Home / Companies / News /  Pernod Ricard sees short-term pain over SC’s highway liquor store ban

Bengaluru: After a rough December quarter, distiller Pernod Ricard SA, which sells whisky brands such as Royal Stag, Imperial Blue and Blenders Pride in India, expects more short-term pain from a recent Supreme Court ban on liquor outlets near highways.

Analysts said subdued discretionary spending by consumers and implementation of the Goods and Services Tax (GST) are other challenges.

“Our industry needs fair and balanced regulations and a responsible and compliant mindset and behaviour from all players. The states, retailers, manufacturers, must build a balanced ecosystem," said Guillaume Girard-Reydet, MD and chief executive, Pernod-Ricard India. “The number of liquor stores and on-trade outlets are already very low in most states. The recent decision by the Supreme Court is a real challenge on a short-term basis," he added, in an emailed response to Mint questions.

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In December, the Supreme Court banned liquor outlets from operating within 500 metres of national and state highways starting on 1 April.

Pernod has reported a 3% increase in its India sales during the six months ended 31 December—it follows a July-to-June fiscal—and said it was hurt by the 8 November invalidation of high-value notes.

The bigger hit from demonetization was on sales of its local or Indian-made foreign liquor (IMFL) brands, with Blenders Pride proving more resilient than others, the French distiller said in its half-yearly presentation on 9 February.

The company reported a 14% jump in its India sales in the first half of the previous fiscal, ending December 2015, and 19% during the same period in the year before, i.e. ending December 2014.

Pernod-Ricard, which also owns Absolut vodka and Chivas Regal whisky, has been posting strong double-digit growth rates in India on an annual basis in recent years.

But the 3% growth in sales for six months ended December 2016 suggests growth was either flat or declined slightly in the quarter, according to Edelweiss Securities Ltd. “This must have been the first (slowdown in growth rate) after many, many quarters is my estimate. They don’t report quarterly numbers but prior to that, based on their yearly numbers, we used to see strong double-digit growth in most years," said Abneesh Roy, senior vice president at Edelweiss.

In comparison, United Spirits Ltd, which owns brands like McDowell’s No1 and Royal Challenge whiskies, reported a 6.16% increase in net revenue to Rs7,082.22 crore during the December quarter.

“Odds that Pernod will follow strong fiscal first-half earnings with upgraded growth estimates are threatened by the developments in India, accounting for about 10% of sales. Indian sales could drag on second-half performance, after the introduction of a law prohibiting alcohol sales within 500 metres of a highway—potentially hitting as many as 50% of Pernod’s outlets," Bloomberg Intelligence analyst Duncan Fox wrote in a report two weeks ago. 

On a call with analysts in January, USL’s chief executive officer Anand Kripalu also struck a cautious note despite a good December quarter, and said the ruling will be a key variable going ahead and something it will be monitoring closely.

“United Spirits is a larger company and it has got its act together. They have relaunched some of their key brands (McDowell’s, Royal Challenge, Signature). They have become more aggressive on point of sale so better visibility in the shop etc," Edelweiss' Roy said. 

Other obstacles loom, including a slowdown in discretionary spending. Any growth that may come in the near term will be from market share gains, Roy said. It is crucial for price growth to be restored, especially with GST in store, he added. Liquor is not included in GST, which means while alcoholic beverage firms will have to add GST to raw material costs; they are not eligible for output credit like most other sectors. 

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