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Stock Recommendation | RADICO KHAITAN LTD – ACCUMULATE – Target Price : 460
Publish date: JANUARY 25, 2019
Radico Khaitan Q3FY19 results was ahead of estimates driven by strong volume growth in prestige and above category and better than estimated EBITDA margins.
■ The net revenue for the quarter grew by 14.6% yoy to Rs 5.5 bn and was ahead of our estimates, driven by 7.2% yoy growth in IMFL volume which was at 5.7 mn cases. Volume in Prestige and above category grew at 18.4% yoy while Regular category grew at a slower pace of 3.4% yoy. Volume growth in regular category slowed due to company reducing supply to Tamil Nadu and Kerala due unattractive prices in those states.
■ EBITDA margins in the quarter grew by 160 bps yoy to 17.3% led by premiumization resulting in better realization on yoy. The company expects higher EBITDA margins based on better product mix.
■ The company has guided for overall volume growth of 8-9% with prestige and above category expected to grow at 13-15% in volume terms in the longer run. The company targets to achieve EBITDA margins in late teens by FY21E and intends to be debt free in the next 1.5 years.
We have largely maintained our EPS estimates. Based on FY19E/FY20E EPS of Rs 14.7/18.4, the stock is trading at PE of 29.1/23.2x. We maintained our Accumulate rating on the stock with target price of Rs 460, valuing the stock at 25x FY20E EPS.
Net revenue grew by 14.6% yoy to Rs 5.5 bn and was ahead of our estimates of Rs 5.2 bn led by 7.2% yoy growth in volume and better product mix and was ahead of our estimates. The IMFL volume growth was driven by 18.4% yoy volume growth in Prestige and above category while regular category witnessed softness with 3.4% yoy growth. The slower growth in regular category was due to company reduced supply to states like Tamil Nadu and Kerala due to unattractive prices in those states. In terms of volume mix, prestige category contributed 27.7% of the quarterly volume and regular category contributed 72.3%. In value terms, prestige and above category contributed 50% of the IMFL sales. IMFL sales contributed 80% of the company’s revenue in Q3FY19.
The growth in volume is driven higher yoy growth rate with increase in market share in UP. Open market policy implemented in UP for FY19 has led to a strong industry volume growth in the state. All its brands did well in the quarter with its recently launched brands 8PM Premium Black whisky and 1965- Spirit of Victory rum also started making meaningful contribution to the volumes. In addition the company’s focus on branding with increased sales and marketing spend has also positively impacted growth in prestige and above category. The management is positive on volume growth in coming quarters across both regular as well as Prestige and above category.
EBITDA for the quarter grew by 26.8% yoy with EBITDA margins at 17.3%, improved by 160 bps yoy led by improved gross margins driven by better product mix, focus on premiumization and price hike received in some of the states on yoy. Gross margins improved by over 120 bps yoy better product mix and benign raw material prices on yoy. Gross margin on qoq has declined due to increase in ENA prices post revision in MSP. The selling and distribution expenses in the quarter grew by 22.2% yoy on company increasing investment in marketing of its brands.
The company’s prestige and above category did well due to robust performance of Magic Moment vodka which commands over 50% market share in its category. The company is focusing on increasing branding through marketing campaign with Bollywood star Jacqueline Fernandez and Kartik Aryan through TVC. It has also signed Tiger Shroff as brand ambassador for 8PM premium black whisky. As a result of these initiatives, the selling and distribution expenses have increased in the last few quarters. The company has kept selling and promotion expenditure budget of 7-8%.
The company has reduced its debt by Rs 768.7 mn in Q3FY19 and Rs 2.76 bn in 9MFY19 to Rs 2.93 bn which was driven by strong operating and free cash flows. This has also resulted in 55% yoy decline in interest expenses in Q3FY19. Based on strong margins and lower interest expenses, PAT for the quarter grew by 48.8% yoy to Rs 521 mn (Vs estimates of Rs 491 mn). The company targets to reduce its debt further Q4FY19 and intends to be debt free in the next 1.5 years.
The management has guided for 8-9% growth in overall volume in the longer run with prestige & above category expected to grow at a faster pace of 13-15%, while regular category is expected to grow at 5-6% on yoy. The growth will be driven strong performance of existing brands in prestige and above category as well as further pickup in new brands. Its recent launches like 8PM Black which is premium variant of 8PM whisky and 1965 premium rum are doing well. The company intends to launch two new brands in premium category in the next two years in brown spirits segment. Further, the management is confident of improving its margins in coming quarters based of improved realization led by better product mix. The company targets to achieve EBITDA margins in late teens by FY21 and intends to be debt free in the next 1.5 years.
■ Its existing brands such as 8PM whisky, Magic Moments vodka and Morpheus super premium brandy delivered sustained growth.
■ Magic moment flavored vodka has become larger than magic moment plain vodka due to changing consumer preference and demand dynamics. The flavored vodka segment is expected to grow at faster than industry average.
■ The gross debt of the company at the end of Q3FY19 stood at Rs 3.3bn which includes Rs 2.9 bn of working capital loan and Rs 0.4 bn of term loan.
We have realigned our volume and realization estimates between product categories, but these changes will not have any significant impact our earnings estimates. Based on this, we expect RKL’s PAT to grow at 41% CAGR in FY18-20E. Based on FY19E/FY20E EPS of Rs 14.7/18.4, the stock is trading at PE of 29.1/23.2x respectively. We maintain our Accumulate rating on the stock with unchanged target price of Rs 460, valuing the stock at 25x FY20E EPS.
Radico Khaitan Ltd (RKL) is one of the largest players in the Indian spirits industry and owns brands like 8PM whisky, Magic Moments vodka, etc. The company was formerly known as Rampur Distillery which was established in 1943. The promoter Mr. Lalit Khaitan along with his father bought Rampur Distil3ery in 1972. The company was operating as bottler for other spirit companies till 1999, when it forayed into its own brand. Now, RKL has evolved from a distillery player to a branded IMFL player in India with presence across product categories and has 4 brands in 1mn cases annual sales category. It operates three distilleries and one JV with total capacity of 157 million litres (30 mn cases of IMFL and 7 mn cases of country liquor) and 33 bottling units spread across the country. It has strong sales network through over 55,000 retail outlets across India. It is presently the market leader in premium vodka category with its brand Magic Moments. The company is increasing focus on premium/prestige category (Price >Rs 300/750ml) which is contributing 26% of its volume and 43% in value terms while regular brands (Price
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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