Rising regulations to keep a lid on liquor stocks

Sale ban on highways to have short-term impact; likely sin tax in GST and note ban key overhangs

Shares of liquor companies United Spirits, Radico Khaitan on Thursday dropped between 0.3 and 4.9 per cent, against a flattish Sensex, as the Supreme Court on Thursday banned sale of liquor on state and national highways across the country. The move is aimed to reduce drunk driving and increase road safety.

The impact of this ban on these companies is not very clear. One reason for this ambiguity is that these companies do not share the percentage of revenues coming from highways. Anecdotal evidence suggests local/unbranded liquor's share of alcohol sales on these highways is on the higher side. Second, implementation of such a ban by the state governments will be crucial and a key monitorable. Most analysts believe store owners will relocate near highways to comply with the ban and mitigate the impact. 

Abneesh Roy of Edelweiss Securities says, “Eventually, shops will be opened, maybe 500 metres to a km on roads off the highway. as was seen in Haryana as well. Initially, there will be some impact because it will take time to shift.” This means there will be near-term impact sales. 

The bigger worry stems from demonetisation and taxation issues. Analysts were already estimating these companies to see a 20-30 per cent fall in their revenues this quarter, thanks to demonetisation. They believe consumers could down-trade to lower priced products in the coming months and sales of premium products will continue get hit. The latest ban adds to the woes of these companies, which have been under the lens of regulators for a while. 

“Revision of excise duty on liquor by the Telangana government has increased the price differential between the Royal Challenge brand of United Spirits and Royal Stag of Pernod Ricard India to 36 per cent, from 22 per cent. This could adversely impact volumes of Royal Challenge,” says Amit Sinha of Macquarie Capital. Additionally, there are concerns around a likely sin tax and/or unfavourable tax rates in the goods and services tax regime. These could be another key overhang on liquor stocks in the foreseeable future. 

In this backdrop, it is not surprising that most analysts have a ‘neutral’ rating on liquor stocks and are in a wait-and-watch mode. Valuations of a few like United Spirits and United Breweries, which are among the widely tracked, are also not cheap at 60-plus times the FY17 estimated earnings.