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Sector update: Alcoholic Beverages - Interaction with Allied Blenders and Distillers

We interacted with Mr. Deepak Roy, Executive Vice Chairman at Allied Blenders and Distillers (ABD).

Key takeaways from the interaction are - a) increasing competitive intensity in the Prestige & Above segment b) recovering volume growth in the industry in FY19 and c) relatively benign input cost environment. We believe UNSP’s transitioning to a more asset-light model in the regular segment has opened opportunities for large regular segment players to increase share; however, it remains to be seen whether this trend will continue. While we expect FY19 to be a positive year for demand and gross margins for the IMFL industry, regulatory changes and ENA price increase remain a key risk. We maintain our Outperformer rating on Radico Khaitan and our Neutral rating on United Spirits (UNSP). 

Third-largest spirit company in India: ABD is the third-largest spirit company in India, after United Spirits and Pernod Ricard. The company sold ~35m cases in FY18 with over 90% of its volumes coming from its Officers Choice brand, which is the largest whisky brand in the world in volume terms. The company has seen 3% volume CAGR over FY15-18.

Comments on industry volume growth: Mr. Roy expects ~12% volume growth in the industry in FY19, with sub 5% growth in the regular and 15%+ growth in the Prestige and Above segments. The subdued growth in regular segment is because no major player is incrementally investing in this segment, given the relatively lower margins there over some time. Also, since few players have priced their entry-level prestige brands at price points that do not require a major up-trade, especially at lower SKUs, the conversion from regular to prestige is also driving growth in the Prestige & Above segment. In the non-southern markets, a clear trend of up-trading has been seen from country liquor to regular IMFL, which is aiding growth in the regular category

Market share gains likely in the regular segment: Players like ABD and Radico Khaitan, over the last 18 months have witnessed market share gains in the regular segment as UNSP has transitioned a large number of states into the franchise model for the regular segment. However, Mr. Roy believes that while the regular segment will not see incremental spends, ABD’s portfolio can outperform growth in the regular category.

Competitive activity remains strong: Competitive intensity remains strong, especially in the semi-premium segment from both Pernod Ricard and UNSP. Moreover, ABD also has upped its game in this segment, with continued investment behind Officer’s Choice Blue and its recent launch backed by heavy investments in Sterling Reserve (2 variants B7 & B10 competing with Royal Stag and Blender’s Pride price points, respectively) in select markets. The launch has seen healthy response, with the company gaining 10-15% market share in select markets in first 4-5 months of the launch. Management expects to cross 1m cases in FY19E for the brand, which will be the first full year of launch; the company plans to scale up presence of the brand in more states.

Positive pricing trends from states: The positive pricing trends across states have been a function of bunching up of price increases. Mr Roy was hopeful of continued upward momentum in pricing, especially in certain southern states like Andhra Pradesh and Telengana, where in spite of the recent price increases, the 5-year price increase CAGR continues to be in low single digits.

ENA prices remain benign, glass prices expected to firm up: While ABD is a large player in the regular segment, however, unlike Radico Khaitan (which has a sizeable molasses-based portfolio) majority of its portfolio is grain based. As per the company, while ENA prices continue to remain benign, glass prices are expected to firm up further in the coming quarters with glass players demanding another 3-4% price hike.