UNITED BREWERIES GROUP: AN OVERVIEW

By S. P. Tulsian and Geetanjali Kedia

It is a human nature, that if we get more than our expectations, instead of getting satisfied, we become more greedy! This is precisely what is happening with United Breweries (UB) Group stocks.

Let’s have a look at their 8 listed group companies:

Having seen such a sharp upmove in these stocks, all analysts, traders, investors, punters have become bullish and have initiated buy calls, in the recent past, which we were doing since start of 2012 and at the average levels, almost half of its current rates. Suddenly, today we have seen depression and profit booking in all these stocks, only on a single news report coming in, that bankers of KFA have declined the request of KFA to grant them additional Rs. 200 crores.

For better understanding, let’s have a look at each company one-by-one on an individual basis:

1. United Breweries (UBL) – Nothing really seen to be changing in this company, which is the largest beer maker in India. UB Group and Foreign Promoters (Heinken) are likely to hold 37.50% stake, each, with joint control and management. Company having posted an EPS of Rs. 3.71 for Q1FY13, may have an optimistic EPS of Rs. 15 for FY13. This share has FV of Re.1. Even if we apply a PE of 50 times, on FY13 estimated earnings, share is seen to have cap at Rs. 750. Profit booking is advised above Rs. 725.

2. United Spirits (USL) – This largest spirit maker in the world is seen to be finalizing terms for inducting Diageo in the company as a controlling promoter. In the process, it is likely that 12.50% stake may be sold by UB Group, while 2.64% stake may get sold by USL Benefit Trust. Thereafter, a preferential allotment of 10% may be made by the company, giving an effective stake of 25% to Diageo. This will trigger an open offer for 26% stake, to be acquired from the non-promoter. All this are likely to happen at over Rs. 1,500 per share. Based on an EPS of Rs. 11 for Q1 of FY13, annualized EPS works out at Rs. 45. Share deal, likely to happen even at Rs. 1,600 per share, will result in a PE of 35 times, which is not seen expensive at all, when 51% control is ceded to Diageo. Also, due to debt of close to Rs. 5,000 crore in the books of USL, preferential issue of 10% can infuse over Rs. 2,000 crore in the company, thus reducing interest burden and increasing its PAT.

Hence, it will be a compulsion for UB Group to divest their 12.50% stake to mobilise Rs. 2,500 crores to clear KFA dues of banks. On the other hand, Diageo is equally eager to acquire controlling stake in USL, which has close to 56% market share in the Indian spirits market.

However, this deal may happen in 2 layers, with stake of Whyte & Mackay (a 100% subsidiary of USL) first being given to PE investors (interests having shown by 4-5 PE investors) to comply with UK Competition Law, to pave way for Diageo, to take stake in USL.

3. Mangalore Chemicals – UB Group, holding 30.44% stake in the company, may not be too keen to keep this company in its fold, which is seen non-strategic and taking precious time of UB Group, as being a less than Rs. 1,000 crore company. This Urea and Complex fertilizer maker is a profit making and having huge surplus land, thus scope to expand. Coromandal International, seen to be keen to acquire stake, at over Rs. 75 per share, while others in the fray are MRPL and K K Birla Group. This can give close to Rs. 300 crores to UB Group, which is likely to be used for repaying KFA dues.

4. UB Engineering – This is a very tiny company with M Cap of just Rs. 75 crores and promoter stake of 41%. This may not see divestment by the Group, due to low valuations.

5. UB Holdings – This flagship investment arm is holding over 3 crore shares of UBL and 2.40 crore shares of USL. In addition to this, it is a holding company for McDowell Holdings, as also promoter of KFA. Share is now ruling at 16% of its estimated current NAV. This is due to guarantee of Rs. 9,000 crore, having given for KFA, coupled with huge losses of KFA.

6. McDowell Holdings – This investment company with stakes in UBL (95.3 lakh shares), UB Holdings, UB Engineering and Mangalore Chemicals.  

7. Pioneer Distilleries – This 81.99% subsidiary of United Spirits is a tiny loss making company with annual sales of about Rs. 100 crore and market cap of Rs. 52 crore.

8. KFA – This company has bank dues from 17 lenders of around Rs. 7,500 crores and suppliers’ liability of Rs. 4,500 crores. If UB Group makes the company debt free and suppliers’ due free, it can get a valuation of close to Rs. 5,000 crore for KFA. It is likely that company will approach CDR cell, for the second time now (earlier request of the company was rejected) for relief of waiver, re-schedulement and waiver. If 50% debt is paid upfront by the UB Group, it can get relief of close to Rs. 1,500 crores, thus bringing down the dues to a net level of Rs. 6,000 crores of Banks.

In such a situation, any foreign carrier will be too keen to take a strategic interest in KFA. If these liabilities of Banks are not repaid by UB Group, Banks will be forced to sell the pledged stakes in UBL and USL, at throw-away valuations. Hence, it will be prudent for UB Group to sell part stake in USL and put KFA back on track.

KFA, in normal working, had 90% of its net losses due to interest burden. Also, with ATF now being allowed as direct import, it can give big savings to Indian carriers. So, with induction of a foreign carrier and part repayment of debt of KFA to Banks, even KFA can regain its old market share.

So no need to loose hope!

Exit call in various stocks can be made by the traders and short term investors, as there is no harm in profit booking. Nobody can really catch the top. But positive view remains on USL, UBHL, Mangalore Chemicals and KFA, till the deal with Diageo gets consummated, which is bound to happen, sooner or later.