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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of United Breweries Limited, hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Harit Kapoor from Investec Capital Services. Thank you, and over to you, sir.
Yes. Thanks, Michelle. On behalf of Investec Capital Services, I would like to welcome you all to this call and a special welcome to the team of United Breweries for Q2 FY '22 (sic) [ Q2 FY '23 ] earnings call.
From the management team today, we have Mr. Radovan Sikorsky, Director and CFO of United Breweries; and Mr. P. A. Poonacha from Financial and Investor Relations.
I'll now hand over to Radovan for opening comments, post which we will open the floor for Q&A. So over to you, Radovan.
Yes. Good afternoon, everyone, on the call, and thank you for joining. So I'm here together with Mr. Poonacha. We will -- together with him, I will be answering some of the questions later on.
And yes, so just taking you through the quarter 2 a little bit. In terms of volume growth, we had 23% in the quarter versus prior year, primarily driven by Rajasthan, West Bengal and Telangana, but really good strong volume performance.
The premium segment grew also ahead of the total portfolio, growing 48%, and the total portfolio was around 23%, so a nice growth in the premium segment. EBIT for the quarter was up 58%, driven by volumes, price increase, but softened a bit by negative state mix. Inflation and pressure on cost of sales continued to impact gross margins, as you can see from the financials, contributing to a decline of about 590 basis points to the 46.7 as we had in the financials.
Strong revenue growth, combined with this cost control, though, drove EBIT margins growth by about 277 basis points.
Now on the next page of the summary table with those quarterly results, you can see that net sales are up like 18%. EBIT, up 58% and a margin of 10.8%.
On the regional volume growth, we have seen a strong recovery of volume, as I mentioned, the 23% over the COVID effect of prior year across all markets. And when you look at the year-to-date results, 67% growth versus prior year across all markets. So that is a nice healthy growth.
If we look at now particular regions, the North posted 15% in Rajastan, Haryana, Uttar Pradesh and also UP. West posted 22% growth driven by higher volumes in Maharastra state. I still have to get used to saying some of the states. But -- so bear with me. But also in Goa, Madhya Pradesh and Silvasa.
The East recorded 52% growth driven by higher volumes. And in West Bengal. And in the South, we posted 21% growth driven by higher volumes in Telangana, Karnataka, Tamil Nadu and Kerala as well.
Now turning to the net sales. This was up 18% in the quarter, driven by the 23% volume growth is on insurance and pricing was up 4%. The negative state mix was around 9% with differential volume growth across the states and with different levels of revenue. There is an improvement over previous quarter.
If we look at the net sales for year-to-date results, that's really healthy. As you can see, with a 67% volume growth, pricing is also quite strong at 6% on the year-to-date data with negative state mix of around 11%. And as I mentioned before, that's the differential volume growth across the states.
And if you look at the EBIT breakdown on the next slide, you have the presentation with you, the gross profit growth was driven by the volume and price increases, however, impacted by commodity prices, right? So that's why you can see the deterioration in gross profit margins. But the strong revenue growth drove fixed cost leverage and still good control over our cost base resulted in healthy margins of 1.7% year-to-date.
If we look at going forward, we continue to be positive about the category penetration, while at the same time, driving shares in our premium portfolio. I think that is key for us. Inflation pressure on cost of goods sold will most likely continue in the foreseeable future. And bearing on that, we will pursue further price increases and in combination with cost measures to mitigate any of these impacts.
We have good CapEx plans in place for our breweries to meet expected volume growth going into 2023 as well. We remain optimistic on the long-term growth of the industry, let's be clear on that one. And involving consumer trends, we'll drive premiumization. So we really still believe in best revenue. So that's a little bit in my opening remarks. I think we can then pass through the Q&A, and we'll try and answer all your questions.
[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.
First question is, one of your competitors have recently acquired Beer Cafe. Does this in any way limit your presence or sales in that retail chain? And globally, is this common that a brand acquired a retail chain also? And would you also have some thoughts on this longer term?
Yes. You're talking about the Bira acquisition of Beer Cafe, right?
Yes.
Yes. I mean Beer Cafe is almost like a restaurant business. I mean what they do is it's like a [indiscernible]. And the [indiscernible] Is a new contract, as you know, it's lesser [indiscernible], and it is a very small lease segment. And as such, it may complement Bira business. But for our business, we are currently not looking at that space because [indiscernible] business is a very different business. and confirming that Bira has limited cloud in rout-to-market, I think they are trying to use this as a route-to-market.
And your presence and sales in Beer Cafe, does it get impacted in any way on that?
We are not present in Beer Cafe retail sales.
Sure. Last question is on the gross margin pressure, which is quite common for every company. So essentially, when do you see a good recovery here in terms of barley and packaging material we are seeing? Globally also, the Ukraine crisis, at least from a raw material availability perspective, things are now resolving. And you also spoke on the price side. So when do you see good recovery in margins? Will it be more FY '24, so it still remains under reasonable pressure in terms of margin?
So if I understood you correct, I'm just -- I'm sorry, I'm not hearing very well through the sound. But if I understood your question correctly, you were asking about the commodity prices, for example, like volume and how do we see that going forward? Is that correct, yes?
Yes, yes.
Okay. So surely, as you can see in our margins, there is pressure on our commodities. And I think that's a global phenomenon. mean, you guys all know about that. We still see some of that continuing going forward. Yes, there seems to be some softening on some of these components going forward. But I think it's still early to tell for us on that one.
So I still think that pressures on margins will remain in the shorter term. And it's a little bit our ability to take pricing and also manage our cost to try and mitigate for a new brand.
The next question is from the line of Jaykumar Doshi from Kotak Securities.
Could you provide an update on some early indicators or response to Heineken Silver launch? How does it compare versus your earlier launches of AMSTEL and Heineken Original? Any numbers, any color, that would be helpful.
So it's very early days, really because we just launched recently, but we had very good feedback and also responses through social media in terms of the big launch we did in Bangalore a few days back.
And in terms of distribution and outlets, it's on track. We have selected certain outlets and ranges where we want Heineken Silver to be and that seems to be going very well. But it's a little bit still early to say. The rate of sales seems to be good as well and repeat by, but it's still quite small.
So I think to give you a bit more comprehensive feedback, I think we needed a few more months in the market [was driven ].
Understood. Do you have plans to launch the product in other states sometime later this year? Or it's going to be -- when do you intend to take it to other key states?
We are looking at that as well and we will be doing that. We're looking at how well it's now performing. But definitely, there are plans to roll that out to different states as well. And that scoping discussed where and when we will do that.
Understood. You've called out for the first time that premium portfolio grew about 48% Y-o-Y volumes, but I understand that last year, this quarter was impacted on trade would have been low. So how does this -- how does premium volumes in the current quarter compare versus September 2019?
Poonacha, can you answer that one? I don't know that's far back in 2019.
From pre-COVID days to now, the premium sales has gone up -- it's gone up from 6% to about 8%.
Understood. That's helpful. And final was your notes to accounts indicate that there is no impact in Tamil Nadu and Andhra Pradesh because of the changes that you have introduced. And I guess it's almost more than 3, 4 months now. So should we assume that this is a steady state now and that shouldn't -- there won't be any disruption in those markets or any adverse impact on volumes? Or are you still cautious?
I think it's a bit early still to call that there will not be any impact. So far, there hasn't really been an impact. So we are -- now we are monitoring that carefully. And maybe you do a sort of route-to-market change, it takes a while to sort of shake out what will happen. But so far, it seems okay in terms of invoicing and the volumes, but we remain -- we keep on watching that market as we progress.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
So what is the volume growth on September '19 base? And second, did we get any price increases between quarter 1 and quarter 2 in any of the states? And if you can call out for the blended price increase?
Okay. I heard the first part of the question, so I'll answer that one, and then maybe you can just repeat it because of the bad audio. And you wanted to ask about how we are comparing volumes versus '19. Is that correct, yes?
Yes, that's my first question, yes.
So if we look at volumes versus '19, in the quarter, we were slightly down around 4% versus '19. But it's quite a lot impacted by Andhra Pradesh in terms of this policy transfer happened there over East world about a year ago or so, really know off. And so it's impacted by that. And if you look at the other states, there's also a good growth versus 2019.
But still on a year-to-date number, we have grown 3% versus 2019. And that's where we are very positive about the category. I know that's how quickly it's actually recovered, and we are back to growth versus a normalized 2019. So that is quite good news for us.
my second question was, sir -- yes. Did we get any price increase between the quarter 1 and quarter 2?
So you can see that the pricing versus quarter 1 has gone to like 6%. So the pricing are going through. We are -- we have looked at taking some pricing also in Punjab. So there, we have taken and that's basically the only state as well that we've taken in between the 2 quarters.
But of course, the pricing that we took in quarter 1 are now flowing through into quarter 2, right, because, of course, taken at different times within those quarters. So that's why we see the increase as well.
So what is the incremental price increase that we have got in quarter 2 in Punjab, let's say at the blended company level?
Sorry, I didn't hear that. Poonacha, can you take that one? I didn't hear the question.
It's about 3%.
3%?
Yes.
The next question is from the line of Himanshu from Dolat Capital.
Can you help me what would be your market share in current quarter...
Sorry to interrupt. Mr. Himanshu, we are not able to hear you. Can you please switch to your handset?
Sure. Hello. Is it better?
Please proceed.
Yes. Can you help me what would be your market share during the quarter and last quarter also?
Our total market share?
Yes, total market share.
Our market is around 55% plus.
Okay. And what would it be, sir, in last quarter?
Similar. We don't give the exact number because it's basically done on approximation based on data available. And after the CCI, we don't track market share specifically in any state other than when it is available in the government cooperation expense.
Okay. And second is other expenses has gone down on a Y-o-Y basis by 3%. And this is despite a 23% volume growth on a Y-o-Y basis. And there has also been inflationary pressure on freight, et cetera. And so what is driving this decline in other expenses during the quarter?
Yes. As you know that there have been a lot of initiatives with respect to cost content that our margins are squeezed because of the increased reasons. So the level we are at which is what will stand going forward. You can't see everything growing better, but the level at which we are in would be what we would see going forward.
So there is no one-offs or anything in this particular line item during this quarter?
No one-offs, no one-offs.
Okay. And can you just tell us, sir, what would be A&P spend as a percentage of revenue during the quarter?
It remains constant as a percentage of top line as it was in the last 4 or 5 quarters.
Okay. Sir, what are the initiatives which are driving such significant decline, if you can just highlight a few of them?
Decline in cost?
Yes, decline in cost in other expenses line item?
Yes. Like I said, most of our administrative costs has been relooked at. And this will help us reach a new level, which would sustain in that particular level going forward.
The next question is from the line of Krishnan from Motilal Oswal Institutional Equities.
My question is on -- I again see that West Bengal and Haryana quarters are doing handsomely. Now in the states like UP, West Bengal and Haryana, because of the differential taxation between beer and spirits, are you also seeing a pickup in the, first of all, nonseasonal consumption of beer as well because beer is relatively cheaper than spirits in these states?
Yes. I mean we are better off in West Bengal than we are in the past because the gap between the pricing of spirits and beer vis-Ã -vis alcohol contents has now narrowed down. So we are looking at better than now, but still spirits are taxed.
If you compare alcohol volume-by-volume, tax is far lower than what we are in. So we can't say that we are fully out of the routes, but we are better than what we were.
Okay. That's useful. My question was more, is the seasonality of beer consumption also reducing a bit compared to the past in these states?
Seasonality, yes. Like I said, the pricing has put us in a better situation. So the seasonality effect has come down. But it will still be there, that's what I'm trying to reiterate because still, the spirits are taxed at a lower rate when you compare it by alcohol volume.
Okay. That's clear. My second question is on, you indicated that about that the demand is great and also about CapEx plans. Can you just quantify that number for FY '23 and FY '24, your CapEx plan?
Yes. For the -- now considering we are operating company of Heineken, our CapEx plans are done from Jan to December. For the coming Jan to December, the CapEx spend, we're looking at somewhere in the region of INR 350 crores.
The next question is from the line of Latika Chopra from JPMorgan.
So my question is a little more medium-term rather than welcome to United Dairies. I wanted to just check with you, is there going to be disproportionate focus to drive the premium part of the portfolio now, which is also witnessing more competition? And as in that process, you would kind of put lesser focus on the mass beer segment. And the related question is, in that context, how should one think about profitability? UBL had generated almost 15%, 17% operating margins in the past. We are now currently hovering between 12%, 13%. There's a lot of gross margin pressures.
But assuming we go back to normalized levels of gross margin, would A&P spend need to increase disproportionately to drive the premium mix and probably we need to settle with more like mid-teens kind of margins? Or do you think the business over the next 3, 4 years has the potential to go back to those high-teens margins? Any initial thoughts on the way Heineken is approaching the other India business now?
Okay. So I'll take that one. Thank you for the question. So in terms of premium, we can see that there is appetite for premium products also in India. And we want to be strong in that segment as we lead also in here in India. So disproportionate growth, well, yes, we -- for sure, we would like to achieve that. Lose focus on our mainstream, definitely not.
I mean, Kingfisher remains the bread and butter of our company and it's an extremely important brand for us. So the focus remains. Actually, when we look going forward, we will continue doing strong activities around the Kingfisher brand. So that needs to be clear.
And as you know, we also do extensions on Kingfisher like Kingfisher Ultra. So it's a great brand. In terms of gross profit margins and the impact of the growing premium vis-a-vis the mainstream. So we are looking at driving more margin via premium. But currently, premium is still at quite a small scale. So the pricing is there.
But because of the smaller scale, we need to work through that in terms of that cost of sales base for the premium to improve those margins. But that will come with scale, no doubt about it, and it will help our gross margins.
Longer term on the gross margins, of course, it is our plan to get back to previous levels. And we believe we can get there. It's just that, as we know, currently, the inflationary pressures across the globe are such that we are a bit under pressure with gross margins and taking prices in India and we try and do what we can state by state, and we will continue. But sometimes it's a little bit more difficult in certain states to take pricing. And therefore, there's a bit of a -- there can be a bit of a delay in catching up on some of those growth -- on some of that custom sales growth.
Sure. No, this is helpful. And one more, non-gross margin, the other costing, whether it's ANC or whether it's the fixed cost and Mr. Poonacha did refer to some of the cost savings initiatives, is there a lot of -- there's a lot of extra costs that you can take away from the system still in your view, can it be run even more efficiently? How do you think about that?
Well, definitely, we can still do more in terms of that. I think UBL has done a good job to date on driving costs down. And as the previous comments around financial shares, the cross-selling coming down. There are definitely more opportunities, particularly still in productivity at the breweries and also bottle returns and these types of things that we can drive costs downwards.
So as I step into this role, and I've only been there for like 4 or 5 weeks, I will be reviewing that as well. And -- but I'm sure when I compare it to other opcos have been, there's opportunities for more.
Sure. And the last question for me is that given the -- given your experience in different markets with Heineken, when you look at the per capita consumption levels, demographic profile, the constraints that you see on -- from a regulation standpoint, what is the realistic target for premium share in the overall revenue mix in your view -- in your portfolio? Maybe 5 years down the line, can it be 20%, 30%? What could be that realistic share?
Well, yes, in terms of per capita consumption, obviously, we see a lot of opportunity there as well. And that's why we are in the market and we want to make sure that the category grows in a good manner. In terms of premium share, you are right, quoting 20%, 25% would be something gained for in terms of premiumization in the category. So it's -- we can see the trend is there. And like I mentioned, 48% growth in the quarter is excellent. So I think to get to those sort of 20% mark is definitely achievable.
The next question is from the line of Pratik Rangnekar from Credit Suisse.
Just one clarification on the volume growth versus pre-COVID. So when you had called out 8% growth over pre-COVID in 1Q, was AP impact in the base plan as well? And excluding AP, what would be the growth that -- would that be really possible to call that out, please?
Sorry, I didn't hear that properly. Poonacha, can you try?
Yes. I'll just give you vis-Ã -vis 2019. Andhra Pradesh used to be 6% of our volume changes with drop scene because of the change in policies there, it is down to 3% of our volume changes.
Okay. Got it. And just one more question. Usually, we complete the buying of barley for the year in advance. Is that now done till the next peak season? And how much higher is the purchase price for this year versus last year?
Is that -- is it -- if I understood correctly, you're asking about how secure is our barley till the end of the year or for this year. Is that correct?
Yes, that's right. Are we done with the barley buying for the year? And how much higher is the purchase value?
Yes. So yes, we are secured, of course, for 2022, and we're already looking into 2023 to secure us. Obviously, the barley clock will come throughout around, I think it's around March, April next year. Prices have gone up.
I mean you heard my predecessor talking about it, of the price increases that they were there. There's been a slight dip recently on markets, but the pressure still remains and the prices are definitely higher than they used to be in previous years.
We have secured quite a lot, but there is still opportunity if prices do come down, that we can pick up better pricing at the back end and going into the next year, but it's still difficult to tell. It would remain as volatile times what's going to happen.
Poonacha, anything else to add on that?
I think you've covered that.
The next question is from the line of Karan Taurani from Elara Capital.
My question is around the Heineken Silver launch, which was there. Now, don't you think there could be some kind of cannibalization in the economical premium category because Kingfisher is also -- is around the same price point. Your thoughts on that, please?
Yes. I mean it is -- I guess, you're talking against price points versus Ultra, so the way we approach it, it's also different consumers choose different brands. So there is also quite a bit marked for the younger sort of consumer, sort of the 25, 30 category or 20 to 30 category. So I think we feel that there is a place for both brands in the market, particularly with the fact of how quickly premium is growing. So the opportunity exists for both brands to work together in that growing market. So yes, I'm optimistic for both.
Right. So you don't believe growth for Heineken Silver will come at the cost of loss for Kingfisher or something of that sort? Because is this a way to kind of -- as you said, I mean, very artistically that you're polling a detailed manner that you want to focus on both the brands as well as Heineken.
But these kind of strategies can we see this further as well wherein Heineken kind of made to stand with the increase in a particular range. And that actually leads to loss of Kingfisher market share in the future, unintentionally.
I did not hear that property, unfortunately. Can...
My question basically was that can we see this coming more of in future as well wherein you have got brands of Heineken standing on side with Kingfisher's brand on the premium space, which is whether the economical premium or slightly higher premium names, and that would lead to unmentioned loss of market share for Kingfisher.
Well, I mean, in terms of absolute percentage share potentially yes, because the premium is growing. But Kingfisher is also playing whether it's Ultra brands in the premium segment. The thing is, we are optimistic about the total category growth, right?
That is the big opportunity for beer, and Kingfisher as a mainstream brand has a big role to play in there. So I would not be too much concerned about the fact that there is a bit of decline on the back of a growing premium segment. So if you look at total category there would be.
As you know, when we dissect categories, we then look at our market share growth within those categories. So we look at our market share within mainstream and we look at our market share within premium and that is important for us as well that within mainstream, Kingfisher will not be losing and within premium, we are gaining share and the category is growing.
The next question is from the line of Vishal Punmiya from Nirmal Bang Equity.
Yes. So I just wanted to understand or hear your thoughts on the margin profile -- operating margin profile of the company for the next 2, 3 years. Assuming that the gross margins reverted back to the '18, '19 levels and the kind of sales that you are doing currently are sustainable, would you rather see a better margin profile? Or would you put all those back into growing the premium portfolio or the other new launches that you do?
So I mean, of course, we want to grow operating profit margins going forward. And I'm not going to really comment on what we believe the margins will be in 2, 3 years' time. It's a little bit difficult. I mean, we do internally forecast that based on what we know.
In terms of -- like I mentioned, in terms of the gross profit margins, you see the decline. We are aware of that, and we're working with our teams in terms of procuring at the right prices, getting the best prices, securing supply and also having quality supply. It's difficult to say at the moment how long this will be -- how long it will sustain.
But like I said, there could be assumptions of hope going into 2023. But at the moment, it's still anyone's gears in terms of that. Now again, on the premium versus mainstream, premium should bring in the medium to longer term better margins, right, because of the price points. But we need to work also on the cost part of that.
In terms of the cost of sales part get the scale so then that comes. We just need to be a little bit patient on that one. But as premium grows, as our scale grows, it can just be very good for our margins going forward.
Okay, sure. Secondly, any update for the current quarter in terms of Delhi, how the change in policy or changes in policy impacting the overall environment in Delhi, how is that panning out in 3Q?
Poonacha, maybe you can give a little bit of an update on those changes in Dehli.
I mean Dehli, effective August 2022, the state government has reverted back to the policy they had prior to November '21. The previous policy was every manufacturer had to have their own depot within the State of Delhi to bring in the beer spirit manufacture outside Delhi. There were no product seen within Delhi and then distribute it.
But in the interim, the manufacturer was allowed to have one super distributors to do the job. But now since the announcement that the state government has made that they will revert back to the old policy with the open statement that this is only temporary and they will review what will be done going forward.
With that being the case, with the government making such statements, everything is fluid people do or the investors. So the market is very volatile. We really can't do any kind of position in this kind of a scenario.
Ladies and gentlemen, this would be the last question for today, which is from the line of Jaykumar Doshi from Kotak Securities.
When I look at your volumes in the 6 months of -- not first 6 months of this financial year, that is marginally higher than the same period of 2019 and we've called out that we've gained market share. So it implies that overall beer industry volumes have valued grown over -- versus pre-pandemic levels in this 6-month period. When we look across other categories, we have seen pent-up demand and much higher growth rates. So why do you think this category has not seen any pent-up demand at all? And why is it lagging most other consumption categories very prior to pandemic, this category was growing faster than attrition volume terms and a few other consumption categories? So any market study or research around the search that you may have done that explains this disconnect.
Right. So like Poonacha mentioned, yes, in terms of market, were broadly flat, right, year-to-date. So the markets, we see growing at around 3% in total industry. I think I cannot compare to others because I don't know the fact. But I think looking at our industry, we also just need to bear in mind the impact that policy changes had on the market, right? So like I think Poonacha mentioned earlier, a market like Andhra Pradesh, which was big volumes for us in the past, due to the policy change, there's been a significant decline in the volumes. And I think it's in a region of 70%. So you can see then that sort of negates within the categories, what is happening.
So if you look at the other states, if you look at growth rates like in Uttar Pradesh and 48%; and Telangana, which is growing at in the region of -- I think it was around 15%; and some of the others as well. And we see a lot of opportunity and growth in the category. The thing is you need to just take into account some of these policy changes and the impact that they have on particular states. So we are very bullish to about the beer category going forward.
And what is the base case growth that you think the category growth should be? Now that is it harmonized, should be like mid-single-digit, high single digits? Or do you think double digits is also possible base case assumption that you needed to work with?
Sorry, really, I didn't catch that question in terms of the audio.
Mr. Doshi, I would request you to use your handset, please.
Sure. What is the base case assumption for the category growth is appropriate to the view? What should be the normalized category, demand category growth in India going forward? Should it be 5%, 7% or more closer to 10% kind of volume growth?
If I understand correctly, what do we believe how the category will grow in the coming years? Is that the question?
That is correct. That is correct.
So again, there is just assumptions. But we believe that the growth rates of high single digits or mid-single digits is definitely a possibility and hopefully higher. Of course, inflation does play a bit of a role on this. But still, like I said, the category is going to grow, I'm sure. And we think that those sort of rates of strong single digits we can see going forward.
Ladies and gentlemen, as that was the last question for today, I would now like to hand the conference over to Mr. Harit Kapoor for closing comments.
Yes. Thank you, Michelle. On behalf of Investec Capital Services, I would like to thank the management of United Breweries for taking a lot of time for this call as well as we would like to thank all the participants who joined in into this call.
I'd now like to hand over to Radovan for his closing comments. So over to you, Radovan.
Yes, thank you. And hopefully, next time when we have this call, I will be in Bangalore, and I'll have a better audio connection because it has been difficult calling from London through a mobile phone. And hopefully, I can catch up with a lot of you.
So just on closing, like I said, yes, there is pressure on margins. But we, as a business, we will manage that, yes, going forward in terms of what we can do with pricing, cost, et cetera, and with our brands. We have strong brands in place. So we have the ability to play and grow the category going forward.
And on that, we remain optimistic that the category will continue to grow, and there will be premiumization and that can, in the medium, longer term, just be good for our margins going forward.
So yes, that would be my closing remarks. And thank you, everyone, for joining us, and hope to see you soon in India.
On behalf of Investec Capital Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.