UBS cuts price target on United Spirits by 9%

UBS has slashed its target price on United Spirits to Rs 500 from Rs 550 and retained its 'sell' recommendation as the brokerage sees negative catalysts for the company in the form of more Indian states being inclined towards alcohol prohibition or increase in taxation on alcoholic beverages.

Citing news reports that Mizoram has promulgated a law that prohibits alcohol in the state from May 27, UBS said this indicates the willingness of the state governments to move towards alcohol prohibition although Mizoram is a small state in terms of alcohol consumption and is unlikely to have a material impact on the sector.

Andhra Pradesh chief minister YS Jagan Mohan Reddy recently indicated plans to ban liquor by 2024 in a phased manner. Media reports have also suggested that the new liquor policy for Andhra Pradesh is likely to result in sharp price increases.


“Andhra Pradesh is one of the largest liquor consuming states in India and a liquor ban in the state will have a material impact on the sector,” said UBS.

The brokerage added that states that do not follow the prohibition route may consider increase in taxation on alcoholic beverages, which can help them meet discretionary expenses like farm loan waivers or social sector schemes.

“For example, Maharashtra, West Bengal, Karnataka, and Rajasthan already increased taxes on alcoholic beverages in 2019. Given such price increases, we believe volume growth for the sector in FY20E/21 is likely to be lower than that in FY18/19," said UBS.

The current valuation of United Spirits is not pricing in potential negative surprises, the brokerage added.