Higher raw material costs to hit alcohol firms in fourth quarter

Premium segment expected to do better than overall sales

Weak volumes and higher raw material costs are expected to hit the financials of listed alcoholic beverages players. The two largest players within the segment — United Spirits and United Breweries — are expected to post muted growth in volume, and a decline in profitability, while Radico Khaitan is expected to do slightly better on the margin front.

While most fast moving consumer goods (FMCG) companies have benefited from the fall in crude and palm oil prices, there is no respite for the alcoholic beverages segment. Companies in this segment have seen the sharpest fall in gross and operating profit margins within the FMCG space, given rising prices of glass and extra neutral alcohol. These two inputs account for about two thirds of raw material costs. What has compounded matters at the operating profit margin level are higher advertising spends.

Most brokerages expect United Spirits to post a 3-4 per cent year on year (YoY) decline in revenues during the January-March quarter (fourth quarter, or Q4) of 2022-23 (FY23). The reversal of the excise policy in Delhi is likely to  impact its performance. The sales decline on a sequential basis is expected to be higher (15 per cent) with volumes expected to drop by 7 per cent. Organic volume growth could come in at 4 per cent.

The volume growth in the prestige and above (P&A) segment is expected to be in the high single-digit range while the growth for the lower priced products could have a dent in the sales. Say Karan Taurani and Rounak Ray of Elara Capital, “Volume growth of popular and regular is expected to remain subdued, while the P&A segment is likely to continue show growth momentum, driven by premiumisation.” The brokerage expects the volume growth in P&A segment for United Spirits at 9.9 per cent and at 12.5 per cent for Radico Khaitan, led by brand innovation and gains in market share.

Realisation per case for Radico Khaitan could fall by 2.7 per cent YoY given the higher base; Q4FY22 was the best quarter for the company. Revenue growth was largely on account of price hikes taken previously and a better product mix. United Breweries (UBL) is expected to post a sales growth of 6-9 per cent. 

While beer volumes grew by mid-single digit led by Kingfisher, the premium portfolio has grown faster (in high teens) led by Kingfisher Ultra and Heineken Silver.

Motilal Oswal Research expects gross margins of UBL to be negatively impacted due to higher barley and glass bottle prices, which is expected to hit the company’s operating profit margins by 420 basis points as compared to a year back. 

For United Spirits, gross margins on a sequential basis could expand while at the operating level there is a decline due to higher advertising costs. A free trade agreement with the United Kingdom and price hikes by a few states could be medium-term triggers for the stock, says Nuvama Research. The brokerage has a ‘hold’ rating on the stock.

Radico Khaitan’s margins are expected to fall by 20 basis points on a sequential basis while they are up over 200 basis points YoY, says Elara Capital which has an ‘accumulate’ rating on the stock.