Liquor stocks on a ‘spirited’ bull run

Liquor stocks have become market favourites this year with up to 180 per cent returns on the back of robust demand for premium alcoholic beverages that lifted margins and profits, and price improvement in certain States. 

For instance, United Spirits is up 18.69 per cent year-to-date (YTD), Som Distilleries – 180.5 per cent, Jagatjit Industries – 43.74 per cent, Tilaknagar Industries – 86.1 per cent, Sula Vineyards – 47.66 per cent, and Radico Khaitan – 21.99 per cent. This is higher than the 7.54 per cent growth seen by the benchmark index Sensex. 

Boost to m-cap

The sector’s combined market-cap has crossed the ₹1.5-lakh crore mark, with United Spirits’ market-cap reaching ₹75,037 crore, followed by United Breweries reaching ₹41,652 crore and Radico Khaitan ₹16,706 crore.

Pankaj Kumar, Research Analyst, Vice President – PCG Research, Kotak Securities, said that larger players in the industry are benefiting from the premiumisation strategy, which has increased volumes and improved margins. Radico Khaitan, for instance, saw a gross margin improvement of roughly 300 basis points and is further expected to improve its margins, he added. 

The approval to increase the price of the products from certain States, too, has been a tailwind for the industry. Nearly a dozen States, including Rajasthan, Kerala, and southern States, have allowed price increases in the recent past. 

Sector headwinds

In terms of headwinds, Kumar said that while in terms of packaging material, there has been a sequential improvement, prices of Extra Neutral Alcohol (ENA) — the primary raw material to make beverages — are still inflationary, and raw material costs have moderated, but still remain on the higher side. 

The reason for uptick is largely robust demand and improved margins for most leading players, while some companies have improved their financials. Tilaknagar Industries recently concluded its financial revamp and prepaid its restructured debt. Jagatjit Industries, too, is on a debt reduction path as it plans to halve its debt by liquidating a real estate asset.