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RA Chandroo

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In High Spirits
Analysts believe the SC ban won’t result in a hangover for liquor stocks

Jash Kriplani

On Friday (March 31), the Supreme Court (SC) re-affirmed its ban on liquor sales in hotels, restaurants and other outlets within 500 metres of highways. While the ban was expected to be limited to only liquor shops, the SC clarified that the ban was applicable to bars and restaurants as well. The apex court had ordered the ban on sale of liquor near highways in December. Subsequently, a review petition was filed. The SC, however, set aside the petition, making the ban is effective from April 1, 2017, as per the original order.

The ruling came as a body blow to liquor stocks when the market opened on Monday with the likes of United Spirits, Radico Khaitan, Globus Spirits and Pincon Spirits dropping between 3% and 7%.

A section of analysts fear the ruling will have a sharp impact on the earnings of liquor companies. For instance, CLSA has been one of the first brokerages to cut its forward-looking estimates on market leader United Spirits. The brokerage cut its FY16-FY19 estimates by 17%-28%, respectively. CLSA analysts concede that the ruling has led to an air of uncertainty for liquor companies and suggest that investors should brace for a long-drawn and a painful transition before things normalise.

The brokerage has revised its 12-month target price for United Spirits to 1,600 from 2,100. As things stand, the stock is trading 43x estimated FY18 earnings. Analysts estimate that about 40% of liquor outlets would fall under the ban as they are located along national or state highways and these will have to shut shop and relocate from April 1, 2017. According to Kotak Institutional Equities, this will drive destocking in the near term and will impact volumes in the first quarter of the current fiscal.

But some analysts feel that not all is lost for liquor companies. Krishnan Sambamoorthy, analyst with Motilal Oswal, believes that with state governments denotifying state and national highways, the impact on volumes will be contained.

Rajasthan government has declared state highways passing through well-populated areas as urban or district roads. It has converted 125 km of state highways into urban roads and a 63 km-stretch into a district road. Chandigarh also recently converted a large chunk of state highways into major district roads. “For state governments, liquor is a major source of revenue after sales tax and that is why they have taken these steps,” says Sambamoorthy.

A section of analysts believe the negatives are already in the price and given the government’s support for the industry, the volumes should see a sharp recovery by Q3FY18. “As these volumes shift, market leaders United Spirits and United Breweries will grow at a faster rate than the industry. The ban has only created a near-term impact, while the long-term growth story is still intact. There is not much to loose from current levels and a small positive outcome could lead to a re-rating,” says Ankit Panchmatia, research analyst at ICICI Securities. The brokerage has maintained its target price of 2,600 for United Spirits. Given the stock’s last close of 2,022, that’s an upside of 29%.

Rohit Chordia and Anand Shah of Kotak, too, believe the ban’s impact will be transitory as it is only a channel-level issue. “This isn’t a demand issue. We expect the impact to be material only until shops relocate and restock in 2Q/3QFY18,” the analysts said in a client note.

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