Alcoholic beverage margins may shrink up to 140bps on costlier inputs: ICRA

The industry will see some relief from the correction in prices of barley, which is a key material for producing beer.

Despite steady demand, the alcohol beverage (alcobev) industry seems to be heading towards a phase of contraction in operating margin in FY24, after a sharp decline in FY23, according to ICRA.

Analysts at the rating agency wrote that the operating margin (OPM) of ICRA’s sample set companies is poised to contract 90-140 basis points in FY24. The margins shrank sharp 300 basis points a year back.

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“The primary reason for the expected margin contraction is the elevated prices of key inputs this fiscal, like non-basmati rice and grains such as maize, used to produce extra neutral alcohol (ENA), the base to manufacture spirits. The impact of a sub-par monsoon, the El Niño conditions, and the government measures on grain prices thus remain crucial to ascertain the industry cost structure,” they said.

Costs of packaging material, particularly glass, will also weigh on the margins.

Kinjal Shah, Vice President and co-group head – Corporate Ratings, ICRA Limited, said that what will be key is the timely increase in the selling price of the alcobev products by state governments.

“This typically happens on an annual basis at the beginning of a fiscal, hence, any mid-year raw material price volatility must be absorbed by the manufacturers. Some key states, including Karnataka, Haryana, Delhi, and Uttar Pradesh, have permitted the increase in prices of alcobev products for the current fiscal. Further, the Madhya Pradesh government expanded the distribution network for alcobev products last year, which continued to provide an upside to the industry in the current year as well,” Shah said.

Another monitorable will be the diversion of grains towards production of ethanol. “The availability and consequent pricing pressure from the diversion of grains towards production of ethanol, which is seeing increased demand due to the government blending norms, is also a key influencing factor to monitor for the industry,” the analysts wrote.

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The industry will see some relief from the correction in prices of barley, which is a key material for producing beer. Barley prices corrected in recent quarters and are likely to remain stable in the near to medium term, the analysts noted.