Near-term profitability gains likely to be difficult for United Spirits

United Spirits expects its revenue to grow in double digits over the medium term, despite regulatory challenges, said the company.

The Street, however, is still worried over the effects of cost, competition, and taxes on the company’s profitability. Analysts at Emkay Research said expanding margins would be tough in 2019-20 (FY20) because of the steep increase in input prices and intense competition.

Prices of key inputs such as extra-neutral alcohol (ENA) and glass bottles have gone north, casting a shadow on operating profit margins of the company. ENA accounts for about 40 per cent of raw material costs.

In the January-March quarter (Q4) of 2018-19 (FY19), gross profit of the company contracted sharply by 228 basis points (bps), year-on-year, to 46.5 per cent. Its effect on earnings before interest, tax, depreciation and amortisation (Ebidta) was, however, offset by lower spending on advertising.

According to analysts, Ebidta will increase by only 30 bps in FY20 to 14.3 per cent. In FY19, it had expanded by 154 bps.

Over the past five-six months, the company has increased prices by 1.5-5 per cent in some large states. But, competition — especially in the premium segment — restricts its pricing power. In FY19, the share of Prestige and other premium segments in the company’s net sales rose to 66 per cent from 63 per cent in FY18.

Also, how much hiking prices will improve margins depends on tax hikes by states. Analysts at Edelweiss Securities cited examples of West Bengal and Maharashtra, and said farm loan waivers might lead to increased taxes on liquor.

Long-term factors, however, still seem to benefit the organised segment of liquor players.

Improving disposable income in urban areas, lower per-capita alcohol consumption in India (2.2 litres annually versus 4.5 litres in the world), and supportive demographics with a rising population in the working-age group are expected to augur well.

In fact, a steady conversion of demand from country liquor to IMFL (Indian-made foreign liquor) will benefit United Spirits over a long term.  

Besides macro factors, the company’s focus on sharp growth in its premium portfolio and its franchise model in its “popular” segment further add to the long-term growth potentials. However, regulatory hurdles would continue to be a bugbear.

For instance, if Andhra Pradesh implements a full liquor ban, it would dent United Spirits’ topline and bottomline by 3-4 per cent. Some analysts estimate 5-6 per cent volume contribution by the state.

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