The Indian alcoholic beverage sector is in focus today. Jefferies has initiated coverage on 3 stocks with a Buy rating. These include United Spirits, Radico Khatian and Allied Blenders. According to the brokerage house, Radico is their top pick in the sector and is expected to lead growth while United Spirits, they believe, ‘offers favourable risk-reward’ after the recent 20% plus correction. Jefferies calls Allied Blenders the ‘dark horse’ and see meaningful upside going forward.
Here is a detailed analysis of their top picks and growth potential going forward for these stocks going forward-
Jefferies’ top picks and target
A quick look at Jefferies top picks upfront
-Jefferies has a Buy rating on United Spirits with a target of Rs 1,570 per share. This implies 19% upside for the share price of United Spirits .
-They have a Buy rating on Radico Khatian as well with a target of Rs 3,590 per share with an implied upside of 22% for the Radico Khatian share price.
-It’s a Buy on Allied Blenders too. Jefferies calls the stock a ‘dark horse’ and expects the price to jump 12% with a target of Rs 620 per share.
Jefferies on Indian spirits sector: Changing dynamics
According to Jefferies, the Indian spirits is a large market with high entry barriers due to complex state-level regulations. They pointed out that the regulatory environment has improved across several states, “with instances of even reduction in taxation for premium products and privatization of retail trade.”
However, they consider the recent tax hike in Maharashtra as a step back.
Jefferies on Indian spirits sector: Focus on premiumisation
The international brokerage house, Jefferies also highlighted that the MNCs focussing on premiumisation and have exiting low-price point segments is changing the dynamics of the alco-bev sector for India. They cited the example of Pernod Ricard selling Imperial Blue Whisky in this context.
The other big factor to watch, as per the Jefferies report is the accelerated pace of innovation, especially in non-whisky categories (vodka, gin, rum, tequila, and brandy) at the premium end.
Jefferies on Indian spirits sector: Double-digit top-line growth likely
Jefferies expects “all three companies to deliver double-digit top-line growth, led by the P&A segment.”
They see growth opportunities strongest for Radico (up 18% CAGR), followed by Allied (12% AGR) and United Spirits expected to grow at 10% CAGR.
Jefferies on Indian spirits sector: Margin expansion
Unlike FMCG, spirit margins are below their peaks. However, Jefferies sees “meaningful margin expansion opportunity, as inflation stabilises and premiumisation continues, along with reduction in import duty on scotch post the India UK FTA.”
They believe that the margin boost is likely to be highest for Indian companies given their low base.