Potential benefits of Diageo's entry into IMFL market pushing up prices of other listed liquor stocks
Like most other consumer product categories, even the alcoholic beverage market is increasingly looking at premium products to drive earnings. To this effect, Diageo acquiring a majority stake in United Spirits Ltd (USL) could transform the Indian-made foreign liquor (IMFL) market. There are several reasons that would support and boost such a trend. For starters, analysts say, rising input costs and higher state levies have already eaten into the margins of most IMFL companies. This has incentivised these players to look at high margin products and brands. The other factor is the demographic opportunity and rising affluence of consumers. Both factors make India’s liquor market an attractive place.
Analysts say Diageo’s entry will bring in transparency, as the dominant player in the space with 41 per cent of the IMFL market (in volume terms). Diageo is expected to push USL’s premium brands and invest in big brands like Black Dog. Competitive intensity from other players like Pernod Ricard will also push Diageo in this direction. From an investment point of view, India’s alcoholic beverage market is looking attractive, analysts say, as Diageo’s entry will bring global best practices and profitability would also improveing, spawn more joint ventures or acquisitions.
India’s spirits market is growing 10 per cent annually. Each year, 1.4 million relevant urban consumers enter the legal drinking age. Going by the run-up USL has seen after the Diageo deal, brokerages say the fortunes of other listed companies will also improve.
Motilal Oswal Securities says it expects the re-rating to sustain, given the potential sector-wide benefits following the deal. The target prices of other spirits companies like Radico Khaitan and Tilaknagar have also been upgraded or brought under coverage.
Tilaknagar, for instance, is strong in southern India and its manufacturing network could make it an attractive partner for foreign liquor companies. The company also announced a strategic bottling agreement with Pernod Ricard India recently. The share prices of Radico Khaitan are up 27 per cent since October 31 and Tilaknagar by 25 per cent. The market is expecting strong earnings growth from most of these companies over the next few years. However, analysts warn that the benefits will be backe-nded, as the industry might see margins come down in the short-term as most companies invest in introducing new categories and brand building.
Earlier this week, CLSA downgraded the USL stock saying: “Our interaction with Diageo Plc indicates that while the group is upbeat on the long-term potential for United Spirits, in the near term, the management and strategy changes may impact volumes. The stock has overshot our revised target price of Rs 1,900/share and offers a five per cent downside from the current levels.”
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