The alcohol industry is banking on festive drinking to free itself from the margin restrictions it has been suffering from for five years

India’s liquor sector is hoping that slowing inflation and a normal monsoon will boost consumer spending during the festive period, helping the main market for low-cost alcoholic beverages overcome high input costs and stagnant margins, according to the head of an industry lobby.

“While the first quarter of the fiscal year was somewhat dismal due to the long and protracted election process and excessive summer heat, the second quarter saw better results for companies,” said Anant S. Iyer, director general of the Confederation of All India Liquor Companies (CIABC), a Delhi-based organisation dedicated to promoting spirits. “The next quarters, the third and fourth, will be positive,” he told Mint, suggesting that several categories could see better sales.

CIABC represents major distillers including Radico Khaitan, Allied Blenders & Distillers Ltd, Tilaknagar Industries and 20 others.

India’s liquor industry, valued at $32 billion, according to London-based drinks consultancy IWSR, is estimated to grow by an additional $7 billion by 2028. Whisky and beer makers are boosting volumes, banking on a young population: 460 million or 33% of Indians are of legal drinking age, according to the Economic Survey.

The industry sold 385 million 9-liter cases in fiscal 2023, up 14% from fiscal 2022 and 12% from pre-COVID-19 levels in fiscal 2020, according to CIABC data released in July. However, profitability has been under pressure.

Over the past five years, while prices of everyday products such as bath and shower gels have risen by 10-12% a year, the liquor sector has been unable to secure increases due to reluctance by state governments, Iyer said. In India, alcohol falls outside the purview of the GST, prices are regulated and levies on liquor are one of the largest sources of revenue for states.

Prices of ethanol, an essential feedstock that contributes around 40% of the total cost of production, have been on a steady rise for over a year due to rising costs of barley, corn and sugarcane, said Manoranjan Sharma, chief economist at Infomerics Ratings.

Sharma said rising grain and packaging material prices could lead to a reduction in industry operating margins in fiscal 2025. “Furthermore, the shift from grain to ethanol production, driven by government blending orders, has intensified supply and pricing challenges for the alcoholic beverage sector.”

Comments from companies underscore the concerns. In its April-June earnings release, Radico Khaitan, the maker of Magic Moments vodka, said its gross margin in the quarter was 2 percentage points lower at 41.5% from a year earlier “due to significant food grain inflation.”

Tilaknagar Industries said it had to negotiate better margins with suppliers due to volatile and inflationary prices of extra-neutral alcohol. The maker of Mansion House brandy said its Ebitda margin of 14.5%, up 89 basis points year-on-year, in the first quarter has been boosted by cost cuts and increasing share of premium products in the portfolio.

Allied Blenders and Distillers also warned of an unfavorable macroeconomic environment and persistent food price inflation. The company, CEO Alok Gupta said on the first-quarter earnings call, has been focused on improving profitability by supplying brands based on regional consumption patterns and other cost-saving initiatives.

According to Iyer, the imposition of more dry days ahead of the elections also affected activity this year. And excise departments are reluctant to approve price increases, he said.

“Policymakers are of the opinion that this industry is making a lot of money. It is not,” said Iyer of CIABC. “In recent years, input costs have increased and across the economy, inflationary cost increases have affected all sectors and goods, but prices have not increased for us as an industry.”

Total revenues obtained from the alcohol industry are more than ₹3 trillion rupees by fiscal 2024, with Uttar Pradesh, Tamil Nadu, Karnataka and Maharashtra generating the bulk, Iyer said. Price increases will help sustain the industry as it is among the top three contributors to state revenue, he said.

According to him, excise policies have not changed, barring minor tweaks, across all states this year. Karnataka has made changes in excise slabs and Andhra Pradesh is yet to announce its policy as a whole, he said.

States should not pass on the various taxes and fees to businesses, but directly to consumers, he said. These taxes further erode product margins, which are already under pressure, he added.

Several northern states, including Uttar Pradesh, have introduced new bottling and franchise fees that affect smaller manufacturers. These states have also imposed additional levies, such as cow tax, which further increases costs.

“Policymakers are of the opinion that this industry is making a lot of money. It is not,” said Iyer of CIABC. “In recent years, input costs have increased and across the economy, inflationary cost increases have affected all sectors and goods, but prices have not increased for us as an industry.”

Total revenues obtained from the alcohol industry are more than ₹3 trillion rupees by fiscal 2024, with Uttar Pradesh, Tamil Nadu, Karnataka and Maharashtra generating the bulk, Iyer said. Price increases will help sustain the industry as it is among the top three contributors to state revenue, he said.

According to him, excise policies have not changed, barring minor tweaks, across all states this year. Karnataka has made changes in excise slabs and Andhra Pradesh is yet to announce its policy as a whole, he said.

States should not pass on the various taxes and fees to businesses, but directly to consumers, he said. These taxes further erode product margins, which are already under pressure, he added.

Several northern states, including Uttar Pradesh, have introduced new bottling and franchise fees that affect smaller manufacturers. These states have also implemented additional levies, such as cow tax, which further increases costs.

A first-class toast

Although the industry is facing a profitability challenge, rising demand for premium alcohol is providing some relief to most manufacturers. More and more consumers are choosing higher-quality alcohol, even as the overall market slows. This shift is due to younger consumers reaching the legal drinking age.

“There is a huge boom, post-pandemic, in premium spirits, while the ‘regular’ or entry-level segment has been relatively stagnant in several markets,” Iyer said. In states where end-consumer prices are reasonable due to “progressive” taxation (such as Haryana, Karnataka and Goa), Iyer said premium spirits consumption has been driven by consumers opting to buy better quality spirits if the price differences are marginal or affordable.