Moody's: European beverage makers' profitability growth in India dampened by regulation Global Credit Research

European alcoholic beverage manufacturers will find it difficult to tap the strong long-term potential of India's alcoholic beverage market as restrictive regulation continues to curb profit growth, says Moody's Investors Service in a report published today. However, ongoing high barriers to new entrants will favour European beverage makers already established in India.

The long-term potential of India's alcoholic beverage market is supported by strong economic growth prospects, rising disposable incomes and an increasing social acceptance of alcohol consumption. The rating agency expects beer volume growth of 8.8% a year in 2015-18, albeit from a low base, and spirits segment volume growth to moderate to around 3.7% a year, more in line with the global average.

"While restrictive regulation in India will continue to make it difficult for European beverage companies to reach the same level of profitability they achieve in other countries over the next two or three years, it also means that incumbent alcoholic beverage producers will have strong protection until regulations change," says Paolo Leschiutta, a Moody's Vice President -- Senior Credit Officer and lead analyst for the European beverage sector.

High barriers to entry into the Indian market as result of persistent restrictions will be positive for brewers Heineken NV (Baa1 stable) and SABMiller Plc (A3 stable) and for spirits market share leaders Diageo Plc (A3 stable) and Pernod Ricard S.A. (Baa3 positive), who are already established in the market.

Alcohol production, distribution and sales are regulated by each state in India and the different regulations and existence of the central state tax (CST) payable on goods moving from one state to another are the biggest limit on growth.

"We do not expect the regulatory environment to materially improve during the next two to three years, which will impede any broad improvement in operating profit margins for alcoholic beverage companies," says Sara Santagostino, co-author of the report.

As an example, Moody's understands that both beers and spirits will remain excluded from the upcoming national goods and services tax reform.

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