Alcobev sales may give States’ revenue a high too

With the alcoholic beverage industry starting to recover, various State governments can expect higher excise duty collection to prop up their falling revenues.

Excise duty on alcohol is the third-largest source of States’ own tax revenues with an estimated contribution of between 12 per cent and 14 per cent. A RBI report (State Finances: A Study of Budgets) shows that during 2019-20, 29 States and the UTs of Delhi and Puducherry had budgeted a combined ₹1,75,501.42 crore from State excise on liquor. This was 16 per cent higher than the ₹1,50,657.95 crore they had collected during 2018-19, according to various reports.

Recovery in volumes

Alcobev volumes have started to recover, especially in key markets including Karnataka, Uttar Pradesh, Maharashtra, Kerala and Tamil Nadu. Also, with the severity of the pandemic easing, production is largely back on track, company officials of leading liquor companies and analysts say.. They add that regulatory risks have been receding with the partial or full rollback of the Covid-19 cess and favourable excise-policy recommendations in select States. This, and the likely further relaxation with regard to the on-premises channel, would drive overall volume growth, according to Analyst at Anand Rathi Financial Services.

During the pandemic, various States increased taxation on the alcobev segment through the imposition of a Covid cess or rise in excise duty. States such as Andhra Pradesh, Delhi and J&K raised taxes by 50-70 per cent by imposing a Covid cess. West Bengal and Odisha increased excise duty by 30 per cent. In other major markets, tax hikes ranged from 10 per cent to 20 per cent. While such a measure helped the States to a certain extent, it hit the alcobev industry hard. Since then, States have rolled back the duties and have allowed the opening of pubs and restaurants to serve liquor.

“I feel very positive about the fact that one or two quarters ago, we were thinking about a doomsday scenario for our industry. I think we’re far better than that. I think there will be steady progress in terms of recovery,” Anand Kripalu, MD and CEO of the country’s largest liquor company, United Spirits, said during an investors call.

A combination of factors

Berend Odink, CFO of United Breweries, said the States have taken a positive stance on the entire issue.

“In the short term, we have seen, of course, a very high growth in the first one, two months, but I think the question for the State will be how well they pan out in the coming months. I think the positive stance is that they look at moderation and affordability, and together with the volume growth in the industry, it is most likely there will be longer-term growth in excise revenues. That would be my expectation,” he said during an earnings conference call.

In an internal note to its investors, Anand Rathi Financial Services said some of the major reasons for the industry’s return to normalcy are supply-chain normalisation, stable to soft input costs and likely less irrational taxation. “This, and easier input costs, leverage benefits and debt reduction would drive healthy, earnings growth,” the internal note said.

In an earlier interaction, Pernod Ricard’s CFO for Indian operations, Rajesh Mishra, said that the company had taken several initiatives to drive towards normal business.

“We reconfigured and reset our business operations quickly (from consumer demand to product availability to business enabling operations) towards contactless commerce, with nerve centre management model to set right trigger points to act with speed, agility & adaptiveness. All these, enabled us to come back very close to the pre-Covid level of business performance,” Mishra said.

According to analysts, in terms of macro-economic drivers, opportunities for growth appear healthy for the alcobev segment in India.

The market here has sufficient drivers: a young demographic (median age: 28 years), an increasing number of people entering legal drinking age (15 million per year), low per-capita consumption and premiumisation potential on shift from illicit liquor to branded alcobevs.