Deep Dive: Is general economic slowdown impacting the alcohol industry?

United Spirits and United Breweries reported muted Q1FY20 earnings which followed tepid returns in Q4FY19.

Higher raw material prices had a huge impact on the operating margins. Price hike can’t be taken easily in such highly regulated environment which is another cause of concern for such companies. The effects have largely been factored in share prices of UBL and USL as both the stocks are down 8-10 percent year-to-date.

But considering the higher raw material prices and supply side issues, whether the alcohol producers manage to grow in FY20 remains to be seen.

Supply Side issues part resolved: The six-week general elections that ran from April 11 to May 19 also lead to restrictions on manufacturing in alcohol production which lead to supply side issues. But that bottleneck is now cleared. A good monsoon witnessed in some parts of the country will also help alleviate the water crises that impacted alcohol production.

Over the election overhang: The election overhang is now behind the industry. The biggest impact was seen in the volumes of the companies due to many dry days during the Q1FY20. Now the remaining three quarters will follow the normal course. July already saw growth returning to normal levels and the alcohol industry is now expected to register mid to high single digit growth.

Festive season: Festive season leads to higher demand. The upcoming festive season will provide a fillip to help revive growth in the coming months. Diwali, Christmas and New Year fall in the last two quarters which are normally strong for the industry.

Higher raw material prices: Prices for of barley and glass bottles, the key raw materials for the industry, are on an upward trend. Large part of margins were impacted by higher costs. And in the near term no softness is expected. Barley prices are up 15 percent and glass prices are up anywhere between 20-25 percent. With no relief in sight,  the higher prices will weigh on the margins, unless the manufacturers are able to hike prices.

Supply issues: Water crises continue in Telangana, one of the important markets for alcohol products, due to weak monsoon. Water is one of the key materials used for manufacturing spirits and beers.

Now that the election overhang and part supply issues have been addressed, the industry is expected to come to its normal levels. The biggest problem right now is the general slowdown in the economy, however, the alcohol industry has remained largely immune to it.

Moreover, higher raw material prices and supply issues are cyclical in nature. Industry experts are confident for revival in second half of this financial year.

USL reported revenue growth of 6 percent (adjusted for one time bulk sale), while UBL reported a 9.8 percent growth in Q1FY20. Volume growth was muted at 5 percent for UBL and 8 percent for USL.

During their earnings call, USL managing director and chief executive officer Anand Kripalu reiterated near term guidance of double digit topline growth and mid to high teens Ebitda (earnings before interest, taxes, depreciation, and amortization) margins. He added that improvement in margins would come from cost efficiencies and not from gross margins.