Stock Review: UNITED BREWERIES

Investors who entered the United Breweries counter a year ago have reaped a more than two-fold gain on their investment even as benchmark indices struggle to earn single-digit returns during the period.

The spectacular stock returns of the country's largest brewer aptly capture the expectations of a sustained business momentum. These expectations are largely fuelled by the company's strong growth momentum in the past six quarters. While the broader economic indicators reflect a long-term sustainable growth for United Breweries (UBL), the stock appreciation in the near term looks limited in the absence of a major demand trigger.

UBL, which earned . 2,779 crore in revenue during FY11, commands more than half of the country's more than 20 crorecase beer market with it flagship brand, Kingfisher. It enjoys a wide presence in both strong and mild beer segments.

The company has shown robust growth in beer volumes over the past few years. A recent report by brokerage firm IIFL highlights that Kingfisher's mild beer segment grew at 16% in FY11, much faster than the category average growth of 9%. Further, the company's strong beer segment has grown three times in the past four years and by 27% in FY11.

UBL has been reorganising its business through consolidation of its arms and joint ventures. In the past fiscal, it merged Millennium Alcobev and Chennai Breweries with itself. These initiatives should bring cost rationalisation across the board, which may add to the UBL's operating margins, which expanded by nearly 200 basis points during the March 2011 quarter to 12.4%. The constant need increase advertising expenditure due to intense competition in the beer segment could keep margins under pressure. A slew of multinational beer brands have entered Indian markets in the past three years. UBL's tie-up with Netherlands based Heineken to distribute beer in India under Heineken brand will be critical in fending off competition from global brands.

Though UBL is well placed to take advantage of increasing consumer propensity towards alcoholic beverages, its current valuation appears to be high. At Thursday's close of . 503, its stock trades at nearly 80 times its FY11 earnings. This may limit an upside in the stock price in the near term.