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Over the last couple of years, Diageo (LSE:DGE) shares have significantly underperformed the FTSE 100. But that might be about to change.
Earlier this week, the UK announced a trade deal with India. And this looks like a potential game-changer for the world’s largest whisky company.
Game-changer
The deal involves a reduction of tariffs on whisky from 150% to 75%, before eventually falling to 40%. And that can only be good for companies looking to export Scotch.
Unsurprisingly, the news has gone down well with the owners of distilleries in Scotland. Jean-Etienne Gourges – the chief executive at Chivas Brothers – said: “India is the world’s biggest whisky market by volume, and greater access will be a game-changer for the export of our Scotch whisky brands, such as Chivas Regal and Ballantine’s.”
It’s important not to underestimate the significance of the agreement. But when it comes to whisky, there’s one company I’m focused on.
Market leadership
Chivas Regal and Ballantine’s are two of the world’s best-selling whisky brands. But the number one is Johnnie Walker, which is owned by Diageo.
The company’s scale is also a big advantage when it comes to the Indian market. Alcohol distribution is regulated on a state-by-state basis, which creates an obstacle to scaling.
Diageo however, has a strong presence in India. Its United Spirits subsidiary makes it the market leader and puts it in a strong position to navigate regulatory challenges. That could give the FTSE 100 firm an advantage in terms of being able to make the most of the opportunities presented by lower costs. And the scope of its brand portfolio should also help.
A stock to buy?
The trade deal with India isn’t the answer to all of Diageo’s recent challenges. And a deal covering tariffs on spirits wasn’t included in the UK’s agreement with the US this week. There are also shifting consumer preferences and at least some investors see this as a threat. But I think it’s worth noting that the share price hasn’t reacted that strongly to the news.
Diageo shares are up around 2.75% since the start of the week. To my mind, that indicates the market isn’t seeing this as the game-changing announcement the industry is reporting.
I think that’s a sign of an opportunity. So I’m looking to keep adding to the existing investment in the company that I have in my Stocks and Shares ISA.
Foolish takeaway
The whisky industry seems to agree that the UK’s deal with India could be a huge opportunity. The question for investors is which companies are best positioned to take advantage.
To my mind, Diageo is the obvious candidate. It has the leading products in a number of categories and the scale of its operations gives it a big advantage.
No doubt there will be challenges along the way. But I think investors have a strong reason to consider buying the stock at today’s prices.
