ICRA warns of margin contraction in alcohol industry for FY24 due to rising costs

The alcobev industry witnessed a strong revival in the last fiscal in FY23 led by a healthy demand across both segments -spirits and beer, after two consecutive pandemic-hit years of FY21 and FY22.

"During Q1 FY2024, the spirits industry reported a 13 percent YoY increase in revenues despite being the lean season for the segment, while the beer industry, despite being the peak season, witnessed a marginal decline of ~1%, due to the unseasonal rainfall," it said.

However, despite a steady demand, OPM of ICRA's sample set companies is poised to contract further by ~90-140 basis points in FY2024, following a sharp 300 basis points decline in FY2023," it said.

The primary reason for the expected margin contraction is the elevated prices of key inputs in the current fiscal, like non-basmati rice and other grains such as maize, used to produce extra neutral alcohol (ENA), the base to manufacture spirits.

The impact of a sub-par monsoon, the El Nino conditions, and the government measures on grain prices thus remain crucial to ascertain the industry cost structure. Besides, packing material costs also remain high, particularly glass, led by an increase in soda ash prices.

However, prices of barley, the key raw material for producing beer, have witnessed correction in recent quarters and are likely to remain stable in the near to medium term.

Moreover, the availability and consequent pricing pressures from the diversion of grains towards the production of ethanol, which is seeing increased demand due to the Government blending norms, is also a key influencing factor to monitor for the industry.

"While ICRA's sample set undertook a sizable capex at 5 percent of the revenues in FY2023, the same is expected to moderate to 2-3 percent in FY2024 and FY2025 as key players enhanced their capacities recently," it said.

Moreover, the majority of the ongoing capacity addition is attributed towards beer manufacturing, which is expected to come up in the near to medium term with some players looking to expand to new states and deepen penetration in the existing regions.

"ICRA expects the industry to continue to demonstrate stable and healthy credit metrics supported by strong cash flow generation and limited debt addition," it said.