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Why Indian Alcohol Market Is Not In High Spirits

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SABMiller's decision to write down the value of its investment in India drew attention to the challenges facing brewers and spirits companies in India. “India is a highly regulated market with centre and state governments deriving a significant proportion of tax revenues from alcohol. State governments on an average derive an estimated 16 per cent from alcohol.

The tax burden has increased over the last eight years,” said Andrew Holland, equity analyst at French financial services firm Societe Generale in his report on Indian Alcohol Market. It stated that the International spirits are highly taxed in India that the industry is dominated by Indian-made Foreign Liquor (IMFL). The London headquartered company, is the world's second-largest brewer, in its recent announcement had written down $313 million (Rs 2,000 crore) of its investment in India, citing increasing regulatory and excise challenges in one of the most regulated markets globally.
 
The report rightly states the fact that the inter-state taxes effectively prohibit the free transit of goods across the country, eliminating scale economies. Licensed retail availability is very low, with one outlet per 18,000 people. “The beer industry is struggling to make progress, with per capita consumption at two litres p.a., due to an excise duty regime that penalises lower alcohol products,” says Holland.
 
International Involvement
The main international players in the market are Pernod and Diageo, numbers 1 and 2 in the domestic spirits industry. Pernod has owned 100 per cent of its business since 2001, while Diageo acquired 55 per cent of industry leader United Spirits (USL) in four stages, ending in July 2014. In beer, Heineken owns 39 per cent of industry-leader United Breweries (UBL), while SABMiller owns 99 per cent of its brewing business. The contribution of Indian operations to profits is small, but the contribution to profit growth - a key factor in valuation - can be more significant.
 
Tax Reform Spells Trouble
Even as India underwent its single largest tax reforms since independence with the introduction of Goods and services tax (GST) this has not been a relief to the Indian alcohol market as it has been excluded from the GST ambit, so will not benefit from lower admin costs. “In fact raw materials costs are likely to rise, and with most states imposing a maximum retail price, margins, which have declined over the last eight years despite volume growth, are likely to be squeezed. We believe that the regulatory negatives far outweigh the structural positives,” states Holland in his research report. 
 
 


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