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Event update: Alcoholic Beverages - Karnataka IMFL tax increase to have a minimal impact

Event

The Karnataka state government in its state budget today has proposed to increase the existing rates of Additional excise duty (AED) on Indian made Foreign Liquor (IMFL) by 4% across all the 18 slabs.

Key details

• As per the Karnataka state budget for 2018-19, government has proposed 4% increase in AED only. There is no change in the basic excise duty (@ Rs 50/BL). This comes on the back of 8% increase in AED announced in state budget in February 2018 prior to the state elections.
• Further the increase in AED is only on IMFL and there is no increase in AED rates for Beer.
• Impact analysis – Based on our working for three liquor brands across three different slabs (refer Exhibit 1 below) and our interaction with industry players, a 4% increase in AED results in a 2.5-3% increase in the MRP/bottle across all slabs which will be automatically adjusted in terms of new MRP in the state.

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Karnataka is one of the key markets for the industry both in terms of revenues as well as profitability. From a salience perspective, it is the largest and one of the most profitable markets for United Spirits (UNSP) and United Breweries (UBBL). We believe no change in the excise structure for Beer is positive for UBBL. Further, our analysis of revised structure on some of the brands across different slabs and our interaction with industry players suggests that a 4% increase in AED in IMFL would result in a 2.5-3% increase in MRP/bottle, which we believe is unlikely to have any significant impact on the volumes for the IMFL players in the state. Hence we believe the fall in stock prices today across the sector based on this event is unwarranted. We maintain our Neutral rating on United Spirits and Outperformer rating on Radico Khaitan and United Breweries.