Due to strong entry barriers and numerous taxes, existing liquor manufacturers are likely to enjoy undiminished strength over the medium to long term. Brands with a strong sub-segmentation strategy
(expansion of product categories by leveraging brand strength) are expected to gain market share as, due to the ban on liquor ads, there are few ways to build new brands. However, pricing power in the face of volatile raw material costs is a concern, as state governments allow price hikes only once a year. Top picks: Tilaknagar & Globus Spirits.
 Strong entry barriers protect incumbents. Several entry barriers exist for new companies and new brands. These include the ban on liquor ads, limited potential for stock-keeping units (SKUs), ‘import’ duties on interstate transfer of molasses and liquor, limited distribution networks due to the various licenses required and stringent government controls.
 Sub-segmentation to offset limited brand-building and volatile income trends. With limits on brand creation, companies are leveraging their existing brands with a sub-segmentation strategy. This also caters to consumers who are likely to change products to match volatile per capita income growth. We expect brands that have products at all price points and segments to do well.
 Pricing power hit by volatile raw material cost & government curbs.
Pricing power is a concern for the sector. Most state governments permit price hikes only once a year. The sector also faces progressive taxation, which further dissuades price hikes, as this attracts higher taxes. A few companies are using a premiumization strategy to pass on the volatile prices of molasses and glass, thereby improving realizations.
 Stock calls. We initiate coverage on Radico Khaitan, Tilaknagar
Industries and Globus Spirits with Buy ratings. Top picks: Tilaknagar
(strong IMFL franchisee) and