The spirits industry has had a challenging year due to operational issues with the implementation of GST, impact of demonetisation and state level prohibitions. But a few policy changes have altered the business climate for these liquor companies somewhat. The National Highway liquor ban got resolved with the Supreme Court relaxing the ban by taking city limits out of its purview. Furthermore, a number of key liquor consuming states have let liquor manufacturers to increase their prices, thereby improving margins significantly. Thus, the second half of the current fiscal year has shown significant improved operating environment, resulting in better industry performance. The long term dynamics of the industry remains robust on the back of growing disposable income, increasing rural consumption and the greater acceptance of social drinking, making India one of the top markets for global spirit companies. The country has a young demographic profile, with 67% of the population within the legal drinking age, representing significant growth opportunities for the industry. Rising aspirational levels are also making consumers shift their tastes towards premium segment brands of these beverage and spirit companies. Currently, liquor is out of GST purview and with the elimination of multiple level taxes, liquor companies are benefiting on the cost input materials. Diageo Plc is a global leader in the beverage and alcohol sector, with an impressive history and an outstanding collection of brands across spirits, beer and wine categories. It has a world class portfolio of brands such as Johnnie Walker, Vat 69, Black Dog, Royal Challenge, McDowell No. 1, Smirnoff, etc. It acquired a 54.8% shareholding in United Spirits Ltd in the year 2013 to enter the Indian spirits markets in a big way. The last few years have been more of a restructuring for United Spirits with the parent Diageo Plc setting the house in order and creating a solid base for the company. The recent performance of the company has been excellent with it reporting a 69% jump in standalone net profit of Rs 258 crore for the quarter ending September 2018 as against Rs 153 crore for the same period of last year. Likewise, its revenue from operations went up by 14.7% to Rs 7,128 crore for the current September quarter, as compared to Rs 6,214 crore in the corresponding quarter of the previous fiscal. The drive in earnings for United Spirits was due to cost rationalisation and improved efficiency. The Rs 2 face value United Spirits stock currently quoting at Rs 615 on the Indian stock exchanges can be accumulated by portfolio investors for an 18-month time horizon, with a 60% price appreciation on the cards. Analysts and fund managers are betting that this emerging blue chip stock can achieve a price target of a four-figure mark in the next six quarters.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.