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Published on 25/06/2019 10:28:18 AM | Source: Motilal Oswal Services Ltd

Consumer Goods Sector - Prohibition in Andhra Pradesh — A roadmap yet to be formulated By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Motilal Oswal #Consumer Goods Sector #Sector Report

 

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Prohibition in Andhra Pradesh — A roadmap yet to be formulated

* The event: After a resounding victory in the 2019 parliamentary elections and the assembly elections (held simultaneously in Andhra Pradesh), the new Chief Minister-designate and YSR Congress chief, Jaganmohan Reddy has announced his intention to impose prohibition in the state in a phased manner by 2024.

* At the end of the phased implementation, alcohol will be available only in five star hotels. Further, the new Andhra government is also looking at entering alcohol distribution, following in the footsteps of the Tamil Nadu and Delhi governments. An NGO, ‘Jana Chaitanya Vedika’, has been entrusted with the task of coming up with a roadmap, which will be used for imposing prohibition in the state. Excise collection from alcoholic beverages in Andhra Pradesh was INR 57,896m (USD827m) in FY18.

* The precedent and the impact: While prima facie the news appears negative, we note that prohibition was imposed in Andhra Pradesh in the past as well. However, in India, prohibition has never lasted for more than two years in any state (including Andhra Pradesh but barring Gujarat, Nagaland and more recently Bihar). In Andhra Pradesh the prohibition imposed by the NT Rama Rao government in the mid-90s was repealed in 1997 by the following Chandrababu Naidu Government because of leakages from across state borders as well as shortfall on welfare schemes due to reduction in an important revenue constituent.

* In recent years, while the governments of Tamil Nadu, Madhya Pradesh, and Chhattisgarh announced prohibition in phases, the Kerala government had imposed complete prohibition on spirits outside of five star hotels. But subsequently, there were only token closure of few outlets in Tamil Nadu, Chattisgarh and Madhya Pradesh, with prohibition being actually repealed in Kerala.

* According to our estimates, we believe that Andhra Pradesh contributes around 6-9% to UBBL and UNSP’s sales. A complete prohibition would have repercussions on the overall sales growth, margins, capacity utilization and debt reduction plans of these companies. But to calculate the actual impact, clarity is needed on the planned phases and consequent execution of the prohibition.

 

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