Bangalore: Liquor firms are likely to be hit by an increase in the price of alcohol, which has almost doubled to Rs40-45 a bulk litre in the past six months due to a shortage of molasses caused by a lower sugar cane crop this year.
“The graph of profitability has gone on the decline,” said J.K. Arora, chairman and managing director of Bhopal-based Som Distilleries Pvt. Ltd, which bottles brands such as Legend Deluxe whisky, Black Fort rum and Blue Chip vodka. “This year it (price rise) is unprecedented. At least till the next crop season, it will be like this.”
Prices of molasses—a sugar industry by-product from which alcohol is distilled—move cyclically depending on sugar cane production. After two years of glut caused by an increase in production globally that also saw sugar prices fall, cane availability for the current crushing year starting October is estimated to be around 290 million tonnes (mt). The country’s sugar cane production was estimated at 340mt for the year ended September.
Worrying signs: A liquor shop in New Delhi. Distillers do not expect prices to come down as the production of molasses in the new sugar season commencing from November is expected to be at least 10% lower. Rajeev Dabral / Mint
“Returns (from paddy) were nearly 25-30% more than what sugar cane was. So, there’s a big shift from sugar cane to cereals, basically corn in north India and rice in the south,” said M. Srinivaasan, managing director of Bangalore-based Sri Chamundeswari Sugars Ltd.
Prices of molasses shot up to Rs6,000 per tonne in the year to September, while it ranged between Rs1,500 and Rs3,500 in the previous year. A litre of alcohol ranged between Rs16 and Rs21 a bulk litre in the year to September 2007.
“The outlook for molasses price for the new sugar season commencing from 1 November is once again very bleak and production of molasses is expected to be at least 10% lower than the last year,” said the All India Distillers Association, or Aida, in an emailed response. “Therefore, prices are not expected to go down by a great extent.”
Average annual production of molasses in India is 12mt, Aida said. Nearly 50% of the alcohol produced is consumed by the liquor industry and the rest by chemical industries and for blending with petrol.
“We have no choice but to (push) up prices,” said Raju Vaziraney, chief operating officer of Delhi-based liquor company Radico Khaitan Ltd, which makes brands such as 8 PM whisky, Contessa rum and Old Admiral brandy. “There will be a bottom-line erosion for all companies.”
However, Vaziraney said cheaper drinks would be the worst hit by the rise in prices of alcohol, which accounts for nearly 60% of the cost of producing these brands.
Siddharth Bannerji, managing director of Kyndal India Pvt Ltd, a Delhi-based importer and distributor of foreign spirits, said drinks priced at Rs100-200 per 750ml bottle would be hit. Bannerji estimates sales of Indian made foreign liquor—as locally made drinks such as whisky, rum and brandy are known—to be nearly 200 million cases annually.
To ease the strain on its profitability because of the high prices, United Spirits Ltd, the nation’s largest spirits firm by sales, had stopped production of its low-end brands such as Kerala Malted Whisky and Vin Majestic in 2005-06.
“We are only affected on (brands such as) Khodays Rum and Hercules Rum,” said Satpal Chaudhry, chief operating officer of Bangalore-based Khoday India Ltd. “That volume is almost 30% of our total sales.”
Khodays rum is priced at Rs210 per 750ml in Bangalore.
Som Distilleries’ Arora said that the pinch will be felt more in southern markets such as Karnataka and Andhra Pradesh where governments control liquor pricing. “Fortunately, we are operating in most of the markets where pricing is not controlled by the government.”
To raise alcohol production, Aida is lobbying with the government to ban exports of molasses and exempt import duty on it, besides demanding a lowering of excise duty to Rs250 from Rs750 per tonne.