Policy support, volume growth: What's lifting the spirits of liquor stocks?

The change in duty structure and new tax policy of FY23 is expected to bring a much awaited relief for alcohol beverage industry. However, analysts believe barley price rise to act as a spoilsport.

Shares of alcoholic beverages were in high demand in the financial year 2021-2022 (FY22) despite disruptions led by Covid-19. Globus Spirits drove the spirits' pack as it delivered over 350 per cent returns during the period.

Among other stocks, Som distilleries zoomed 58.29 per cent, Globus Spirits 13.34 per cent, IFB Agro Industries 6.32 per cent and United Spirits moved up 0.93 per cent. In comparison, S&P BSE Sensex gained 2.46 per cent whereas S&P BSE 500 climbed 1.05 per cent this year.

Going forward, analysts expect the revival in economic activity and near normalization in on-trade establishments to buoy spirit volumes above pre-covid levels.

The positive regulatory developments, they said, will bring the much needed breather for the industry which has faced several headwinds over the past five years, in the form of constant excise duty hike, demonetization, highway ban, and pandemic.

Several states like Maharashtra, Uttar Pradesh, West Bengal, and Madhya Pradesh have adopted the new tax policy of FY23, which is expected to support consumer demand and drive volumes.

Analysts at Equiris Securities believe that the reversal of Covid-cess will augur well for the industry. "We expect volume growth in the spirits segment to be in low-to-mid single digits whereas certain categories within the spirits space are likely to outpace average industry growth rates," they said in a recent report.

Besides, the change in duty structure on sales of bottled in India (BII) or bottled in origin (BIO) in Maharashtra and West Bengal have also pushed down consumer retail prices by 30 to 35 per cent. Given this, Deepak Jasani, head of retail research at HDFC Securities believes that the new customer-centric policy will optimise volumes.

"We firmly believe that the regulatory environment for the industry is the best that it has been for over a decade. This, in turn, should drive ahead-of-historical industry growth," he said.

Kaustubh Pawaskar, Deputy Vice President, Fundamental Research - Sharekhan by BNP Paribas, too, believes consumer upgrading to premium liquor brands and key states coming out with liberal liquor policies is helping liquor companies with a strong portfolio of premium and mid-premium India made foreign liquor (IMFL) brands to consistently grow ahead of the industry.

Barley price rise to be a spoilsport?

That said, the inflated barley price casts a shadow over the companies' margin. The prices of barley, a major ingredient used in the production of beer, has shot up over 11 per cent in the past two weeks due to the Russia-Ukraine conflict. Both of them are amongst major exporters of barley.

According to a report by The Observatory of Economic Complexity, a private data pooling website, India imported $16.6 million barely in 2020, of which $1.05 million belonged from Ukraine. Companies like United Breweries (UBL) book barley during February to April to secure supplies for the full year. With barley prices skyrocketing to 48 per cent year-on-year (YoY), analysts expect UBL to witness gross margin pressure in FY23.

"We expect margins to be impacted for UBL due to firm barley or glass prices which are up by 48 per cent on a YoY basis. While management indicated that UBL has low-priced barley inventory, it is likely to witness gross margin pressure in FY23," Jasani said.

However, analysts expect better product mix and gradual price rise across states to offset near-term margin pressures. "There would be pressure on margins in the near term but that could be largely mitigated by premiumization and cost control measures," said Ajit Mishra, VP-Research at Religare Broking.