United Breweries Gets BofA Downgrade As Margin Recovery Seems Unlikely

Bank of America has downgraded United Breweries Ltd.'s rating to 'underperform' and reduced its target price, saying the expected margin recovery is not seen in the "foreseeable future". The brokerage cut the target price to Rs 1,850 apiece from Rs 2,000 earlier, implying a potential downside of 3% from the previous close.

The company posted a consolidated net profit of Rs 81.6 crore in the fourth quarter of financial year 2024 in comparison to Rs 9.87 crore in the year-ago period, according to an exchange filing.

"Prioritising growth and market share seems a strategically correct move, but it does affect the elevated near-term estimates, which should likely be reset," the report said. The brokerage has lowered its earnings estimates by 2–7% for financial years 2025/26, mainly due to lower margin forecasts.

"The high teens Ebitda margin pre-Covid may not be seen in the foreseeable future. Our base case assumes a low double-digit/teens margin over the next three years," it said.

The company's gross margin expansion has been low due to an adverse state mix and lower bottle returns. It is taking many steps to correct the latter, according to BofA. "A general cost push and higher investments on the brand and organisation weigh on profitability."

BofA said the current stock price factors in the near-to-medium-term upside. "UB's stock has significantly outperformed the broader market indices over the last one year. Current valuations adequately price in recent volume recovery and premiumisation trends and excitement around management change/board revamp," it said.

Volatility on the regulations has led to restrictions on movement, inventory, fewer pricing changes and approval for new manufacturing. The management talked about price hikes lagging the increase in cost and tax, and receivables issues, including Rs 7–8 billion pending from Telangana, it said.

"We'd keep an eye on the prolonged election calendar, including the state election in Maharashtra later this year," BofA said. "External factors aside, UB has made its own changes/corrections to the operating model in a few markets."