European alcoholic beverage manufacturers in India see their business outlook continuing to be dampened by an unfavourable regulatory environment even as increasing income levels and social acceptance of alcohol consumption support long-term prospects, Moody's Investors Service said on Wednesday (29 July).
Brewers Heineken NV and SABMiller Plc have historically generated operating profit margins of around 9-10% and 3%, respectively in India, which is well below margins made elsewhere in the Asia-Pacific region of 26.3% and 15%, respectively, Moody's said.
In the spirits category, Diageo Plc's margins in India are lower than its group average and lower than its peers, Moody's noted.
The rating agency said it estimates the operating profit margin of Pernod Ricard SA in India in the low to mid double-digit percent range, which is closer to its 23% group average, helped by its focus on the premium segment.
"We do not expect the regulatory environment to materially improve during the next two to three years, which will impede any broad improvement in operating profit margins for alcoholic beverage companies," says Sara Santagostino, a Moody's analyst.
The rating agency said it expects beer volume growth of 8.8% a year in 2015-18, albeit from a low base, and the spirits segment volume growth to moderate to around 3.7% a year, more in line with the global average.
"India's young and growing population, coupled with increasing wealth and urbanisation will also help increase alcoholic beverage consumption. Gradually increasing social acceptance of alcohol consumption will also support volume growth in bars and restaurants," Moody's said.
Alcohol production, distribution and sales are regulated by each state in India and the different regulations and existence of the central state tax (CST) payable on goods moving from one state to another are the biggest limit on growth, Moody's said.
The rating agency said it understands that both beers and spirits will remain excluded from the upcoming national goods and services tax reform.
At the same time, tough conditions for new entrants into the market means existing players have lesser challenges, the rating agency noted.
"While restrictive regulation in India will continue to make it difficult for European beverage companies to reach the same level of profitability they achieve in other countries over the next two or three years, it also means that incumbent alcoholic beverage producers will have strong protection until regulations change," said Paolo Leschiutta, a Moody's vice president.
High barriers to entry into the Indian market will be positive for brewers Heineken NV and SABMiller Plc and for spirits market share leaders Diageo Plc and Pernod Ricard SA, who are already established in the market, Moody's said.
The Indian beer market is dominated by UB Group with a 51% market share followed by SABMiller with 26%. Heineken owns 42% of the UB Group.
The spirits market is led by Diageo with a 40% market share followed by Pernod Ricard which does 11% of the total business.