Sri Lanka alcoholic beverage demand sustainable despite higher prices – Fitch Report
View(s):Makers of alcoholic beverages in Sri Lanka will be able to pass on back-to-back increases in excise duties to consumers without worrying about them shifting to the more affordable illicit market, Fitch Ratings says in a news report.”Rising disposable income will absorb the higher duties, and the inelastic demand and increased consumer demand for refined alcohol should allow companies, including Distilleries Company PLC (DCSL) and Lion Brewery (Ceylon) PLC to pass on those charges to consumers.”
Fitch has assigned a stable outlook to Sri Lanka’s alcoholic beverage sector. “We expect DCSL and Lion Brewery to be able to accelerate deleveraging from the financial year ending 31 March 2016 as they have recently expanded capacity to meet future demand. We believe their liquidity positions will continue to be strong in 2016, backed by high unrestricted cash balances and extensive unutilised but committed credit lines,” the report said.
The report said that Fitch expects increased per capital income, driven its forecast GDP growth for Sri Lanka of over 6 per cent in 2016, the recent increase in public-sector pay, higher tax exemptions for private-sector employees and reduced essential-goods prices to improve the affordability of – and sustain the demand for – alcohol in 2016.”The market structure is attractive for existing manufacturers as a total ban on advertising and stringent licensing requirements set up high barriers to entry
We expect the market share of leading spirit makers, including DCS to shift in 2016 as the minimum monthly excise tax of Rs. 200 million Brewery on alcohol manufacturers, reintroduced in the budget for 2016 after being first proposed in January 2015, cause smaller spirits makers, which account for about 10 per cent of the market, to exit. Similarly, the change in the annual licensing fee of liquor manufacturers, which has moved to a flat rate of Rs. 150m irrespective of volume
could also adversely affect the smaller firms and hasten exit.” The speed at which drinkers are switching to beer from hard liquor should slow down somewhat in 2016, as taxes on a 100 per cent alcohol by volume basis on strong beer have surpassed that of hard liquor after back-to-back tax increases in October and November 2015, the report added. Spirits makers have been facing increased competition from beer producers – given the growing popularity of beer among the younger population, competitive pricing on the basis of pure alcohol content and rapid urbanisation in post-war Sri Lanka.
“Companies may find it difficult to revise prices on a regular basis if the government decides to raise taxes multiple times in the same year as seen in 2015 and that could adversely affect profitability. Similarly, consumers may shy away from the mainstream market if the price increases are significant and imposed at short intervals.”