Alcohol makers that saw battered margins in the January to March quarter on account of high raw material costs are hoping to see better times in the April to June quarter, analysts say.
Talking to Moneycontrol, Karan Taurani, Senior Vice-President, Elara Capital says, “There would be some respite in EBITDA margins for United Spirits and Radico Khaitan in Q1FY24 and it may not be as bad as what they were in Q4FY23,” Taurani expects EBITDA margins to increase by 400 basis points quarter-on-quarter to 20.5 percent in the April to June quarter.
The raw material, Extra Neutral Alcohol (ENA) in the case of spirits, is expected to remain high. However, spirit companies have increased the cost of their alcohol brands in order to balance the growing ENA costs. “Price increases have been taken across multiple states and we have a continued commitment to drive revenue management activities,” said Radovan Sikorsky, Chief Financial Officer at United Spirits, in an earnings conference call in May.
Radico Khaitan has increased prices for its products in Uttar Pradesh, Rajasthan, Telangana, Karnataka and other states, said Abhishek Khaitan, managing director at Radico Khaitan in an earnings conference call in May. “With these price increases coupled with a favourable product mix, we will be able to mitigate margin headwinds in the IMFL business to a large extent,” he said.
According to Bloomberg median estimates, United Spirits’ revenue in Q1FY24 is estimated to be around Rs 2,195 crore and net profit to be around Rs 233 crore. The stock is trading at one year forward PE (Price to Earnings) of 59.33. For United Breweries, revenue for Q1FY24 is estimated to be at Rs 1,769 crore. United Breweries stock is trading at one year forward PE of 69.26.
High ENA costs
During the January to March quarter, spirit companies encountered pressure on their margins due to the escalating prices of ENA and glass bottles. ENA, a key ingredient in alcoholic beverages is made from sugarcane. In 2023-24, sugarcane prices rose by around 3.5 percent from the previous year, reaching Rs 315 per quintal, according to the Press Information Bureau. This increase in sugarcane prices has directly contributed to the higher costs of producing ENA.
Another factor influencing the rising ENA prices is the government's new ethanol blending policy. Under this policy, the target for blending ethanol with petrol by 2025 has been raised to 20 percent from the previous target of 10 percent. So, a larger quantity of ethanol is now being allocated to Oil Marketing Companies (OMCs) for blending, resulting in a reduced supply for spirit companies. “Now there is a demand-supply issue as more ethanol is going to OMCs, leaving less ethanol to be used by spirit companies,” says Alok Shah, Vice-President at Ambit Capital.
Also read United Spirits sees Q4 net profit rise 7% to Rs 204 crore, revenue slumps 25% YoY
Glass costs continue to cut margins
Glass prices which have been high for quite some time now will start easing from Q2FY24, analysts say. Hindustan National Glass, a major producer and supplier of glass bottles used extensively by alcohol manufacturers, faced insolvency proceedings initiated by DBS Bank in October 2021. Subsequently, supply disruptions have caused a surge in glass costs, impacting the profit margins of companies within the alcohol industry.
In their efforts to mitigate the impact of rising glass prices, alcohol companies are gradually phasing out the use of mono cartons. According to an analyst from a domestic broking firm who preferred anonymity, beer and spirit companies are implementing this adjustment to compensate for the escalating price of glass bottles. Although the savings from cutting expenses on mono cartons may not be substantial, it contributes in reducing the overall spending.
Beer margins to trip
Margins for United Breweries will stay affected in the April to June quarter on account of high barley costs. “The pressure on margins in Q1FY24 will continue and we should start seeing some benefits flowing through in Q2FY24 as we start incorporating the new barley crops into production,” said Radovan Sikorsky in an earnings conference call.
Barley is used in beer for its enzymes, fermentable sugars, flavour contributions, and foam stability. Barley price was high as one of the top producers of the crop, Ukraine, is engaged in war, leading to supply issues.
United Breweries purchases barley crops in February to March for the rest of the year, says a Motilal Oswal report. “United Breweries is currently using the high-priced barley crop that they purchased earlier, so margins will continue to remain affected in Q1FY24 on account of high raw material costs,” says Alok Shah. He further said that margins for United Breweries will start recovering from Q2FY24 once the company starts using the new barley crop which is of good quality and lower priced.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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