United Breweries Ltd (BOM:532478) (Q1 2027) Earnings Call Highlights: Premium Margins Turn ...

Negative Points

• Gross margin declined 155 bps YoY to 41%, impacted by a 300 bps cost shock from the Middle East conflict, with near-term inflationary pressure expected to remain elevated.

• Sell-in volumes grew only 9% versus sell-out growth of 13%, due to deliberate inventory reduction, which may temporarily dampen reported revenue growth.

• Contract brewing volume growth (ahead of overall) had a ~4% dampening effect on reported revenue growth, and this mix impact is expected to persist.

• The company made tough choices to reduce trade spend in states like Haryana, leading to significant volume drops in those markets, reflecting a trade-off between profitability and market share.

• The business remains highly seasonal, with dependence on summer weather and policy reforms; without reforms, category growth could revert to historical ~6% CAGR.

• The Middle East conflict continues to create volatility in packaging, logistics, and FX, with no clear end in sight, posing ongoing margin risks.

• Premium portfolio is still only ~10-11% of revenue, limiting its ability to offset input cost inflation in the near term.

• The company faced operational disruptions from the Punjab brewery closure and transition, which involved short-term hits to profitability and supply.

• In states like West Bengal, reliance on imports from other states at inflated costs led to volume impacts, highlighting supply chain inefficiencies.

• Management refrained from committing to a definitive margin bottom, indicating uncertainty about future cost pressures and pricing recovery.

Q & A Highlights

Q: What is the company's outlook for volume growth and margins for the rest of FY27, given the cost shocks from the Middle East conflict and the recent pricing interventions? A: Vivek Gupta (CEO & MD) stated that the company expects to see double-digit volume growth in the coming quarters, driven by category momentum and policy reforms, barring any major roadblocks. Jorn Kersten (CFO) added that while they won't commit to a specific quarter being the bottom for gross margins, the company's long-term goal remains to expand margins. They revised the estimated full-year impact of the Middle East conflict downward to INR350-400 crore, from the earlier INR400-500 crore range, citing the success of their recovery program.

Q: Can you provide more color on the premium portfolio's performance and the milestone of it becoming accretive? What is its current share of the business? A: Jorn Kersten (CFO) confirmed that premium margins became accretive for the first time in Q1 FY27, a structural milestone achieved ahead of schedule, driven by localization, network optimization, and deliberate revenue management. Vivek Gupta (CEO & MD) added that premium is currently 10-11% of revenue, with an aspiration to reach 20%. Premium volumes grew 17% (excluding intentional interventions), led by Kingfisher Ultra and Heineken Silver, which grew 28%.

Q: What is the impact of the contract brewing (CBU) model on reported revenue and price/mix, and is there a plan to shift to owned breweries in high-growth states? A: Jorn Kersten (CFO) explained that the CBU model had a dampening effect of approximately 4% on reported revenue growth in the quarter, as it is reported as a single line item. The underlying price/mix was actually positive at 4%. Vivek Gupta (CEO & MD) stated that the company uses a hybrid network model, balancing owned and contract breweries based on capital intensity and return on investment. They are investing in own capacity, such as a greenfield brewery in UP and new can lines in Telangana and Maharashtra, but will continue to use contract partners where it makes strategic sense.

Q: How is the company responding to increased competitive aggression, particularly regarding trade spend, and what is the impact on market share? A: Vivek Gupta (CEO & MD) stated that the company is focused on building brand power and pull rather than engaging in unprofitable trade discount wars. They have made deliberate choices to reduce trade spend in states where the business is not viable, such as Haryana, which led to a significant drop in volumes there. However, they are investing in value-creation initiatives for retailers, such as placing 50,000 coolers and improving go-to-market execution, and have seen brand power improve for Kingfisher, Ultra, and Heineken.

Q: Can you elaborate on the strategic network optimization decisions made during the quarter, such as the closure of the Punjab brewery? A: Vivek Gupta (CEO & MD) confirmed that the company closed its Punjab brewery and transitioned to a partnership with ABB, a decision made to ensure long-term business health despite short-term hits. He also highlighted the commissioning of a new can line in Telangana, which was completed in record time, and the completion of premium localization projects in other states. These moves are part of a broader effort to optimize the network for profitability and efficiency.

Q: What is the extent of the price increases implemented across the 22 states, and how will this impact the price/mix going forward? A: Jorn Kersten (CFO) stated that the weighted average price increase is between 2.5% and 3%, which is being accelerated through other initiatives like price laddering and trade spend optimization. Vivek Gupta (CEO & MD) added that the pricing implementation is now live in all 22 states as of the end of July, which will help mitigate the impact of cost inflation.

Q: What is the company's strategy to address the drop in beer consumption outside of large cities, and what success is being seen in Tier 2 and Tier 3 towns? A: Vivek Gupta (CEO & MD) stated that the company is making a disproportionate allocation of visi-coolers to smaller cities and has seen improved activation and higher market share in Tier 2 and Tier 3 towns. They are also partnering with BCCI to activate Fan Parks in these areas to bring the IPL experience to consumers. However, he noted that the number of retail stores remains a limiting factor, and they are using this data to advocate for more stores in these regions.

Q: Can you provide insights into the cost efficiency programs and their timelines? A: Jorn Kersten (CFO) explained that cost efficiency is a continuous effort, not a one-time program. Key initiatives include procurement strategies like forward buying to lock in prices, recipe flexibility to optimize supply chain utilization, and strict budget controls to foster a cost-conscious culture. These efforts are foundational to navigating current headwinds and building a strong business for the future.

Q: What is the company's view on the impact of Maharashtra-Made Liquor (MML) on beer consumption, and is there any substitution happening? A: Vivek Gupta (CEO & MD) stated that it is difficult to see direct data on MML's impact on beer, but they have not seen much impact so far. However, they are seeing strong growth in the economy segment in Maharashtra, which is more linked to affordability. He noted that affordability is becoming critical for consumers, and the company is monitoring the situation.

Q: Can you elaborate on the innovation pipeline and efforts to retain consumers who start with beer but may switch to other categories? A: Vivek Gupta (CEO & MD) highlighted several initiatives, including the launch of Kingfisher Strong, Smooth, which is gaining share every month due to the consumer trend towards smoother beers. Heineken Silver is also growing at 28% and is being expanded to new states like Kerala and Haryana. The company is also looking at draft beer to increase consumption occasions and has a strong innovation pipeline to address share of occasion, though he did not provide specific details.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .