Visit http://indiaer.blogspot.com/ for complete details Strong expectations from Sep Q
Exceptional volume growth and easing of margin pressures
We expect Liquor companies to do well on two counts – 1) Re-stocking in Andhra
to lead to strong topline growth as volume growth should be close to ~20% and 2)
Initial easing of margin pressures as partial benefit of lower molasses prices start
flowing in. Also, Radico Khaitan should benefit from lower
interest costs.
Radico Khaitan - We expect a healthy 200% earnings growth in Sep Q led
by strong topline growth set to benefit from Andhra re-stocking and benefit
from higher growth in sales of premium brands like Magic Moments and
Morpheus brandy. Also, we expect strong margin gains from premiumization
and decline in input costs.
Price objective basis & risk
Radico Khaitan (RKHAF)
Our price objective is Rs250/share. We value Radico on target P/E of 18x FY12E
and EV/EBITDA multiple of 12x FY12E. This is at 20% discount to the FMCG
sector which we believe is justified given the cyclicality of its earnings, smaller
business scale and weaker market share. This multiple we believe is justified
given 1) earnings growth is set to surge, 2) balance-sheet health is now not a
cause for concern, and 3) the company is strategically improving its
product/brand portfolio. Upside risks: Higher-than-expected fall in molasses
prices, stronger-than-expected volume growth and a better pick up in new product
launches. Downside risks: Lower-than-expected fall in molasses prices and
failure of new product launches.
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