By Suhani Adilabadkar

After a tumultuous 2017, the Indian liquor industry has been recovering from its hangover in 2018. Rising urbanization, a growing middle class and higher social acceptance of alcohol has propelled India to the third largest liquor market globally after China and Russia, with annual consumption of about 6 bn liters annually. Coming back from a volume decline of 3% in 2017, the breweries or alcohol beverages as it is popularly known, is ready to uncork its energies and augment its revenue base in the ever growing Indian spirits industry.

Quick view

• India is dominated by hard liquor or spirits, rather than beer and wine
• Demonetization and Supreme Court restrictions on alcohol sales hit the market in 2017
• What is bad for sugar stocks in terms of oversupply is good for liquor: alcohol gaining from molasses price correction.
• Strong fourth quarter results for alcohol firms, including Radico Khaitan and GM Breweries

CUPS OF ETERNITY - MAJOR PRODUCTS

The Indian liquor industry largely constitutes Indian Made Foreign Liquor (IMFL), locally produced country liquor, imported liquor, beer and wine. IMFL has the maximum alcohol permissible limit of about 43% and includes whisky, vodka, rum, brandy and gin.

Whisky constitutes around 60% of the total spirits market. As India is dominated by hard liquor or spirits, per capita consumption of beer in India is about 2 litres per person annually, which is very low compared to a global average of 30 litres per person.

Beer has nonetheless caught the fancy of indian consumers over the last two decades because of low alcohol content, rising income levels and higher social acceptance. Products like craft beer are moving the growth rate in this segment to healthy double digits.

The wine market on the other hand, constitutes a small chunk of the entire industry with consumption restricted to metros and large cities.

MAKERS OF GOOD TIMES 

Apart from the unbranded liquor segment, Liquor/spirits industry is predominantly divided into Indian Made Foreign Liquor and beer. Both the segments are dominated by erstwhile UB group companies, United Spirits and United Breweries. United Spirits owns more than 140 brands and is the market leader with 44% market share.   Radico Khaitan is the next big company to reckon with and has emerged as a strong competitor to USL and various other foreign brands.

The beer segment is synonymous historically in India with the word ‘Kingfisher’ owned by United Breweries with a market share of about 50%. Heineken, Anheuser-Busch InBev, and Carlsberg together control about 90% of the domestic beer market.

The other smaller players in alcohol beverages industry are Tilaknagar Industries, Globus Spirits, Som Distilleries, Pioneer Distilleries to name a few. The Indian liquor market, witnessed slow growth over the last five successive years mainly due to higher taxation and strict government regulations, and was hit by demonetization in FY17.

FINANCIAL STRENGTH

Most of the listed liquor companies either decelerated with respect to profitability or remained stagnant in FY17. United Breweries, United Spirits & Globus Spirits declined 22%, 35% & 27% respectively and Som Distilleries & Tilaknagar Industries were stagnant on the profitability front as on March 2017.

But there are star performers in this highly regulated industry - Radico Khaitan & GM Breweries. Radico stood out with PAT growth of 5% in FY17 and continued its growth momentum throughout 2017-18, reporting a 54% net profit jump as on March 2018. GM breweries reported even better numbers with an average quarterly growth of 10% and 66% annual growth in PAT in FY17-18.

The liquor industry revenue base was severely impacted by Supreme Court banning the sale of liquor within 500 metres of national and state highways from 1st April 2017. As a result 30% of total outlets across the country were closed. Later, by the end of August 2017, the Apex court clarified that municipal areas across the country were exempted from its highway liquor ban, bringing some relief to the battered industry.

As a result the first two quarters of FY18 were impacted but the rest of the year recovered, post the Supreme Court clarification and the decline in price of molasses from October last year - what is bad for sugar stocks in terms of oversupply is good for liquor. In the current scenario, the liquor industry is in a sweet spot as the molasses index has corrected 45% since the beginning of 2018 .   

CHEERS FOR THE FUTURE: An industry on the upswing

The third largest alcohol industry in the world is also the largest market for whiskey growing by 25-30% YOY. Though Indian liquor consumption is dominated by IMFL, the beer market is moving at an exponential rate propelled by new products like craft beer brewed and served on the premises carrying lower taxes.

Still, alcohol consumption in India stands at 5 litres per capita in 2018 whereas Asian per capita average is 21 litres, plenty of margin for higher future growth. The Indian liquor industry has weathered higher taxation, Supreme Court ban, various regulatory state controls on production, distribution, pricing & marketing of alcohol, and even prohibition in states such as Gujarat & Bihar.

In spite of all these hurdles, India is one of the most attractive markets favoured by growth potential, higher disposable income and growing awareness which in turn is driving the rise of the alcohol beverage industry. So let’s wait for the party to begin as favourable numbers have already started pouring in in the fourth quarter results.

Suhani Adilabadkar is a Research Analyst registered with SEBI ((INH200003240)) She has done PGDBA (Finance), MS (Finance) and a Fellowship from Insurance Institute of India. She maintains a blog at oasisfundamentals.blogspot.in.

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