volumes. The strategy will be crucial in the coming quarters as volumes are likely to show further weakness.