Indian alcoholic market is expected to grow faster under Indian consumer space. Several drivers such as per capita income, premiumisation, demographics and regulation challenges are now moderating.

The two big brands such as United Spirits (USL) and United Breweries (UBL) enjoy more than half of the market share in India. Though both companies are different in terms of their products as UBL drives the beer market while USL goes with spirits, looking at the alcohol industry as a whole, these are the two prominent players in the organised market.

In terms of stock returns, UBL leads the race as the stock gained 43 percent in the last one year while USL has fallen by 19 percent. UBL continues to trade at a premium at 45 times FY21 against USL at 33 times FY21.

Why UBL trades at a premium when compared to USL?

It is clear from the table above that UBL's financial performance outperformed USL's in the last five years. While both the companies managed to pare down their debt to improve profitability, UBL saw a decline of 76 percent to Rs 312 crore from Rs 1,301 crore in the last five years against USL's 58 percent decline to Rs 3,430 crore from Rs 8,242 crore.

Volume growth is largely impacted by regulatory changes like increase in excise rates. Recently, the Maharashtra government hiked excise rate by 20-25 percent from January 1. In 2018, the Karnataka government hiked excise duty on liquor by 8 percent. Also, a ban on liquor stores on highways in FY17 impacted the overall alcohol industries.

On December 15, 2016, the Supreme Court had ordered a ban on all liquor shops along the national as well as the state highways within 500 metres. This had led to the market falling 3 percent in 2017. However, later in August 2017, the court had clarified that the ban was not applicable within city limits. The market recovered and liquor sales in the country grew in double digits in 2018, the most since 2012.

Volume Growth

Despite all the hiccups, UBL continued to deliver volume growth, ahead of Industry growth rate while USL’s volume growth remained under pressure. For USL, 'prestige and above' segment, which is currently contributing 65 percent to the topline, has been the only driver for volume growth. Meanwhile 'popular' segment, which was impacted post demonetisation and highway liquor store ban, is expected to outperform going ahead.

'Prestige and above' segment consists of products with prices of above Rs 400 (average consumer prices in India) for a 750 ml bottle. Products at prices below Rs 400 fall under 'popular' segment.

Market Share

UBL continues to make significant investments in brand-building activities and this has helped it maintain a dominant market share, over 50 percent in the beer industry. USL also enjoys an overall market share of 45 percent.

Consistency

Apart from grains and other raw materials, packaging material, especially glass bottles form a major component. Around 60 percent of the total raw material is packaging material. Both, UBL and USL have managed to maintain the cost of packing material cost as a percentage of sales in a consistent manner over FY13 to FY18. Packaging cost as a percentage of net sales for UBL stands in the range of 26-27.5 percent over FY13 to FY18, while USL managed to pare down the cost from the levels of 45.1 percent in FY13 to 38.6 percent in FY18.

Concerns

Few overhangs will continue forever like an increase in excise duty, any changes in government regulations and food grains prices. Consumer preference and competition also need to be factored in.

Consumer preference may be beer over spirits or either way but investors preference seems to be more inclined towards beer. Though UBL continues to trade at a premium over USL on its financial performance whether it is justified or not still remains in the hands of markets.

Also, as we enter into the election year, volume growth remains a concern for the first quarter of FY20 as indicated by industry players. Overall alcohol space is expected to grow faster within consumer space going ahead.

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First Published:Apr 15, 2019 1:15 PM IST