How will India-UK FTA affect Indian alcobev stocks?
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Mumbai: Shares of most Indian alcohol companies fell on Wednesday after India and the United Kingdom finalised a Free Trade Agreement (FTA) that includes deep cuts in import duties on Scotch whisky and gin. The move is expected to make imported liquor more affordable in India, a development that may challenge local liquor brands in the premium and luxury space.Under the new FTA, India has agreed to cut import duties on Scotch, whisky and gin from 150% to 75% with immediate effect, with a further reduction to 40% over the next 10 years. This means that imported spirits, especially premium Scotch, will become much cheaper for Indian consumers.Shares of Som Distilleries and Breweries fell 4%, Radico Khaitan and Piccadilly Agro declined 3% each. Companies fear that cheaper Scotch could erode the market share of Indian-made premium liquor. But not everyone is losing.United Spirits, India's biggest liquor company and part of the global Diageo group, could emerge as a big winner from this deal. That's because 32% of its sales already come from luxury and premium brands, many of which are imported Scotches bottled in origin (BIO). Shares of United Spirits gained 0.9%."While competition from imported scotch whiskey (no of cases) might increase, the Indian Alco-beverage sector, which uses bulk whisky as raw material for blended Scotch, stands to benefit," said Chakri Lokapriya, CIO - Equities, LGT Wealth India.Currently, taxes make up around 15% of the retail price of imported Scotch in India.Analysts estimate the new tariff structure could lead to price drops of 8-20% over time, making imported brands much more competitive.With lower duties, these premium imports could see stronger demand and higher volumes. Analysts estimate that United Spirits' BIO Scotch portfolio could grow at a compound rate of 33% over the next three years, driven by rising affordability and changing consumer tastes.Moreover, Diageo's global supply chain means United Spirits is well-positioned to scale up its Scotch offerings without major cost pressures. Even if profit margins from imported Scotch remain limited (around 10%), the sheer volume growth is likely to boost the company's overall profits.Domestic companies like Radico Khaitan may face more direct pressure. However, they also import Scotch in bulk to blend with Indian spirits, so cheaper raw material could help them cut costs and improve margins. Radico's super-premium products, which use imported Scotch for blending, could see a margin gain of about 100 basis points, according to analysts."Radico imports the bulk of scotch for blending premium products. This could reduce raw material costs significantly for Radico, which can lead to expansion of gross margin by ~100 bps helping Radico's super-premium portfolio (~10% of IMFL revenue)," Lokapriya said.So, while competition may increase, some Indian firms could still benefit by using cheaper imported ingredients to make better-quality products at more competitive prices.
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