Liquor stocks raise a toast to premiumisation trends, margin gains

Already outperformers in FY24, leading listed players may witness further uptick, say analysts

The stocks of India’s biggest listed alcoholic beverage manufacturers are reaching record highs, driven by expectations of increased realisations due to premiumisation trends, a slight reduction in raw material costs for the beer segment, and promising growth prospects.

United Spirits has seen the most significant rally in this financial year to date (FY24YTD), witnessing a return of 46 per cent. United Breweries and Radico Khaitan have also rewarded investors with returns of 33 per cent and 40 per cent, respectively. These stocks have outperformed their peer index, the Nifty FMCG, and the benchmark, both of which have delivered a 25 per cent return.

Brokerages have become optimistic about the country’s largest beer producer, United Breweries. The stock underperformed in the past couple of years due to multiple challenges it faced following the onset of Covid: It missed out on the crucial summer months due to Covid-related disruptions before FY23 (FY21 and FY22) and a sharp increase in barley costs impacted margins; besides, its operations were affected by route-to-market changes, and it lost some market share. But analysts now believe the stock has several positive triggers.

Krishnan Sambamoorthy and Sunny Bhadra of Nirmal Bang Research highlight that a steep decline in barley costs, combined with a much-needed leadership change, should lead to improved performance. The brokerage also believes that route-to-market changes will not significantly impact the base from Q4FY24 onwards. According to Nirmal Bang Research, the beer maker's operating profit will grow 2.5 times in FY25 compared to the FY23 level. The brokerage recommends buying the stock with a target price of Rs 2,020 per share.

Nuvama Research predicts a strong year in CY24 with high single-digit volume growth (twice that of United Spirits) and robust margin expansion due to softer barley costs. The brokerage highlights United Breweries' agility in innovation and launching its global offerings (Ultra Witbier and Heineken Silver Draught Beer) in India. Analysts led by Abneesh Roy of the brokerage view this as another step towards segmentation and premiumisation by United Breweries. Nuvama Research is bullish on the stock and has set a target price of Rs 1,935.

As for the domestic market leader in both spirits and overall alcohol markets, United Spirits is expected to continue its premiumisation trend after selling its popular category brands. Approximately 80 per cent of volumes are now accounted for by the prestige and above category. Premiumisation, driven by increasing disposable income and aspirations, has become the most critical theme in each of the liquor companies' sub-segments. This is evident in the new launches (Godawan), innovations (Johnny Walker Blonde), and renovations (Royal Challenge, Signature, Antiquity) in different categories.

Harshal Mehta of ICICI Direct Research expects blended realisation to continue improving due to a positive product mix. Another trigger for the stock has been improved pricing in multiple states, with state excise policies focusing on higher volume growth in the Indian-made foreign liquor segment rather than increasing excise rates. ICICI Direct has set a target of Rs 1,250 for the stock.

For the December quarter, the company is expected to post 8 per cent growth in revenue with the base quarter reflecting the divestment of popular segment brands.

Kotak Securities expects the premiumisation trend to continue, driven by share gains in Upper Prestige (success of RC American Pride) and strong underlying growth in scotch bottled in India, as well as at the origin. However, gross margin may see a decline of 115 basis points on a sequential basis due to inflation in extra-neutral alcohol and glass prices.

On a year-ago basis, the company is expected to report a gross margin expansion because of price hikes and the elimination of mono-cartons. The operating profit margin is expected at 14.6 per cent, up 136 basis points Y-o-Y and down 181 basis points on a sequential basis. The company is eyeing double-digit growth in revenues and expects the operating profit margin to remain in the mid-to-high-teen levels in the medium term. Kotak Research has an “add” rating with a fair value of Rs 1,075.