A sharp rise in excise duty could hurt liquor volumes. UBS has slashed its target price for UBL and USL by 20-23 per cent, following 12-27 per cent cut in 2020-21 earnings estimates.
There could be another round of earnings downgrade after the announcement on Tuesday of Lockdown
2.0. While some analysts do not see sharp tax increases, as this could impact the overall liquor sales and, in turn, hurt states’ revenue, the jury is out on this.
As is the case with other companies, labour shortage and the overall supply chain disruption will hurt liquor volumes, even if some relaxation on store reopening happens. “Though prices of key raw materials, such as extra neutral alcohol, have come down, providing better margin outlook, the overall supply chain disruption, including production process, would remain a concern for some time, even after the lockdown,” says another analyst at a domestic brokerage. Closure of hotels and restaurants would further hurt overall liquor sales.
Even as demand for items such as liquor or cigarettes is relatively inelastic, lower incomes (with salary cuts and job losses) are likely to hurt liquor consumption. Some analysts expect customers to switch to lower-priced brands, hurting revenues and margins of companies.
While there are hopes that the liquor ban by some states may not materialise now and raw material prices may remain benign, investors are recommended to stay away until the supply chain normalises and clarity emerges on the tax front.