STATUTORY WARNING Buying Liquor Stocks May Be Injurious To Your Health

In November 2015, Bihar Chief Minister Nitish Kumar announced that alcohol would be banned in the state from April 1, 2016. Kumar officially declared a total ban on April 5, 2016 and later said in a press conference hold —‘All types of liquor will be banned in the state from April 5, 2016. The sale and consumption of any type of alcohol in hotels, bars, clubs and any other place will be illegal from April 5 onward.'

This move definitely raised a few questions whether the ban is good or bad. As this move by the Bihar government would adversely impact the state's finances as the Bihar government gets revenue of nearly of Rs.2,000 crore from the sale of IMFL and revenue of around Rs.4,000 crore from country liquor sales in 2015-16. However, Chief Minister Nitish Kumar was clear in his vision as he stated that the government would do everything to discourage the drinking habit as it severely hits the poorest of the poor. The alcohol consumption has caused a lot of problems such road accidents and family problems that result in domestic violence, affecting children's education. After the ban on liquor in Bihar, other states which joined the liquor ban bandwagon were: 

Kerala: Implemented liquor ban in a phased manner 
Tamil Nadu: Ruling AIADMK is mulling complete liquor ban in the state in a phased manner 
Madhya Pradesh: Considering complete liquor ban 
Chhattisgarh: Considering complete liquor ban

As per the report of World Health Organisation (WHO) named "Global status report on alcohol and health", alcohol consumption and problems related to alcohol vary widely around the world, but the burden of disease and death remains significant in most countries. Alcohol is a causal factor in 60 types of diseases and injuries and a component cause in 200 others. Almost 4 per cent of all the deaths worldwide are attributed to alcohol, greater than deaths caused by HIV/AIDS, violence or tuberculosis.

Recently, the Supreme Court of India ordered that the liquor vendors within a radius of 500 metres of national and state highways will have to shut down from April 1, 2017. The apex court has given some exemptions to Sikkim, Meghalaya and Himachal Pradesh. It also held that areas with a population up to 20,000 may have liquor vends at a distance of 220 metres from the highways. This decision has yet again ignited a debate across the nation as it will have adverse effect on the travel and tourism sector, which includes bars and restaurants, which are among the leading employers in the country. Moreover, the states are likely to witness a big hole in their pockets as revenues will take a hit. Maharashtra, one of the largest excise earners, is likely to take a severe hit on its revenues and it is estimated that nearly 100,000 people lose their jobs. 

Some of the hotels which are close to the highways within the 500 metre radius have closed entry from the road side and opened entry at the back side! This is a smart move by the hoteliers by which the distance from highway to hotel could be enhanced to more than 500 metres and they can continue doing their business of serving liquor.

Some of the states have converted state highways to district highways or local body (municipal) highways to keep the liquor lobby happy as well as without prevent the possible loss of revenue. But, soon thereafter, the apex court notified the states that they cannot alter state highways to other types of roads to bypass the law.

There is always a loophole to bypass the law, but this time around, the Supreme Court is going whole hog to ban alcohol across all national highways in the country.
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The major reason of the apex court's decision to impose a ban on the sale of liquor near highways is that it results in road accidents. The presence of shops and restaurants selling liquor near highways was leading to drunken driving, which caused a vast majority of fatal road accidents in the country.

There are various streams of income for the state governments from across industries. In the case of liquor, there are state-wise different excise duty on sale of liquor in these states. The state government earns significant amount of revenue from the liquor industry alone. As per the Reserve Bank of India, 29 states budgeted revenues worth Rs.20 trillion in FY16. With alcohol accounting for at least 25 per cent of state revenues, a drop would mean a hit of Rs.5 trillion. In the case of some states, alcohol accounts for as much as 40 per cent of tax revenues.

Some states such as Madhya Pradesh and Chhattisgarh are considering whether to impose a ban on liquor and join the ‘dry' states in the country. Madhya Pradesh could lose as much as Rs.7500 crore in annual revenues through the proposed ban. The southern state of Kerala, which is a huge alcohol consuming state, is also reviewing liquor ban in a phased manner. Up to one fifth of the budget of most of the state governments is funded by booze.

The World Health Organisation found an increase of 38 per cent in the per capita alcohol consumption in India. Naturally, increased consumption has led to better income for the states.

The table below shows that revenue collection from liquor for some of the states. The hole in the governments' pockets due to highway liquor ban in the current fiscal will be huge.

There are 22 companies listed on the capital markets from breweries and distilleries industry. We have analysed the nine-month financials of the industry.

On the nine-month financial front, breweries and distilleries industry's topline increased 1.37 per cent and stood at Rs.14102 crore in 9MFY17 as compared to the same period in the previous financial year. However, the industry's operating profit dropped 12.91 per cent to Rs.1544 crore in 9MFY17 on a yearly basis. Its bottomline remained flat and reduced by 0.24 per cent to Rs.306 crore in 9MFY17, as compared to the same period in previous fiscal.

If we consider financial impact due to liquor ban across highways in the country, it will be visible only in Q1FY18. There are estimates that the industry may experience drop in topline of almost 8 per cent in FY18 due to highway ban alone. The breweries industry which may face erosion of 20 per cent to 20 per cent of bottom line in FY18. There may be declining of 17 per cent to 18 per cent in industry EPS. Major companies such as United Spirits and United Breweries are likely to have a significant negative impact on their volume growth in Q1FY18.

After imposing liquor ban across highways in India, the Supreme Court has partially modified its order banning liquor vendors in the vicinity of 500 metres on national and state highways, but it has refused to give any relief to hotels and restaurants. The apex court has also reduced highway liquor ban distance from 500 m to 220 m in small towns having population of less than 20,000.

Delhi: In Delhi, restaurants, liquor vendors and bars, including those in five star hotels, along the six national highways passing through the state stopped serving alcohol.

Haryana: There are at least 200 liquor licences in Gurgaon, including 150 bars and 15 high-end hotels that have been rendered ineffective. Similarly, in a small city like Chandigarh, the SC directive has forced at least 91 bars, pubs and restaurants to go dry.

Maharashtra: In Maharashtra, the liquor ban on highways has affected at least 1,000 star hotels. Nearly 15,699 liquor outlets are shut down in Maharashtra in compliance with the apex court's order.

Kerala: Overall in Kerala, one of the highest liquor consuming states, 1,956 liquor bars and toddy shops have been affected. Kerala is looking at revenue losses as well as the tourism industry being affected.

Tamil Nadu: Tamil Nadu has been hit very badly, with as many as 3,320 outlets run by state-owned sole retailer TASMAC being closed since April 1.

Goa: In Goa, some 30 per cent of liquor outlets have shut down following the SC order.

Dry states and Union Territories: Gujarat, Bihar, Manipur, Mizoram, Nagaland, Lakshadweep.

Sikkim, Meghalaya and Himachal Pradesh: No impact
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Liquor industry is facing various kinds of bans all over the country. Therefore, allied business for the industry such as hospitality, tourism and related food & beverage industry will also feel the heat due to ban of alcohol in some of the states and sale of alcohol across highways. Niti Aayog, the highest policy-making body in India, has come out strongly against the Supreme Court order, stating that it would kill the tourism industry in India.

The consumption of alcohol is incomplete without its accompaniments such as soda, peanuts, namkeen or fries. The sales of items like such as soda, packaged water, juices, packaged chips, peanuts, fries, namkeens and starters have already dipped 10 per cent to 30 per cent since April 1, when the SC order came into effect, said manufacturers of these items and restaurateurs.

From the start of FY18, the sales of packaged snacks have been dented across highways in India. Many more industry players of related food & beverages are staring at revenue loss in the upcoming months. Soda business in top cities in the country is also experiencing downtrend in sales by 30 per cent to 50 per cent.

In the hospitality industry, the billing amount on an average has come down by 30 per cent to 40 per cent in hotels across highways due to the liquor ban and the subsequent fall in demand for dishes that go along with it. There are speculations among the industry players that the overall topline loss would be Rs.65,000 crore with loss of almost 10 lakh jobs.

The related food industry is in the unorganised sector as there are very few listed players in the country. The coming time will tell how much will be the loss for the related industries.

The stock prices of breweries and distilleries have declined after March 2016. The trend for these stocks became negative after the apex court imposed liquor ban across highways. The share prices of these companies will slide down further amid financial distress in the upcoming quarters.

The liquor stocks which experienced almost 20 per cent drop in last one month on the account of liquor ban. After so much negative sentiments, share price of the companies from breweries sector dropped enough and also going forward there may be sign of buying in these companies.

Earlier, there were states such as Andhra Pradesh, Haryana, Tamil Nadu, Mizoram and Manipur which have experimented with partial or complete ban on liquor. But a change in the ground as well as a negative feedback from the public have forced political parties to reverse the decision. Widespread smuggling and sale of illicit liquor have also been the reasons for such bans to fall apart. But this time around, the ban on liquor is quite aggressive and fullproof. There are no signs of reversal of the apex court's order for highway liquor restrictions. Going forward, there may be chances of reversal of liquor ban across highways in the country. That would be same situation like various states which had earlier experience liquor ban reversed ban on account of pressure from public and various political parties.

However, there are certainly a few silver linings. Consumers can still buy alcohol at stores located more than 500 meters away from the highways and stock them in their journey. There may be impact for some of the dealers which are located on highways rather than manufacturers. Going forward, earnings for Q1FY18 will clear the clouds on these liquor companies.

We at DSIJ urge our reader-investors to be wary of liquor stocks from an investment perspective at this point of time as near term negative scenario to continue for the sector. Despite all the negative sentiment affecting the liquor stocks, investors with risk appetite may take a contrarian view on the sector and add liquor stocks in the portfolio with a long-term view. Drive your investments on the safe way to profits. Hic....hic....hooray!