An exciting new chapter of premium-led growth has just begun for India’s alcohol drinks market, and select liquor stocks are now being watched by global brokerages. Jefferies in its newest report on the alcobev sector has recommended a ‘Buy’ on Radico Khaitan & Allied Blenders & Distillers, While it holds a ‘Neutral’ on United Spirits. The international broker believes that premiumisation will now be the largest long-term catalyst for growth in India’s alcobev sector.
With disposable income set to grow, urbanisation, new consumer preferences and the increasing demand for premium brands the brokerage expects these trends to support earnings momentum for the whole sector. Although Jefferies sees this effect having different implications for different companies.
Premiumisation Continues to Reshape India’s Liquor Market
Jefferies has pointed out that the liquor industry in India is undergoing a structural shift where consumers moving away from cheap products towards premium and prestige drinks.
This phenomenon, termed ” premiumisation ” in the market, is leading to higher revenue growth, healthier operating margins and improved profits for those that own premium brands portfolios.
The broker said that premium and luxury liquor segments remain strong for the time being, outpacing the industry on:
* Rising household incomes
* Younger urban consumers
* Brand-conscious purchasing behaviour
* Growth in luxury whisky, vodka and gin categories
*Expand modern retail, hospitality and other channels
We believe the three long-term demand drivers will ensure the continued strong growth of the Indian alcobev industry in the years to come. ([Business Standard][2])
Why Jefferies Prefers Radico Khaitan
Of all the listed liquor companies, Jefferies has highlighted Radico Khaitan as one of its best investment ideas.
According to the brokerage, the company is well placed to leverage premiumisation given its growing premium portfolio, stronger brand equity and improving earnings.
Several factors support the positive outlook:
• Extensive premium whisky and vodka selection
* Higher contribution rate in certain lines of product whereby at the end of marketing exercice, contribution rate expected from these lines are higher than its actual rate.
* Healthy earnings growth visibility
* Margin expansion opportunities
* Continued premium product launches
Radico Radico has further deepened its presence in the premium Indian spirits markets enabling it to compete in higher-value categories where the margins continue to be much higher than those in the mass-market liquor category.
Allied Blenders Emerges as a High-Growth Opportunity
Jefferies has also given a “Buy” rating to “Allied Blenders & Distillers, another attractive premiumisation play”.
The brokerage feels the company is slowly moving the product mix and is investing in higher tier brands which could enhance profits in the mid-term.
Its investment thesis includes:
* Rising premium product contribution
* Improving operating margins
* Portfolio repositioning
* Better manufacturing efficiencies
* Long-term earnings growth potential
Jefferies notes that despite Allied Blenders still being a smaller company than industry leader United Spirits, the faster-growth profile means it will have more upside for long-term investors. ([Whalesbook][3])
Why United Spirits Receives a Neutral Rating
Although Jefferies is favourable on the entire liquor industry,it’s given a **Neutral** on United Spirits.
The brokerage agrees that United Spirits still maintains a commanding position in the Indian organised liquor market with a broad portfolio of premium brands.
However, Jefferies feels that a lot of the company’s growth potential has already been factored into its valuation when compared to Radico Khaitan and Allied Blenders.
Compering with other stocks, brokerage also has relatively mild earnings growth estimates for the stock which can offset potential leader-yield and make the stock less attractive for investor. ([Financial Express][1])
India’s Alcobev Industry Offers Long-Term Structural Growth
From the report, it would appear the alcoholic drinks industry in India still has plenty of room to grow when benchmarked against many of the world’s more developed countries.
Several macroeconomic factors continue to support long-term industry growth:
* Rising middle-class population
* Increasing disposable income
* Premium lifestyle spending
* Urban consumption trends
* Organised retail expansion
* Willingness of broader consumer acceptance to premium brands35
Compared to developed international markets, India’s premium liquor market still has a long way to go. With not enough penetration today, India still has great potential over the next 10 years.
According to the业内experts, firms that are investing most heavily in high premium brands will be among the main winners.
Investors Focus on Earnings Quality Instead of Volume Growth
Rather than just achieving higher volumes of sales, investors are putting their stake into companies making higher margins.
Premium brands generally deliver:
* Better gross margins
* Higher pricing power
* Stronger brand loyalty
* Better return on capital
* Improved cash generation
Thus, those producers that can continually raise their premium product mix should have higher market values.
This is the reason why brokerage houses are now attaching greater importance to quality of earnings, rather than just the volume expansion when analyzing liquor stocks.
Risks Investors Should Watch
While the positive outlook, Jefferies listed the following risks to the sector as well.
These include:
- Regular alterations to excise policies at the state level
- Items for which alcohol carries a higher tax rate
- Other factors4. Inflation in raw material costs
- Regulatory uncertainties
- Competitive pricing pressure
Since alcohol continues to be a heavily regulated business in India, policy decisions by state governments can materially influence specific regions profitability and demand.
Therefore, investors need to watch out for both regulatory developments and company-specific execution when making investment decisions.
Market Outlook for Alcobev Stocks
As Consumption Patterns Evolve, India’s Premium Liquor story continues to garner strong institutional interest.
According to Jefferies, those companies that both develop the franchise on world-class brands and selling greater number of units efficiently stand, are likely to outperform the broad consumer group in the midterm.
Of the names above, Radico Khaitan and Allied Blenders seem best placed to tap into these tailwinds in the medium/long-term, with United Spirits being a good quality, fundamentally sound business, although with less scope for valuation upside at this point.
Conclusion
Jefferies’ fresh sector initiation boosts emerging hope for India alcohol space, with brokerages and report suggesting that premiumisation will be the key structural trend to look forward to for future years, as consumers gradually upgrade their consumptions.
For investors interested in playing this consumption theme that is still evolving, Radico Khaitan and Allied Blenders emerge as preferred bets given their higher growth potential on earnings as well as growing premium portfolios. United Spirits continues to be a market leader but has a more balanced risk reward profile vis-a-vis its peers and hence Neutral recommendation.
Premium liquor companies could be at the top end of the performance spectrum in the broader FMCG and consumer discretionary sectors over the long-term as India’s disposable power expands.
