After rising two-fold in the 12 months to July 2011, the stock of beer maker United Breweries (UB) has lost most of its gains since then. Its movement is in tandem with the overall weakness in the broader market. The stock was also under pressure after the company reported escalated operating costs and a higher interest outgo during the September 2011 quarter.
The rising trend in the cost relative to sales would affect its bottomline in the near term even though the overall long-term outlook is positive, given the company’s strong branding and increasing youth market in the country. In the past six months, the maker of Kingfisher beer did see an impressive growth in its topline, but it failed to curtail rising operating costs.
Its sales from operations rose by 26% year-on-year to Rs 733.2 crore during the half year ended September 2011. Operating costs, including raw material expenses, salaries, and fuel costs, rose even faster by 29% thereby impacting operating profitability. Its operating margin fell by 280 bps to 11.3% during the period.
While the overall cost pressure in the economy is cooling off as reflected from the falling rate of increase in the wholesale price index of late, economists feel it may take a while for prices to fall further and stabilise at those levels. Until then, companies, including UB, are likely to report lower profitability.
Another concern is rising interest costs, following higher borrowings. Loan funds went up by 13%in a year to Rs 641 crore in the September 2011. Though small in proportion, interest outgo as a percentage of sales inched up by 50 bps to 2.5% during the six months to September. As a result, net profit for the period fell by 7% notwithstanding the double-digit growth in sales. Higher costs are likely to impact its performance even though sales may grow.
Beer sales are expected to be buoyant, given the rising disposable income and higher propensity towards beer consumption. In addition, UB has been able to grow faster than the sector growth in the past. According to some estimates, its mild beer segment grew twice as fast as the overall growth of the segment last fiscal. This will offer some support to the stock in the coming months.