The Brazilian government announced it will increase federal taxes for beer as of October 2012. The tax increase is not equal for all players but would increase by about 27% on average for AmBev. Taxes will increase also for soft drinks but the exact level of increase is not clear yet (based on various press articles we believe the increase to be significantly lower than for beer).
As federal taxes represent an estimated 10-15% of the beer selling price, the proposed tax increase in itself would warrant an approximately 3.5% increase of AmBev’s average beer pricing. However, given the impact there will also be on the taxable base relevant for state taxes and some multiplier effects, the total increase in beer selling prices needed to fully offset the tax increases would be closer to 5% for AmBev.
Historically it has been the policy of the company to pass on higher taxes right away to the market and the company is determined to do so also this time. Nevertheless, given the possible negative impact of higher prices on volumes the company might somewhat adjust its capex plans in Brazil. We are not sure whether the proposed tax increase does put at risk the company’s earlier guidance of beer revenue growth in Brazil being in line with general inflation in 2012.
Nevertheless, the bottom line of this story is that the proposed tax increase is for sure higher than what we expected and might negatively affect volumes (we currently forecast a 4.6% increase in Latin America North volumes in 2012 but might revise slightly down). Note also that the BRL has depreciated by about 10% vs the reporting currency (USD) since the end of the first quarter, which is no good news neither. We stick to our Hold rating and € 56 target price for now.