According to news reports, the government may scrap the mandatory licencing policy for liquor manufacturers. Prima facie, Citi believes the probability of this occurring is low, given the vested interests of local polity in the industry, in other words, the quantum of licensing revenues to state governments? exchequers and the sector?s political influence. Even on the presumption that this goes through, a pure delicensing strategy with no changes to distribution or pricing would have a negligible impact on United Spirits (UNSP) and doesn?t impact its competitive positioning. UNSP currently has a strong presence in India with a 55% market share with 100 million cases, with the second player garnering only 9%. Unless changes are implemented in distribution and pricing, Citi sees few changes to UNSP?s current business model. The measure announced is more of an overhang in terms of news flow, rather than having any tangible impact.
United Spirits might benefit (management?s perspective) as it could arguably rationalise the manufacturing footprint from around 80 distilleries to about ten in key states. However, if one considers this to be a precursor to the fully-fledged opening up of the sector, including distribution and free pricing, then there will be both merits and demerits for UNSP over the longer term of three to five years.
Speculation abounds that the recently tabled Alcohol Bill in the Scottish Parliament might have an adverse impact on Whyte & McKay (W&M). In essence, the Bill seeks to set a minimum price (40p/unit) for alcoholic drinks, in a bid to curtail binge drinking especially among teenagers. The legislation may impact the competitive advantage that private label players enjoy vis-?-vis the branded segment. In turn, this would indirectly impact W&M as it sells bulk scotch to private label players. We note the impact of the Bill is restricted to Scotland only (and not England); the management clarified that the Bill, if passed, would impact 3% of W&M?s overall revenues. At present of W&M?s 11 million cases sold, per annum, 1.5 million cases are branded sales. The current Diageo contract is for 5.5 million cases, which is 50% of W&M?s volumes. The consideration for the contract becomes less important from a pricing perspective as this 50% volume constitute 30% of value sales. In other words, the average selling price of the residual portfolio is almost 40% higher.
Citi?s discussions with the UNSP management reveal that W&M?s business strategy could change, with the company moving away from being a bulk scotch manufacturer to a branded spirits marketer. The repositioning would mean that W&M needs to set aside more bulk scotch and permit it to mature, which will increase the market value of the liquor, but result in lower sales. W&M would also have to realign marketing and distribution in line with its need to increase presence on shelves. Strategically this could be a long-term positive; however, over the near term it could lead to an Ebitda decline for W&M to pounds 35 million from current estimates of pounds 55-60 million over FY11/12.Citi says that in the near term the share price could drift down and the UNSP stock may be weak over the near term given the overhang of: a) potential legislation changes and b) possible miss of the Ebitda guidance at W&M. If the Ebitda were to be revised downwards to pounds 35 million for FY11-12, it would adversely affect Citi?s target price of Rs 1,452 by 10% and the current profit after tax (PAT) estimates by about 16-18% over FY11/12.