Supreme Court’s Liquor Ban Could Be A ‘Highway To Hell’ For United Spirits: CLSA

The Supreme Court's ban on liquor sales along highways could impact a third of liquor outlets in the country.

The ban will not only impact the revenues for the liquor companies but impact as much as Rs 20,000 crore of revenue from liquor for state governments.

The ban in liquor outlets will have a huge implication for industry and states, brokerage CLSA said in its report, ‘Highway to Hell?' on United Spirits Ltd.

The brokerage said most of the liquor outlets would be closed down from April 1, and would be required to relocate to other places. But given restrictions around religious and educational institutions, this migration could be tough and time consuming, it added.

State governments could come to the aid of the industry since a large part of their revenue is linked to liquor sales.

Another option, which a few states have implemented is, conversion ofhighways into district roads. 

According to brokerage Emkay Research, 62 percent of the liquor is consumed in southern India, while northern India consumes only 18 percent of the industry volumes. The eastern region consumes 8 percent and western India consumes 9 percent.

Five states account for 61 percent of the industry volumes. Tamil Nadu is the largest consumer of liquor accounting 18 percent, followed by Karnataka at 17 percent.

The Order

Supreme court had on March 31 refused to relax its December 2016 order banning liquor outlets along 500 metres distance of national and state highways.

The court modified the order slightly to reduce the distance to 220 meters for municipality areas with population of under 20,000. It also exempted Sikkim and Meghalaya from this 500 metre limit.

Further, it allowed the licences issued before December 15, 2016, and valid beyond April 2017 to continue until the licence expires, or September 30, 2017, whichever is earlier. Licences would remain valid till end of September for Telangana and end of June for Andhra Pradesh.

United Spirits Earnings Downgrade

The brokerage while stating that the process of transition is quite complex and impact on the industry volume is difficult, cut the company's revenue forecast by 5-7 percent and its earnings per share projections by 17-28 percent.

We strongly recommend investors to SELL as the road to profitability could bequite long and earnings volatility would weigh on the stock. A potential openoffer from Diageo seems to be the only positive trigger, if at all.

Also Read: Did Not Formulate Policy, Upheld Legislative Intent: Apex Court On Liquor Ban