As YS Jaganmohan Reddy is all set to take charge as the chief minister of Andhra Pradesh on May 30, one of his key campaign promises, a complete ban on alcohol in the state, is expected to herald trouble for the industry, especially for two major listed firms -- United Spirits (USL) and United Breweries.

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After an election victory of unprecedented scale, Reddy is likely to take quick steps to implement his populist campaign promise. Total prohibition was a crucial part of his ‘Navratnalu’ (nine) welfare schemes, promised during the poll campaign. He wants to implement the programme in a phased manner.

In the first phase, the number of shops will be reduced, followed by a steep tax hike and total ban by 2024. Once the ban takes effect, only five star hotels would be allowed to sell alcohol products. The CM-designate is already in talks with V Lakshma Reddy of Jana Chaitanya Vedika, an NGO, to prepare a roadmap for the ban.

The measure would a setback for liquor manufacturers and traders alike. While United Spirits and United Breweries would take a hit, it is very early to put the actual impact in terms of revenues and profit loss. Both the companies don’t provide state-wise volume and revenue details. However, HDFC Securities sees a volume loss of 5 percent for United Spirits and 7-8 percent for United Breweries.

As per HDFC Securities estimates, 38 million cases of Indian-made foreign liquor sales are currently sold in AP. USL has outsourced ‘popular’ segment and sell only ‘prestige and above’ (P&A) segment.

P&A segment includes products having price above Rs 400 (average consumer prices in India) for a 750ml bottle. So products having prices below Rs 400 is categorised as ‘popular’.

Assuming P&A as 20 percent of the market and USL share at 45 percent, it would lose about 3.5 million cases or 5 percent of its volume. United Spirits’ products are also divided into segments -- popular and prestige and above segment.

Beer sales in the state in FY19 were about 28mn cases. Assuming UBL has 50 percent share, it would lose 14mn cases, a loss of around 7-8 percent in terms of volumes.

Talking to CNBC TV18, Shekhar Ramamurthy, MD of United Breweries said that AP is a very important market for the company and comments from the AP government is worrying for the industry. They expect that total business will be impacted by 5-6 percent.

In 1995, NT Rama Rao had also won elections on alcohol ban promise. But the ban remained in force for only 16 months. The step was reversed by his son-in-law Chandrababu Naidu when he became the new CM​, citing huge loss to the exchequer.

Policy risk always casts a shadow on the industry and in near-term growth, AP ban would impact the performance of companies. But companies and analysts continue to remain bullish on long-term prospects.

First Published:May 28, 2019 5:39 PM IST