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Weekly Insight
1 June 2015
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Review and Equinomics’ Views on Economies and Markets
 For the third time since the expansion began in June 2009, the U.S. economy suffered a
setback. Gross domestic product shrank at a 0.7% annualized rate in the first quarter,
revised from a previously reported 0.2% gain. That’s the weakest reading since frigid
winter temperatures derailed growth at the start of 2014;
 China posted a wider $17.3 billion deficit on trade in services in April, led by a $15.6
billion gap in tourism as more Chinese travel overseas, China had a surplus of $31.1 billion
on trade in goods in April, giving a combined surplus on trade in goods and services of
$13.8 billion. For the first four months, China had a deficit of $58.5 in services trade and a
surplus of $148.9 billion on trade in goods, producing a combined surplus on trade in
goods and services of about $90.5 billion;
 A Chinese factory gauge rose last month, suggesting the government’s monetary easing and
relaxation of fiscal rules have helped cushion the economy. The official manufacturing
Purchasing Managers’ Index came in at 50.2 for May;
 Crude oil prices jumped almost 5% on Friday, their biggest rally in 1-1/2 months, as a
steady U.S. dollar and a bigger than expected drop in U.S. oil rigs in operation set off a
renewed rush of bullish bets. Brent crude settled at $65.56 a barrel, up $2.98, or 4.8%, on
the day. It was flat on the week, while for the month, it fell 2%;
Review of the Domestic Economy and Equity Markets
The domestic market finished the first day of the June series on a strong note led by a stellar
rally. The Sensex zoomed 322 points to end at 27,828 while the NSE Nifty surged 115 points to
close at 8,434. The broader markets closed in tandem with the benchmarks. BSE Midcap and
Smallcap indices gained over 1% each. On a weekly basis, the market did not make any
significant move. Sensex was down 0.5% while Nifty fell 0.3%. For the week ended 29th
May. 2015 the FIIs were net buyers of stocks worth Rs.98.96 crore while the DIIs were net
sellers of stock worth Rs.786.26 crore. However for the month of May 2015 the FIIs were net
sellers of stock worth Rs.5767.40 crore while the DIIs were net buyers of stock worth
Rs.2378.44 crore;
 India’s rupee completed its third monthly drop, the longest losing streak since 2013, after
global funds sold the nation’s assets amid speculation the Federal Reserve is moving closer
to raising interest rates. The rupee weakened 0.6% from April 30 to 63.82 a dollar. The
currency, which was little changed on Friday, has lost 1.2% in 2015;
 India’s 10-year bonds rose before a central bank policy review on June 2. The yield on the
notes due July 2024, the current 10-year benchmark, declined four basis points, this month
and on Friday to 7.82%, while the yield on the debt due May 2025, the new 10-year
security issued last week, fell one basis point to 7.64% on Friday;
 India’s economic growth accelerated to 7.5% in the three months through March from a
revised 6.6% in the previous quarter, government data showed on Friday. For the fiscal
year 2015 ending in March, growth came in at 7.3% compared with an earlier official
estimate of 7.4%. Growth was 6.9% in FY2014;
 According to the assurance, tax and advisory firm, Grant Thornton corporate India
announced merger and acquisition deals worth $1.19 billion through 58 transactions in
April, registering a decline of 83% in value terms over the year-ago period. In April 2014,
there were 48 transactions worth $6.8 billion;
Founder &
Managing Director
chokka.g@equinomics.in
 India Inc raised a record Rs.85,000 crore through private placement of corporate debt
securities or bonds in April to fund business expansion plans and to support working
capital requirements. This was the highest-ever fund-raising by Indian companies in a
single month since January 2007;
Equinomics Research & Advisory Private Limited - Investment Adviser
1 June 2015
Equinomics
Weekly Insight
|
Review of the Domestic Economy and Equity Markets (Continued)
 After rising for many weeks, India’s foreign exchange reserves have dipped steeply by $2.319 billion to $351.557
billion. In the previous reporting week, the forex reserves had surged by $1.745 billion to touch a record high of
$353.876 billion;
 The Union Minister for Heavy Industries on Friday informed that the proposed closure of the five sick units under
the department of heavy industries will be completed in the next two-three months. While the cost of closure of
these units is estimated to be around Rs.1,400 crore, the assets of these Central Public Sector Enterprises
(CPSEs) are estimated to be worth Rs.22,000 crore. The five sick CPSEs include HMT Watch, HMT Chinar
Watch, HMT Bearing, Tungabhadra Steel and Hindustan Cable, which have been non-functional since 2007;
Equinomics’ View: On global front the Greece issue continues to remain fragile. However, we continue to maintain
our view that it doesn’t have significant implications for the Indian economy or for the capital markets. Its share in
the global GDP is merely 0.2% and India doesn't rely on Greece for trade or inflow of capital in the form of FDIs or
inflows through FIIs. We need to continue to monitor the GDP growth in both US and China. Any severe slow down in
these economies could lead to strengthening of deflationary pressures in the global economy. The US GDP growth
came at 0.7% for the first quarter of 2005 after the revision. The US FED may not hike the benchmark interest rates
significantly till its growth improves above 2%;
On the domestic front monsoon performance remains as a key area of concern. We need to worry and cut down
equity exposure only if more than about 15% to 20% areas fail to receive adequate rainfall. Tomorrow the
RBI reviews its monetary policy. The existing fundamentals of industrial economy warrants significant (50 bps) rate
cut. If the RBI refuses to cut it down, the markets could remain this week. On the other hand, if the RBI cuts the
interest rate by 50 bps, the markets could get significant boost;
The macroeconomic indicators like government's thrust on investments, excise duty collections in April, growth in
air traffic, FDI inflows, forex reserve build up, etc remain firm. However, the goods exports continue to degrow and
quarterly corporate earnings remain the worst in the latest quarter. While India's export performance hangs on
global economic recovery, we believe that the RBI's flexible approach in terms of easing of monetary policy can help
recovery in the aggregate demand and thereby recovery in the industrial economy. We continue to remain hopeful of
proactive action from the RBI and continue to suggest our investors to adopt stock specific approach till some initial
indicators are available on monsoon performance;
Corporate Developments
 Reliance Communications (RCOM) has reported quite impressive result: - the company has reported 46.2%
rise in its net profit to Rs.228 crore for the quarter ended March 31, 2015 as compared to Rs.156 crore in the
same period last year on account of 26.2% yoy growth in its total data customer base, which grew to 33.7 million.
Net sales for the quarter grew 6% to Rs.5,683 crore as compared to Rs.5,371 crore in the same quarter last year,
while its operating profit stood at Rs.972 crore as compared to operating loss of Rs.181 crore in the same period
last year. In the quarter ended March, RCom's ARPU came in at Rs147, compared with Rs 142 in the third
quarter and up nearly 15% yoy. RCOM has reduced its consolidated debt substantially to about Rs.31,943 crore
as on March 31, 2015 from Rs.36,822 crore in FY2014. It is expected to reduce the debt further down
substantially by monetizing its noncore assets going forward;
 Moil Ltd has reported a 45% yoy drop in its net profit to Rs.102.46 crore for the quarter ended March 31, 2015
compared to Rs.149.35 crore mainly due to fall in sales. Net sales for the quarter stood at Rs.161.36 crore, down
by 44.7% compared to Rs.292.01 crore in the same period last year. The company has said that the reduction in
turnover and, consequently, profits is mainly due to oversupply of manganese ore from international market,
leading to lower off take and pressure on selling prices. The net cash as of 31st March 2015 with the company
stands at Rs.2830 crore which is ~69% of its current market cap;
 BAL PHARMA has reported a 121.8% yoy drop in its net profit to Rs.55 lakh for the quarter ended March 31,
2015 compared to Rs.1.35 crore mainly due to substantial rise in Depreciation and Other Expenses. Net sales for
the quarter grew by 7.1% yoy to Rs.49.93 crore asEquiNomics
compared to
Rs.46.62
crore in Private
the same
last year;
Research
& Advisory
Ltdperiod
| For private
circulation only
Equinomics Research & Advisory Private Limited - Investment Adviser
1 June 2015
Equinomics
Morning
Insight
| EquiNomics Research & Advisory Private Ltd
Weekly
Insight
We reiterate our ‘BUY’ recommendation on United Breweries Ltd
Report of some governance issue in United Spirits (USL) led to weakness in United Breweries (UBL) also. Before its
own results, it fell ~6.3%. Still we reiterate our ‘BUY’ on UBL for the following reasons:

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In USL the management got changed, after global player took over. After taking over they found out the
issues. Whereas in UBL Heineken was already there on the management. So any possible shock on similar
story is remote;
UBL is expanding its manufacturing capacity on a large scale: The Company has informed that its Greenfield
project in Bihar was completed in the last quarter of FY2015 and commercial production has commenced at
the end of March, also the commercial production at the acquired brewery, Pacific Spirits in Rajasthan
is likely to commence by end of August 2015;
As UBL is engaged in the business of Alcoholic Breweries any bad news on the weak monsoon forecast and
industrial economy which is yet to show signs of turnaround is not likely to impact UBL as this business is
largely recession and inflation proof;
The public stake–after deducting the shares held by the promoters, FIIs and DIIs– is mere 5.36%. Shares with
such small floating stock play out in a big way whenever any positive story plays out;
Heineken & United group have been co-promoters of United Breweries limited since 2008 when the two
signed an agreement to jointly sell imported beer in India. Both the promoters had almost same stake holding
in the company which stood at 37.57% by Heineken and 37.35% by UB Group respectively. Later, Heineken
bought an additional 1.35% stake in UB through open market purchases, taking its shareholding to over
38.7% and recently Heineken acquired more through acquiring shares of UBL which were pledged. Now the
global player, Heineken has 38.85% stake in the company while UB Group has only 35.97% stake. Still
more than 50% of Indian promoter’s stake in UBL is pledged. So there is a logical possibility that Heineken
would further increase stake as UB group is still under financial constraints;
United Breweries has reported a 7.3% yoy growth in its net sales to Rs.1045.23 crore for the quarter ended March
2015 as compared to Rs.973.9 crore in the same quarter previous year. Operating profit for the period came down by
33.7% to Rs.68.94 crore from Rs.104.10 crore mainly on account of rise in raw material costs and sales promotion
expenses leading to a 29% yoy drop in net profit to Rs.48.13 crore as compared to Rs.67.71 crore in the same
quarter previous year. However, sequentially it has reported 20% growth in net profit in Q4FY2015 to Rs.48
crore as compared to Rs.40 crore in Q3FY2015.
Pan-India presence with strong brand recall in a nascent market
UBL, with 18 owned and 10 contract manufacturing facilities, has a pan India presence. Also, the company has a
strong distribution network, which enables it to capture the major market in India. UBL with its 14 major brands
enjoys strong patronage and commands a market share in excess of 50%. As Kingfisher is synonymous with beer in
the country, the fabric of India beer market favors UBL greatly. India with per capita consumption of 1.9 liters per
annum is one of the lowest and potentially the largest beer market in the world. The Indian beer market grew at a
CAGR of 8% over FY10-14 driven by favorable demographics, greater social acceptance and higher disposable
income. Driven by aforementioned factors per capita consumption of beer is expected to grow from ~2 liters per
annum to 5 liters over the next decade;
Resilience to competition, presence across segments bode well
UBL’s ability to maintain superior market share amid growing influence of players such as SABMiller and Carlsberg
account for the strong brand affinity it enjoys in the Indian beer market. UBL continues to enjoy market share in
excess 50% (51% in Q3FY15) with the immediate competitor’s market share nearly half of that of UBL acts as
testimony to the popularity and brand affiliation customers attach to UBL and Kingfisher, in particular.
Outlook and Valuation
As the Asia-Pacific region and, more specifically, India remains one of the fastest growing beer markets in the world,
we expect UBL to be well placed and be the prime beneficiary to capture the opportunity. At the current market price
of Rs.953 the stock trades at 61.4x its FY2016E EPS of Rs.15.5 and at 48.3x its FY2017E EPS of Rs.19.7. We initiate a
‘BUY’ recommendation on the stock with a target price of Rs.1,200/, assuming 4.5x target multiple for
Enterprise Value to Net Sales (around Rs.7,000 crore in FY2017E).
Disclosure: I, G.Chokkalingam, personally do not hold the shares of United Breweries directly or indirectly through
any friends, relatives or proxies;
Equinomics Research & Advisory Private Limited - Investment Adviser
Equinomics
Weekly Insight
Equinomics’ View on the Stock Risk and Suggested Investment Horizon
Stock Risk Profile
Low
Moderate
Investment Horizon
1 Year
1-2 years
High
√
2-3 years
Very High
3 years & Above
√
Disclosure: I, G.Chokkalingam, do not hold the stock directly or indirectly through any friends, relatives or any
proxies. I declare that I haven’t obtained any monetary benefit from the company, which is recommended here.
200
United Breweries
Sensex (Both on scale of 100)
180
160
140
120
100
80
May-15
Apr-15
Feb-15
Mar-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Aug-13
May-13
Jun-13
Source: Equinomics, BSE
60
Stock Disclosure: Whether Stock Held By:
United Breweries Ltd.
G.Chokkalingam & Family
Equinomics
NO
NO
Equinomics Research & Advisory Private Ltd
Investment Adviser
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G. Chokkalingam - Founder & Managing Director
Head Office – Mumbai
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