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Jaganmohan Reddy’s bid to ban alcohol in AP to hit USL, United Breweries hard

Jaganmohan Reddy’s bid to ban alcohol in AP to hit USL, United Breweries hard

Jaganmohan Reddy’s bid to ban alcohol in AP to hit USL, United Breweries hard
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By Nupur Jainkunia  May 29, 2019 1:22:54 PM IST (Updated)

As YS Jaganmohan Reddy is all set to take charge as the chief minister of Andhra Pradesh on May 30, one of his key campaign promises, a complete ban on    alcohol in the state, is expected to herald trouble for the industry,

As YS Jaganmohan Reddy is all set to take charge as the chief minister of Andhra Pradesh on May 30, one of his key campaign promises, a complete ban on    alcohol in the state, is expected to herald trouble for the industry, especially for two major listed firms -- United Spirits (USL) and United Breweries.

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After an election victory of unprecedented scale, Reddy is likely to take quick steps to implement his populist campaign promise. Total prohibition was a crucial part of his ‘Navratnalu’ (nine) welfare schemes, promised during the poll campaign. He wants to implement the programme in a phased manner.
In the first phase, the number of shops will be reduced, followed by a steep tax hike and total ban by 2024. Once the ban takes effect, only five star hotels would be allowed to sell alcohol products. The CM-designate is already in talks with V Lakshma Reddy of Jana Chaitanya Vedika, an NGO, to prepare a roadmap for the ban.
The measure would a setback for liquor manufacturers and traders alike. While United Spirits and United Breweries would take a hit, it is very early to put the actual impact in terms of revenues and profit loss. Both the companies don’t provide state-wise volume and revenue details. However, HDFC Securities sees a volume loss of 5 percent for United Spirits and 7-8 percent for United Breweries.
As per HDFC Securities estimates, 38 million cases of Indian-made foreign liquor sales are currently sold in AP. USL has outsourced ‘popular’ segment and sell only ‘prestige and above’ (P&A) segment.
P&A segment includes products having price above Rs 400 (average consumer prices in India) for a 750ml bottle. So products having prices below Rs 400 is categorised as ‘popular’.
Assuming P&A as 20 percent of the market and USL share at 45 percent, it would lose about 3.5 million cases or 5 percent of its volume. United Spirits’ products are also divided into segments -- popular and prestige and above segment.
Beer sales in the state in FY19 were about 28mn cases. Assuming UBL has 50 percent share, it would lose 14mn cases, a loss of around 7-8 percent in terms of volumes.
Talking to CNBC TV18, Shekhar Ramamurthy, MD of United Breweries said that AP is a very important market for the company and comments from the AP government is worrying for the industry. They expect that total business will be impacted by 5-6 percent.
In 1995, NT Rama Rao had also won elections on alcohol ban promise. But the ban remained in force for only 16 months. The step was reversed by his son-in-law Chandrababu Naidu when he became the new CM​, citing huge loss to the exchequer.
Policy risk always casts a shadow on the industry and in near-term growth, AP ban would impact the performance of companies. But companies and analysts continue to remain bullish on long-term prospects.
 
 
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