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The CornerOffice: Significant challenges on the horizon
27-Jun-2017

  • The ban on sale of alcoholic beverages along highways is likely to impact the business up to 3QFY18. A favorable hearing in July to a petition filed by the Restaurant Owners Association of Tamil Nadu could help mitigate the impact.
  • UNSP is confident of an improvement in the long-term pricing environment. The longer-term margin growth potential remains intact, mainly led by continued mix improvements. UNSP believes franchising of Popular brands is a win-win situation for both parties.
  • In our recent report on Alcoholic Beverages, we had pointed out the risks emanating from a host of factors like (a) the impact of GST implementation on profitability, and (b) the impact of ban on sale of alcoholic beverages along highways and the prohibition decrees by various states on volumes.
  • Our DCF-based valuation indicates a target price of INR2,415. Owing to limited 8% upside, we maintain our Neutral rating on the stock.
Impact of highway ban on demand unlikely to continue beyond FY18
The ban on the sale of alcoholic beverages along highways   is impacting consumption as well as the pipeline. UNSP expects instability in demand up to 3QFY18, but does not expect sustained loss of demand beyond the current financial year. Given that the states too want to maximize revenue, UNSP expects a uick resolution. The Restaurant Owners Asociation in Tamil Nadu has appealed against the Supreme Court judgment that has brought on-premise consumption into the ambit of the highway ban; a hearing on this issue is expected in July.

GST effect not as high as feared
The impact of GST would not be as severe as feared initially, with ENA being kept out of the GST ambit.However, packaging and molasses would be subject to higher rates of taxation under the GST regime. UNSP should be able to provide clarity on the margin impact with a fair degree of accuracy in two weeks, by when it expects it would be able to understand all the provisions.

Company expects price hikes on a regular basis in medium term
UNSP took price increases in Karnataka, Maharashtra and West Bengal in FY17. It is yet to be granted price increases in other key states like Andhra Pradesh and Telangana. The company intends to bargain for price increases   after fully understanding the ST impact. In FY17, higher proportion of the gross margin increase (90bp out of 155bp improvement) was on account of price increases and not due to premiumization, which is more sustainable. However, UNSP is not worried, as it expects price increases more regularly in the medium to long term.

Franchising to help arrest gross margin decline and free up working capital
In states where UNSP intends to retain its Popular brands (lower end brands), it is developing separate teams for the Popular and the Prestige and Above (P&A) segmets. It already has such a system in place in Karnataka, which it plans to replicate in Maharashtra and West Bengal. 


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