United Breweries, a company that sells Kingfisher beer, did well on the sales front but operating margins dipped in the June 2009 quarter. The company’s sales during the quarter grew by 17.2% to Rs 556 crore. The company, which sold Rs 1,700 crore worth of the liquid in 2008-09, said that it sold 12% more beer during the quarter over the corresponding previous period, twice the industry average. Strong beer sales grew by 25%.
But rising costs took away much of the gains, as operating expenses rose by 18.2%, and as a result operating profit rose by just 11.2%. Operating margin growth reveals how the core business is performing. The key reason for higher costs are a 26% jump in packaging costs, 33% jump in advertising costs and 22% jump in selling and distribution costs. Thus, though it hiked prices during the period, its operating profit margin declined by 70 basis points to 12.8%. Rising commodity costs have hit it hard, as price hikes could not cover all of it.
The company seems to have spent significant sums on promoting its existing products, particularly its strong beer brand, Kingfisher Strong. It has introduced Kingfisher Blue in some markets and will rolling the product out nationally. Perhaps, some of the benefits of this marketing push will get reflected in better margins during the forthcoming quarters.
But the decline in margins did not affect its profit growth, mainly due to deployment of surplus funds. UB had raised Rs 425 crore through a rights issue of which Rs 250 crore is deployed in mutual funds. Its other income therefore tripled to around Rs 19 crore during the quarter. This and a forex gain of Rs 3.9 crore led to a 57% jump in net profit to Rs 35.5 crore, saving it from what would otherwise have been a bad quarter for the company.
The company declared an additional dividend of 15 paise per share, taking total dividend to 30 paise per share. The share price is down about 2% on the BSE, as investors seem t have expected a better operating performance.