Liquor ban on highways: United Spirits, Radico Khaitan down over 5%

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Shares of breweries & distilleries companies such as United Spirits, Radico Khaitan, Associated Alcohols & Breweries and Globus Spirits have fallen by up to 8% on the BSE in otherwise strong market after the Supreme Court order banning sale of liquor along the national and state highways.

Liquor vends within 500 metres of national and state highways will have to shut down from Saturday, the Supreme Court on Friday said, exempting the hill states of Sikkim, Meghalaya and Himachal Pradesh and areas having population up to 20,000, the PTI report suggests. CLICK HERE TO READ FULL REPORT.

According analysts ban on liquor sales close to highways weighing on Q4FY17 alcohol industry sales, given destocking by retailers. Further, the demonetisation impact continues, albeit lower than in Q3FY17.

Among individual stocks, United Spirits, the largest liquor company in India with more than 50% market share, was down 6% to Rs 2,048 on BSE at 10:56 am, as compared to 0.47% rise in the S&P BSE Sensex. The stock slipped 8% to Rs 2,002 in intra-day trade so far.

"The Supreme Court ruling will impact all liquor companies as ~35-40% of liquor outlets (on average) are located along national or state highways and will have to shut shop and relocate from April 1, 2017 – this will essentially drive destocking in the near term and will impact volumes in 1QFY18 (may have also impacted 4QFY17 volumes a tad due to lack of clarity over this ruling to date)," point out Rohit Chordia and Anand Shah of Kotak Institutional Equities in a report.

"However, given this is a channel-level issue and not a demand issue, we expect the impact to be material but transitory in nature until shops relocate and restock in 2Q/3QFY18. In the interim, we expect bulk of consumer-level demand to be met through compliant outlets," they add.

Analysts at Emkay Global, however, maintain a buy rating on Radico Khaitan with a target price of Rs 202.

"Radico Khaitan is trading at 46% discount to its global comparable peers and at a 12% discount to its 5-year historic price earnigs ratio (PER). We believe that with strong brands and a good distribution network, RDCK is poised for an upward rerating in its valuations multiple. We initiate coverage on the company with a BUY rating and a target price of Rs 202. Our target PER of 20x is based on 24% discount to peer group," says Anubhav Gupta of Emkay Global in his March 30, 2017 report.

GST impact

In addition to the ban on sale of liquor close to highways weighing on Q1FY18 performance, analysts at IIFL Institutional Equities believe the goods and services tax (GST) implementation (likely in Q2/ Q3FY18) would weigh on FY18 sales growth as United Spirits adapts to the changed regulatory environment.

Further, a tax increase in Karnataka may weigh on FY18 volumes. In such a situation, United Spirits ability to manage costs and in turn profitability remains the key to performance, said analysts in latest report.

UNITED SPIRITS 2045.25 2173.45 -5.90
ASSOC.ALCOHOLS 157.55 165.80 -4.98
RADICO KHAITAN 131.35 137.50 -4.47
GLOBUS SPIRITS 73.30 76.25 -3.87
KHODAY INDIA 56.05 57.55 -2.61
PINCON SPIRIT 63.75 65.45 -2.60
WINSOME BREW. 9.51 9.75 -2.46
EMPEE DISTILL. 51.00 52.05 -2.02
UNITED BREWERIES 755.60 770.55 -1.94
PIONEER DISTIL. 161.00 164.10 -1.89
G M BREWERIES 466.00 471.40 -1.15
RAVIKUMAR DISTLL 11.40 11.51 -0.96


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