United Breweries May See Profitability Pressure After Telangana Supply Halt: Kotak

United Breweries Ltd.'s decision to halt beer supply to Telangana will likely put pressure on its near-term profitability, according to Kotak Institutional Equities. The company stopped beer supply to the southern state because of delay in price hike and overdue receivables.

Kotak Institutional Equities kept a 'reduce' rating on the stock, with a target price of Rs 1,900 apiece. The current target price implies a 5.77% downside from Wednesday's closing price.

United Breweries' recent decision is bold and necessary, the brokerage said, as the company was witnessing EBIT losses despite its great market share and scale in the state. Telangana government did not hike price since 2019-20, despite the company putting in several requests for upward revision as inflation continued to rise, Kotak Institutional Equities said.

United Breweries has Rs 2,430 crore worth overdue receivable from the Telangana Beverages Corp., the state-owned sole distributor, as of September 2024. The overdue amount is up 67% from the corresponding period in 2023, Kotak Institutional Equities said.

The issue is not company specific; it's present across industry. Telangana hiked price for spirits last year. However, did not do the same for beer ignoring requests from several companies, the brokerage said. Though Telangana is the largest beer market in India, it is loss-making for entire beer-producing industry. The state contributes 13-15% volume to the industry. Net realisation of beer firms in the southern state is at 17–18% of maximum retail price, compared to 25–30% in other states, Kotak Institutional Equities said.

United Breweries required 30% price increase in Telangana to get higher return on capital employed than cost of employed. United Breweries' net realisation in Telangana is Rs 27-29 per 650 milliliter of mainstream beer, with an MRP of Rs 150-160. In this case, if the state increases MRP by 8% and splits the absolute price increase equally with United Breweries, it would translate into 20-25% increase in net realisation.

"We believe that United Breweries’ ask is reasonable, and the state can accommodate it without any meaningful inflation for consumers. We hope that the state government moves swiftly and takes necessary actions, balancing the interests of all stakeholders," Kotak Institutional Equities said.

The receivable cycle could take some time to normalise. The suspension of supply to Telangana could meaningfully impact near-term earning, given operational deleverage. Meanwhile, a potential 15-20% price hike would eventually translate into an Ebitda upside of Rs 200–250 crore along with 200-250 basis points margin expansion, Kotak Instituional Equities.