With interest rates hardening, Carlsberg should pour that Indian IPO now

Probably the best beer in the world may just be the coolest Indian IPO this summer. But if Carlsberg A/S wants to maximize the valuation of its planned stock offer, it had better rush it across the counter.

Happy hour could be over soon. With the US Federal Reserve signalling two more interest-rate hikes this year, the Indian market’s thirst for new paper – up 77 per cent so far in 2018 from last year – could dry up.

Pedigreed consumer stocks, such as the country’s third-largest-selling beer, are still likely to see buyers, but capturing anywhere near the 73 times price-earnings multiple of United Breweries Ltd., which makes India’s most-popular Kingfisher brand, will need all the froth the Danish brewer can muster.
 

That’s largely a question of timing. But Carlsberg doesn’t appear to be fully ready. Bloomberg News has reported that it’s still meeting arrangers, and a transaction isn’t certain.

Among the 13 markets represented by stocks on the iShares MSCI All Country Asia-ex-Japan exchange traded fund, India is the most vulnerable to rising US interest rates, according to a simulation analysis by Patrick Phan, a Bloomberg portfolio analytics specialist. Historical stress testing might be a tad less relevant this time around because of a change in investor base. Ever since New Delhi’s shock November 2016 ban on 86 per cent of the then-existing stock of currency notes, domestic mutual funds have emerged as the preferred parking lot for individual wealth. The relative importance of foreign institutional money – the biggest flight risk – has declined. However, Indian interest rates have also started hardening, and that puts market-timing pressure on Carlsberg, which is in the process of setting up its eighth Indian brewery.

Everyone wants in on Asia’s beer carnival. Saigon Beer Alcohol Beverage Corp.’s shares spiked last year in anticipation of a 25 per cent stake sale to Thai beverage tycoon Charoen Sirivadhanabhakdi. And Vietnam’s only supposed to witness the world’s second-largest jump in beer sales between 2016 and 2021. Demand in India is forecast to grow even faster.

Still, the last couple of years have also brought India’s policy risks to the fore. First, the currency ban disrupted both demand and supply, and then a court order placed restrictions on the sale of alcohol near highways. After a 10 per cent drop in beer sales in 2017 – 259 million cases versus 288 million cases in 2016 – the market is only now recovering.

The highway ban has been mostly rescinded, but beer is still 80 times more accessible to an average Chinese citizen than to an Indian consumer, according to Budweiser parent Anheuser-Busch InBev NV, which has a 23 per cent share of the market, ahead of Carlsberg at 14 per cent.

The other big hurdle to growth is taxes. Having surrendered control over most other sales charges to a nationwide goods and services tax, Indian states will increasingly rely on liquor levies to create fiscal space for discretionary spending. Kerala, a popular tourist destination, this year raised beer taxes to 100 per cent from 70 per cent. The other predicament is that while GST on most inputs is higher than previous taxes, alcohol being outside GST means brewers get no credit. Passing on cost increases to consumers in a price-sensitive market like India is also delaying the explosive volume growth they’d hope to see.

With general elections due next year, investors shouldn’t expect a letup in unpredictable and irrational taxation. So Carlsberg had better not let its India IPO plans ferment any longer. Best beer in the world or not, just pour it now.