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United Spirits slips on cocktail of highway ban and GST uncertainty

LiveMint logoLiveMint 25-07-2017 Ravi Ananthanarayanan

The Supreme Court’s order banning the serving and sale of liquor within 500 metres of highways has hit the liquor business hard. United Spirits Ltd’s results have been affected and it expects two more quarters for the situation to normalize. And that is if business revives along highways running through cities.

The company’s sales were down by 12.7% to Rs1,782 crore in the June quarter, over a year ago. Some of that decline is due to a shift to a franchise model in some states, for its popular brands. The highway ban’s impact is estimated at a 7% decline in sales, of which about 3-4% was also due to destocking by the trade. The direct impact was a decline of 3-4% in sales.

The management said the company did not cut marketing spends despite the ban, taking a longer view of the business. The decline in sales hit its Ebitda (earnings before interest, tax, depreciation and amortization) hard, which fell by 26.2% over a year ago and Ebitda margin declined by 1.6 percentage points. Again, one-off provisions related to restructuring were partly responsible.

United Spirits’ profit before tax and before exceptional items declined by 20%, but net profit rose by 43%, as it benefited from lower provisions related to exceptional items.

One bright spot was that the company’s gross profit (sales less cost of goods sold) did not fall as much as sales did, partly due to the changed business model, a better mix and productivity improvements. That implies its profit margins should look considerably better once sales regain ground.

But that’s where the concerns creep in. There is no uniform approach among states to de-notify highways passing through cities. The management expects the downturn to last for two more quarters. That can lengthen if governments don’t play ball. In those cases, the management expects consumers will find their way to watering holes that are still open.

Another uncertainty relates to the goods and services tax (GST). While liquor is not covered under GST, certain inputs and services will come with GST paid on them, for which the company cannot claim credit. There are also state and local body levies, and uncertainty on whether these can or will continue. United Spirits has approached state governments to revise prices, a process which may take time. The management expects it may take two-three years for things to normalize on the GST front. More clarity on this should be available in a few more months.

Thus, the near term is expected to see the continued effect of the highway ban, while the impact of GST will be seen from the September quarter onwards. Excluding these events, United Spirits’ financials seem to be in good shape. But these events are structural changes with an uncertain path to resolution. That uncertainty can give investors reason to pause, which may explain why its shares fell by 2.5% on Monday. They are up by 37% from three months ago and have been falling since 17 July and are down 4% since then.

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