United Spirits results lift liquor stocks

The strong showing by USL indicated the sector was able to weather the storm created by the ban on sale of liquor on highways

Shares of all liquor makers rose on Friday after United Spirits (USL) reported higher than expected growth in profit and margins.

The strong showing by the Diageo-owned company indicated the sector was able to weather the storm created by the ban on sale of liquor on highways and the new goods and services tax (GST).

USL shares rose 23 per cent at one point, the highest in a day over four years, after it reported an 84 per cent increase in net profit, a 57 per cent jump in earnings before interest taxes, depreciation and amortisation (Ebitda) and a 631 basis points increase in Ebitda margins for the quarter ended September. The stock ended with a 17.6 per cent gain, at Rs 3,029. 

Shares of Globus Spirits gained 16 per cent, while Pioneer Distilleries and GM Breweries gained 10 per cent each.

“Liquor companies in India were faced with tumultuous headwinds - demonetisation, highway liquor ban and implementation of GST. Ripple effects of demonetisation and highway liquor ban are now clearly behind as evident from current results management commentary. Ambiguity around GST and implementation of it has also been largely cleared out. With all regulatory headwinds largely behind, we expect a smooth journey ahead for the liquor stocks from here,” said Abneesh Roy, senior vice-president of Edelweiss Financial Services.

“In spite of the GST and highway ban issues, United Spirits delivered an impressive 14 per cent year-on-year Ebitda growth in the financial year's first half. Further, improving cash flows and a reducing cost of debt is driving interest cost reduction-led earnings growth. With continued mix improvement, waning impact of the highway ban, price increases in states and seemingly negligible impact of GST-led cost pressures, we believe there is greater certainty of operating margin delivery from the company,” went a note from IDFC Securities.

Last December, the Supreme Court had ordered that all outlets selling alcohol within 500 metres of a highway be shut from April. In August, the court added that the ban would not apply to outlets within city limits.

USL said shoes started to re-open in September after the SC's amendment. “We expect the impact of the highway ban to continue to decrease and the business to normalise by the end of the third quarter. Based on our current expectations, through our continued focus on productivity initiatives, coupled with price increase in select states, we expect the net adverse impact of GST on our margins to be moderate in this financial year,” said Anand Kripalu, chief executive officer.

While GST doesn’t apply on liquor sales, distillers and brewers have to bear additional levies on input material and services. In the past year, liquor shares have been under pressure due to the highway ban, prohibition in certain states and GST. Analysts say the worst for the sector might be over and shares could gain by 10-15 per cent from current levels.

With inputs from Bloomberg