More cheer for United Spirits as hard liquor sales outperform beer in Q2

Higher in-home consumption and premiumisation to benefit the Diageo-owned company

Alcoholic Beverages have been one of the worst performers among fast moving consumer discretionary segments over the past two quarters. The weighted average fall in sales growth of the sector 16 per cent in Q2, according to HDFC Securities. 

While this is an improvement over the 58 per cent fall in the June quarter, the segment is among the slowest to recover since the start of the pandemic. Even over the last four quarters the average growth has been in the negative 19 per cent. Say analysts at IIFL Research, “Alcohol has been highly impacted by Covid and related lockdowns, but the impact on beer has been much more pronounced compared with the hit to spirits.”

This is evident from the volume performance of listed stocks, with the laggard being United Breweries (UB). After a 77 per cent YoY volume drop in the June quarter, the firm's volumes dipped 48 per cent in the September quarter. 

The reason for the beer segment’s underperformance comes as consumers have tended to avoid chilled beverages during the Covid period, early closure of retail outlets and muted sales from the on trade channels including bars, pubs and restaurants. These account for a fifth of sales and have seen a slower recovery. The lower sales came despite the reduction in excise duty by West Bengal on beer to pre-Covid levels and partial roll back by Odisha of increase in excise duty taken earlier. 

As compared to the 42-48 per cent sales and volume decline for UB, United Spirits fared much better with sales and volume decline in the 3-6 per cent range in the quarter, outperforming comparable peers as well. Say Bharat Chhoda and Harshal Mehta of ICICI Securities, “Volumes doubled on a sequential basis leading to mere 3.4 per cent YoY decline as compared to 9-10 per cent de-growth in the liquor industry in Q2 and a double digit decline for its major competitor Pernod Ricard.” 

There are a couple of trends which are favouring the spirits maker. Brokerages believe that the company with 80 brands spanning scotch, brandy, rum, vodka and gin segments has benefited from migration from beer to hard liquor as in home consumption has increased significantly. The other trend is premiumisation. The company highlighted that sales in the Prestige & Above (P&A) segment grew 1 per cent in Q2, backed by strong momentum in the scotch portfolio, improved relative price positioning in key markets as well as a lower base. Analysts point out that some of the premiumisation trends could be permanent aiding growth for the P&A segment which accounts for two thirds of the company’s revenue.

While beer sales are expected to improve as the lockdown eases, analysts at Motilal Oswal Research highlight some downside risk for UB. They believe another Covid wave will affect UB more than spirits makers, a Competition Commission of India investigation and possible penalties which would remain an overhang and further excise increases given state finances. 

Though the two stocks have gained 12-14 per cent each over the last month with UB doing a shade better than United Spirits, analysts believe the better operating performance of the latter would continue given current trends.