The extension of the lockdown until Tuesday 3 May would prove to be a bad hangover for liquor companies, even as their shares bounced back amid recent easing in store reopenings / distribution rules and expectations of a sharp drop in valuations.
After falling dim percentages a month until March, the share prices of major liquor players – United Breweries (UBL), United Spirits (USL), and Radico Khaitan – rose 18 percent in April, beating the 4-Nifty on the FMCG index. Percent increase. However, the downside is the risks, which can play a game of loot for liquor companies.
In addition to discretionary consumption, alcohol is exposed to the risk of excise increases, as many states face outbreaks of coronovirus given the large fiscal deficit.
UBS Securities believes that despite sharp improvements in UBL and USL shares over the past three months, rerating is unlikely, given the potential tax hikes by states to bridge their losses. According to Dolat Capital, states like Maharashtra, Karnataka and Telangana earn 12-20 per cent through liquor tax.
A sharp increase in excise duty can lead to a drop in the alcohol content. UBS has reduced its target price for UBL and USL by 20–23 percent, a 12–27 percent decrease in its 2020–21 earnings estimate.
There may be another round of earnings decline following the announcement on Tuesday of Lockdown 2.0. While some analysts do not see a sharp tax increase, as it could affect overall liquor sales and, in turn, hurt states’ revenue, the jury is out on this.
As with other companies, labor shortages and overall supply chain disruption will hurt liquor volumes, even if there are some discounts on store reopening. “While main raw material prices, such as excess neutral wine, have declined, providing a better margin outlook, overall supply chain disruptions, including the production process, will remain a concern for some time even after lockdown.” Other analysts say in a domestic brokerage. The closure of hotels and restaurants will further reduce liquor sales.
Even as demand for items such as alcohol or cigarettes is relatively low, low incomes (along with pay cuts and job losses) can harm alcohol consumption. Some analysts expect lower-value brands to customers, loss of revenue and margins of companies.
While there are expectations that some states may no longer ban alcohol and raw material prices may remain benign, investors are recommended to stay away until the supply chain returns to normal and the tax front But clarity does not come.