Highway liquor ban to impact United Spirits until September, says analyst
The impact of highway liquor ban on United Spirits will be much lower in the second quarter than in the first quarter, said Edelweiss
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Bengaluru: The Supreme Court’s ban on the sale of liquor near state and national highways is expected to impact India’s largest alcoholic beverages company United Spirits Ltd until September but the long-term view on the firm remains positive, according to Edelweiss Securities.
“The impact will be much lower in the second quarter than in the first quarter because state governments are also ensuring that the relocation happens fast. For states, this is the biggest (source of) tax and as far as possible they would not like to have that revenue cut,” said Abneesh Roy, senior vice-president of institutional equities at Edelweiss.
In December, the Supreme Court ordered a ban on the sale of liquor within 500 metres of all highways in a bid to curb incidents of drunken driving. That ruling has taken a toll on many—from liquor firms, hotels and outlets selling alcohol along highways to state coffers and even private equity investors who are struggling to exit their food and beverages investments in India.
In a presentation to investors in London on Tuesday, Diageo Plc-owned United Spirits’ chief executive also said the impact from the liquor ban would go through to the first half of the financial year 2017-18, till September. “We expect the impact to be mitigated eventually and where it doesn’t get mitigated the consumption will shift to other outlets,” Anand Kripalu, United Spirits’ CEO said in that presentation.
Shares of liquor firms rallied on Thursday on hopes that there could be changes in the Supreme Court’s order. According to an Economic Times report, the apex court said it might announce a modification to the rule in the second week of July as hotels and clubs sought changes. But even if the court modifies its ruling, the impact will remain until September, according to Edelweiss.
Another challenge ahead is the implementation of the goods and services tax (GST). While alcohol has been kept out of GST, raw materials used by liquor companies will be included in the tax. That’d mean firms like United Spirits will end up paying the tax but won’t be eligible to receive any credits. But state governments and liquor companies are in discussions with the central government on lowering the impact.
“We remain positive on (United Spirits from) a longer term perspective. Medium term there is a GST issue; there is the highway ban, in which the worst is now behind and from here on it will be improvement. But their quarterly results will be quite muted. There will be volume and EBITDA (earnings before interest, tax, depreciation and amortization) decline,” said Roy from Edelweiss.
United Spirits will report its March quarter results at the end of this month.