India's United Breweries: Attractive From All Angles

by: Jonathon Mierer

It seems to me that one should be looking in the current carnage in India for stocks that Warren Buffet would call 'inevitables'-- ie companies that have many drivers to the positive. One that I have come across on another website and consequently done some digging on is United Breweries Holdings (BOM: 507458).

This is a holding holding with a variety of listed and private assets - the main ones being a 9% stake in United Breweries (ie a subsidiary company), holdings in McDowell (36-42%), Shaw (75% plus), Herbertson (90% plus),Triumph (owned), Aventis India (10%), Bayer Cropsciences India (2.5%), GMR Industries (0.6%), UBE (30%).

What appeals to me about UB Holdings is that it is trading at a discount to the assets above. The issue is how much. Dependent on how the private assets are valued potentially UB holdings has 50% upside from here (and potentially more).

The majority of the assets are listed so market prices can be derived. Roughly UB is trading at a 10% discount to the LISTED assets. (Note that Herbertson and Triumph effectively are private so I have used the last listed prices which for Herbertson were a couple of years old ie I am being conservative - ie value Herbertson plus Triumph at Rs 1.5bn combined).

The company also owns two private assets - UB City (a real estate development in Bangalore) and Kingfisher Airline (95 - 100%).

The key swing factors are that Kingfisher is roughly the same size as SpiceJet which is a listed competitor. Yet Kingfisher Airlines has a higher market share and more valuable routes. So valuing it at the same value as SpiceJet appears reasonable ie Rs8-9 Bn - but then that is equivalent to 1/2 the market cap of the entire UB group. UB City is a real estate development which the company expects to have a 200m rental income from starting next year so it is probably fair to value this at Rs2Bn ie another 10% of the market cap.

So it is very easy to get a sum of the parts of this Rs18bn market cap company of over Rs28-30bn.

Then the fun really starts:

1. United Breweries has a 40% market share in the Indian beer market (about 30% is Kingfisher Beer).

2. McDowell, Shaw, Herbertson and Triumph combined have a market share of 55% in the Indian spirits market. They are going to merge to create the third biggest spirits group worldwide.

3. The above numbers are for the legal market. 2/3 of the Indian drinks market is illegal moonshine that the government is trying to close down due to not paying taxes and poisoning people.

4. 50% of the Indian population is under 25 and attitudes to alchol in the young are different from their parents. In the adult population alcohol consumption is very low. (High % of teetotallers).

5. There are very few legal distribution points in the country but with changing attitudes this is changing.

6. To me the changing demographics, the squeeze on the illegal market, the changing attitudes and the increasing distribution make increased alcohol consumption an inevitable.

Similarly on the airline side:

1. Kingfisher Airline has gained 7-10% share in the top three routes in the country.

2. It will probably float this year or early next

There is very little research on this group but one note prior to the crash suggests that McDowell (and therefore United Spirits) was trading on about 15x 2007 earnings. Which, given its market position, appears attractive - even more so when considering that consumer discretionary companies in India typically trade at 20x plus.

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