Although the rise in pri­ces of barley and grain has resulted in rise in beer pri­ces by at least 30 per cent this year, you wouldn’t have to shell out more for your favourite bottle of Indian-made liquor.

Higher sugar production, resulting in lower prices of sugarcane molasses, a key raw material used in the production of Indian-made foreign liquor (IMFL), has provided a huge relief to local manufacturers. The price has reduced from ab­out Rs 525 per quintal in January to Rs 377 per quintal at present.

Local liquor manufacturers are likely to benefit from lower molasses price with higher margins this financial year. Since the government has fixed prices for spirits from April 1 that cannot be hiked throughout the financial year, the companies are bound to benefit with higher margins and thus higher profits.

Over the past two years, companies were under constant pressure of lower sugar production resulting in higher molasses prices.

Robust production

India’s sugar production is likely to touch 19 million tonnes in financial year 2011, compared with about 12 million to­nnes in financial year 2010. This robust production is a huge help to IMFL brands such as United Spirits, Radico Khaitan and Tilaknagar Industries, am­ong others, because they were challe­nged with high molasses prices throughout financial year 2010.

Molasses accounts for 70-75 per cent of the raw material cost for manufacturing IMFL. While most of the IMFL bra­nds available are made through molasses in India, molasses as an input is not used for alcohol production outside India. Globally, manufacturers use grain in spirits production.

Molasses is a by-product of the processing of sugar cane or sugar beets into sugar. The quality of molasses depends on the maturity of the sugarcane or sug­ar beet, the amount of sugar extracted and the method of extraction. Mol­asses-contained alcohol accounts for around 85 per cent of the total consumption of alcohol in the country.

IMFL hard liquors include whiskey, rum and vodka, which are manufactured in India. These alcoholic beverages are different from country liquor, which inc­ludes fenny, toddy and arrack. For example, whereas a whiskey in most co­u­ntries would be distilled from grain, Indian whiskey is made by adding whi­skey-like flavour and colour to neutral sp­irit obt­ained from molasses.

Challenging prices

Even farmers were moving away from sugar production to other crops in financial year 2010 because of the worldwide crash in sugar prices. In India, many far­mers had shifted to other crops such as oilseeds, which fetch better prices. The total IMFL market in India is estimated at around 200 million cases per annum and molasses-based liquor accounts for more than 90 per cent of it.

As a result of rising input costs for bar­ley and grain, beer prices across all bra­nds have increased by at least Rs 20 per a bottle of 650 ml.

Brands such as Kin­gfisher, which used to cost about Rs 45, now costs Rs 65, while premium brands like Carlsberg now costs as much as Rs 90.

“Prices of spirits cannot change because they have been fixed by the government for this financial year. The next price decision will be taken on April 1, 2011. Companies could voluntarily cut down prices though, but cannot sell at higher rates. Next year can be called the ‘year of bulk’ for the industry because in October 2011 the harvest will be much better, so that will be a bigger relief for distilleries. In terms of India’s sugar production, it is likely to touch 19 million tonnes in financial year 2011, compared with 12 million tonnes in financial year 2010. IMFL manufacturers are bound to show higher earnings in this quarter,” VN Raina, director general of All India Distillers Association, said.

Manufacturers on the other hand, say they are unlikely to pass on the benefit of lower molasses prices to the consumer at least for this financial year because it would help them level up the lost earnings before interest, depreciation, taxes and amortisation (Ebitda) margins over the past two years.

“Molasses prices, which is low at the moment, should not be seen in isolation. For the past two years, companies had been facing pressure on their Ebitda margins because of high molasses price. As a part of sales, raw materials account for 20 per cent of the sale price. Of the 20 per cent, about 70 per cent constitutes molasses price,” Lalit Sethi, chief financial officer of Tilaknagar Industries, said. “In the southern markets, we work on a cooperation basis, which entails that market prices are agreed once a year. Since 90 per cent of our sales come from the southern markets, we had not passed on the price increase to the consumer. Going forward, we will definitely report better margins because sugar production has been much better. There is no reason why the prices of molasses will not remain stabilised or reduce in the present or next quarter.” United Breweries did not respond to a mail sent on this story.

Market expectation

Analysts too are upbeat about molasses price remaining stable over the next two quarters as well. “Molasses prices should stabilise at the present levels in the next quarter (October-December) as well. Raw material costs have become comparatively quite low for the domestic liq­uor companies compared to the selling prices,” Ambareesh Baliga, vice-president of Karvy Stock Broking, said.

According to Debashish Mukherjee, principal at global management consultant firm A T Kearney India, the companies are unable to pass on the benefit of lower input cost to the consumers bec­ause they have to factor in commodity prices fluctuations. He added, “So even if molasses prices have come down, they have to take into account the high prices of molasses last year. It's a combination of profit and losses that needs to be balanced out. Therefore no company can undertake dynamic price changes.”

Stock performance

Stocks of brewers have given mixed retu­rns year-to-date. Companies such as Glo­bal Spirits, United Breweries, Tilak­nagar Industries, Winsome Breweries and Uni­ted Spirits have jumped 86.65 per cent, 78.75 per cent, 38.47 per cent, 29.14 per cent and 4.08 per cent, year-to-date. On the flip side, Indage Vintners has plummeted 53.14 per cent, followed by Mount Shivalik and Millennium Beer, which have slipped 5.77 per cent and 2.10 per cent. Balaji Distilleries and Radico Khaitan gained 6.03 per cent and 4.08 per cent. The BSE 500 index returned 5.57 per cent during the same period.

Alex Mathews, head of research at Ge­ojit BNP Paribas, said, “Decline in mol­asses prices, the major input used by brewers, will definitely help beverage ma­k­ers improve their margins.”

(With inputs from Urvashi Jha in Hyderabad and Amit Mudgill

in New Delhi)