Stocks of Indian distillers have recovered some losses after the worst plunge in more than a decade as investors bet on reopening stores and home delivery of alcohol. Yet, that’s not enough as consumption, slowing even before the pandemic, may take longer to recover and revenue-starved states increase taxes on liquor.
Shares of United Spirits Ltd., United Breweries (Holdings) Ltd., Radico Khaitan Ltd., and GM Breweries Ltd. have recouped some lost ground since April lows but are still way below their February peaks. Like hotels and airlines, the alcohol industry’s business was wiped out in April and most of May as it was categorised as a non-essential item after Prime Minister announced the world’s strictest lockdown starting March 25. Sales resumed partially more than a month later when the second phase of the lockdown ended on May 3.
Not only have the makers of whisky to beer lost revenue, the Covid-19 stress is likely to stretch receivable cycle or the number of days it takes to receive payments from distributors, squeezing cash flow, according to brokerages, including Motilal Oswal Financial Services Ltd. and Edelweiss Securities Ltd.
While the government has allowed operations to resume, hotels and restaurants that contribute 20% of the liquor demand are still closed. With the economy expected to contract, people losing jobs and companies slashing salaries, India’s consumption is unlikely to recovery anytime soon. Even before the Covid-19 outbreak, alcoholic beverage makers were flagging signs of slowing demand
To make things worse, alcohol is getting costlier for consumers in state after state as cash-strapped governments hike taxes on liquor, one of their biggest sources of income.
Tax Squeeze
Liquor is outside the purview of goods and services tax. Being a sin good, states already levy high taxes on it. To generate resources for Covid-19 relief, Delhi imposed an additional 70% cess on liquor and Andhra Pradesh increased excise duty by 75%. Rajasthan, Haryana and Goa, too, have increased levies on alcohol.
While these states are not among the biggest revenue contributors for India’s top three liquor companies, decision by Karnataka to increase levy will impact them the most. The southern state raised taxes on alcohol by 17%, according to The Times of India.
Karnataka is the biggest revenue contributor for Diageo-controlled United Spirits, and the second-largest income generator for United Breweries and Radico Khaitan.
If other high-contributing states like Maharashtra and Telangana also follow suit, making liquor costlier, that can potentially hurt demand and revenues of these companies. Higher levies in Maharashtra would be the most detrimental to GM Breweries, which generates its entire revenue from the state.
Motilal Oswal, however, said in a note said that as long as other states don’t emulate Delhi and Andhra Pradesh, a hike in the range of high single digits and early teens won’t depress demand massively.
Earnings Downgrades
- Motilal Oswal and Dolat Capital cut return on equity estimates for fiscal 2020-21 for United Spirits and United Breweries by 9 percent and 6 percent to 12-15 percent and 7 percent, respectively.
- United Breweries is expected to see a bigger impact as the first quarter contributes more than a third to the full-year operating income compared to about a quarter for United Spirits.
Pinning Hopes On Alcohol Home Delivery
Punjab, Maharashtra and Chhattisgarh were among some states that allowed home delivery of liquor. Swiggy and Zomato have also started alcohol home delivery from stores in Jharkhand.
Macquarie said it’s a structurally positive move for dominant players United Spirits and United Breweries with higher spends on advertising and promotions and strong brand recall. That, as per the brokerage, will help them gain share from regional players.
Motilal Oswal is more cautious. Logistics of home delivery are complicated, it said, and this is more a damage-control exercise than an effort to augment revenue.
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