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Could Ukraine-Russia crisis escalation make beer costlier? A brokerage thinks so

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Could Ukraine-Russia crisis escalation make beer costlier? A brokerage thinks so

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Russia is the world’s second-largest producer of barley and Ukraine is the fourth largest. Should tensions escalate, global barley supplies could be affected—adding to a rise in procurement costs of barley, the major ingredient in your beer.

Before the critical summer season for beer, spot prices of barley, which accounts for almost 30 percent of total retail marketing cost for the alcoholic beverage, has shot up 62.5 percent year-on-year and 5 percent quarter-on-quarter in 4Q FY22 till date. An escalating Ukraine-Russia crisis will likely impact barley prices and supplies further and make beers costlier.

Why could beer become costlier?
Russia is the world's second-largest producer of barley, and Ukraine is the fourth largest. Should tensions escalate between the two, global barley supplies could be affected—adding to a rise in procurement costs of barley, the primary ingredient in your beer.
But India produces barley?
Correct. Apart from some premium brands, Indian brewers primarily source barley locally. However, barley prices here could move in tandem with global prices if there are supply disruptions. Also, new bottling—a significant component of total retail marketing cost (around 60 percent)—will become costlier, with oil price surges due to the crisis. A major part of bottling costs is taken care of by recycled bottles.
What will be the impact on brands?
United Breweries, which has more than a 40 percent share of the Indian brewing market, sources barley in February-March, according to brokerage Motilal Oswal. So, any disruption in barley supplies or prices could hit those making procurements now for the summer demand rush. "Even if the situation in Ukraine was to defuse and global prices stabilised, brewers could be stuck with higher cost inventories for the duration of FY23," Motilal Oswal warned in a recent note.
But price hikes of alcoholic beverages are monitored by states?
True. Motilal Oswal report also states that outside of free pricing states like Maharashtra, alcoholic beverage price increases are "granted" by state governments. This process, the brokerage says, can take months to several years, but, until then, companies' margins remain impacted. United Breweries reported a 28.4 per cent decline in consolidated net profit at Rs 91.02 crore for December quarter 2021-22 on account of "inflationary pressures".
Motilal Oswal's take on alcohol stocks
"We have a SELL rating on United Breweries. Possible raw material headwinds (owing to the absence of pricing power, unless granted by states), risk of excise increases in state budgets in FY23 after no increase/rollbacks in FY22, and expensive valuations are the key reasons for our cautious view on the sector. We may lower our current forecasts further if material cost pressures escalate," the brokerage says.
What about other brands?
"Barley prices, which is already going through the roof, can see some further spike due to uncertainties in Ukraine. For companies like United Breweries and United Spirits, to some extent, this would have some adverse implications in terms of the raw material prices going up," Hemang Jani, head, equity strategist, Motilal Oswal Financial Services. "I am not too sure whether these companies source raw material entirely from the domestic market or they are importing. But the way commodity prices have shot up; there is going to be the risk of prices in India to go up, too."
What does United Breweries say?
“We have already been operating in a high inflation environment. With the current crisis, we foresee the pressures of inflation and supply chain disruptions accelerating in the short term," a United Breweries spokesperson told CNBC-TV18. "We are actively working towards mitigating the impact through a combination of productivity, cost control, optimisation, and judicious price increases for which we are in conversations with state governments."
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