Ukraine Tensions Could Disrupt India’s Alcobev Companies [22-02-2022]

Ukraine Tensions: Commodity cost inflation, especially in barley, due to geopolitical tensions in Ukraine is a key worry for alcobev companies in India like United Breweries Ltd. and United Spirits Ltd., according to a note from Motilal Oswal Research.

Ukraine is among the top five global producers of barley and accounted for 18% of global barley exports in CY2022. Any major escalation in geopolitical situation in Ukraine could hurt barley supply equilibrium.

The brokerage added that Indian brewers will also be impacted by such supply disruption despite them largely sourcing barley locally. It’s not just the barley price, the bottling costs also contribute for the total RM costs. With brent crude surging over $90 per barrel, the bottling costs are expected to soar as well, putting pressure on United Breweries and United Spirits.

Views on the two stocks United Breweries and United Spirits, in light of the Ukraine situation and rise in crude prices.

Reports

  • Packaging costs for alcobev companies account for large part of total RM costs (64% for United Breweries and 34% for United Spirits, respectively).
  • Barley cost accounts for 30% of RM costs.
  • United Breweries was largely unscathed by the impact of steep rise in barley price over FY22 since it procured barley in February-March before the onset of inflation.
  • United Breweries could be hurt by significant RM inflation due to rise in barely prices, Ukraine crisis.
  • UBL’s bottle procurement system will allow the company to offset due to impact from crude-led inflation, as it relies on recycled bottles to meet 75% of its bottling requirements.
  • United Spirits is less reliant on recycle bottles and is vulnerable to higher bottle acquisition costs, directly correlated to crude prices.
  • Alcobev price increases, outside of free pricing states like Maharashtra, are ‘granted’ by state governments, which is a time-consuming process. Hence, the margins of these firms remain impacted.
  • Another major raw material cost for United Spirits is Extra Neutral Alcohol (ENA), whose prices have started rising as OMCs offered price increases to ethanol producers. The ripple effect of this could adversely impact margins.
  • Risk of excise increases in state budgets in FY23 and expensive valuations are also other key reasons for the cautious view on the sector.

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