United Breweries gains 28% in four days on bourses, valuations look stretched

MUMBAI: The stock of beer major United Breweries rose by as much as 14% on Monday. With this gain, it has earned over 28% return in just four trading sessions. The other group company, United Spirits also gained 13% on Monday. The jump comes at a time when the USL group is in the process of transfer of shares to Diageo, which acquired a controlling stake in United Spirits in November 2012.

The stock gain since last four sessions has catapulted the valuation of United Breweries. Its trailing price-earnings ratio works out to be 127. The company enjoys a dominant position in the domestic beer market and the tie-up with Netherlands based Heineken is likely to help target the high-end segment.

However, it looks difficult for the current valuations to sustain and grow further considering pressure on volumes and expected tapering growth in the near term.

The company has been able to grow sales volumes by 5% in FY13 despite slowdown in the offtake in Tamil Nadu, one of the biggest states in India in terms of consumption of alcoholic beverages.

The trend, however, may not sustain in the near term. One reason for volumes to feel the pressure is the gradual upward revision in the duty structure by various states in the country. For instance, Maharashtra raised the excise duty on strong beer in March 2013 to Rs 60 per litre from Rs 42 per litre.

The state accounts for the second largest consumption of beer in India after Andhra Pradesh.

The management claimed during a recent conference call that it registered a sustained growth in the premium beer segment, which includes brands such as King fisher Blue and Kingfisher Ultra.

The focus on higher value brands helped the company grow revenue at a faster pace compared to the growth in volumes. The strategy will be crucial in the coming quarters as volumes are likely to show weakness.