United Breweries sees volume growth but targets margin recovery amid cost pressures

Investment View and Valuation

Motilal Oswal Financial Services Ltd. maintains a Neutral rating on United Breweries following its August 5, 2026 results update. The broker describes 1QFY27 performance as steady, with the investment focus shifting towards margin recovery. It retains a target price of Rs 1,400, based on 50 times March 2028E EPS, compared with the CMP of Rs 1,391.

The Neutral stance reflects limited upside from the CMP, rich valuations and continuing cost headwinds, despite an improving beer-demand environment.

1QFY27 Financial Performance

United Breweries reported standalone net sales of Rs 30,649 million in 1QFY27, up 7 per cent year on year but 1.8 per cent below Motilal Oswal's estimate of Rs 31,200 million. Sales growth was supported by 9 per cent volume growth, ahead of the broker's 8 per cent expectation.

Consumer sell-out increased 13 per cent, matching industry growth, while sell-in was lower because United Breweries deliberately reduced channel inventory by around 20 per cent year on year. Management said the move was intended to improve working capital and ensure fresher beer in the market.

Beer Industry Growth and Premiumisation

The beer industry grew around 13 per cent year on year during 1QFY27, supported by a favourable summer, premiumisation and regulatory reforms. United Breweries' premium portfolio grew 7 per cent in volume, moderating from a high 46 per cent base in 1QFY26. Heineken Silver remained a strong performer, recording 28 per cent volume growth.

Management said premium products currently contribute 10-11 per cent of revenue and aims to increase this contribution to around 20 per cent over the longer term. Premium margins became accretive for the first time, helped by localisation, revenue management and network optimisation.

Margin Pressure and Recovery Initiatives

Profitability was affected by geopolitical cost pressures. Gross margin contracted 160 basis points year on year to 41 per cent, broadly in line with the broker's 41.5 per cent estimate, as packaging, logistics and foreign-exchange costs increased amid Middle East-related disruption.

EBITDA declined 9 per cent year on year to Rs 2,827 million, broadly in line with Motilal Oswal's Rs 2,786 million estimate. EBITDA margin was 9.2 per cent, down 160 basis points year on year but improved from 6.2 per cent in 4QFY26. Employee expenses rose 9 per cent and other expenses increased 7 per cent year on year.

Interest expense more than doubled to Rs 230 million, versus the broker's Rs 150 million estimate. However, other income of Rs 506 million, against an estimate of Rs 150 million, helped adjusted PAT of Rs 1,664 million exceed the Rs 1,535 million estimate, despite a 9 per cent year-on-year decline.

Management estimated that the Middle East conflict created an approximately 300-basis-point margin headwind through packaging, logistics, foreign exchange and supply-chain costs. Recovery initiatives delivered more than Rs 500 million, offsetting roughly half of the inflationary impact through pricing, procurement and productivity actions.

• Pricing actions of 2.5-3.0 per cent have been implemented in 22 states.
• Management reduced its estimate of FY27 geopolitical cost impact to Rs 3,500-4,000 million from Rs 4,000-5,000 million previously.

FY27 Growth Outlook and Estimates

Management expects high-single-digit industry and United Breweries volume growth in FY27, translating into double-digit revenue growth for the company. Karnataka's alcohol-by-volume taxation reform is supporting category growth of 30-35 per cent, exceeding 50 per cent in recent months, while several states are evaluating similar reforms.

Motilal Oswal expects favourable regulations, improved beer affordability, stable demand and premiumisation to support growth. The broker broadly retained its FY27 and FY28 EPS estimates.

Key Risk

The key downside risk identified by Motilal Oswal is persistent cost inflation, which could delay margin recovery.