United Breweries: Cheers to growth

United Breweries

BSE Sensex

28,243

S&P CNX

8,738

United Breweries

Initiating Coverage | Sector: Consumer

CMP: INR907

TP: INR1,120 (+23%)

Buy

Cheers to growth

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

12M Avg Val (INR M)

Free float (%)

Structural story attractive, high entry barriers

UBBL IN

264.4

1,014 / 690

11/-1/-4

239.9

3.6

243

26.1



Financial Snapshot (INR b)

Y/E Mar

2016 2017E 2018E

Net Sales

EBITDA

EPS (INR)

EPS Growth (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

EV/EBITDA (x)

EV/Sales (x)

50.8

7.3

3.0

11.2

13.6

79.8

14.9

13.2

81.3

11.4

33.3

4.8

56.9

8.6

3.8

14.5

30.1

92.2

16.9

15.2

62.5

9.8

28.4

4.3

66.0

10.5

4.8

18.3

26.3

108.0

18.3

16.1

49.5

8.4

23.4

3.7



A confluence of demographic, economic and socio-cultural factors (such as large

proportion of young population with rising income, increasing acceptability of

alcohol consumption and an extremely low base of consumption) has made India

one of the most attractive markets in the world for global beer companies.

With its well-spread breweries across key states, presence across all 90,000 outlets

selling beer in India, iconic Kingfisher/Heineken brands and superior efficiencies

versus peers, United Breweries (UBBL) – India’s largest beer player – is well

positioned to exploit growth opportunities in the industry, in our view.

We believe the profit base of UBBL (at USD44m in FY16) is extremely low and

growth opportunities are immense, justifying its prevailing high nascent-stage

multiples. We expect healthy EPS CAGR of 26% for next three years and 22% for

next 10 years, led by 10% volume CAGR and margin improvements given ongoing

premiumization and operating leverage. We thus initiate coverage on UBBL with a

Buy rating and a TP of INR1,120 based on 35x cash EPS. As its business is in

investment phase, depreciation is almost as large as PAT. While this proportion

will reduce over time, price/cash EPS appears more relevant, in our view.

Shareholding pattern (%)

As On

Promoter

DII

FII

Others

Jun-16 Mar-16

73.9

6.9

13.5

5.7

3.8

17.0

5.4

Jun-15

74.8

1.9

17.9

5.4

Immense growth opportunities; expect double-digit volume growth over next

10 years:

Over the next decade, India will form the largest chunk of the world’s

population below 30 years of age. Despite this demographic benefit, per capital

consumption of beer – a youth-centric product – is only 2 liters, significantly

lower than Asia-Pacific and global average of 29-30 liters. With increasing

acceptability of alcohol consumption, tropical climate favoring beer consumption

and rising disposable income, the country is well positioned to record strong

beer volume growth. Despite encumbrances in the form of high duties,

government-mandated distribution and pricing, the category has recorded 11%

volume CAGR over past 10 years, and we expect continuation of this momentum.

Strong moats helping maintain market leadership:

(a)

Brand strength:

At 51%,

UBBL’s market share is over 2x that of the next largest brewer, and its leading

brand Kingfisher is nearly 4x bigger than the next largest beer brand. (b)

Distribution:

UBBL has presence across all 90,000 outlets selling beer in India, a

reach that is 1.5-2x higher than its immediate peers. (c)

Brewery reach:

UBBL has

breweries across all key states of India, which gives it an advantage over peers as

inter-state excise duties are prohibitively high. UBBL is also better placed than

peers because of its scale, cost-saving efforts, cold chain infrastructure, sourcing

advantages and valuable brand associations.

FII Includes depository receipts

United Breweries

Cheers to growth

Krishnan.Sambamoorthy@motilaloswal.com

91 22 3982 5428

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3 October 2016

United Breweries

Stock Performance (1-year)

Heineken backing offers growth and premiumization benefits:

Heineken – the

largest beer brand in the world and by far the largest in the premium segment –

owns ~43% in UBBL. Notably, Heineken has identified India and Africa as high-growth

and potentially higher-margin markets. In India, Heineken has consistently been the

fastest growing brand in the UB portfolio. However, it accounts for less than 2% of

overall market share, while UBBL’s other brands command nearly 49%. We believe

growth of the Heineken brand (priced at 2x Kingfisher) will continue aiding sales and

premiumization. Heineken’s other large global brands – Amstel and Tecate – are also

likely to be launched in India, which could support its future growth.

GST and other concerns could fade eventually:

Beer companies pay around 15%

duty on input material. However, it could increase to 18% given the possibility of a

similar standard GST rate. As alcohol is being kept out of the GST ambit, the

company may not get setoffs on inputs. However, we believe that if the company

gets setoffs from state governments, the earnings impact might not be very

significant. Also, if alcohol companies are allowed to increase prices, their volume

growth could be affected for a year, but it will not be a problem from a longer-term

perspective, in our view. We also note that, barring Gujarat, prohibition of alcohol

has not lasted much longer in any large state as duties from alcohol form a

significant proportion of state earnings.

Initiating with Buy and TP of INR1,120:

Despite slowdown in discretionary

consumption, UBBL has reported ~15% EPS CAGR over past five years and 20% CAGR

over past four years, with return ratios improving considerably from mid-single-digits

to ~15%. Operating cash and free cash generation has also improved multifold over

past few years. UBBL remains an attractive play on potential recovery in urban

consumption. We expect healthy EPS CAGR of 26% over next three years, led by

~10% volume CAGR and margin improvements given premiumization and operating

leverage benefits. Compared to worldwide-listed brewery peers, UBBL has recorded

over 3x higher sales growth and over 4x higher PAT growth during FY14-FY19E.

Although valuations are near six-year lows on P/E basis and below historical average

on EV/EBITDA basis, absolute P/E at 44x September 2018 and 21x EV/EBITDA is

expensive. However, since the profit base of UBBL (USD44m in FY16, other peers do

not even make money at net level) is extremely low, growth opportunities are

immense. We thus initiate coverage on UBBL with a

Buy

rating and a TP of INR 1,120

based on 35x cash EPS. As its business is in investment phase, depreciation is almost

as large as PAT. While this proportion will reduce over time, price/cash EPS appears

more relevant, in our view

Compelling long-term opportunity:

We believe once volumes recover to double-

digit levels, earnings growth could sustain at 20%+ levels for nearly a decade and

return ratios could potentially jump to 25%. Importantly, our base-case forecast for

next 10 years does not assume a change in regulatory regime, which is currently not

very favorable of the beer industry. However, if the regime changes for the better,

earnings growth prospects and return ratios could be much higher.

3 October 2016

United Breweries

Unique industry dynamics

Factors restricting growth of beer In India

Indian beer industry is encumbered by the following issues:

High taxation:

Alcohol comes under the purview of state governments in India, and

over 25% of state revenues (even up to 40% in a few states) come from duties on

alcohol. It is the second largest revenue generator for most states after sales

tax/VAT. For many cash-strapped states, alcohol is a key source of incremental

revenue generation.

All this is true of many emerging economies of the world, but what is markedly

different in India is that beer (4-7% alcohol) gets taxed at the same rate as other

spirits that have over 40% alcohol. This means lesser value for money for beer

drinkers. Beer in India is thus much more expensive compared to other comparable

countries inhibiting growth of the category. Excise increases by some states are

extremely steep, and thus even if the rise is passed on to consumers, there is an

adverse impact on volumes which can even last for a couple of years. On the other

hand, if companies do not pass on the excise increase, it leaves them with a hit on

the EBITDA margin front.

Government control over supply, distribution and pricing:

There are a meager

90,000 outlets serving beer for a country with population of 1.3b. On a per capita

basis, this is far lower than other emerging markets. India has 1 beer outlet per

20,000 people while China has 1 outlet per 200 people. In 70% of the country, it is

the government which decides the pricing of the product, and price increases are not

granted on an annual basis to account for commodity cost inflation, but once in a

few years. Until then, the cost increase has to be absorbed by the manufacturer.

Government agencies are often the largest and in most cases the only suppliers of

alcoholic beverages in many states and are thus the deciding authorities of what to

procure and how much to procure (in some cases even going against what the

consumer wants).

There are signs of small changes over the last 10 years. The only additional retail

licenses that the Maharashtra state government has allotted over this period has

been to shops selling only beer and wine. The Kerala government imposed

prohibition on spirits outside of five star hotels last year but spared beer and wine

from such restrictions. The Karnataka government has started campaigns against

binge drinking which affects spirits more.

Ban on advertising:

Unlike other consumer products, advertising of alcohol is not

permitted in the media. This restricts awareness of products and new launches.

Alcoholic beverage companies have to take the resort of surrogate advertising,

hoardings at alcohol vending outlets and sponsorship of sports/ music events, but

the impact of ban on direct advertising does affect growth.

3 October 2016

United Breweries

Disproportionately high duties means that beer is close to 2x expensive in India

compared to a comparable country like China, but that still does not explain the fact

that India’s per capita consumption is ~2 liters, far lower than the global average.

Even after considering all the negative factors encumbering growth, India’s per

capita consumption of beer is still abysmally low compared to global peers and thus

there is a huge opportunity to grow on account of the demographic, economic

growth factors, as well as rapidly increasing social acceptability.

Exhibit 1: In store advertising

Source: Company, MOSL

3 October 2016

United Breweries

Competitive advantages for UBBL

Reach, efficiency, brands, scale, associations

Nationwide brewery presence:

UBBL is the only company with national presence,

and majority of its new breweries are being set up in the under-penetrated states.

Nationwide presence with multiple breweries in many states enables it to:

a) Supply beer profitably as it is uneconomical to export from one state to another

given high state import duties.

b) Ensure that it takes advantage of growth opportunities across all states.

Whenever a state, particularly in lower-penetrated northern and eastern

regions, witnesses sharp growth, UB is well placed to take advantage because of

its presence in those states.

c) Having multiple breweries across a state also ensures consistent supply during

crucial periods. For example, during the summer season (which is the peak

period for beer consumption in India) this year, water cuts were announced in

Aurangabad, Maharashtra. UBBL, SABMiller and Carlsberg all have breweries in

Aurangabad, but UBBL was the only company to have an additional facility at

Taloja in the same state. Thus, even if operations in one region of a state are

affected, UB can ensure supply economically from its other breweries, unlike

peers which have to import from other states and thus incur higher freight cost

and import duties. UB is the only brewer with presence in both Andhra Pradesh

and the newly demerged state of Telangana.

3 October 2016

United Breweries

Exhibit 2: United Breweries has a much wider presence across the country

Companies

United Breweries

Own Breweries

Andhra Pradesh- Srikakulam

Telangana- Mallepally and Kothlapur

Tamil Nadu- Kuthambakkam and Aranvoyal

Goa- Ponda

Punjab- Ludhiana

West Bengal Kalyani

Kerala- Cherthala and Palakkad

Rajasthan- Chopanki and Shahjahanpur

Karnataka- Mangalore, Nelmangala and Mysore

Maharashtra- Taloja and Aurangabad (2 units)

Odisha- Khurda

Bihar- Naubatpur

Haryana-Dharuhera

Karnataka- Bangalore

Telangana- Medak

Haryana- Sonepat

Maharashtra- Aurangabad (2 units)

Uttar Pradesh- Meerut

Rajasthan- Neemrana

Kerala- Chalakudy

Orissa- Cuttack

Puducherry union territory

Bihar- Patna

Haryana- Dharuhera

Rajasthan- Alwar

Maharashtra- Aurangabad

West Bengal- Kolkata

Telangana- Hyderabad

Himachal Pradesh- Paonta Sabib

Karnataka (under construction)

Contract Breweries

Uttar Pradesh- Aligarh

Rajasthan- Alwar

Daman and Diu- Daman

Assam- Gauhati

Madhya Pradesh- Indore

Sikkim- Rangpo

J&K- Samba

Meghalaya – Shillong

SAB Miller

Chattisgarh

Daman

Orissa

Punjab

Carlsberg

Source: Company, MOSL

Cold chain and infrastructure:

Unlike spirits, beer is a perishable commodity and

needs to be chilled. UBBL’s investments in integrated cold chain infrastructure have

been ahead of peers. Its GPS-enabled trucks also ensure that it gets back its own

bottles. When added to the fact that UBBL has owned or contract breweries in all

key states, it means that its beer is fresher than peers and supply is on time.

Collection of used bottles:

Glass accounts for the largest material cost for beer

companies in India as beer is still largely consumed in bottles. Bottling costs were as

high as 47.9% of materials consumed and 20.9% of sales in FY11. Since then, UBBL

pioneered the system of collecting used bottles. Ability to reuse/recycle used bottles

is particularly critical as cost of new bottles can be as high as 3x that of used bottles.

The company competes for used bottles with other beer players. Especially during

the key summer season, glass traders could demand a significantly higher rate, which

the company had to fork out as missing out on demand was even more costly. UB

thus struggled to get back its own bottles. Because the company was by far the

largest player and only UBBL and SABMiller to an extent were inducting new bottles

into the system, they ended up subsidizing others since it was still cheaper for other

players to buy a UB bottle from a trader at a premium than buying a new bottle.

3 October 2016

United Breweries

Thus, the company worked on two things. It patented the bottle itself with an

additional embossment so that each UB beer bottle could be distinguished and

would come back to the company. The company also successfully worked on making

the glass thinner and yet ensuring both content quality and safety. We reckon that

new bottle induction has reduced from over 25% earlier to around 15% now.

Subsequently, over the last five years, the company has been able to save

significantly on the bottling cost component, which has come down from 47.9% of

material costs/20.9% of sales in FY11 to 38.3% of material costs/14.7% of sales in

FY16, leading to considerable improvement in gross margins.

Exhibit 3: Cost of bottles has reduced substantially…

Bottling cost as a % of RM cost

47.9

44.7

40.8

Bottling cost as a % of sales

39.1

38.3

54.4

54.6

Exhibit 4: ...big factor in strong gross margin improvement

Gross margin (%)

59.0

59.7

60.8

40.1

57.8

20.9

20.1

17.2

16.4

15.6

14.7

FY11

FY12

FY13

FY14

FY15

FY16

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

We also reckon that there have been some savings in the last few years on new

bottles as well. Fuel forms large part of glass manufacturing cost, and crude price

decline would have helped reduce manufacturing costs and bottle prices.

Reduction in water utilization:

Beer is made up of four ingredients: water, malted

barley, hops and yeast. Water is thus a key ingredient in the process of making beer.

Summer season is the key demand period for beer, and water shortage during that

season can have an adverse impact on supply and market share. All corporates pay

for usage of water as it is for commercial purposes. Water utilization has been an

area of substantial improvement for UBBL, which offers advantage in terms of both

costs and sustainability over peers. Its current water consumption is 4.52 liters per

liter of beer, with 3.52 liters of fresh water consumption (reduced considerably from

7.42 liters in FY07). At this level now, UBBL is among the best across Asia and the

world in terms of fresh water usage for recycled beer bottles. Some of its breweries

are even at 2.4 liters far better than the global average of 4 liters. In addition, the

proportion of recharged water is also increasing as 11 out of its 21 breweries already

use rainwater harvesting. Proportion of recharged water to fresh water has

increased to 17% in FY16 from 12% in FY15, is targeted at 38% by end of FY17, and

UB actually aims to be a water positive organization by 2025.

3 October 2016

United Breweries

Exhibit 5: Water consumption has declined considerably

Fresh water consumption (Litre/Litre of beer)

7.42

6.46

5.49

5.12

4.94

4.54

4.25

3.75

3.73

3.52

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Dominant brand, potential launches from the Heineken portfolio:

UBBL commands

51% market share in beer, of which the iconic Kingfisher brand with its variants

account for around 80% of its market share. Despite the advent of global beer

brands, Kingfisher retains its dominant market leadership. Kingfisher is nearly 3x the

next largest brand in terms of brand-wise market share. It is the dominant leader in

both the strong beer and mild beer segments in India. In 2014, Kingfisher was

featured in the list of 100 most valuable brands for its credibility and consumer

following by the World Consulting and Research Corporation. In 2015, Kingfisher was

one of the Top 50 most valuable Indian brands in the WPP and Milward Brown

Survey. In addition, the company has other strong regional brands like London

Pilsner, Sandpiper, Bullet, UB Export and Kalyani. From the Heineken portfolio so far,

it has only launched the eponymous Heineken brand. Heineken is the largest beer

brand in the world. There are a host of other large brands, including Amstel and

Tecate, which can be launched from the huge parent portfolio.

Exhibit 6:

UB brand portfolio

Source: Company, MOSL

3 October 2016

United Breweries

Exhibit 7:

Heineken brand portfolio

Source: Company, MOSL

Distribution:

UBBL is the only beer company whose brands are available at all the

90,000 outlets that serve beer in the country. While we do not have data on

SABMiller’s distribution reach, we know from news clips that Carlsberg, the third

largest brewer in the country, reaches only 40,000 outlets, less than half of UBBL’s

nationwide footprint.

Scale benefits:

In India, breweries cannot achieve global economies of scale due to

an element of seasonality in consumption and the need to have breweries in each

state. However, opportunity in many states is massive, and in the other states,

utilization could pick up as demand improves rapidly. Moreover, breweries with 1m

hectoliters of capacity tend to be far more efficient from economies of scale

perspective than smaller breweries. UBBL has the highest number of breweries

attaining such scale, which substantially boosts profitability and return ratios

compared to peers in India.

Sourcing:

International commodity volatility was a bugbear for the company in the

past, as a result of which gross margin fluctuated. Over the past decade, however,

UBBL has considerably reduced its dependence on imports for barley and other

packing materials. In FY16, for example, the company worked on about 30,000 acres

and built relationships with about 7000 farmers for barley cultivation.

Exhibit 8: Localization of raw materials…

RM imported as a % of total RM

6.0

Exhibit 9: …as well as packaging materials enhance barriers

Packaging material imported as a % of total packaging material

23.0

21.0

5.0

4.0

7.0

2.0

1.0

2.0

Source: Company, MOSL

Advertising ban:

While the ban on alcoholic beverage advertising in the media

restricts industry growth, it does favor incumbent brands like Kingfisher as many

consumers are not fully aware of newer brands.

3 October 2016

United Breweries

Ability to maintain customer connect-

With its customers being from the youth

segment, for whom tastes change as a result of various factors, it is important for

companies dealing with this demographic to keep their ears on the ground and adapt

to changing tastes. With its long presence in India, Kingfisher has been able to do the

same. In addition, the management goes in for refreshing new packaging once in a

few years so as to maintain the attraction.

Association with key events:

Attracting and retaining the youth demographic is

imperative for beer companies. Kingfisher’s association with sports and music events

in addition to food and fashion is a great way of addressing this demographic. UBBL

has historically had strong links with major sporting events in India. It is associated

with the Indian Premier League T-20 Cricket, is the title sponsor for the East Bengal

Football Team, is associated with Formula 1 racing and is the title Sponsor for Derby

racing in India. On the internet, UB has been associated with the web series ‘TVF

Pitchers’. The company has extended this relationship in the current year with the

launch of ‘Pitchers Aggregator App’ which provides updated information on the

nightlife options in Bangalore and could be extended to other cities later. The app

saw 60,000 downloads within a week of launch.

In addition, Heineken’s association with UEFA Champions League Football

tournament is also important as European Football has become extremely popular

with the Indian youth segment over the last decade. Heineken is also associated

globally with the James Bond movie franchise as well as music events worldwide. In

India, Kingfisher is also associated with Sunburn, the largest EDM music festival the

country. The ‘Kingfisher Calendar’ is also an important feature in the annual fashion

circuit in India, and Kingfisher is also associated with annual supermodel hunt.

Kingfisher also has long-standing association with restaurants, bars, pubs, nightclubs

and star hotels.

Exhibit 10: Associations with youth centric interests- IPL Cricket….

Source: Company, MOSL

3 October 2016

United Breweries

Exhibit 11: … Sunburn Music Festival….

Exhibit 12: ……Formula 1 Racing…..

Source: Company, MOSL

3 October 2016

United Breweries

Strengths over key competitors

Closer look at SAB Miller’ and Carlsberg’s India operations

UBBL (~51%), SABMiller (~20%) and Carlsberg (~17%) together command ~88%

market share in India’s beer industry. The world’s largest brewer, AB Inbev has less

than 2% share, while Mohan Meakins and Mount Shivalik are the other marginal

players with 2-3% market share each.

Exhibit 13: UBBL leads the beer market with 51% market share

Others

Carlsberg

Market share of

beer companies (%)

United Breweries

SAB Miller

Source: Company Presentation, MOSL

SAB Miller- Consistent market share loss, weak financials

SAB Miller is the second largest brewing company in India. Over the past 10 years,

SABMiller (mainly Haywards and Fosters brands) has lost market share from early-

30% to around 20%. Its Castle Lager and Peroni brands have not made much

headway. UBBL has consistently outpaced SABMiller in terms of sales growth. Thus,

SABMiller’s sales have declined from nearly 56% of UBBL’s sales in FY10 to less than

39% in FY16.

Exhibit 14: Consistently better sales growth for UBBL compared to SAB Miller India….

UB Net Sales (INR m)

UB Net Sales (INR b)

Growth (%)

SAB Miller Net Sales (INR m)

SAB Miller Net Sales (INR b)

Growth (%)

Differential value (SAB Miller/UB)

FY10

23,074

23.1

12,860

12.9

55.7

FY11

30,598

30.6

32.6

14,859

14.9

15.5

48.6

FY12

35,614

35.6

16.4

16,663

16.7

12.1

46.8

FY13

39,004

39.0

9.5

19,965

20.0

19.8

51.2

FY14

42,297

42.3

8.4

19,202

19.2

-3.8

45.4

FY15

46,990

47.0

11.1

19,397

19.4

1.0

41.3

FY16

50,834

50.8

8.2

19,786

19.8

2.0

38.9

Source: Company, MOSL

Moreover, SABMiller has consistently made losses at the net level in India as its

FY09-FY16 EBITDA margin range of 4-8% is far lower than UBBL’s 12-15%.

3 October 2016

United Breweries

Exhibit 15: …and its EBITDA margins have also been far superior

UB's EBITDA margin (%)

13.0

11.5

12.8

7.1

4.9

1.1

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

4.6

11.6

SAB Miller EBITDA margin (%)

13.0

14.1

13.5

14.4

6.8

8.1

5.7

4.3

Source: Company, MOSL

Exhibit 16: Fixed asset turns are far superior to SAB…

UB's FATR (x)

2.6

2.7

2.8

2.9

2.4

1.3

1.5

1.8

SAB Miller FATR (x)

2.6

1.7

2.6

1.8

2.8

1.9

Exhibit 17: ….as are working capital days

UB's NWC (days)

SAB Miller NWC (days)

131.3

93.9

71.7

104.3

63.4

109.2

102.3

83.9

142.8

96.1

156.3

82.5

45.0

96.3

98.3

91.4

1.2

1.1

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 18: SABMiller brand portfolio

Source: Company, MOSL

Carlsberg-Huge success but not much impact on UB’s market share

Carlsberg has been the big success story of the last decade in the Indian beer

industry. The company started commercial operations in India only in June 2007 and

has gone on to achieve ~17% market share over this period and become the third

largest player. Its big success in terms of its portfolio has been Tuborg (now the

second largest brand in the country after United Breweries’ Kingfisher, according to a

Carlsberg parent presentation), with smaller presence of other brands from the

global portfolio, including the eponymous Carlsberg and Okacim Palone. What is also

noteworthy is that all of Carlsberg’s brands are from its global portfolio and not

3 October 2016

United Breweries

Indian brands that it acquired (unlike SABMiller for which Hayward’s – the brand that

it acquired from Shaw Wallace – is by far the largest brand). Even for UBBL, Heineken

is only a very small part of overall market share as yet. Carlsberg has demonstrated

that even with its global brands, and in a market that prohibits advertising of alcohol,

a brewer can emerge as a major success story. Carlsberg has also demonstrated

flexibility in adapting its brands to the Indian consumer taste preference for strong

beer. Some other factors behind Carlsberg’s success in India are as follows:

a) Strategic focus on underpenetrated states.

If one looks at the brewing capacity

set up by Carlsberg, five out of its eight breweries have been set up in non-

traditional states. In fact, the company only began constructing its eighth

brewery in Karnataka in 2016. Karnataka is one of the top 3 markets for beer in

India. The other two Carlsberg breweries are in the traditionally strong markets

of Maharashtra and Telangana. 5 of its 8 breweries are in the states of Bihar,

Haryana, Rajasthan, West Bengal and Himachal Pradesh. In West Bengal,

Haryana and Bihar (before prohibition was introduced in that state in April

2016), they have in excess of 30% market share.

Brewery timeline for Carlsberg

1) June 2007 – Acquired a brewery in Paonta Sahib, Himachal Pradesh

2) March 2008 – Set up brewery in Alwar Rajasthan

3) August 2008 – Set up brewery in Aurangabad, Maharashtra

4) June 2009 – Set up brewery in Hooghly, West Bengal

5) December 2010 – Set up brewery in Sangareddy, Andhra Pradesh

6) 2013 – Set up brewery in Dharuhera, Haryana

7) 2014 – Set up brewery in Patna, Bihar

8) 2016 – Setting up brewery in Karnataka

b) Innovation:

Carlsberg has been an innovator in both packaging as well as

advertising. It created a stir in the industry with an easy-to-open top for its

largest brand Tuborg, and its smart use of surrogate advertising for the

eponymous brand Carlsberg.

c) Global quality standards and brand associations:

Carlsberg has also brought in

best practices from its European experiences into India. In an indirect way,

Carlsberg has also gained in terms of appeal to Indians entering/recently entered

legal drinking age as a result of the parent’s association with the English Premier

League, which is hugely popular among members of that demographic.

3 October 2016

United Breweries

Exhibit 19: Carlsberg India brand portfolio

Source: Company, MOSL

Implications of Carlsberg’s growth for UBBL and the industry:

It is interesting that

UBBL has withstood the Carlsberg onslaught fairly well. Its market share has

increased in the last 10 years, and even the recent dip from around 56% to 51% can

be almost entirely attributed to losses as a result of changes in procurement policy

by the state government in Tamil Nadu and Andhra Pradesh (discussed in detail in

the next page). UBBL’s established presence and new breweries in non-traditional

markets have meant that the company has also gained from demand spurt in these

markets. Carlsberg has thus gained its incremental market share at the cost of

SABMiller and other smaller players in the industry. Like Carlsberg, UBBL has also

brought in best global practices and quality from Scottish and Newcastle (S&N), the

JV partner before S&N was acquired globally by Heineken and latter from Heineken

since 2009. Heineken’s brand sponsorship of the UEFA Champion’s League Football

also appeals highly to the demographic entering/recently entered legal drinking age.

What Carlsberg’s emergence has done is that it has marginalized the small players in

the market. Moreover, as pointed out earlier, the bottling scenario prevalent earlier

was subsidizing the smaller players, which is no longer the case after UBBL’s

patented bottling strategy was also adopted by SABMiller. The small players do not

have the financial muscle and the economies of scale that the leading industry

players have and are likely to be even more marginalized over the long term. UBBL,

SABMiller and Carlsberg put together have around 88% market share in the Indian

beer industry.

While we do not have financials of Carlsberg India, the parent mentioned last year in

a conference call that the Indian entity is close to breaking even on profitability for

the first time, still a long way away from reaching the profitability levels of UBBL.

3 October 2016

United Breweries

Exhibit 20: UBBL’s 50% market share has been maintained despite increasing competition

UB's market share (%)

55.8

49.7

39.1

50.0

48.2

48.6

47.9

50.5

56.6

52.9

51.4

52.5

51.5

36.6

Source: Company, MOSL

Adjusting for the fact that there was a drastic change in sourcing pattern in two key

states, UBBL has done well to hold on to the 50% market share that it had 10 years

ago.

1) In Tamil Nadu (three years ago), in order to encourage breweries located in the

state, the state government through its agency, TASMAC, decided to procure on

the basis of brewing capacity in that state. Neither SABMiller nor Carlsberg had

any capacity in that state and thus their market shares were not affected. But

UBBL had 70% market share in the state, which dropped down to 30%. This loss

of share to regional players in a state that was among the top 4 markets in terms

of cases sold affected UBBL’s national volume growth and market share as well.

2) In Andhra Pradesh, the state government has flip-flopped between procuring on

the basis of nation-wide market share and the state market share. As a result,

over the past few years, UBBL’s market share in the state has dropped from 65-

70% at peak to ~50%, in line with the national average. Before bifurcation of the

state into Andhra Pradesh and Telangana last year, the state was the largest in

India in terms of volumes and hence the impact of the change in procurement

lowered national market share from decadal peak levels few years ago.

3 October 2016

United Breweries

Financials- P&L statement assumptions

We expect healthy growth in sales and EBITDA

A. Volume growth pace of the past decade likely to sustain

Given the extremely low consumption base, demographics and social/economic

factors aiding growth, we believe that there is no reason why the industry

cannot achieve ~10% volume CAGR over the next 10 years. We also note that it

posted 11% volume CAGR over the past 10 years, despite many encumbrances.

Interestingly, before the slowdown in discretionary demand in India over the

past few years, management was guiding for volume CAGR of 15%. Thus, our

assumptions are far more conservative, especially given the sharp potential for

growth over the low base of the past few years.

Even if the industry were to compound at ~10% CAGR, per capita consumption

of beer in India in FY26 will still be only ~4 liters, which is still far lower than

the current global average.

Beer may never reach consumption levels achieved by spirits if the excise regime

remains similar – despite lower units of alcohol in beer, it gets taxed at the same

rate and hence higher per unit of alcohol. Nevertheless, it can continue its

growth momentum of the past 10 years. If any of the key states relaxes the

regime in favor of beer owing to its lower alcohol content (as is the case with the

rest of the world), it would be a huge bonus. However, that is not our base case.

Despite UBBL outpacing industry growth for the last 10 years, we are assuming

the company and the industry will record the same ~10% volume growth rate,

indicating assumption of no market share gain. More breweries in

underpenetrated states, more brands from the Heineken portfolio like Amstel

and Tecate, and innovative products like Kingfisher Buzz should boost volumes.

Exhibit 21: Industry has grown at 10% CAGR

Industry cases sold (m)

31.7

155

137

13.1

172

11.0

200

16.3

Industry volume growth (%)

294

270 280

263

235

Exhibit 22: UBBL also grew at a similar pace

UB cases sold (m)

27.1

14.1

9.3

101

126

133

UB's volume growth (%)

139

147

152

225

12.5

11.9

4.4

2.7

3.7

5.0

22.6 24.3

6.0

4.5

(0.2)

6.0

3.1

Source: Company, MOSL

3 October 2016

United Breweries

Exhibit 23: …with its market share inching up over a 10-year period

UB's market share (%)

55.8

50.5

47.9

56.6

52.9

48.2

48.6

51.4

52.5

51.5

Source: Company, MOSL

Exhibit 24: Industry should be able to match earlier pace

Industry cases sold (m)

10.0

8.1

318

349

388

431

474

521

573

630

693

763

11.0 11.0

Industry volume growth (%)

Exhibit 25: …and we are assuming UBBL will grow in line

UB cases sold (m)

10.0

8.0

164

180

200

222

244

268

295

325

357

393

11.0 11.0

UB's volume growth (%)

10.0 10.0 10.0 10.0 10.0 10.0

Source: Company, MOSL

It is to be noted that a few years before the downturn, UBBL management was

guiding for 15% volume CAGR over the medium term. Considering this and the

low base of the past few years, our expectations of 10% volume CAGR for the

next 10 years are not ambitious.

B. Excise duties to continue increasing, capacity utilizations to improve

gradually

On excise, we assume a consistent increase as has been the case over the last 10

years. Yet, we expect healthy 14% net sales CAGR for the next 10 years. As

discretionary consumption recovers, benefits will be two fold for United

Breweries

Demand for beer picks up sharply

Need of the state governments to tax alcoholic beverages at much higher rates

reduces as they are able to generate revenues from other sources

We are still assuming consistent increase in excise rates going forward as the

state governments may not adopt a more liberal approach.

3 October 2016

United Breweries

Exhibit 26: Excise duties rose sharply and we expect further increase

Excise duty as a % of Gross sales

Source: Company, MOSL

Exhibit 27: As is case of volumes, we believe UBBL is likely to

show healthy sales growth of the past…

Total Sales growth (%)

50.4

29.4

32.6

23.6

17.9

16.4

9.5

8.4

11.1

Exhibit 28: ...in the future as well

Total Sales growth (%)

16.0

15.0 15.0 15.0

16.0

14.0 14.0 14.0 14.0

12.0

8.2

Source: Company, MOSL

We believe capacity utilization will improve but only gradually over the next 10

years. Seasonality in beer consumption (i.e. summer season) is likely to remain and

reduce only gradually. Gradual improvement will be aided by demand growth,

activities like Oktoberfest to boost demand in non-peak seasons and an

improvement in capacity utilization in lower-beer consuming states. Even in FY26,

capacity utilization is expected to be around 73% from 66% currently, below other

consumer peers.

Exhibit 29: Capacity utilization will pick up, but only gradually

Utilisation (%)

71.9

72.6

73.3

69.3

65.7

66.3

67.5

69.3

70.6

Source: Company, MOSL

3 October 2016

United Breweries

C. Assumptions on pricing and mix

Pricing is driven by state governments for nearly 80% of the market, and so

outlook does not change there.

Last 10 years have witnessed blended price/mix CAGR of ~7%; we expect ~4%

CAGR realization increase due to price increase/mix improvement over the next

10 years in our forecasts.

Realization and mix effect could be more than our assumption of 4% CAGR for

the next 10 years, but we prefer to be conservative.

Mix will improve as a result of greater sales of Heineken (priced at over 2x

Kingfisher base variant) and Kingfisher Ultra (over 1.5x base variant). In FY16,

these put together were ~only 2% of sales.

Exhibit 30: Gross realizations have grown at 11% CAGR

UB's gross realisation growth (%)

35.2

19.7

13.6

-1.4

10.1

5.7

10.0

6.9

8.7

15.5

17.7

10.5

8.3

8.1

8.9

9.7

7.6

7.5

7.3

7.2

Exhibit 31: We expect 9% CAGR going forward

UB's gross realisation growth (%)

Source: Company, MOSL

Exhibit 32: Net realizations have grown at 7% CAGR

UB's net realisation growth (%)

18.3

13.5 13.1

6.7

9.8

4.8

8.7

4.8

5.0

Exhibit 33: We expect 4% CAGR going forward

UB's net realisation growth (%)

5.5

3.7

4.5

3.6

5.5

-3.8

Source: Company, MOSL

Assumptions on margins

Over the next 10 years, we are assuming:



160bp rise in gross margins

over FY16-FY26 to 62.4% of sales. Increase between

FY07 and FY16 on the gross margin front was 580bp, but we reckon large part of

growth in gross margins was on account of bottling initiatives. Factors pushing

up gross margins are likely to be premiumization (greater sales of Heineken

brands and premium variants of Kingfisher), cost-saving program under Project

3 October 2016

United Breweries

UDAAN, further localization of raw materials and price increases from state

governments.



140bp savings on staff costs

to 5.3% of sales by FY26. Even as recently as FY10

and FY11 (when volume growth was higher than current levels and therefore

operating leverage was high), staff costs were as low as 4.6-4.7% of sales. Thus,

we are not being ambitious in assuming 5.3% staff costs to sales by FY26.



180bp savings on selling, promotion and distribution expenses

in the next 10

years. Under this broad expense head, the company classifies:

a) Sales promotion expenses is the largest component (around 61% of these

costs in FY16, and 17% of net sales) and consists of brand building expenses

and discounts offered to trade (since they are secondary discounts and not

primary, they are not netted off from sales).

b) Selling and distribution expenses, which basically contain any kind of cost

incurred by the company in getting the product moved from the brewery

right up to the point of sale. Outward freight, halting and breakage expenses

were 21% of these costs and 6% of sales in FY16, and other selling and

distribution expenses at 18% of such costs and 5% of sales in FY16.

Particularly on these costs, we believe there could be some savings due to

better efficiencies and reduced bottlenecks.



110bp savings on other expenses

to sales as a result of better absorption of

fixed costs to sales. At 12.2% of sales, other expenses in FY16 (after five years of

moderate volume growth) were at the highest levels since FY06.

Exhibit 34: There is potential for savings in other expenses as demand picks up

Other costs (%)

Power and Fuel

Rent

Repairs

Travel and Conveyance

Rates and Taxes

Legal and Prof Charges

Miscellaneous expenses

Technical management Fee

Bad debts/ bad advances w/o/ Bad debts provision

Facility Fees

Stores and spares

Others

FY13

11.9

4.1

0.5

0.8

0.0

1.2

0.0

2.8

0.0

0.5

0.0

1.8

0.2

FY14

11.2

3.6

0.5

0.9

0.0

1.2

0.0

3.1

0.0

0.1

0.0

1.6

0.2

FY15

10.7

3.1

0.5

0.9

0.0

1.3

0.0

2.6

0.0

0.1

0.0

1.8

0.3

FY16

12.2

2.9

0.5

1.2

0.0

1.7

0.0

2.9

0.0

0.7

0.0

1.9

0.4

Source: Company, MOSL

We expect EBITDA margins to improve from 14.4% in FY16 to 20.2% by FY26 as a

result of the points discussed above.

3 October 2016

United Breweries

Exhibit 35: Gross margins have been big driver of EBITDA margins in past five years, but

lower volume growth has affected operating leverage

6.4

12.8

2.0

0.5

3.3

14.4

Source: Company, MOSL

Exhibit 36: Over next 10 years, margins will rise due to premiumization and savings on

other expenses as demand picks up from recent levels

1.8

1.1

20.2

1.6

14.4

1.4

Source: Company, MOSL

EBITDA margins have increased from 11.5% in FY11 to 14.4% in FY16, despite

lukewarm demand growth and therefore low operating leverage.

EBITDA CAGR is expected to be 18% over the next 10 years, ahead of sales CAGR of

14% over this period.

3 October 2016

United Breweries

Balance sheet assumptions

Business will remain capital intensive, earnings growth prospects high

Fixed asset turns will improve gradually

Capacity utilization is currently at only around 66% due to:

a) New capacities being set up in traditionally weaker markets.

b) Moderate volume growth in recent years due to weak consumer sentiment.

Over the next 10 years, we expect utilization levels to increase gradually from 66% to

73% as a result of an improvement in discretionary demand and better utilization of

capacity in smaller markets.

Exhibit 37: Utilization levels to improve only gradually

Utilisation (%)

71.9

72.6

73.3

69.3

65.7

66.3

67.5

69.3

70.6

Source: Company, MOSL

We are not assuming a higher utilization number than 73% because:

At least as of now, beer remains a summer drink in India, which means optimum

utilization in the June and March quarters but less than 50% utilization in the two

other quarters. This will change but not over the near term.

The need to have an owned or contract brewery in every state as very high inter-

state duties mean that capacity is fragmented and therefore utilization is sub-

optimal.

If any of these change for the better, utilization rates will be much higher. Over the

past few years, the company is also hosting events like Oktoberfest with an aim to

stimulate demand in non-peak months.

We expect FATR on gross block to improve only from 1.44x in FY16 to 1.75x in FY26.

FATR on net block will, however, improve from 2.83x in FY16 to nearly 4x in FY26,

driving up return ratios gradually.

3 October 2016

United Breweries

Exhibit 38: We expect only minor upswing in gross fixed

asset turns over next 10 years

Gross FATR (x)

1.6

1.7

3.4

3.5

3.6

3.8

3.9

Exhibit 39: Net fixed asset turns will also increase gradually

but steadily, aided by pick-up in utilization

Net FATR (x)

1.5

3.0

3.1

3.2

Source: Company, MOSL

We reckon that capex investment will continue to be high on absolute terms. Over

the past 10 years, the company has spent an average of INR 2.8 bn on capex and we

estimate that the capex spend will be much higher at INR 7.8bn on an average over

the next 10 years. For our capex forecasts we have used the recent Bihar greenfield

brewery costs as benchmark and added inflation impact over a 10 year period.

Exhibit 41: We expect average capex at INR7.8b/year for

next 10 years

Capex (INR b)

3.8

2.1

2.4

4.1

7.8

1.7

0.5

1.5

3.8

4.8

5.5

5.6

8.9

8.2

9.1

11.5

Exhibit 40: Average capex has been INR2.8b in last 10 years

Capex (INR b)

3.7

2.8

4.4

3.8

Source: Company, MOSL

Working capital to remain at current levels

As of now, we are not making any assumptions on improvement in working capital.

NWC days have been fluctuating between 70 and 100 over the past 10 years. There

has been an improvement from 100 days to 91 days over the past two years, but as

this has been an improvement from the upper end of the range, we would not want

to read too much into it. The key component of NWC days is debtor days, which was

around 76 days in FY16. Selling, as UBBL does, to government agencies in majority of

the states, we prefer not to assume an improvement in debtor days in our

assumptions.

Cash flow generation will continue to improve

Operating cash flows (OCF) have improved significantly over the last few years, both

in absolute proportion as well as proportion of capital employed. We expect it to

improve further. The company has also been generating substantial amount of free

cash flows (FCF) over the past three years. We reckon that, despite assuming nearly

3 October 2016

United Breweries

triple the average annual capex in the next 10 years compared to the preceding 10

years, FCF generation will continue to improve.

Exhibit 42: Considerable OCF improvement is driving FCF

improvement as well

OCF (INR b)

5.7

2.2

1.1

-1.0

-1.6 -1.7

0.2

-2.7

1.7

1.3

-1.9 -2.3

1.9

1.5

2.9

4.3

0.8

2.5

1.0

-1.1

2.0

0.5

2.2

-0.3

FCF (INR b)

8.4

4.9

4.8

3.7

7.5

6.1

15.2

10.0

8.6

7.0

12.8

9.0

3.7

Exhibit 43: We expect improvements in both measures,

despite substantial capex

OCF (INR b)

FCF (INR b)

20.5 19.0

6.0

Source: Company, MOSL

As the company may increase capex over the next couple of years in anticipation of a

recovery, cash flows may not be as impressive as have been over the past three

years, but longer-term uptrend is clear.

Net debt to equity has already come down to 19% in FY16, compared to around

100% in FY07/FY08 and around 60-64% during FY09–FY14. We expect further

reduction in the next 10 years to the point where dividend payout could be hiked

from 10% levels to 40% levels.

Exhibit 44: Huge reduction in net debt to equity already is

driving earnings growth

Net Debt to Equity (x)

1.1

0.9

0.6

0.5

0.6

0.7

0.6

0.4

0.2

Exhibit 45: Despite massive investment in capex to boost

growth, net debt to equity is likely to remain low

0.2

0.1

Net Debt to Equity (x)

Source: Company, MOSL

Return ratios to improve to mid-20s level in the next decade

ROCEs have steadily improved from 6-8% range in FY07-FY10 to around 12.5% in

FY16, despite moderate demand growth in the past few years. This has been brought

about due to EBITDA margin improvement as highlighted earlier, despite muted pace

of growth due to discretionary demand slowdown. What the sharp improvement in

ROE/ROCE in the last few years has achieved is to boost cash generation.

3 October 2016

United Breweries

Exhibit 46: ROE has shown uptrend in the past few years

RoE (%)

14.0 14.6 14.9

Exhibit 47: …as has ROCE, which was in single-digits earlier

RoCE (%)

12.5

8.2

7.0

8.9

6.1

7.3

7.9

8.9

10.1

10.7

9.5

5.5

12.1

8.2

9.5

12.0

Source: Company, MOSL

Earlier the company was not even able to make ROE/ ROCE higher than cost of

capital, but all that has changed even during a period of moderate demand. What

this means is that unlike the past, the company can fund growth largely through its

internal accruals and a bit of debt (not significant incrementally). This substantially

reduces the risk of dilution or increasing debt burden.

We reckon that with anticipated operating margin improvement and higher net FATR

over the next 10 years for reasons stated above, ROE/ ROCE can improve further to

~24-25%% by FY26.

Exhibit 48: We expect continued improvement in ROE…

RoE (%)

25.0

22.7 23.9

20.8 21.5

19.2 19.6 19.8

16.9 18.3

Exhibit 49: …and ROCE levels

RoCE (%)

23.2 24.5

20.5 21.8

18.4 19.7

16.1 17.2 17.8

14.9

Source: Company, MOSL

As ROE and ROCE improve, interest costs are likely to be moderate across these

years, remaining largely flattish. While depreciation will still increase at 10% CAGR (in

line with capacity addition) due to continued fixed asset investment, PAT CAGR of

22% over the next 10 years will be even higher than 18% EBITDA CAGR over this

period mainly due to moderate interest costs.

EPS has grown at a 20% CAGR in the last six years and ROCEs by over 600bp, despite

moderate volume growth. Thus, we reckon that 22% EPS CAGR over the next 10

years is achievable.

3 October 2016

United Breweries

Exhibit 50: EPS CAGR of 20% in past six years despite

slowdown…

EPS growth (%)

30.1

Exhibit 51: …and we estimate 22% EPS CAGR going forward

EPS growth (%)

64.5

29.8

-0.8

19.0

26.3

23.7

20.6 19.9

22.4

17.5

19.8 19.0 18.9

15.0

13.6

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 52: Tax rate is already at peak levels and thus unlikely to dilute earnings trajectory

Tax rate (%)

46.8

35.3

36.2

39.0

41.9

34.9

37.3

32.4

31.3

34.3

Source: Company, MOSL

PAT and EPS is likely to grow at 26% CAGR for the next three years and 22% CAGR for

the next ten years.

Exhibit 53: Net margins have been improving steadily

PAT margin (%)

5.5

5.8

6.7

7.3

7.9

Exhibit 54: …and are expected to grow gradually

PAT margin (%)

9.1

9.4

9.9

10.3 10.7

4.5

3.4

2.3

4.8

3.9

4.9

4.1

5.4

8.3

8.6

Source: Company, MOSL

3 October 2016

United Breweries

Upside and downside risks

Mainly regulatory risks on both sides

Upside risks to our base case are mainly regulatory

More favorable policies for beer and wine compared to spirits:

States can

potentially experiment with this as beer and wine form a very small part of the

overall mix, and higher volumes could more than offset any small loss due to lower

duties for the states. Lower duties for beer compared to spirits is the norm

worldwide and, if implemented in India, could lead to a huge spurt as currently beer

forms less than 11% of alcohol sales. Social desirability is also higher as beer has 4-

7% alcohol compared to over 40% for spirits.

GST:

Bringing in alcohol under the GST purview over the long term puts an end to

the punitive inter-state movement and would lead to less fragmented capacities and

thus greater utilization levels and higher economies of scale.

Free pricing of beer:

As of now, the government controls distribution and/or pricing

in most states in the country. There is a lag between commodity cost increase and

eventual permission from the states to increase prices. These lag periods can stretch

to many years. Free pricing makes the business much more flexible to a change in

the commodity price environment as well as from a strategic perspective in response

to competition.

Government and its agencies moving away from alcohol distribution:

For other

consumer companies, sales to traditional retail is on cash and there is some credit

for modern trade and canteen stores, which means that debtor days are usually in

single digits. However, for beer and other alcoholic beverages, it is either the

government or a third-party monopoly that are in sole charge of distributorship. This

leads to high debtor days between 2-3 months. If there were to be liberalization of

distribution, it would reduce working capital days substantially as it takes away the

monopoly. Currently, net working capital days are at 90 days, much higher than

consumer peers.

Licenses for outlets:

The number of outlets in the country serving beer in the

country is only 90,000, and retail licenses are difficult to obtain. Modern retail

outlets in most parts of the country are not allowed to sell alcoholic products. Actual

home consumption of beer in India is thus less than 10% as beer is largely consumed

in pubs and restaurants. Liberalization of retail licenses will be a big boost as will be

the availability in super market shelves.

Downside risks

Prohibition:

In April 2016, Bihar imposed complete prohibition on all forms of

alcohol. Bihar is a small market in terms of national beer sales, but was among the

fastest growing and had proximity to the barley-growing regions. The state

government actually invited breweries like UBBL and Carlsberg to set up facilities and

then imposed prohibition some time later, reflecting the capricious nature of dealing

with the state government in India. In the meantime, these companies had spent

3 October 2016

United Breweries

anywhere between INR1.75-INR2b to set up breweries in the state. While the state

government subsequently granted permission to export beer, companies were left in

the lurch. Subsequently, in May 2016, the newly elected state government in the

state of Tamil Nadu announced prohibition in a phased manner. Impact has been

only been marginal as of now because only around 5% of the outlets serving beer

have been shut so far. Prohibition, whenever it has been imposed in any state in

India barring Gujarat, has not lasted more than two years, mainly because alcohol

generates anywhere between 25-40% of revenues for various states and they

struggle to find alternative sources to plug the gap. However, unlikely it may be, if

other states follow suit, especially key beer-consuming states like Karnataka, Andhra

Pradesh, Telangana and Maharashtra, the impact on earnings (even if prohibition is

only imposed for a short while) will be substantial.

GST impact:

The worst case scenario in case of adverse GST impact would be

a) Breweries currently pay 12-15% tax on inputs which could go up to 18% of that is

the GST rate.

b) The company will not get credit for GST paid on inputs as alcohol is kept out of

GST ambit.

c) 75% of its glass bottle requirement is from used bottles. New bottles cost INR 10

per bottle while used bottles cost INR 3per bottle. Under the prevalent VAT

system since a used bottle since is not a manufactured product beer companies

do not pay excise and only pay service tax ranging from 0-6%. Under GST, even

used bottles may attract full GST rates.

d) In case of freight, the company pays service tax of 15% and gets 70% abatement

currently and thus effectively pays 4.5% indirect tax on freight currently. If

abatement is not granted, then the company could end up paying 18% GST rate

on freight as well.

The management expects more clarity in 2-3 months on GST. They have lobbied for

abatement to continue on freight costs. They have also pointed out that used bottles

globally have much lower tax rate. United Breweries and the industry in association

with E&Y are in talks with the state governments already for setoffs on input taxes

paid or price increases to be granted.

Water woes: While UBBL has performed admirably well in substantially reducing

usage of water even compared to global brewery and aims to be water positive by

2025, any significant shortage of water due to drought could have an adverse impact

on peak summer season beer sales.

Steep increases in excise, affecting demand: In the last few years, volume growth in

Maharashtra, (among the largest beer consuming states and where UB is the

dominant market leader) was affected by a steep hike in excise duties on alcoholic

beverages in two out of three years in succession. When revenues go down or steady

growth prospects in duties get affected despite rising duty rates, state governments

do realize their folly, but the impact of such decisions can have substantial impact on

volume growth outlook. Uttar Pradesh, after a few rounds of sharp increases,

subsequently reduced duties in April 2016.

3 October 2016

United Breweries

SABMiller-AB Inbev JV taking off in a big way in India:

AB Inbev is the largest beer

company in the world, while Heineken is the largest brand globally. AB Inbev’s global

sales are higher, but it has less than 2% market share in India despite operating in

the country since 2007. SABMiller, on the other hand, has seen a substantial decline

in market share. Its mid-single digit EBITDA margins are far below that of UBBL, and

it has not made profits at the net level for many years. However, Global SAB-Miller-

AB Inbev JV would mean that AB-Inbev could eventually get access to SABMiller’s

brewing facilities in India for its global marquee brands like Budweiser, Stella Artois,

Corona, Beck’s and Hoegaarden, possibly resulting in the combined entity providing

stiffer competition to UBBL and Carlsberg in India. UB could potentially respond with

newer variants of existing products as well as a host of brands from the Heineken

stable.

Brew pubs and Microbreweries-

The presence of these are negligible in India but are

increasingly gaining significance in the rest of the world. Brewpubs are restaurants

serving their own beer. Microbreweries are small brewing units where the emphasis

is more on specialty beers brewed at location. UB is not interested in the former but

the management has expressed interest that they would be interested in the

opportunity in opening up their own microbreweries brewing specialty beers in cities

in cities where demand becomes significant.

3 October 2016

United Breweries

Heineken actions

An unknown factor which will be watched is what Heineken does going forward.

Heineken has been increasing its stake steadily in the business to 43% now from 37%

a little over two years ago.

We believe Heineken would keep on increasing its stake gradually through creeping

acquisition route. The table below indicates that 14.6% of UBBL’s outstanding share

capital is still pledged with bankers. Proportion of pledged shares is 47% of the

current Mallya group shareholding of 30.8% as of June 2016. These bankers have

been selling shares to Heineken and will continue doing so.

Heineken would want to gradually increase its stake to block a third party (either a

competitor or a private equity player) from acquiring stake and affecting day-to-day

decision making.

Exhibit 55: Details of pledged shares

Vijay Mallya HUF

McDowell's Holdings Ltd

The Gem Trading and Invst Co

Pharma Trading Co PVt Ltd

Mallya Pvt Ltd

Kamsco Industries Pvt Ltd

Vittal Investments Pvt Ltd

United Breweries Holdings Ltd

Devi Investments Pvt Ltd

UB Overseas

Mallya Group

Scottish & Newcastle India Ltd

Heineken UK Ltd

Heineken International BV

Heineken Group

Total Promoters

Total Shares

No of Shares

21,353,620

8,122,344

4,315,132

1,514,366

9,786,666

5,523,636

375,955

28,337,911

1,859,300

427,740

81,616,670

89,994,960

8,489,270

15,265,858

113,750,088

195,366,758

264,400,000

8.1%

3.1%

1.6%

0.6%

3.7%

2.1%

0.1%

10.7%

0.7%

0.2%

30.9%

34.0%

3.2%

5.8%

43.0%

73.9%

100.0%

Pledged no

20,950,954

6,451,000

620

2,279,000

8,794,000

Pledge %

98.1%

79.4%

0.0%

41.3%

0.0%

31.0%

0.0%

47.1%

0.0%

19.7%

14.6%

38,475,574

Source: Company, MOSL

Globally, Heineken did make an open offer in case of Asia-Pacific Breweries (of Tiger

beer fame) a few years ago to prevent Fraser and Neave, a private equity player,

from increasing its stake.

While we do not believe Heineken is likely to make an open offer in case of UBBL

(despite having access to negligible cost of capital), we do believe that it will

continue increasing stake gradually over the next 2-3 years and they can reach close

to 58% ownership just from the pledged stake. These purchases will keep on

supporting the stock price.

An interesting slide in the CY15 parent presentation indicates the aggression

Heineken demonstrated in the recent past.

3 October 2016

United Breweries

Exhibit 56: Heineken has been very active on acquisitions in recent years

Material Acquisitions by Heineken in 2015

Desnoes & Geddes,Jamaica

Guinness Anchor Berhad, Malaysia

Pivovarna Lasko d.d,Slovenia

Lagunitas Brewing Company, US

DHN Drinks (Pty) Limited/Sedibeng Brewery (Pty)Limited, South Africa

Namibian Breweries Limited, Namibia

Current shareholding percentage

95.8%* (73.3%in October 2015)

51% (indirectly)

97.5%* (53.4%in October 2015)

50%

75%

29.9% (indirectly)

Completion date

7-Oct-15

15-Oct-15

1-Dec-15

Source: Heineken presentation, MOSL

3 October 2016

United Breweries

SWOT Analysis



Nationwide brewery presence

enables them to supply beer

economically

Wide distribution reach

Cold chain infrastructure and

Initiatives on used bottles give

them a headstart over peers

Water utilization

improvement ahead of global

standards give them an edge

on sustainability

Kingfisher and Heineken

brand portfolio

Associations with events like

IPL Cricket, Formula 1, UEFA

Champions League, Sunburn

sustains youth connect.



High and increasing taxation

and government control over

pricing in most states puts

pressure on profitability.

Government control over

distribution in most states

restricts growth

While brewing presence in

every state is a barrier to

entry, it also results in sub-

optimal capacity utilization

levels



A combination of factors like

large and young population,

increasing acceptability of

alcohol consumption,

urbanization and rising

income along with low

consumption base presents a

huge opportunity for long

term growth

A few states have

differentiated policies

favouring lower alcohol

products like beer. If this

spreads to other states it

creates a massive opportunity

for growth.



Prohibition has been

introduced in a few state of

late but effect is limited and

prohibition in Indian states

has a history of being repealed

in a short while

Proposed GST regime excludes

alcohol from ambit. If beer

players do not receive either

set offs of GST paid on inputs

or not allowed price increase

earnings will be affected

SAB Miller-AB Inbev merger.

In response UB could launch

more brands from Heineken



April 2016

Company name

Nascent stage absolute valuation appears high

We value the company at 35x Cash EPS

In terms of valuations, the stock is now trading at its cheapest levels in the last six

years on 1-year forward EPS basis (between 74-78x average for 5 10,13 years) as

well as 2-year forward basis (between 57x-63x average for 5,10,13 years). On

EV/EBITDA basis the stock has traded at 25-26x over this period. However absolute

multiples are still expensive.

Exhibit 57: P/E 1-yr forward

240

180

120

77.6

Negative

Earnings

Cycle

74.1

74.0

53.4

Negative

Earnings

Cycle

63.4

56.9

61.5

42.7

P/E (x)

5 Yrs Avg(x)

13 Yrs Avg(x)

10 Yrs Avg(x)

Exhibit 58: P/E 2-yr forward

180

P/E (x)

5 Yrs Avg(x)

13 Yrs Avg(x)

10 Yrs Avg(x)

Source: Company, MOSL

Exhibit 59: P/B 1-yr forward

18.0

15.0

12.0

9.0

6.0

7.0

3.0

0.0

10.2

8.4

8.8

P/B (x)

5 Yrs Avg(x)

13 Yrs Avg(x)

10 Yrs Avg(x)

Exhibit 60: EV/EBITDA

7.1

25.6

24.5

24.8

EV/EBITDA(x)

Median(x)

Peak(x)

Min(x)

Avg(x)

46.2

Source: Company, MOSL

At CMP of INR 907, while the stock is at a premium to FMCG peers, on P/E strong

potential earnings growth of 26%/22% over the next 3/10 years is unlikely to be

surpassed by most of its consumer peers. Additionally after barely managing to

recover cost of capital for many years in the previous decade, UBBL has done very

well to grow its ROCE/ROE by 770bp/670bp over the last six years to 13.2%/14.9%

respectively in FY16.

With potential 26%/22% EPS CAGR ahead of peers over 3 year/10 year period even

on base case and healthy cash flow generation of the last few years sustaining going

forward, ROCE/ROE are likely to improve even further to 17.2%/19.2% by FY19 and

23.7%/25% by FY26, in our view. Earnings could grow even faster if some of the

regulatory factors restricting the sector are relaxed.

25 August 2016

United Breweries

Potential EPS CAGR of 26% over FY16-FY19E is ahead of peers and in line with its 10

year track record. Over the next three years, United Breweries remains a great play

on potential recovery in urban consumption. Yet valuations are close to the

cheapest level in the past 6 years.

We initiate coverage on UBBL with a Buy rating and a TP of INR 1,120 based on 35x

Cash EPS. As the business is in investment phase, depreciation is nearly as large as

PAT. While this proportion will reduce over time, as of now Price/Cash EPS appears

to be more relevant in our view. Potential upside is 13%.

We believe that once volumes recover, earnings growth momentum could sustain at

above 20% levels for over a decade, while return ratios could potentially jump up to

25% levels. Importantly, our base case forecast for the next 10 years, does not

assume change in the regulatory regime which is presently not in favour of beer. If

the regime changes for the better earnings growth prospects and return ratios could

be radically higher.

Exhibit 61: Valuation matrix of coverage universe

Company

Consumer

Asian Paints

Britannia

Colgate

Dabur*

Emami*

Godrej Consumer

GSK Consumer

Hind. Unilever

ITC

Jyothy Labs

Marico*

Nestle

Page Industries

Parag Milk Foods

Pidilite Inds.

P&G Hygiene

Radico Khaitan

United Breweries

United Spirits

Retail

Jubilant Foodworks

Shopper's Stop

Titan Company

Reco.

Neutral

Buy

Neutral

Buy

Neutral

Buy

Neutral

Buy

Neutral

Buy

Neutral

Price

(INR)

1,192

3,483

983

276

1,182

1,639

6,193

869

242

359

282

6,597

15,453

302

723

6,842

122

907

2,424

974

372

408

Mkt. Cap EPS growth YoY (%)

(INR cr) FY16 FY17E FY18E

114,298

41,777

26,744

48,586

26,828

55,820

26,045

187,965

292,234

6,497

36,386

63,603

17,236

2,536

37,065

22,209

1,617

23,993

35,222

6,407

3,055

36,182

25.0

46.3

8.7

17.5

17.7

24.4

20.7

12.9

-3.5

-41.6

26.1

-7.3

18.7

-66.7

46.6

22.3

-1.8

13.6

-11.7

19.3

-13.4

20.1

12.5

2.2

12.3

10.0

22.9

4.6

7.1

17.9

85.0

14.6

-5.5

28.2

38.2

23.0

9.5

-1.6

30.1

21.1

-6.2

48.9

11.4

16.3

25.0

31.1

15.5

23.9

25.8

9.9

12.8

15.6

19.9

22.8

25.5

37.0

37.9

18.2

21.6

29.1

26.3

50.8

74.7

30.9

21.0

P/E (x)

EV/EBITDA (x)

ROE (%) Div. (%)

FY16 FY17E FY18E FY16 FY17E FY18E FY16

FY16

64.3

49.7

44.0

38.7

46.9

49.4

37.0

45.6

31.4

87.5

50.3

55.0

74.1

44.9

48.7

52.5

18.7

81.3

78.3

65.1

63.8

50.7

53.5

44.2

43.0

34.5

42.6

40.2

35.4

42.6

26.6

47.3

43.9

58.3

57.8

32.5

39.6

47.9

19.0

62.5

64.7

69.4

42.8

45.5

46.0

35.4

32.8

29.9

34.4

32.0

32.2

37.8

23.0

39.5

35.8

46.4

42.2

23.5

33.5

39.4

14.7

49.5

42.9

39.7

32.7

37.6

43.0

35.6

27.9

31.1

40.0

36.5

27.1

31.8

19.9

31.3

34.6

38.8

45.9

16.9

30.8

34.9

14.2

33.3

36.0

23.8

15.2

42.0

35.7

31.4

25.9

27.7

33.2

30.7

25.8

29.5

17.6

26.6

30.6

33.8

37.0

15.5

25.6

30.8

11.7

28.4

34.0

22.6

12.6

34.5

30.6

24.6

20.0

23.9

27.5

25.3

22.9

26.2

15.0

23.0

25.1

26.9

27.4

12.3

21.5

24.7

9.9

23.4

25.5

15.6

10.4

28.3

34.4

55.9

67.9

33.2

43.4

23.4

30.7

82.4

29.3

9.1

36.9

40.9

46.0

19.5

30.4

30.9

9.6

14.9

36.7

13.4

6.3

21.3

0.8

0.6

1.1

0.7

0.6

1.1

1.8

2.8

1.1

1.2

0.7

0.6

0.0

0.6

0.7

0.1

0.0

0.3

0.0

0.6

Note: For Nestle FY16 means CY15

Source: Company, MOSL

3 October 2016

United Breweries

Exhibit 62: Comparative valuation of Cash EPS

Cash EPS (INR)

FY16

Consumer

Asian Paints

Britannia

Colgate

Dabur

Emami

Godrej Consumer

GSK Consumer

Hind. Unilever

ITC

Jyothy Labs

Marico

Nestle

Page Industries

Parag Milk Foods

Pidilite Inds.

P&G Hygiene

Radico Khaitan

United Breweries

United Spirits

Retail

Jubilant Foodworks

Shopper's Stop

Titan Company

21.6

79.5

26.4

7.9

27.2

36.2

177.0

20.5

8.6

5.8

6.4

155.9

230.4

11.5

17.4

146.5

9.9

20.4

23.7

34.4

17.5

9.6

FY17E

26.1

90.0

27.7

7.1

29.9

43.9

193.6

22.0

10.1

9.3

6.3

151.2

288.7

13.8

20.4

161.5

9.8

24.1

45.8

37.1

21.2

10.8

FY18E

29.9

110.8

35.3

8.3

36.6

54.7

209.8

24.7

11.6

11.0

7.7

185.3

393.9

18.2

23.9

196.2

11.9

29.1

65.7

51.1

26.0

12.4

FY16

53.8

42.3

36.7

34.5

43.4

43.8

34.0

42.3

28.2

59.0

42.9

41.2

65.6

25.7

39.3

46.6

12.1

44.3

104.0

27.9

20.9

41.3

Price/Cash EPS

FY17E

44.6

37.4

35.1

38.0

39.4

36.1

31.0

39.5

23.9

36.8

43.6

42.5

52.3

21.3

33.4

42.3

12.3

37.4

53.8

FY18E

38.8

30.4

27.5

32.8

32.2

29.0

28.6

35.2

20.8

31.4

35.9

34.7

38.4

16.2

28.5

34.8

10.1

31.0

37.5

25.9

18.8

17.2

14.0

36.6

31.8

Source: Company, MOSL

Comparison of growth with listed global breweries

We have compared United Breweries to listed brewery majors like AB Inbev,

Heineken, Carlsberg and SAB Miller as well as listed emerging market breweries like

Tsingtao, East African Breweries and Nigerian Breweries for the period FY14-FY19 (3

year historical and 3 year forward numbers from Bloomberg).

The key observations are



Revenue CAGR- The average for these global brewery companies is 4% while

United Breweries is expected to grow at 13% over this period.



EBITDA CAGR- United Breweries EBITDA performance is even more impressive

at 17% CAGR compared to an anemic 3% CAGR for global peers.



PAT CAGR-Here again United Breweries performance is far superior with a CAGR

of 22% over this period compared to global beer players growing at an average

of 5% over this period.



Barring the African Brewery companies which have Superior ROEs, UBs ROE is

not only higher than the other peers but is also growing at a rapid pace.



On valuations, global average P/E ratios for other breweries are ~20x FY19 with

AB Inbev and Tsingtao at 20% premium to the average. On EV/ EBITDA global

average is around 11x with SAB Miller at around 15x. Given its far superior

growth metrics, long term opportunity and improving ROEs, United Breweries

valuation premium looks justified.

3 October 2016

United Breweries

Exhibit 63: United Breweries’ topline and earnings growth metrics are way ahead of listed global breweries

Company Name

Sales CAGR (2013-18E) EBITDA CAGR (2013-18E)PAT CAGR (2013-18E)2018 P/E (x) EV/EBIDTA (x) 2018 RoE (%)

Anheuser-Busch InBev SA/NV

-1%

-7%

23.1

19.0

11.6

Heineken NV

13%

18.3

15.6

10.8

Carlsberg A/S

16.6

11.1

9.2

Tsingtao Brewery Co Ltd

-1%

-3%

24.2

8.8

11.0

Nigerian Breweries PLC

21.3

29.8

10.1

East African Breweries Ltd

19%

14.8

39.3

8.3

SABMiller PLC

21.2

15.8

14.9

United Breweries Ltd

12%

16%

22%

40.0

19.4

19.2

Source: Company, MOSL

3 October 2016

United Breweries

Bull and Bear Case

Few points regarding our assumptions for bull and bear case



Given the uncertainty around actual GST impact and tendency to skew numbers,

we have not assumed GST implementation in our numbers in either scenario.



We have primarily played around with volumes in our bull and bear case.



We have not altered capex assumptions materially irrespective of volumes.



We are also not assuming a change in target multiple in either scenario.

Bull case

In our bull case, we are assuming 300bp, 300bp and 400bp higher volumes

compared to our base case in FY17, FY18 and FY19, respectively.

We have largely kept price increases and premiumization impact similar in our bull

case, compared to our base case. Premium segment is very small at less than 3%

and, even if it increases sharply, it will not move the needle much from a 2-3 year

perspective, especially if we assume overall volumes to be very strong.

Compared to our base case, EPS in our bull case is higher by 1.9% in FY17, 6.8% in

FY18 and 13.2% in FY19.

Valuing the company at 35x September 2018 Cash EPS (as we are in our base case),

we get a target price of INR1,193 (32% upside to CMP) under our bull case,

compared to INR1,120 (23% upside to CMP) under our base case.

Exhibit 64: Bull Case

Volumes (m cases)

Volume growth (%)

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT Growth (%)

EPS

Cash EPS

Target Multiple (x)

Target Price

Upside/ (Downside) (%)

FY16

151.5

3.1%

50,834

8.2%

7,317

14.4%

2,951

5.8%

11.2

20.4

FY17E

166.7

11.0%

57,951

14.0%

8,751

15.1%

19.6%

3,912

6.8%

32.6%

14.8

24.4

FY18E

188.3

13.0%

68,962

19.0%

11,103

16.1%

26.9%

5,179

7.5%

32.4%

19.6

30.4

FY19E

216.6

15.0%

82,065

19.0%

14,033

17.1%

26.4%

6,786

8.3%

31.0%

25.7

37.8

1,193

Source: Company, MOSL

3 October 2016

United Breweries

Bear Case

In our bear case, we are assuming volume growth to remain tepid at 6-7%. Volume

growth forecasts are thus 200bp, 400bp, and 400bp lower than our base case

numbers in FY17, FY18 and FY19, respectively, and in line with the trend of the past

few years.

Unlike our base case, margin increase is likely to be very small over a three-year

period, mainly driven by mix improvement but with no operating leverage other

costs will not subside.

Compared to our base case, EPS in our bear case is lower by 6.9% in FY17, 17.4% in

FY18 and 26.3% in FY19.

Valuing the company at 35x September 2018 Cash EPS (as we are in our base case),

we get a target price of INR958 (6% upside to CMP) under our bear case, compared

to INR1,120 (23% upside to CMP) under our base case.

Exhibit 65: Bear Case

Volumes (m cases)

Volume growth (%)

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT Growth (%)

EPS

Target Multiple (x)

Target Price

Upside/ (Downside) (%)

FY16

151.5

3.10%

50,834

8.20%

7,317

14.40%

FY17E

160.6

6.00%

55,918

10.00%

8,164

14.60%

11.60%

3,573

6.40%

21.10%

13.5

23.1

FY18E

170.2

6.00%

62,069

11.00%

9,124

14.70%

11.80%

4,003

6.50%

12.00%

15.2

25.9

FY19E

182.1

7.00%

68,896

11.00%

10,197

14.80%

11.80%

4,416

6.40%

10.30%

16.7

28.8

958

2,951

5.80%

11.2

Source: Company, MOSL

3 October 2016

United Breweries

Annexure: Huge potential for top-line growth

Per capita consumption lowest, even among emerging markets

Beer volumes in India have grown at a healthy 11% CAGR over the past 10 years.

UBBL, the largest beer player in India with ~51% market share, has also grown its

volumes at a similar pace over this period. In terms of number of cases (each case

has 12 bottles of 650ml each, amounting to 7.8 liters). Indian beer industry has

grown from 104m cases (811m liters, 8.11m hectoliters) in FY06 to nearly triple the

size to 294m cases (2,293m liters, 22.9m hectoliters) in FY16. During the same

period, UBBL increased its volumes from 52m cases (406m liters, 4.06m hectoliters)

to 151.5m cases (1,182m liters, 11.8m hectoliters).

Exhibit 67: ..and UB, the largest player, grew at a similar

pace

UB cases sold (m)

27.1

22.6

11.9

4.4

2.7

3.7

5.0

14.1

9.3

101

126

6.0

4.5

(0.2)

6.0

3.1

24.3

133

UB's volume growth (%)

139

147

152

Exhibit 66: Beer industry volume has grown at 11% CAGR

Industry cases sold (m)

31.7

155

Industry volume growth (%)

263

270

280

294

200

172 16.3

137 13.1 11.0

12.5

225

235

Source: Company, MOSL

Despite healthy growth, per capita consumption of beer at ~2 liters in India is among

the lowest in the world and even when compared to most emerging markets barring

a few Islamic countries which have nationwide prohibition. APAC average is 29.4

liters, global average is 30 liters and EU average is 70 liters.

Exhibit 68: India’s per capita consumption of beer far lower than other emerging markets

74.3

66.8

Per Capita Beer Consumption 2015 (litres per annum)

48.9 45.0

41.4 41.4 40.0 38.6

27.0 23.2

20.9

11.3 10.9 5.8

2.0

0.7

Source: Heineken presentation, MOSL

Factors which are and will continue to be growth drivers in India are:

Large and young population:

As is true for most consumer categories, India’s

demographic dividend as a result of its large young population is the key factor

driving current and potential growth in the beer segment. Half of India’s population

3 October 2016

United Breweries

is below 30 years of age. More importantly, the number of young population is likely

to remain high for a few decades, which mean that a significant proportion of the

world’s population entering drinking age is likely to be an Indian. Beer is the third

most popular beverage in the world after water and tea. Also, surveys indicate that

it is the preferred drink for most people entering drinking age in the country. It is

perceived to be cooler to consume lower alcohol products in the alcoholic

beverages segment.

Higher social acceptability of alcohol consumption:

Social acceptance of consuming

alcohol has increased radically over the past decade, thereby driving volume growth

for the beer industry over this period. While acceptability was initially higher in

metro and Tier 1 cities, it is now gradually spreading to other parts of the country as

well. Association with major sporting and music events (which have strong appeal

among the young population, like IPL cricket, UEFA Champions League and English

Premier League Football, Sunburn, etc.), proliferation of the pub culture (which

began in Bangalore in the early 90s and spread to the rest of the country later) and

marketing of beer as a lifestyle product have increased the acceptability further.

This means that beer is not only attracting newer set of customers, there is also

growth coming in from existing customers.

Higher disposable income:

A transformational pace of GDP growth over the past 15

years has led to immense job opportunities and rising incomes, particularly led by

the service sector, which employs a large proportion of the target demographic for

beer companies. This, combined with the factors mentioned previously, favors

growth of segments like beer.

Favorable climatic conditions for beer consumption:

India’s tropical weather with

high levels of heat and humidity for large part of the year also aids beer

consumption growth. Beer is perceived as a thirst quencher, and close to 60% of

yearly sales happen in the June and March quarters, which are the hottest periods in

many parts of the country.

Further inroads into underpenetrated markets:

Demand has been traditionally

strong in coastal states in south and west India, but beer players have also made

successful inroads into the rest of the country. Incremental expansion of most

breweries reflects the efforts to tap markets of north and east India where per

capita consumption of beer is far below even the low national average.

Availability of global brands:

Iconic brands of many large global brewers are now

widely available across the country. Many of these are manufactured locally and

hence offer international quality at Indian prices. Earlier these brands were

unaffordable due to high import duty rates. Distribution reach was also limited for

MNC brands. 100% FDI in beer has been allowed since 2007, which has been a key

factor behind the scaling up of brewers like Carlsberg.

3 October 2016

United Breweries

Annexure- The Heineken Factor

Driving both growth and margin prospects substantially

Heineken is the largest selling beer in the world, and with increasing distribution in

India (now available in 15 states) has been the fastest growing brand in the

company’s portfolio for many years. The brand is also likely to be launched in

Andhra Pradesh and Telangana shortly. Before the bifurcation, the state was the

largest market for beer and hence these states represent a large growth

opportunity. The Dutch brewer’s other large global brands are Amstel and Tecate,

which are not yet available in India.

The eponymous Heineken brand and the other two big global brands (Heineken has

a lot of other smaller brands in its global portfolio) are even more important from a

mix and margin perspective, unless the company uses one of the other two brands

as an economy play (similar to what Carlsberg has done with Tuborg in India). In

such a case, that brand could also be a potential volume driver.

India is increasingly becoming more important to Heineken worldwide.

a) Comment by Laurence Debroux, CFO and member of executive board at a

recent conference:

“You were asking me about countries, one country where we

bet long term is India for instance. And we have actually taken a clear choice

between investment in China and investment in India, and we do believe that

long term we’re better positioned with our Indian investment”.

‘Asia Pacific will contribute 70% of global beer growth in the next 5 years’

from a

recent Heineken presentation.

c) ‘I

think India and Africa are for beer the last frontiers, for meaningful growth in

terms of volume and thereafter growth also of the premium segment’.

Comment

by Jean-Francois Van Boxmeer, CEO.

We reckon that Heineken brand beer sales could potentially increase 4-5x over the

next 10 years, which means that overall gross and EBITDA margins could move up

significantly. We are conservatively assuming only 160bp expansion in gross margins

in the next 10 years, compared to 580bp improvement between FY07-FY16.

3 October 2016

United Breweries

Exhibit 69: Heineken is dominant player in premium segment worldwide

Source: Canadean, Heineken presentation, MOSL



Exhibit 70: Proportion of premium beer in India is also very low

50.0

Premium segment share of total beer market % (by volume, 2015)

35.0 33.0

29.0 25.0

22.0 21.0

16.0 14.0 13.0

10.0 9.0

8.0

5.0

3.0

0.0

Source: Company, MOSL

3 October 2016

United Breweries

Financials and Valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

% of Sales

Employees Cost

% of Sales

Other Expenses

% of Sales

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Less: Mionrity Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY12

35,614

16.4

16,163

45.4

1,886

5.3

13,424

37.7

31,472

88.4

4,143

11.6

1,489

2,654

653

376

2,377

-196

2,181

914

41.9

1,268

1,464

-0.8

4.1

FY13

39,004

9.5

16,441

42.2

2,172

5.6

15,335

39.3

33,948

87.0

5,056

13.0

1,704

3,352

676

255

2,930

-178

2,752

1,026

37.3

1,721

1,899

29.8

4.9

FY14

42,297

8.4

17,321

41.0

2,628

6.2

16,375

38.7

36,324

85.9

5,973

14.1

1,978

3,995

778

135

3,351

1,087

32.4

2,260

19.0

5.3

FY15

46,990

11.1

18,937

40.3

3,010

6.4

18,717

39.8

40,664

86.5

6,326

13.5

2,075

4,251

651

190

3,790

1,188

31.3

2,598

15.0

5.5

FY16

50,834

8.2

19,928

39.2

3,404

6.7

20,186

39.7

43,517

85.6

7,317

14.4

2,436

4,881

735

351

4,497

1,542

34.3

2,951

13.6

5.8

FY17E

56,934

12.0

22,319

39.2

3,710

6.5

22,309

39.2

48,338

84.9

8,597

15.1

2,547

6,050

475

246

5,820

1,979

34.0

3,837

3,838

30.1

6.7

FY18E

66,044

16.0

25,779

39.0

4,229

6.4

25,535

38.7

55,543

84.1

10,501

15.9

2,848

7,653

560

258

7,351

2,499

34.0

4,848

26.3

7.3

(INR Million)

FY19E

75,951

15.0

29,516

38.9

4,694

6.2

29,056

38.3

63,267

83.3

12,684

16.7

3,208

9,476

658

271

9,089

3,090

34.0

5,995

23.7

7.9

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Preference Capital

Total Reserves

Net Worth

Minority Interest

Deferred Tax Liabilities

Total Loans

Capital Employed

FY12

264

741

12,652

13,658

514

9,916

24,099

20,683

8,485

12,198

242

2,074

18,366

4,007

6,995

1,728

5,638

8,782

3,833

4,949

9,584

24,099

FY13

264

741

14,106

15,112

745

13,010

28,883

26,062

10,112

15,950

242

1,140

20,069

5,136

8,134

2,331

4,468

8,518

2,500

6,018

11,550

28,883

FY14

264

741

16,061

17,066

795

12,322

30,201

28,153

12,074

16,079

242

823

21,831

5,441

9,586

1,425

5,378

8,774

2,097

6,677

13,057

30,201

FY15

264

18,242

18,506

663

8,364

27,554

32,254

14,138

18,116

242

902

19,585

5,591

9,643

131

4,220

11,291

3,427

7,864

8,294

27,554

FY16

264

20,825

21,089

626

4,111

25,851

34,482

16,502

17,980

242

608

22,510

6,058

11,431

139

4,882

15,491

3,829

11,662

7,020

25,851

FY17E

264

24,116

24,381

626

5,211

30,242

38,282

19,048

19,233

242

1,262

25,708

7,045

12,279

1,259

5,126

16,204

4,283

11,921

9,505

30,242

FY18E

264

28,301

28,565

626

6,511

35,727

43,082

21,896

21,186

242

1,692

29,040

8,155

15,224

278

5,383

16,434

5,126

11,308

12,606

35,727

(INR Million)

FY19E

264

33,499

33,764

626

6,511

40,925

48,582

25,104

23,477

242

1,988

32,169

9,324

16,404

788

5,652

16,952

5,694

11,258

15,217

40,925

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

3 October 2016

United Breweries

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Debt/Equity

FY12

5.5

11.2

51.7

0.7

14.6

FY13

7.2

13.6

57.2

0.7

10.8

FY14

8.5

16.0

64.5

0.9

10.5

FY15

9.8

17.7

70.0

1.0

10.2

92.3

51.3

13.0

5.3

39.2

0.1

16.4

11.0

7.9

8.5

1.5

0.7

13.2

8.8

9.5

1.4

0.9

14.0

9.7

10.4

1.4

0.7

14.6

10.8

10.9

1.7

0.5

FY16

11.2

20.4

79.8

1.2

10.3

81.3

44.5

11.4

4.8

33.3

0.1

9.5

14.9

13.2

12.4

2.0

0.2

FY17E

14.5

24.1

92.2

1.5

10.0

62.5

37.6

9.8

4.3

28.4

0.2

4.0

16.9

15.2

15.1

1.9

0.2

FY18E

18.3

29.1

108.0

1.8

10.0

49.5

31.2

8.4

3.7

23.4

0.2

-4.0

18.3

16.1

16.4

1.8

0.2

FY19E

22.7

34.8

127.7

2.3

10.0

40.0

26.1

7.1

3.2

19.4

0.2

7.5

19.2

17.1

17.4

1.9

0.2

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Cash eqv

FY12

2,182

1,489

937

-659

-1,845

2,104

-219

1,885

-3,806

-1,921

463

-3,343

2,136

-923

-268

1,106

2,050

592

1,117

FY13

2,660

1,704

770

-744

-2,692

1,698

-176

1,522

-3,782

-2,260

-535

-4,317

3,093

-737

-244

2,113

-682

1,750

1,263

FY14

3,351

1,978

779

-1,006

-2,159

2,944

-48

2,895

-2,120

776

544

-1,576

-688

-795

-239

-1,722

-402

1,068

760

FY15

3,790

2,075

718

-1,423

3,381

8,541

-132

8,408

-4,069

4,339

774

-3,295

-4,699

-715

-303

-5,717

-604

665

FY16

4,497

2,436

755

-1,606

-1,209

4,873

4,939

-2,430

2,509

-22

-2,452

-1,400

-772

-344

-2,516

-29

107

FY17E

5,821

2,547

475

-1,484

-2,533

4,826

-3,780

1,046

-3,780

1,100

-475

-551

1,120

107

FY18E

7,351

2,848

560

-1,875

-5,156

3,729

-4,780

-1,051

-4,780

1,300

-560

-669

-980

1,153

106

(INR Million)

FY19E

9,089

3,208

658

-2,318

-3,187

7,450

-5,480

1,970

-5,480

-658

-803

-1,461

510

175

104

3 October 2016

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not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in

the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This

document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be

engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by

the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal

Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and

therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore

Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a

subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the

Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Varun Kumar

Varun.kumar@motilaloswal.com

Contact : (+65) 68189232

Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931

Kadambari Balachandran

kadambari.balachandran@motilaloswal.com

(+65) 68189233 / 65249115

3 October 2016

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com

Motilal Oswal Securities Ltd