Summer blues for alcobev makers: West Asia crisis set to hit margins

Alcoholic beverage (alcobev) manufacturers in India are likely to face a 150-200 basis point decline in EBITDA margins this fiscal as rising packaging costs and supply-chain disruptions linked to the raging West Asia conflict weigh on profitability, Crisil Ratings said. 

According to the ratings agency, revenue growth for the sector is expected to moderate to 5-7%, much lower than the 11% CAGR recorded over the last three fiscals, primarily on shortages in glass bottle availability. Despite weaker operating cash flows, a reduction in inventory levels is expected to provide temporary relief to the working capital cycle of manufacturers. 

The study covered 31 alcobev companies, including 10 listed entities, which together account for around 30% of the organised industry’s revenue of ₹3.8 lakh crore. 

Glass bottle shortage hits industry 

The alcobev sector is currently grappling with a shortage of glass bottles. Spirits and beer together account for more than 95% of the industry size. 

Packaging costs are relatively higher for beer makers at 35% of net revenues, compared with 25% for spirits manufacturers. Nearly two-thirds of total packaging costs are attributable to glass bottles. 

The ongoing geopolitical tensions have disrupted the supply of liquefied natural gas (LNG), a key input used in glass bottle manufacturing. As a result, glass bottlers have reportedly cut production by 35-40% , creating shortages across industries and pushing up prices. 

Margins may shrink 

“The cost of glass bottles is expected to rise 20% on average this fiscal to ₹280-300 per case. Since the alcobev industry is highly regulated and manufacturers have limited flexibility to pass on higher costs to consumers, operating margins are likely to contract,” said Jayashree Nandakumar, Director, Crisil Ratings. 

She added that margins in the spirits segment may decline by 140-180 basis points while the impact could be sharper in beer at 250-300 basis points. 

Overall, the blended industry margin is expected to fall to 11.5-12% this fiscal, assuming supply-chain disruptions continue through the first half of the year and there are no major retail price revisions. 

Lower inventory offers temporary relief 

Crisil said packaging inventory levels have been steadily declining since the conflict began, amid rising input costs. “Companies usually maintain packaging inventory of 50-60 days to manage supply disruptions. This may fall to 20-30 days during the ongoing conflict,” said Sajesh KV, Associate Director, Crisil Ratings. 

He added that lower inventory levels could temporarily improve liquidity by releasing working capital. However, a prolonged disruption may tighten supplies further and increase pressure on procurement strategies and pricing. 

Despite debt-funded capital expenditure plans, the sector’s balance sheets are expected to remain stable due to prudent borrowing practices. Crisil estimates the interest coverage ratio will remain healthy at 6.8 times this fiscal, while the ratio of total outside liabilities to tangible net worth is likely to stay under control at 0.75 times.