Indian Liquor Industry Growth and Its Implications

Table of Contents

Introduction

The Indian liquor industry comprising mainly of distillers (IMFL spirits) and brewers (beer) is seeing healthy growth this fiscal year. Total revenues are projected to grow 12-13% to Rs. 4.45 lakh crore on the back of robust demand and increasing premiumization. This growth estimate follows 15-16% revenue growth last fiscal. The premium segment with bottles above Rs. 1000 is clocking over 20% growth as affluent consumers trade up. Mass segments priced below Rs. 700 per bottle are seeing slower but steady 5-7% volume growth and still make up over 75% of industry revenue. Improving profitability is also aiding the upbeat outlook.

Analysis for Layman

The Indian liquor industry is categorized into two broad subsets – IMFL distillers who manufacture Indian spirits likes whiskey, rum, vodka etc. and brewers who produce beer. Distillers dominate accounting for 65-70% of revenue while brewers make up the remaining 25-30% share. This fiscal, the industry is estimated to grow 12-13% by value to around Rs. 4.45 lakh crore on the back of two key drivers:

Strong consumer demand: Post-pandemic revenge spending by consumers is driving volumes across segments – premium and mass-market. Rising household incomes and changing lifestyles especially for urban youth are boosting social drinking. This is aiding both at-home and out-of-home liquor consumption.
Premiumization: The trend of consumers opting for more expensive, premium liquor varieties is also providing an updraft. Premium liquor defined as bottles above Rs. 1000 price point are seeing over 20% value growth versus 5-7% volume growth in mass-market deriving 75% of industry revenue.

Alongside demand tailwinds, input costs for packaging and grains have softened recently. This expansion in revenue and some easing in costs is improving profit margins by 100-150 basis points this fiscal as estimated by CRISIL.

Original Analysis

The headline 12-13% revenue growth estimate seems achievable given the high 20% plus growth rates in premium offerings. Even mass segments are clocking steady mid single-digit improvements. Post-pandemic resurgence in social drinking occasions and occasions like festivals, weddings etc. are aiding sales. However, these demand upticks maybe temporary. As the economy slows over the next few quarters with high inflation and interest rates, demand may moderate across income strata.

The current growth is off a relatively lower base last fiscal when the third COVID wave impacted sales in Q1 FY 2022-23. Moreover, the actual volume-led expansion maybe in high single digits adjusted for price hikes and premiumization trends. Some volume gains are also from channel loading ahead of Diwali. These volumes may normalize next year.

On the profitability front, while packaging and grain costs have eased lately, the sustainability of this softness remains unclear given global recession worries. Any rise in key input prices like ENA for distillers or volatility in barley prices for brewers can compress margins. Advertising and marketing spends to fuel premium growth may also limit profit expansion compared to topline growth.

So in summary, while industry prospects seem constructive right now, moderation in demand patterns and steady input prices are imperative to extend this growth streak. Any external shocks like liquor duty hikes in state budgets or COVID flare-ups are downside risks to monitor.

Impact on Retail Investors

For retail investors, this largely positive industry report signals investing prospects in the publicly traded liquor sector. Companies undertaking brand building initiatives, revamping product portfolios towards premium offerings and aligning distribution reach to tap aspiring consumer segments are well-poisoned to ride the industry upcycle.

However, retail investors need to assess some aspects before investing in liquor stocks:

Product Mix and Brand Positioning: Analyze product portfolio breadth across price points and brands catering to new-age consumers. Premium-skewed profiles with renowned aspirational brands signal better growth potential.
Input Cost Structures: Study exposure of distillers to grain costs and brewers to packaging material costs. Favourable procurement contracts and backward integration strengths can alleviate margin pressures during input spikes.
Macroeconomic Linkages: At an aggregate level, liquor demand moves in tandem with larger consumption cycles and economic health. Factor this in before generalizing industry outlooks to all constituent stocks.

Also, current growth rates being amplified by post-pandemic revenge demand may moderate 12-18 months down the line. So some tempering of growth expectations would be prudent while evaluating liquor stocks.

Impact on Industries

The optimistic liquor industry outlook has positive ripple effects across its associated value chain:

Grain producers and packaging manufacturers benefit from volume-led demand uptick. However, higher realizations maybe limited for mass segments
Premium focus by liquor makers necessitates investments in packaging artwork and visual branding elements. This hints at opportunities for printing, packaging design companies.
With revenge leisure travel in full swing, hospitality sectors like hotels, resorts, bars and pubs directly correlate with out-of-home liquor consumption. This further aids tourism inflows.

So multiple industries like agriculture, packaging, printing, hospitality and tourism stand to gain both directly and indirectly from buoyant liquor demand trends. However, their fortunes remain coupled to income stability and macroeconomic cycles.

Long Term Benefits

From a long term perspective of 3-5 years, the Indian liquor industry’s structural tailwinds remain intact:

Favorable Demographics – Rising working age population with higher disposable incomes and evolving tastes preferences for lifestyle products like wines, craft spirits etc. aids premiumization potential.
Urbanization – Urban centers with younger demographics taking to social drinking continues to expand. This results in wider reach for modern retail formats like liquor stores, pubs etc. further boosting consumption.
Women Shoppers – Women shoppers entering the fray directly and as gifting channels also broadens the target audience for liquor brands. On-premise consumption with women co-patrons in urban pockets has risen post-pandemic.
Tourism Growth – Expanding inbound tourism, rise of experiential travel appealing to global Indian travelers also allows international liquor brands to enter India both on and off-trade.

These benefits attract investments in production capacities, brand building resulting in new products variants and modern retail formats. Incumbents and new entrants introducing premium offerings for maturing consumer palates stand to gain most.

Short Term Benefits

The liquor industry is poised to deliver strong short term results over the next 6-12 months riding on –

Lower Input Prices – Current softness in input costs like packaging materials and grains support gross margin expansion in the near term. Brewers also benefit from high barley yield thanks to good monsoons.
Revenge Tourism Tailwind – Resurgence in leisure travel, weddings, festivals, conferences etc. boost on-premise liquor consumption aiding hospitality sectors with trickle down benefits for liquor volumes.
Inventory Restocking – Liquor players across price points ramped up production and channel inventories to meet festive and year-end demand. This supply activity further fuels short term revenue growth.

However, sustainability of demand uptick, input price stability and avoiding inventory pile-ups remains crucial to extend this near term growth streak. Any demand moderation or sudden policy moves like liquor duty hikes can act as potential dampeners.

Companies to Gain

Some publicly listed liquor manufacturers well positioned to benefit from the industry upcycle trends are:

Radico Khaitan: Premium whiskey portfolio with brands like Rampur, Jaisalmer etc., widening distribution reach in tier-2/3 markets, strengthening input security via grain distilleries.
Globus Spirits: Value oriented liquor player but focusing on premium brand extensions. Added grain distilling capacities aided margin stability.
Som Distilleries: MP based distiller but scaled up premium rum offerings leveraging supply infrastructure. Forayed into whiskey and beer to tap wider consumer segments.
Allied Blenders & Distillers: Mass market whiskey leader. But augmenting premium credentials via additions like Stirling Reserve and Jaisal Italy. PI network boosts pricing power.

Among brewers –

United Breweries: India’s beer leader by market share, strong brand portfolio catering to masses and classes. Upgrades production capacities regularly, ad-spend intensification fuels volumes.
Carlsberg India: Danish parent’s global experience aids premium offerings introduction. Captive barley fields and water recycling units control input risks. Distribution reach expanding beyond metros/tier-1.

Among hospitality firms –

Indian Hotels Company: Luxury hotel chain with renowned signature bars appealing to premium consumers and inbound leisure tourists.
Delta Corp: Casino operator also houses upmarket liquor serving outlets with mass market appeal. Huge property development pipeline adds long growth runway.

Companies at Risk

However some liquor players face headwinds from current industry trends –

Lower-end focused spirits makers like Tilaknagar Industries, IFB Agro-Industries etc. have fairly stagnant brand propositions without contemporary brand activations amongst youth. Their positioning remains vulnerable to premium substitutes.
Microbrewery pub operators have witnessed failures amidst expansion overdrive. High opex models with limited differentiation are untenable as consumers down-trade during income squeezes.
Laden balance sheets in some cases, high leverage ratios make such companies prone to working capital crises if demand falls unexpectedly or broad liquidity tightness emerges.

Examples –

Pincon Spirits recently defaulted on obligations indicating financial strain.
Restructuring fears refuse to abate for Allied Blenders despite volume uptick.

So companies lacking pricing power in flagship brands, higher leverage metrics or insignificant value proposition for evolving consumer preferences may continue to face market share losses to strong incumbents.

Additional Insights

Some additional perspectives can be derived from this industry review –

Balance pricing strategies deftly between premium and mass segments based on on-ground demand analytics. Chase volumes in mass via astute brand activations without dilution premium brand equity.
Ensure grain linkages security for distillers by augmenting captive grain distillation capacities. Similarly, brewers need to strengthen local barley sourcing or imports via contracts at optimal procurement costs.
Seek partnerships with tourism boards to amplify brand visibility and out-of-home consumption. Align distribution strategies to on-premise channels for premium offerings and off-trade channels for mass variants.
Factor in short term inventory reorder cycles to avoid under-stocking but monitor slow-selling regional skews. Adopt data analytics models to tailor regional production mix.
For hospitality firms, signature liquor brands lend pricing power and differentiation for bars and pubs. Identify emerging cocktail trends and möglich varieties to attract footfalls.

Conclusion

To conclude, the Indian liquor industry is poised at an inflection point catalyzed by premiumization trends amid buoyant demand environment. Industry revenue growth forecasts of 12-13% do mirror the consumer uptrading underway. However volume-led expansion adjusted for price hikes maybe at high single digits levels. Margin uptick from softer input costs provides operating leverage benefits in the short term.

Yet demand consistency across wider price points, input costs stability from inflation threats and avoiding overcapacity risks remains crucial. At a stock specific level, factors like product positioning indexing to evolving tastes, brand strengths, input security, financial standing and distribution reach enhancenesses the growth potential in this sector. So retail investors need to incorporate these parameters within broader macroeconomic linkages to make discerning investment decisions.

Citation:
FE Business. (December 2023). Organised liquor industry revenue seen up 12-13% to Rs 4.45 lakh crore this fiscal, led by strong demand, premiumisation.