Why Liquor Stocks are a Must-Watch in the Upcoming Elections

The Indian liquor industry is one of the fastest growing industries in the world.

The Confederation of Indian Alcoholic Beverage Companies (CIABC) estimates the sales of alcoholic beverages grew 7-8% in 2023. The industry should maintain its growth rate over the next few years.

With increasing alcohol consumption, the top companies in the liquor industry are seeing strong growth in their revenue and profit.

According to CRISIL, in the financial year 2023, the revenue of leading organised liquor players grew by 15%. This was supported by growth in the tourism and hotel sectors. It's no wonder global companies are looking to enter the Indian liquor market.

According to a report by International Spirits and Wines Association of India (ISWAI), the Indian alcoholic beverage industry is expected to reach a size of US$ 64 billion (bn) by 2027. This would be up from US$ 52.4 bn in 2021.

This growth will be on the back of rising incomes, urbanisation, increased access to alcohol, the expanding middle class, premiumisation of brands, and rise in the number of young consumers. Also, alcohol is less of a taboo today compared to what it was a decade or two ago.

Here's a fun fact. Indians consume over half of all whiskey produced worldwide. This is due to India's huge population and a preference for whiskey.

As per an article in the Business Standard, the sector already accounts for 2% of India's GDP.

It generates employment for more than 8 million (m) people, directly and indirectly. This includes the jobs created in sectors such as agriculture, F&B, retail, and hospitality. The sector also accounts for about 1.5% of the total workforce employed in the country.

The high entry barriers due to strict government regulations at the centre and state levels, as well as the ban on direct advertising of alcohol brands, ensures limited competition. This helps the industry generate decent margins and cash flows.

Despite this, the competition is still fierce among the incumbents. Also new companies regularly enter the Indian market with their best-selling premium brands.

Liquor Stocks in India

Astute fundamental investors will always look for two things in any consumer company before they consider buying its shares.

First, the company should not need to push its product too much, i.e., the product should sell easily.

Second, once a customer buys the product, repeat sales should keep coming in easily. Once hooked onto the product, the consumer should return for more.

Liquor stocks in India fit this description perfectly.

Naturally, the sales of the companies in this sector will rise steadily, as will their profits. What's more, first timers often wind up as loyal repeat customers. This is because of the highly addictive nature of alcohol.

The second half of the financial year normally sees a rise in alcohol consumption in India. People willingly spend money on liquor during the holidays in the festive season. So, it doesn't require rocket science to tell you that liquor or alcohol sales pick up in the second half of the financial year.

However, once every five years, when general elections are held, this scenario changes for obvious reasons. Sales pick up massively during the first half of the financial year.

Now we are not saying these stocks are going to rise solely because of the elections. But this has happened in previous general elections and is likely to happen this time around too.

Now there are fundamental reasons to be bullish about these stocks too. With growing disposable incomes and the premiumisation trend just kicking in, the liquor industry should grow quite well.

To capitalise on this growth, Indian breweries and distilleries are expanding their production capacities and launching new products.

Equitymaster's smallcap editor, Richa Agarwal, wrote about this in a recent Profit Hunter editorial...

• The liquor industry has its own challenges. It is highly regulated. There are quotas, controlled pricing, and rules about production, taxes, licenses, and so on.
  
  So, is there a way to ride this trend and minimise these risks?
  
  The answer lies in the supply chain.
  
  Whether you are a teetotaller or a connoisseur, one thing we all agree on is the aesthetic appeal of glass liquor bottles.
  
  Not only for aesthetics, but glass also remains a preferred packaging material as it is non-reactive unlike plastic.
  
  The point is, when you see a particular sector growing, try to look beyond direct players. Sometimes, the real riches in the gold rush lie with pick and shovel stocks.

Read Richa's editorial here.

Now let's look at the top liquor stocks in India for your watchlist...

#1 United Spirits

The first stock to watch out for is United Spirits.

A subsidiary of Diageo PLC, the company is a leading beverage alcohol company in India. United Spirits is among the top three spirits companies in the world. It's the world's second-largest spirits company by volume. It's headquartered in Bengaluru.

It manufactures, sells, and distributes a wide portfolio of premium alcohol brands spread across product categories, including popular, prestige, premium, and luxury. It produces famous brands such as Antiquity, McDowell's Royal Challenge, Signature, Black Dog, Johnnie Walker, VAT 69, Smirnoff, etc.

It has a portfolio of more than 80 brands of scotch whisky, IMFL whisky, rum, brandy, vodka, and gin. The company sells over 79 million cases every year. It has a global footprint with exports to over 37 countries.

In the last three years, the revenue of the company has grown at a CAGR of 9.4%, driven by high demand. The net profit also grew at a CAGR of 45.9% during the same time, primarily driven by the strong management and operational support from its parent.

In FY23 the company's operating profit increased 10.5% YoY. Operating profit margins expanded to 24.0% in FY23 against 12.3% in FY22. The net profit for the year grew 38.9% YoY.

United Spirits is looking to sustain its growth momentum and delivering long-term value to all stakeholders.

The company has been growing through acquisitions, and it has acquired companies and brands to grow its business. It's also concentrating on launching new brands every year to expand its product portfolio.

Given the company's leading presence in the alcohol beverage sector, it is expected to strongly benefit from the growing demand for premium alcohol.

For more details, see the United Spirits company fact sheet and quarterly results.

#2 United Breweries

The second stock to watch out for is United Breweries.

The company is India's largest beer producer headquartered in Bengaluru, India. It's the distributer of the beer brands Kingfisher and Heineken. These are among the most popular beer brands in India.

It also owns various other brands of alcoholic beverages. The company has a market share of 40% in the Indian brewing market and has 79 distilleries and bottling plants around the globe.

Over the last three years, the company has focused on solidifying its market leadership and rebuilding the Kingfisher brand by concentrating on premiumisation. This is why the company's financial performance has improved.

The revenue has grown at a CAGR (compound annual growth rate) of 20.7%, driven by high volume growth. The net profit grew at a CAGR of 39.1% during the same period, driven by cost control and efficiency measures taken by the company.

However, in FY23 the company's operating profit decreased 16.3% YoY. Operating profit margins fell to 35.3% in FY23 against 48.1% in FY22. The net profit for the year fell 16.8% YoY.

Going forward, the strong demand for liquor and the company's focus on revenue management and cost initiatives is expected to drive its revenue and net profit.

To know more about the company, check out the United Breweries financial factsheet and its latest quarterly result.

#3 GM Breweries

The third stock to watch out for is GM Breweries.

The company manufactures and markets alcoholic beverages, country liquor (CL), and Indian-made foreign liquor (IMFL).

It has a monopoly in country liquor in Mumbai with a sizable market share. Its brands include GM Santra, GM Doctor, GM Limbu Punch, and GM Black.

It has the capacity to produce and process 140 million (m) of country liquor, which is about 50,000 cases per day.

In the last few years, the company has concentrated on country liquor to capture the growing demand in rural areas. It also received a license from the Food and Drugs Administration to manufacture hand sanitisers.

To overcome the challenges with glass bottles, such as shortage, breakage, and price fluctuations, PET bottles were introduced.

All this has helped the company improve its financials. The company's revenue and net profit have grown at a CAGR of 18.3% and 7.4%, respectively in the last three years. This was driven by high volume growth and price realisations.

In FY23 the company's operating profit increased 22.5% YoY. Operating profit margins fell to 10.3% in FY23 against 11.1% in FY22. The net profit for the year grew 7% YoY.

GM Breweries also pays consistent dividends to its shareholders.

To know more, check out GM Breweries' financial factsheet and latest quarterly results.

#4 Aurangabad Distillery

The fourth stock on the list is Aurangabad Distillery.

The company operates a molasses-based distillery that performs PLC distillation and manufactures spirits and alcohol.

It has a diversified product portfolio, including rectified spirit, neutral alcohol, potash, bio potash, and de potash vinasse. The company's products are used in diversified sectors, including liquor, pharma, cosmetics, and fertiliser.

In the past three years, the company's revenue has grown at a CAGR of 13.7%, driven by robust growth in volumes. The net profit also saw a healthy growth of 75.7% during the same period.

To know more, check out Aurangabad Distillery's financial factsheet and latest quarterly results.

#5 Globus Spirits

The fifth stock on the list is Globus Spirits.

The company is present across the entire alcohol value chain.

It was the first to set up a grain distillery and launched branded distiller's dried grains with soluble (DDGS).

It manufactures Indian-made Indian liquor (IMIL), Indian-made foreign liquor (IMFL), and bulk alcohol hand sanitiser and also undertakes bottling for companies.

The company's product portfolio consists of a consumer segment consisting of value liquor, premium liquor, and craft spirits and a manufacturing segment consisting of grain-neutral alcohol, bioethanol, and technical alcohol.

The company recently invested in a greenfield project to enhance its capacity for ethanol blending.

It's also building a portfolio of brands under its premium liquor segment. The company introduced craft spirits such as Terai, Snosk, and Mountain Oak, which received a good response.

Globus Spirits is also launching new variants of craft gin, whisky, and premium rum to benefit from the demand for premium alcohol.

Coming to its financials, the company's revenue has grown at a CAGR of 9.3% in the last five years, driven by high demand. The net profit also grew at a CAGR of 38.8%.

It has also been paying dividends for the last four years.

In FY23 the company's operating profit increased 71.4% YoY. However operating profit margins fell to 17.6% in FY23 against 40.3% in FY22. The net profit for the year fell 34.7% YoY.

Going forward, the demand for premium liquor and the company's significant presence in bulk and consumer liquor will drive its growth in the medium term.

To know more, check out Globus Spirits' financial factsheet and latest quarterly results.

Conclusion

The Indian liquor industry is growing rapidly, driven by growing disposable incomes and high demand for preimmunised liquor.

This presents an exciting investment opportunity as liquor stocks enjoy healthy profit margins and strong cashflows.

Moreover, the defensive nature of liquor stocks is another added advantage.

However, it's important to note that the industry is highly regulated by centre and state-specific policies.

The industry also faces intense competition from established and new players, which can affect the market share and profitability.

Also, alcohol consumption is still considered a sensitive topic which impacts the market perception and brand reputation.

Hence, it is important to do thorough research and understand the market dynamics before investing in this sector.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...