State governments continue to hike taxes to fund subsidies, Liquor stocks under pressure

In Karnataka, the excise duty on Indian-made Foreign Liquor (IMFL) and beer has been increased.

The Karnataka budget said "I propose to increase the existing rates of additional excise duty on Indian made liquor by 20 percent. I also propose to increase the additional excise duty on beer from 175 percent to 185 percent in excise rates."

The players expected to be impacted are United Spirits, UBL, Radico Khaitan, Som Distilleries and GM Breweries. All of these stock are trading 2 to 6 percent lower on July 7.

Karnataka is a market of 7 crore cases for IMFL and 4 crore cases for beer, Som distilleries said in an interaction with CNBC-TV18.

Furthermore, there is an increase in tax on milk in Karnataka. Analysts expect the price hikes to be absorbed by market. However this is a negative news as Karnataka state had given price hikes for beer industry of 8-9 percent in April 2023.

Karan Taurani, Analyst at Elara Capital expects this hike to lead to an MRP hike of 7 percent and 15 percent for the beer and spirits segment respectively. He adds "Karnataka contributes 15-20 percent of volumes for spirit and beer (higher for beer industry). Hence, any hike in prices will have a negative impact on volume growth prospects."

Abneesh Roy, Analyst at Nuvama has a negative on Liquor stocks. He says, post GST, liquor is one of the easiest way to increase tax collections. This year has many state elections apart from General elections 10 months away, so political parties will be aggressive on subsidy announcements to voters. He adds, "there is a higher risk for the liquor stocks, than other consumer stocks".