Regulatory overhangs to pose challenges for India's alcobev industry: United Spirits

New Delhi: Regulatory overhangs will continue to pose challenges for the alcoholic beverage industry though it holds great potential for spirit companies in the country, United Spirits Ltd (USL) said in its latest annual report.

Regulatory oversight of both central and state governments encompasses a slew of restrictions on the production, movement, and sale of alcobev (alcoholic beverage) products, it said.

Moreover, "prohibitively high inter-state duties" compel national alcobev players to put up owned or contract manufacturing set-ups in every state. Distribution is also highly controlled, both at the wholesale and retail levels.

In states, where the government controls pricing, a price increase is based on government notifications, while in states where retailing is controlled by the state government, there is a specified quota that each player can sell, capping the potential to increase market share for the products, USL, a subsidiary of Diageo said.

"These regulations make operations restrictive for the industry players," it noted.

Though several states have withdrawn the additional taxes/levies (COVID cess) imposed on the industry in FY21, pricing continues to remain a challenge for the category since with continuous increase in excise duties, end consumer prices continue to experience upsurge with no benefit to the company, it said.

During the year, the company secured pricing in only select states across India.

USL also said factors such as the current low per capita consumption and aspirations of growing younger population along with shifting preferences towards the quality alcohol which also includes liquor with low alcohol, are expected to drive the growth, the annual report for FY22 said.

"The rising trend of accepting alcohol drinking and increasing the number of pubs and bars is expected to foster the market growth. Moreover, a growing number of women drinking alcohol, favourable demographics with a median age of 27.9 years is further expected to drive the market growth of alcohol," said USL.

A revival in GDP will give a further fillip to alcobev sales as IMFL (India made foreign liquor) volume grows.

Diageo continues to strengthen USL with changes at management & distribution levels, revamp of brand promotions strategy, supply chain efficiency, focusing on a lean portfolio, engaging with the government, and improving work culture and driving gender diversity, the annual report said.

USL looks "on track to deliver on its medium-term goal of delivering double-digit topline growth and achieve mid-high teens EBITDA margins led by better pricing and cost optimization," it said.

Its strong focus on premiumisation coupled with rising disposable income and evolving consumer lifestyles presents a significant opportunity to grow sales and expand margins.

"The conclusion of strategic review of selected popular brands is a strategic move to reshape our portfolio and will enable the sharpened focus of management time on Prestige and Above and delivering our mission of double-digit profitable topline growth," it said.

However, USL said there are some risks also as the alcobev industry is exposed to multiple regulatory risks emanating from state taxes, adverse rulings from courts and changes in regulations with respect to pricing, licensing, working of operating facilities, manufacturing processes, marketing, advertising, and distribution.

"Another concern emerges from the dependence on state governments to get price increases. Margins may get severely impacted due to commodity cost inflation," said USL while raising its concern over increasing international commodity prices.

While addressing the shareholders, USL Chairman Mahendra Kumar Sharma said:"As we move forward, we see a strong horizon of opportunities, expanding beyond tier-one cities to smaller towns, where growing purchasing power corresponds to increased awareness about drinking better and not more".

USL Managing Director & CEO Hina Nagarajan said USL is conscious of the significant levels of commodity inflation and geopolitical headwinds and is working on a continual pipeline of productivity initiatives across the value chain.