United Breweries

 

The benefits of the truce with Heineken for United Breweries are mostly of longterm nature. At the current price, the stock's valuation does not look attractive

 

THE management of United Breweries (UBL) will breathe easy now. Country's largest brewer, UBL, has finally managed to pull the curtain down over a year-old tiff with Amsterdam-based Heineken, one of the largest beer companies in the world. This resolves, though to certain extent, UBL's concern over increasing competition from the multinational brands in the fast growing Indian market and also the uncertainity over Heineken's business in India.

The agreement and its impact:

The dispute began when Heineken introduced its key beer brands Heineken and Tiger in India through Asia Pacific Breweries (APB), its joint venture arm with Singapore-based Fraser and Neave. At the time, Heineken was also holding 37% stake in UBL. This created a conflict of interests as UBL strongly objected to Heineken's stance in India. 

   According to the current settlement between UBL and Heineken, the latter would purchase the remaining stake in APB and transfer the assets to UBL within a year. It will also transfer rights to brew and distribute Heineken brands in India in the name of UBL. Heineken currently owns 170 beer brands globally and UBL would be the single source of distribution if Heineken decides to introduce any of these brands in India. This means UBL certainly has an immense opportunity to be a major catalyst of Heineken's growth in India.
   The benefit to UBL is not restricted only to the domestic market. As part of the arrangement, UBL will also be able to promote its brands in international markets using Heineken's global reach. The latter commands a network of 115 breweries in 65 countries.

GROWTH PROSPECTS:

Indian liquor market is witnessing a revival of beer consumption given the growth in beer-drinking population among the youth in the country and entry of new players and brands in last few years. With a volume of 174 million cases (9 litres per case), domestic beer market grew by 10% in FY09 and UBL was the largest player claiming 50% share. 

   The growth rate for beer consumption is expected to remain intact in the near future. Further, the deal gives UBL an easy access to the upper layer of the market, the target segment of Heineken. This segment currently constitutes just over 5% of the total beer consumption but it is likely to grow fast with increasing number of the affluent youth class in the country. Thus, it's a double benefit for UBL. While it retains its leadership in the domestic market, it also gets a pie of the high-end market.

VALUATION:

At the price of around Rs 170, UBL's stock trades at 50 times its trailing twelve months (TTM) earnings. There is no other listed pure-play beer company to compare valuations. While UBL stands to gain from the arrangement, most of these gains would accrue over the next few years. Its current valuation appears to reflect these future benefits. Hence, the room for further appreciation looks limited.