Corporate Valuation and Restructuring

United Breweries

Submitted to:
Prof. Ajay K. Garg

Submitted by:
Section A Group 6

PGP38149 Shivam Rawat

PGP38235 Kshitij Gore

PGP38272 Aayush Saxena

PGP38305 Rahul

ABM19036 Shrayash Singh

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Contents
Industry Analysis ..................................................................................................................................... 3
Porter’s 5 forces analysis..................................................................................................................... 3
PESTEL Analysis ................................................................................................................................... 4
Significant Accounting Policies for the year ended March 31, 2010 ....................................................... 5
Basis of presentation of financial statements: .................................................................................... 5
Revenue Recognition: ..................................................................................................................... 5
Inventories ...................................................................................................................................... 5
Interest and Dividend Income: ........................................................................................................ 6
Contract Balances ........................................................................................................................... 6
Tax ................................................................................................................................................... 6
Borrowing Costs .............................................................................................................................. 6
Earnings per share........................................................................................................................... 7
Impairment of Assets ...................................................................................................................... 7
Provisions, Contingent Liabilities and Contingent Assets ............................................................... 7
Employee Retirement benefits ....................................................................................................... 7
Intangible Assets ............................................................................................................................. 8
Government grants ......................................................................................................................... 8
Non-current assets held for sale ..................................................................................................... 8
Property, plant and equipment: ...................................................................................................... 9
Discounted Cash Flow Valuation (‘DCF’) ............................................................................................... 10
Discount Rate - WACC ....................................................................................................................... 10
Computation of Cost of Equity (ke) ................................................................................................... 11
Computation of WACC ...................................................................................................................... 11
Valuation using FCF ........................................................................................................................... 12
Relative valuation .................................................................................................................................. 12
Recommendation .................................................................................................................................. 13
References............................................................................................................................................. 14

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Industry Analysis

Below analyses were done for the Indian beer industry back as per the environment in 2020:

Porter’s 5 forces analysis

Low The threat of new entrants

•High initial investment
•Economies of scale

Low Bargainig Power of Supliers

•Availability of suppliers
•rise of craft brewries
•Bulk buyers

Moderate Bargaining Power of Buyers

•brand loyalty
•considered as luxury item
•growth of craft beer

Moderate Threat of Substitutes

•Option of alcoholic and non-alcoholic beverages
•Changes in consumer preference
•Health consciousness

High Competitive Rivalry

•Aggressive Marketing
•Price Competition
•Fragmented market

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PESTEL Analysis
Political Factors
Government Regulations: India's central and state governments both impose
a variety of rules and taxes on the country's beer industry. Production,
distribution, and pricing are impacted by these regulations.
Alcohol Policies: In India, each state has its own alcohol laws, which causes
variations in beer availability and sales. Alcoholic beverage marketing and sales
are restricted in some states by stricter laws.

Economic Factors
GDP Growth: The demand for beer among consumers are impacted by India's
overall economic growth. Increased disposable income and consumer
spending on non-essential items like beer are typically correlated with higher
GDP growth.
Exchange Rates: The profitability and competitiveness of foreign breweries
doing business in India are impacted by exchange rate fluctuations.

Sociocultural Factors
Population Demographics: The large and young population of India offers the
beer industry a sizable market opportunity because younger consumers might
be more willing to try new drinks.
Lifestyle and Urbanization: Urban consumers now consume more beer as a
result of urbanisation and the adoption of Western lifestyles in urban areas.

Technological Factors
Brewing Technologies: Innovation, quality, and production efficiency can all be
impacted by improvements in brewing technology.
Distribution and E-Commerce: Technological developments in distribution and
e-commerce have opened new avenues for beer sales and marketing.

Environmental Factors
Environmental Regulations: Environmental rules governing emissions, waste
management, and sustainability measures may be applied to the sector.
Water Resources: As water is a key ingredient in brewing, therefore water
availability and sustainability are crucial concerns.

Legal Factors
Licensing and Permits: In India, obtaining the necessary licences and permits
to produce, distribute, and sell alcoholic beverages can be difficult and time-
consuming.
Advertisement and Mrketing Regulations: The beer industry is subject to
stringent rules governing marketing and advertising, particularly when it
comes to the promotion of alcoholic beverages.

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Significant Accounting Policies for the year ended March 31, 2010

Upon undertaking competitive analysis, we found that the accounting policies are compliant
with government regulations and in line with industry standards.

Basis of presentation of financial statements:

The Financial Statements of the company have been prepared in accordance with Indian
Accounting Standards (Ind AS) notified under Section 133 of the Companies Act, 2013 read
with the Companies (Indian Accounting Standards) Rules, 2015. The financial statements have
been prepared on a historical cost basis, except for assets and liabilities which are required to
be measured at fair value. The financial statements are presented in Indian Rupees and all
values are rounded to the nearest lakhs, except when otherwise indicated.

Revenue Recognition:
a. Sale of Product: Revenue from the sale of the product is recognised at the point of
time when control of the products is transferred to the customer and there is no
unfulfilled obligation that could affect the customer’s acceptance of the products.
Revenue from the sale of products is measured at the amount of transaction price, net
of returns and allowances, discounts, and incentives.
b. Sale of Service: Royalty income is recognized on accrual basis, at a agreed rate on sale
of branded products by license in accordance with the term of agreement. The
company recognizes revenue from sales-based royalty promised in exchange for a
license of intellectual property only when (or as) the sale occurs and the performance
obligation for the sales has been satisfied.
c. Contract Manufacturing: The Company is regarded as a principal if it controls
promised good or service before it transfers the good or service to customer in this
case, the Company recognizes revenue at the gross amount of consideration to which
it expects to be entitled in exchange for those goods or services transferred.
The Company is regarded as an agent if its performance obligation is to arrange for the
provision of goods or services by CMU. In this case, the company recognizes revenue at the
net amount of consideration the Company is eligible under the contract and is included under
“Other operating income”.

Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on a
weighted average basis.
Implications: In this industry, the product value increases over its life as such using other
methods of inventory valuation (FIFO and LIFO) would lead either to overvaluation or
undervaluation of inventory. Thus, the weighted average method of inventory valuation is
utilized to account for this issue.

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Interest and Dividend Income:
Interest income is recognized using the effective interest rate method and is
included under “Other Income” in the Statement of profit and loss.
Dividend income is recognized when the company’s right to receive the payment is
established, which is generally when the shareholders approve the dividend.
Implications: Interest income is recognized using effective interest rate in accordance to the
tax law of the country. Dividend income is also recognized post tax.

Contract Balances
a. Contract Assets: A contract asset is the right to consideration in exchange for goods or
services transferred to the customer. If the Company performs by transferring goods
or services to a customer before the customer pays consideration or before payment
is due, a contract asset is recognized for the earned consideration that is conditional.
b. Trade Receivables: A trade receivable is recognized if an amount of consideration is
unconditional.
c. Contract liabilities: A contract liability is recognised if a payment is received, or a
payment is due from the customer before the company transfers related goods or
services. Contract liabilities are recognised as revenue when the Company performs
under the contract.

Implications: Contract assets/liabilities are part of the working capital and any company’s
policy to increase/ decrease their contract assets/liability will affect the valuation of the firm.

Tax
Current income tax assets and liabilities are measured at the amount expected to be
recovered from or paid to the taxation authorities.
Deferred Tax: Deferred tax assets are recognized to the extent it is probable that taxable profit
will be available against which the deductible temporary differences, and the carry forward of
unused tax credits and unused tax losses can be utilized. Unrecognized deferred tax assets are
re-assessed at each reporting date and are recognized to the extent it has become probable
that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets
and liabilities are measured at the tax rates that are expected to apply in the year when the
asset is realized, or the liability is settled.

Borrowing Costs
Borrowing costs incurred for the acquisition of qualifying assets are recognized as part of cost
of such assets when it is considered probable that they will result in future economic benefits
to the Company while other borrowing costs are expensed in the period in which they are
incurred.

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Implications: In case borrowing cost is incurred, the company receives a tax benefit
proportional to the interest expense.

Earnings per share

Annualized earnings/ (Loss) per equity share (basic and diluted) is arrived at based on ratio of
profit/ (loss) attributable to equity shareholders to the weighted average number of equity
shares.

Impairment of Assets
At each Balance Sheet date, the Company assesses whether there is any indication that assets
may be impaired. If any such indication exists, the Company estimates the recoverable
amount. If the carrying amount of the asset exceeds its recoverable amount, an impairment
loss is recognized in the accounts to the extent the carrying amount exceeds the recoverable
amount.
Implications: In case an asset is found to be impaired, this would add to one-time loss for
the company and provide tax relief for the year. However, this would not affect the valuation
of the firm.

Provisions, Contingent Liabilities and Contingent Assets

Provisions are recognized when the company has a present obligation as a result of past
events, for which it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation and a reliable estimate of the amount can be made.
Provisions are reviewed regularly and are adjusted where necessary to reflect the current best
estimates of the obligation. When the company expects a provision to be reimbursed, the
reimbursement is recognized as a separate asset, only when such reimbursement is virtually
certain.
A disclosure for contingent liability is made where there is a possible obligation or present
obligation that may probably not require an outflow of resources.

Employee Retirement benefits

a) Defined-contribution plans: Contributions to the Employees’ Provident Fund,
Superannuation Fund, Employees’ State Insurance and Employees’ Pension Scheme are as
per statute and are recognized as expenses during the period in which the employees
perform the services.
b) Defined-benefit plans: Liability towards gratuity is determined on actuarial valuation using
the Projected Unit Credit Method at the balance sheet date. Actuarial Gains and Losses are
recognized immediately in the Profit and Loss Account.
c) Other long-term employee benefits: Liability towards leave encashment and compensated
absences are recognized at the present value based on actuarial valuation at each balance
sheet date.

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 d) Short term employee benefits: Undiscounted amount of liability towards earned leave,
compensated absences, performance incentives etc. are recognized during the period when
the employee renders the services.

Implications: These benefits acts as a liability for the company as the amount required to be
paid to these employees cannot be used for other purposes.

Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost.
The cost of intangible assets acquired in a business combination is their fair value at the date
of acquisition. Following initial recognition intangible assets are carried at cost less any
accumulated amortization and accumulated impairment losses. Intangible assets are
amortized over the useful economic life and assessed for impairment, whenever there is an
indication that the intangible asset may be impaired. An intangible asset is derecognized
upon disposal.
Implications: In case an asset is found to be impaired, this would add to one-time loss for
the company and provide tax relief for the year. However, this would not affect the valuation
of the firm.

Government grants
Are recognised where there is reasonable assurance that the grant will be received, and all
attached conditions will be complied with
a. Grants related to expense: When the grant relates to an expense item, it is
recognised as income on a systematic basis over the periods that the related costs,
for which it is intended to compensate, are expensed.
b. Grants related to asset: When the grant relates to an asset, it is recognised as
income in equal amounts over the expected useful life of the related asset.
Implications: When grants are asset-related, income is recognized equally over the asset's
useful life, impacting depreciation and asset valuation. This approach enhances financial
statement comparability across periods. Grant recognition affects reported profitability and
audit considerations
Non-current assets held for sale
a. Understanding of non-current assets: The Company classifies non-current assets as
held for sale if their carrying amounts will be recovered principally through a sale
rather than through continuing use.
b. Criteria for held for sales: The criteria for held for sale classification is regarded as
met only when the sale is highly probable, and the asset is available for immediate
sale in its present condition. Property, plant and equipment and intangibles are not
depreciated or amortized once classified as held for sale.
c. Measurement of value of non-current assets: Measured at the lower of their
carrying amount and fair value less costs to sell. Costs to sell are the incremental
costs directly attributable to the disposal of an asset, excluding finance costs and
income tax expense.

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Implications: When a non-current asset is classified as "held for sale," its valuation changes
based on the lower of carrying amount and fair value less costs to sell.
Depreciation or amortization stops once an asset is held for sale. This accounting treatment
aligns with the conservatism principle, preventing overstatement. Fair value measurement
introduces market-based valuation, affecting financial statements and ratios.

Property, plant and equipment:

a. Recognition of PPE: Stated as cost, net of accumulated depreciation and
accumulated impairment losses, if any. Capital work-in-progress is stated at
cost. Such a cost includes the cost of replacing part of the plant and
equipment and borrowing costs for long-term construction projects, if the
recognition criteria is met.
b. Recognition of replacement parts: When significant parts of plant and
equipment are required to be replaced at intervals, the Company depreciates
them separately based on their specific useful lives.
c. Recognition of major inspection cost: Cost is recognised in the carrying
amount of the plant and equipment as a replacement if the recognition criteria
is satisfied.
d. Depreciation of PPE: Depreciation is calculated on a straight-line basis over the
useful lives of the assets, estimated by the management, as follows:

Asset Category Useful Life (Years)

Factory Buildings 30
Other Buildings (RCC) 60
Other Buildings (Non-RCC) 30
Roads (RCC) 10

Roads (Non-RCC), Fences, etc 5

Plant and Equipment 15

Electrical Installations 10
Office Equipment 5
Computers 3
Servers and Networks 6
Furniture and Fixtures 10
Laboratory Equipment 10
Vehicles 8 and 10

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Assets acquired on amalgamation, etc. (where original dates of acquisition are not readily
available), are depreciated over the remaining useful life of the assets, as certified by an
expert. Beer dispensers and coolers and Kegs are depreciated on a straight-line basis over a
period of 3 years being useful life

e. Residual value for depreciation: Residual value is determined as 5% of the

original cost for all the assets, as estimated by the management. The residual
values, useful lives and methods of depreciation of property, plant and
equipment are reviewed at each financial year end.
f. Derecognition of asset: An item of property, plant and equipment and any
significant part initially recognised is derecognised upon disposal or when no
future economic benefits are expected from its use or disposal. Any gain or
loss arising on de-recognition of the asset is included in the Statement of
Profit and Loss when the asset is derecognised.

Implications: Properly identifying depreciation and amortization is necessary as

overstatement or understatement would lead to incorrect valuation of the firm

Discounted Cash Flow Valuation (‘DCF’)

The DCF method helps determine the value of an asset (in this case, the shares of United
Breweries Ltd) on the basis of its future cash flows. The cash flows of the foreseeable future
are projected using estimates and discounted at the Company’s WACC to arrive at its present
value.

Cash flows projected are projected for a definite period of 5 years, the cash flow based
valuation will not incorporate cash flows generated beyond the projection period and hence
a terminal value is calculated to consider the value beyond the 5 year period. We have
presumed that this terminal value reflects a stable, perpetual rate of growth.
We have followed the below steps in estimating value under DCF:
1. Reformulation of Financial Statements
2. Computing discount rate (WACC)
3. Projecting future cash flows
4. Estimate present value by discounting future cash flows at WACC

Discount Rate - WACC

A critical part of the Discounted Cash Flow (DCF) approach for valuation of any firm is the
rate used to discount the forecasted/expected cash flows to the present value using a rate
which appropriately reflects the risk of investments / a business.
The free cash flows to the firm have been discounted using its Weighed Average Cost of
Capital (WACC), arrived at using the below approach –

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WACC = we*ke + (1-t)*wd*kd

Computation of Cost of Equity (ke)

Cost of equity has been estimated through the Capital Asset Pricing Model (CAPM), wherein
the cost of equity is estimated as the sum of Risk-free rate (Rf) (on 10 year
Government/Treasury Bond), and product of the company’s Beta (computed through
regression of returns against market returns (BSE 500) for a 5 year time frame) and equity
market risk premium.

Ke = Rf + B*(Rm-Rf)
Ke = Cost of Equity,
Rf = Risk-free rate of return – India’s 10 year bond yield rate (Government of India treasury
bond). In the absence of data from Bloomberg, the rates have been considered from
investing.com.

Risk free rate 7.19%

Market risk premium 8.33%
Levered beta 0.45
Cost of equity 10.94%

Computation of WACC
Considering the values of Cost of Debt and Equity arrived above, the WACC is arrived using the
Market Value weight of equity and debt in company’s capital structure respectively. Basis the
secretarial audit report, there has been no evidence/event indicating a change/possible change to
the company’s capital structure. As a result, the current capital structure as on valuation date has
been considered for the purpose of computation of WACC and correspondingly valuation as well.

Risk free rate 7.19%

Market risk premium 8.33%
Levered beta 0.45
Cost of equity 10.94%
Credit rating (for long-term capital structure) AA-
Credit spread over risk free rate 2.00%
Cost of debt pre-tax 9.19%
Marginal tax rate 28.59%
Share price (as on 31 mar 2023) 1424.45
Diluted number of shares (lakhs) 2,644
Total debt 231089
Total capital 628039
% equity capital 61.94%
% debt capital 38.06%
Weighted average cost of capital 9.27%

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Valuation using FCF

Free cash flows Hist. Proj. Proj. Proj. Proj. Proj.

March'23 March'24 March'25 March'26 March'27 March'28
Sales 16,70,052 19,70,661 22,46,554 25,16,140 27,17,432 28,80,478
EBIT 45,043 55,179 61,780 67,936 73,371 77,773
NOPAT 32,886 39,405 44,119 48,515 52,396 55,540
Depreciation 20,644 20,108 19,925 20,045 20,430 20,978
Amortization 415 415 415 415 415 415
(Inc) dec in OWC 74,029 37,186 31,709 30,985 23,135 18,740
Capex 15,628 18,441 21,023 23,546 25,429 26,955

(inc) dec in other long term

assets 9,414 1,758 5,070 4,954 3,699 2,996

inc (dec) in other long term

liabilities 21,824 15,320 13,510 13,201 9,857 7,984
Free cash flows 1,23,926 91,404 82,755 83,831 76,274 72,875

PV of Cashflows = 331867.825

Present value of terminal value = 1689785.276

Enterprise Value = 2021653.101

Value per share = Rs. 664.57

Relative valuation

Under the Relative Valuation Approach, multiples are computed using metrics of publicly traded
comparable companies. These multiples are then applied to the respective metrics of the Company
under consideration to arrive at the relevant value.

We have presented the EV/EBITDA, Price/Earnings (P/E), & EV/Sales (EV/S) Multiples for valuation
purposes.

We have taken the mean / median values of the respective purposes.

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 Net
Companies Equity Debt Cash EV Sales EBITDA Income
United Breweries 376678 156.2 3952.9 372881.3 74999.2 6129.5 3046.8
United Spirits 537014.9 1833 11390 527457.9 106116 14170 12597.8
Radico Khaitan 59687 7536.4 1312.9 65910.5 27439.1 3583.5 2203.5
Tilaknagar 20887.8 2531.2 662.4 22756.6 24692.8 1371.8 2043.2
Globus Spirits 22368.2 2907.2 351.5 24923.9 21090.6 2455.8 1261.7
Sula Vineyards 30893.1 2026.4 337.6 32581.9 5077.1 1574.6 840.3
Som Distillieries 24742.7 2421.9 126.4 27038.2 14980.5 1021 603
274395.3 30306.2 22596.3

EV/Sales EV/EBITDA P/E

4.971803699 60.83388531 123.6306945
4.970578424 37.22356387 42.62767309
2.402064937 18.39277243 27.08736102
0.921588479 16.58886135 10.22308144
1.181753957 10.14899422 17.72862012
6.417423332 20.69217579 36.76436987
1.804893028 26.4820764 41.03266998
Average 3.912422334 35.42345461 47.45341937
Median 2.402064937 20.69217579 36.76436987

EV/Sales EV/EBITDA P/E

293428.5451 217128.065 144581.0781
156.2 156.2 156.2
293272.3451 216971.865 144424.8781
264.4 264.4 264.4
Value per share 1109.19949 820.6197618 546.2363015

Recommendation
The stock is currently overvalued, and we recommend to sell the stock.

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References

• https://openathens.net/
• https://www.moneycontrol.com/competition/unitedbreweries/comparison/UB02
• https://www.researchgate.net/publication/308960555_Study_on_Market_Analysis_of_Indi
an_Beer_Industry
• https://www.livemint.com/
• https://www.unitedbreweries.com/Pdf/InvestorReport/Annual-Report-2022-2023.pdf
• https://www.bloomberg.com/
• https://www.nseindia.com/
• https://www.radicokhaitan.com/investor_relations/annual-report-rkl-2022/
• https://tilind.com/investors-filings-reports/
• https://www.globusspirits.com/investors_agm.php

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