Tax cuts will allow beer to regain lost market share: Fitch

• But credit rating of beer and liquor makers unlikely to change 
• Hard liquor sales to fall by 2%; Lion Brewery expected to cut prices

Credit rating agency Fitch yesterday said the recent budget proposals to change the taxation structure on beer and hard liquor products would see the former regain some of the market share it lost to the latter over the past year, although the credit ratings of the two largest beer and liquor producers are unlikely to change. “Sri Lanka’s beer industry will regain market share from hard liquor following a more favourable tax regime for the segment announced in the Sri Lankan government’s budget,” Fitch said. The budget proposed to reduce excise duties on beer by 33 percent and raised the duty on hard liquor by 2 percent, while also introducing a Nation Building Tax of 2 percent on all alcohol products.

Further taxes were brought on non-potable liquor and the raw materials used to produce ethanol.

“With the latest tax revisions and barring further changes, we expect beer’s market share of total reported alcohol consumption in Sri Lanka, as calculated by Fitch, to increase to around 24-25 percent in the medium term, posting an average volume growth of 22 percent over 2017-2019,” the ratings agency said.

It is expecting the hard liquor sales to fall by 2 percent over this period. The hard liquor’s market share in the alcohol market increased to 84 percent in 2016 from 71 percent in 2014 due to the tax increases on beer, of which, the market share fell to 14 percent from 27 percent, according to Fitch.
Fitch said that Lion Brewery (Ceylon) PLC, which sells 80 percent of beer in Sri Lanka, would reduce the prices of its products due to the tax cut on beer sales and the removal of a tax on beer cans, in order to make beer products more competitive.

However, Fitch said that the beer sales volumes are unlikely to recover fast enough in the next 12 to 18 months for Lion’s net leverage is to reduce to less than 3.0x (6.3x at end-March 2017), given the already high debt levels. 

 
Meanwhile, Distilleries Company of Sri Lanka PLC (DIST), which is the largest hard liquor manufacturer, has already increased the prices of its main product by 6 percent to account for the tax and raw material increases, Fitch said.

It noted that the ratings of the two firms are expected to remain steady, with Lion’s A+(lka)/Negative Outlook and DIST’s AAA(lka)/Rating Watch Negative.

Fitch said that the taxes on alcohol manufacturers, which accounted for 60-70 percent of gross revenues of the companies over year ended March 2017, are unlikely to be increased by the government to an extent which would make alcohol prohibitively expensive to the average consumer.
“The alcohol excisea taxes contributed 8 percent to government tax revenue in 2016. As such, we expect further tax increases to be gradual, especially for hard liquor,” the ratings agency said.
Fitch said that the budget proposal to simplify the issuance and rate structure of liquor retail licences may have a positive impact on alcohol sales.