Why Is India Considered A Key Growth Market For Diageo?

Diageo‘s (NYSE:DEO) acquisition of United Spirits, India’s leading alcoholic beverage company, which gave it a 54.78% stake in the company, bestowed it a foothold in the country, and provided it the footprint to compete and win in India. The region, Diageo’s second biggest market in terms of revenue, is considered to be a key growth market for the company, given the increasing disposable income, as well as the addition of LPA (legal purchase age) consumers. According to Research and Markets, the Indian alcoholic beverages market is set to grow at a CAGR of 7.72% over a ten-year period, reaching INR 5.3 trillion by 2026. Diageo, being the leading player in the market, is set to benefit immensely with the splendid growth forecast for the region.

We have a $140 price estimate for Diageo, which is slightly lower than the current market price.

Impressive Growth Seen In The Region Despite Setbacks

Organic net sales in India were up 2% and reported net sales were higher by 14% in FY 2017 (year ended June 2017), despite a fall in reported volumes of 7%. This was in spite of the negative impact of demonetization and a Supreme Court ruling that prohibited the sale of alcohol within 500 meters of a state or national highway. The increasing urbanization and improving levels of disposable income positively impacted their revenues, as sales of Prestige and higher brands grew 7%, largely driven by IMFL whisky and scotch. Indian Made Foreign Liquor (IMFL) already accounts for a large chunk of Diageo’s total volumes. However, given the lower prices for these products, their share in the company’s total sales still remains small.

Immense Potential In India

Diageo has made good progress in accelerating growth in India as it focuses on the long-term opportunity, while mitigating short-term impacts of events and legislation. The priority for the company in this region is to focus on and strengthen the prestige and above brands, improve the route-to-consumer to ensure that its brands have great visibility, and drive out costs to invest in growth and expand margins. In this regard, the company relaunched a number of its core prestige brands in the second half of FY 2017, with notable performance and market share improvement. For greater cost efficiency, the company’s tram-lining has helped to reduce glass costs, through light-weighting and a more effective sourcing strategy. Furthermore, zero-based budgeting has reduced indirect costs.

In FY 2017, price increases, positive mix, and productivity savings helped to push the gross margins in India higher by 56 basis points. The Goods and Service Tax (GST) implemented in the country, which went live in July 2017, should have an impact on the margins in the future, as a result of higher tax rates on packaging material, molasses, and services, partially offset by reduced input costs. Despite this, in the medium term (by FY 2019), the company aims to improve organic operating margins to the mid-high teens. This will again be a result of increasing premiumization among consumers, due to higher disposable incomes.

India will be a key growth driver for Diageo’s Asia Pacific division, along with China, in the years to come. We expect the segment’s revenue per unit and volumes to grow slowly, but steadily, while the margins are predicted to improve substantially by the end of our forecast period.

The charts below have been made using our new, interactive platform. The driver assumptions can be modified to judge the impact it can have on the valuation and price per share dynamics.

See Our Complete Analysis For Diageo Here

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