The momentum in the cigarette and alcohol industries remains strong and experts do not foresee any major announcements for the sector in the Interim Budget. As alcohol is a state-owned subject, no major announcements in excise duties are expected. However, some relaxation on the commodity side can be expected, say experts.
Some announcements on the easing of extra neutral alcohol (ENA) costs are expected, said Ajay Thakur, lead analyst for consumer staples at Anand Rathi. ENA, a raw material, makes up almost 40 percent of the total costs in alco-beverage companies. ENA is nothing but the purest form of ethanol. ENA costs have been high for over a year now due to an uptick in the cost of grains such as barley, maize, and sugarcane.
Prices of barley and wheat are still inflationary, and the government might undertake some initiatives to bring down agri-commodity prices in the Interim Budget, said Karan Taurani, Senior Vice President at Elara Securities. "Announcements in terms of farmer incentives might help in lowering agricultural commodity prices," he said.
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Taurani also said that announcements on delaying the 20 percent ethanol blending target for FY25 can also help the alco-beverage industry. Currently, 10 percent of ethanol is blended with petrol. The government increased this to blending 20 percent ethanol with petrol and wants it to be followed from 2025. ENA costs might inch up further if more ethanol goes for blending and so alco-beverage companies want the FY25 deadline to be postponed.
Stocks likely to move as a result of these announcements are United Spirits, United Breweries, and Radico Khaitan.
The overall alcohol industry will report revenue numbers similar to FY24 in FY25 due to input price inflation and no further price hikes, said Taurani.
Premium category alcohol is expected to grow faster compared to the regular category in FY25, say experts. "Prestige and Above (PA) category will see a double-digit revenue growth in FY25 and medium-to-high single digit volume growth in the same period," said Thakur. However, revenues from the regular category will continue to decline.
"We expect premiumisation to aid growth as consumer preferences are shifting to better quality liquor. We expect the trend of uptrading from regular to PA as a structural and sustainable trend and aid overall growth for the sector," said B&K Securities in a report on the sector.
Cigarettes
No incremental announcements on cigarettes are expected in the Interim Budget, experts Moneycontrol spoke to said.
"The government will most likely not increase taxes on cigarettes because it lowers their revenue," said Preeyam Toila, Equity Research Analyst at Axis Securities. He also said that the National Calamity Contingent Duty (NCCD), a type of tax on cigarettes was revised last year so any new tax changes this year are unlikely. NCCD on specific cigarettes was raised by 16 percent in the last budget.
Increasing taxes on cigarettes is also aimed at trying to lower consumption. However, experts say it does not reduce cigarette consumption, and sometimes leads to some people shifting to cheaper alternatives like bidis and chewing tobacco. Plus, the government loses revenues from organised players.
Between FY13-17, excise duty on cigarettes grew at a CAGR of 15.7 percent, while the taxes remained stable during FY18-20. ITC wrote in its annual report that during FY13-17, the government's tax revenues increased by only 4.7 percent. Tax revenue collections grew 10.2 percent during the period of stable cigarette taxes.
Stocks which could likely move from any announcements in the sector are ITC, VST Industries and Godfrey Phillips.
In cigarettes, volumes and revenues are expected to grow slower in FY25 because of a high base, said Toila. After the pandemic, cigarette volumes and revenue increased due to high out-of-home consumption, creating a high base. People returning to offices contributed to the noticeable increase in cigarette sales during the same period. Also, the trend of organised cigarette players clawing back market share from illicit players will continue in FY25, said experts.
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