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Growth to outpace consumer peers ahead

Our channel checks and management interactions indicate encouraging volume recovery for the alcobev industry across most states since July. In addition, regulatory changes have continued to be positive and are likely to further boost growth rates ahead. We believe that alcobev growth will outperform most consumer staples in the medium term as the sector comes out of the pandemic impact and favorable policy changes provide the additional impetus. We maintain our positive stance on the sector and increase our EPS forecasts by 3-7% across companies.

We are raising target multiples based on improved growth outlook and likely higher improvement in ROEs. Our forecasts/TPs now capture potential upsides stemming from near-term catalysts, such as the policy change in Delhi, tax cut in West Bengal and the free trade agreement (FTA) agreement with the UK that could drive import duty reduction for scotch. Retain Buy on UNSP (Sep’22 TP raised to Rs970 versus Rs750 previously), UBBL (TP of Rs1,900 versus Rs1,570), and RDCK (TP of Rs1,090 versus Rs1,000). After the recent run up in UNSP, UBBL and RDCK offer more upsides.

* Volume trends point to strong recovery: Our interactions with companies and channel checks indicate strong recovery trends for alcobev in most markets. Excluding Andhra Pradesh (AP), IMFL has witnessed growth over pre-Covid levels in most other states. In beer too, the overall recovery appears to be robust, with strong growth in Karnataka (up 6%/30% in Q2 vs. FY20/FY21). Price reductions in Eastern states (particularly WB), UP and Rajasthan are driving strong double-digit growth rates (vs. pre-Covid). Maharashtra is recovering well, but AP continues to be impacted. Telangana and Kerala are lagging behind in terms of growth recovery.

* Regulations continue to ease, more positives ahead: After the Covid tax reversals, regulatory policies are turning more favorable for the sector, with states improving distribution models and increasing liquor outlets. The change in retail distribution in Delhi from the government-operated outlets to private outlets from mid-November is expected to result in higher sales and market share gains for leading brands. Telangana and AP have announced an increase in the number of liquor licenses, while Rajasthan has made all liquor shops composite shops. We see additional growth-catalysts for alcobev industry in the near-term, such as: (1) a reduction in IMFL taxes in WB; and (2) an FTA with the UK that may lead to a reduction in duty on scotch-imports.

* Input costs are inching up but appear manageable: Although gross margins might see some pressure ahead due to the increase in glass prices, overall inflation seems to be manageable as of now. ENA prices are steady and are likely to remain soft given the low inflation in key crops (sugarcane and maize). Glass (40-50% of RM costs) is seeing an inflationary trend on account of higher fuel prices and a sharp rise in the prices of soda ash (up 40% qoq). This will likely drive moderate cost inflation for UNSP and RDCK. Growing use of returnable bottles should offset most of the glass inflation for UBBL, leading to stable margins. Overall cost savings and operating leverage should still drive EBITDA margin gains across companies, in our view.

Recovery trends encouraging across key markets

Our interactions with companies and channel checks indicate strong recovery trends for alcobev across most markets. Excluding Andhra Pradesh, IMFL has witnessed growth over pre-Covid levels in most states. After a slow July, on-premise has picked up, resulting in stronger traction for the premium segment. Karnataka, Telangana, Kerala and Maharashtra have grown 0-5% vs. FY20.

In beer too, the overall recovery appears to be faster, with growth in Karnataka (6%/30% vs. FY20/FY21) and strong double-digit growth (vs.FY20) in Eastern states, UP and Rajasthan, led by the price reductions in beer. Maharashtra is recovering well as per channel checks, with IMFL recording growth and beer close to pre-Covid levels in Q2-end. Andhra Pradesh continues to be impacted by high taxation, while Telangana and Kerala are lagging behind in recovery.

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