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Alcoholic Beverages: Maintain ‘buy’ on UBBL,’hold’ on UNSP- Emkay Global

After the change in retail trade, IMFL/beer volumes were sharply down in October. (Representational image)

By Emkay Global

The Andhra Pradesh government last week announced the cancellation of all existing bar licences (not retail shops) and will issue new licences for a period of two years from January 1, 2020. It plans to cut the number of bars by 40% from around 800 to 500. The government will continue to run nearly 3,500 liquor shops, which were reduced 20% in October after the change in retail trade from private to government. Hence, the total liquor shops in AP will be cut by 20%. The government has also raised the additional excise retail tax, imposed in October, on IMFL/ beer sold to licensees of bars from Rs 20-60/180 ml of IMFL and Rs 10 to Rs 30/330 ml of beer.

Bars account for 15-20% of states' alcohol volumes, according to our channel checks. The reduction in outlets has an impact on volumes but to a lower extent as consumption shifts to other operating outlets as seen even during the initial period of highway ban.

The recovery of retail operations remains the key. After the change in retail trade, IMFL/beer volumes were sharply down in October. Though there is an improvement in November, volumes are down by about 50% due to trade disruption, operational inefficiencies and significant payment delays to alcobev firms. We expect the fall to continue in December.

AP accounts for ~8% of beer volumes and over 10% of IMFL volumes. UBBL/ UNSP have sales contribution of 6%/4% from the state, while a lower profit contribution due to lower product realisations and higher share of popular spirits. UBBL/UNSP have sales contribution of 6%/4%. UNSP's popular business is franchised in the state, and hence, the overall impact on sales/profit is low. We believe Q3 volumes will be affected 2-3%, but expect a recovery from Q4. We maintain FY20/21 EPS estimates and 'buy' rating (OW in EAP) on UBBL, while 'hold' on UNSP (UW in EAP).