Liquor ban: 2017 sales in low spirits, valuations soar

MUMBAI: Liquor sales in the country declined for the second consecutive year in 2017, shrinking 3% in part due to the Supreme Court-ordered ban on sale of alcohol near highways and distribution changes in some states. This is the worst performance of the spirits industry in India — one of the fastest-growing liquor markets in the world with a compounded annual growth rate of more than 12% for the decade starting 2001.

Sale volumes of locally made versions of foreign liquor fell 2.7% from 2016 to 324.7 million cases, with demand dropping for whiskey, brandy, rum, vodka and gin, industry executives said, citing excise department data. In 2016, the market fell 2.2%.

Indian-made foreign liquor (IMFL) brands such as Royal Stag, McDowell’s and Officer’s Choice account for almost 70% of the market. With companies focusing on pricier brands and several states planning to control liquor sales directly, industry expects a sharp recovery in 2018. “There is no fundamental issue with demand, but there was a structural regulation impact in the market,” United Spirits Ltd (USL) MD Anand Kripalu told investors on Wednesday.


In March last year, the Supreme Court had imposed restrictions on the sale of alcohol near state and national highways, which led to the closure of about a third of the country’s liquor vends. As sales dipped, several companies halted supplies fearing the ban would continue. The court subsequently clarified its ruling, easing conditions for liquor sales.

Apart from this, policy changes in West Bengal, Chhattisgarh and Jharkhand to allow liquor sales only through government-owned corporations, similar to states such as Delhi, Rajasthan, Kerala and Tamil Nadu, added to the uncertainty.

The industry executives cited earlier, however, said consumer demand picked up in the third quarter of the fiscal year, although that was also because of a lower base due to a demonetisationinduced dip.

The note swap was announced in November 2016.

Valuations Soar
“The industry has grown by 6% during the October-December quarter and will end the financial year with a growth of about 1-2%. A positive growth after two years of decline in the alcobev industry is indeed cause for cheer,” said Ahmed Rahimtoola, marketing head at Allied Blenders, which sells Officer’s Choice, the world’s largest spirits brand.

While the Haryana government has decided to establish a corporation from April 1 to sell IMFL directly to retailers after purchase from manufacturers, Punjab and Uttar Pradesh are expected to announce similar distribution plans soon.

USL, which controls nearly 40% of the market, said it did not push products aggressively in states that are expected to change their route-to-market to minimise credit risk of existing dealers and distributors. The company, part of the world’s largest spirits firm, Diageo Plc, said that underlying performance outside these states shows a positive growth trend. In the December quarter, USL posted sales growth of 1%, while Radico Khaitan, which sells brands like Magic Moments vodka and Morpheus brandy, saw revenue growth of 17%.

“With several states turning into corporations, the network will only expand and could grow at a double-digit rate. Issues such as demonetisation and highway ban are no longer relevant,” said Abhishek Khaitan, managing director of Radico Khaitan.

Despite falling sales, most listed spirits companies have seen valuations soar for about a year now, with a few stocks trading near their all-time highs. The top 10 companies have collectively added nearly ?22,112 crore in the past 52 weeks to total market capitalisation, which stands at ?58,229 crore.

Growth in the medium-to-long term will be driven by rising disposable income in a country with more than a billion people that has a youthful demographic and a low per-capita consumption of alcohol.

“From 4QFY18, the impact of the highway ban and operating model changes is expected to subside, while route-to-market changes are expected to normalise in three-four months,” said a report by brokerage firm Motilal Oswal.

“Price increases granted in key states like Andhra, and now Telangana, augur well for the future.”

While mass and lower-priced brands across segments dragged down the liquor market last year, premium products saw mid-single-digit growth. This was partly due to USL shifting its focus to premium brands and franchising lowerpriced ones in key states.

Two years ago, the company's pricier products accounted for about half of its sales. That has now risen to about 65%. “In future, we see the segment contributing to about 75%,” Kripalu said.