Published on 20/03/2017 2:42:32 PM | Source: Motilal Oswal Securities Limited
Budget implications likely to be neutral - Motilal Oswal
Karnataka budget implications likely to be neutral
* The Karnataka government, in its budget announcement on 15 March 2017, abolished the value added tax (VAT) on beer, wine and hard liquor. Three years ago, the state government had introduced a 5.5% VAT on liquor sold in bars and restaurants. The budget document also mentions an increase in additional excise duty on some slabs in the range of 6-16%. These measures will be effective from 1 April 2017.
* Karnataka is an important state for both United Spirits and United Breweries, accounting for ~25% and ~14%, respectively, of their national sales, in our view. Our discussions with management of United Spirits indicate that the impact of these moves is likely to be neutral, with additional excise increases offsetting VAT repeal.
GST and highway ban remain near-term headwinds
* While alcohol is kept out of the ambit of the Good & Services Tax (GST), many input raw materials for the manufacture of alcohol will attract taxes. Also, the tax rates on these raw materials are yet to be finalized. As input tax credit will not be available under the GST, alcoholic beverages companies are negotiating with various state governments for setoffs to lessen the cost burden. Companies are seeking price increases if the states are unable to provide setoffs. We believe the near-term volume and profitability prospects depend on how soon and effectively these issues are resolved.
* We believe the attorney general’s statement that the liquor sale ban within a 500-meter radius of the national/state highways does not apply to bars and restaurants is encouraging from the perspective of the alcoholic beverages sector. However, it is important to note that the review petition will be heard later this month by the Supreme Court, which will have a final say on this issue. It is estimated that ~45% of all alcohol vending outlets are stationed at proximity of 500 meters or less to the highways. Of these, over 60% are bars and restaurants. Even if the ban (slated to be implemented from 1 April 2017) does not apply to bars/restaurants, we believe there would be supply disruption at other outlets until they move to a location outside of the 500-meter limit. This, in turn, is likely to impact sales of alcoholic beverages companies over the coming few months.
With growth levers in place, both United Breweries and United Spirits are well positioned to tide over these near-term challenges. We thus have Buy ratings on United Breweries (TP: INR1,044; 35% upside) and United Spirits (TP: INR2,885; 27% upside).
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