HDFC Securities Says ‘Sell’ United Spirits As States Crack Down On Alcohol

HDFC Securities downgraded United Spirits Ltd. to ‘Sell' from ‘Neutral' due to structural and distribution hurdles, increasing competition, and Goods and Services Tax induced cost pressures.

Stating that "liquor is a whipping boy for state governments," the brokerage said in a research note this has led to continued structural challenges for United Spirits on liquor branding, distribution and pricing fronts.

This is fuelled by GST-led cost additions, liquor industry's shrinking volume compounded annual growth rate to 3.5 percent in financial year 2015-16 from 13 percent in financial year 2011-12. The company's current rich valuations offer a decent exit point, added the brokerage.

Profit margins for United Spirits have been lagging due to indirect taxes rising to 66 percent in FY17 from 42 percent in FY10, while premiumisation is difficult as it's part of a ‘media dark' industry, said HDFC Securities.

Ban of liquor sales near highways, demonetisation and an increasing number of states announcing prohibition on liquor consumption are further dampeners for UNSP's business.

Another potential challenge could arise from probable changes in tax structure for Indian made foreign liquor, the brokerage said. The excise duty on IMFL is 60 percent, a mere 10 percent high from the duty on beer, despite the former exhibiting a higher alcohol/price ratio.

When compared in terms of alcohol by volume, IMFL is prone to further increase in its tax structure, resulting in contraction of sales and profits for liquor majors like United Spirits.