Alcohol beverage industry may see margin contraction

New Delhi: The domestic alcohol beverages (alcobev) industry is expected to have revenue growth of 8-10 per cent in 2023-24 but operating margins may contract by 90-140 basis points due to input cost pressure, a report by rating agency ICRA stated.

The industry revenues are estimated to grow, helped by volume growth and product mix benefits, the report based on a sample set of domestic alcobev companies said. “Industry operating profit margin (OPM) to contract by ~90-140 basis points in FY24 due to input cost pressure, especially grain prices and packaging materials,” it said. The alcobev industry witnessed a strong revival in the last fiscal in FY23 led by a healthy demand across both segments -spirits and beer, after two consecutive pandemic-hit years of FY21 and FY22 “During Q1 FY2024, the spirits industry reported a 13 per cent YoY increase in revenues despite being the lean season for the segment, while the beer industry, despite being the peak season, witnessed a marginal decline of ~1%, due to the unseasonal rainfall,” it said. However, despite a steady demand, OPM of ICRA’s sample set companies is poised to contract further by ~90-140 basis points in FY2024, following a sharp 300 basis points decline in FY2023,” it said. “The primary reason for the expected margin contraction is the elevated prices of key inputs in the current fiscal, like non-basmati rice and other grains such as maize, used to produce extra neutral alcohol (ENA), the base to manufacture spirits. The impact of a sub-par monsoon, the El Nino conditions, and the Government measures on grain prices thus remain crucial to ascertain the industry cost structure. Besides, packing material costs also remain high, particularly glass, led by an increase in soda ash prices. However, prices of barley, the key raw material for producing beer, have witnessed correction in recent quarters and are likely to remain stable in the near to medium term. Moreover, the availability and consequent pricing pressures from the diversion of grains towards the production of ethanol, which is seeing increased demand due to the Government blending norms, is also a key influencing factor to monitor for the industry. “While ICRA’s sample set undertook a sizable capex at 5 per cent of the revenues in FY2023, the same is expected to moderate to 2-3 per cent in FY2024 and FY2025 as key players enhanced their capacities recently,” it said.