Time to raise a toast to liquor stocks? Selectively, say analysts

Shares of liquor companies have tumbled between 8 per cent and 32 per cent thus far in calendar year 2022 as raw material prices and low demand have hit breweries and distilleries. By comparison, the benchmark Nifty50 and the broader Nifty 500 indices have shed 8.6 per cent and 10.2 per cent, respectively, during this period, reveals ACE Equity data.

Analysts believe the worst may be over for the sector, with out-of-home (OOH) consumption picking up, and reduction in taxes by some state governments allowing related companies room to pass on cost pressure to consumers.

Amid these developments, Allied Blenders & Distillers, the maker of Officer’s Choice whisky, has filed draft papers with the Securities Exchange Board of India (Sebi) to raise Rs 2,000 crore through an initial public offering – a sign of changing times for the industry.

“We are optimistic about liquor companies, given the revival in OOH consumption that constitutes 20-25 per cent of total demand. We don’t expect much downside for related stocks since the recovery theme is playing out well. Although there could be some inflationary pressure, strong volumes could partly offset cost pressures,” says Ajay Thakur, an analyst tracking the sector at Anand Rathi Shares and Stock Brokers.

Also Read: Liquor firms ask Maharashtra govt to allow home delivery, drop ban
 

Liquor companies, including United Spirits (USL), United Breweries (UB), Radico Khaitan, and Globus Spirits, reported volume growth of 6-41 per cent year-on-year (YoY) during the January-March quarter, suggest reports, helping companies report healthy YoY revenue growth of up to 34 per cent.

Meanwhile, various states, including Kerala, Rajasthan, and Assam, have allowed the industry to raise prices of Indian-made foreign liquor, which augurs well for top-line growth. However, analysts expect margin pressure to continue for a few more months, as supply-chain bottlenecks keep raw material prices at elevated levels.

Prices of rice and barley have jumped around 15 per cent and 59 per cent, respectively, over the past six months, while those of glass and packaging have risen by 15-40 per cent. Effectively, companies reported earnings before interest, tax, depreciation, and amortisation (Ebitda) margin decline of up to 800 basis points YoY in the fourth quarter of 2021-22.
 

“In India, regulatory challenges exist, but some state governments are trying to create an ecosystem that eases business. However, we continue to have concerns on high competitive intensity and low pricing power in the liquor industry,” said analysts at Edelweiss Securities in a recent report.

Manoj Menon, head of research at ICICI Securities, however, says that even though gross margin pressure is an inevitable reality, most companies should be able to manage it well.

“Over the past 12-18 months, there have been many progressive steps by state governments, such as rollback of tax increases, reduction of Customs duties, and cutback in local levies on imported products. It appears the industry is seeing positive changes. While companies expect the pain to continue for the first half of 2022-23 (FY23), these developments are already priced in by the stocks,” he adds.

Investment strategy

Most analysts recommend investors buy these stocks from a medium- to long-term perspective, given the overall market sentiment, and the fact that input-cost pressures have not fully abated yet.

ICICI Securities, for instance, has a ‘buy’ call (target price: Rs 1,800) on UB as it expects the volume momentum to continue in the first quarter of FY23 (peak season for breweries).

“Although near-term challenges remain, the management expects to lower the impact by taking price hikes in key states,” it said.

Those at Sharekhan, on the other hand, prefer Globus Spirits and Radico Khaitan among the lot.

“Radico Khaitan will be one of the key beneficiaries of improving Indian demographics, consumer preference to premium brands, and reviving liquor policies in various states. Although the backward integration plan will derisk raw-material sourcing in the long run, it will dilute earnings due to incremental debt on books in the near term. The stock has corrected 28 per cent in the past six months and is trading at 30.4x/23.9x its FY23E/FY24E earnings per share. We maintain our ‘buy’ recommendation with a price target of Rs 1,135,” says the brokerage.

HDFC Securities has ‘add’ rating on USL (target price: Rs 900) on the premiumisation trend in the liquor industry, state-wise pricing actions, and portfolio reshuffle benefits.