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MacVisit – Radico Khaitan
Spirited recovery
We met Radico Khaitan (RDCK IN, Not Rated) management in Delhi recently.
Radico, the second-largest Indian spirit player, has been witnessing robust
volume and earnings growth on the back of a rise in consumer discretionary
spending and balance sheet deleveraging. Radico is now increasing its focus on
premiumisation. It is well placed to capture IMFL volume growth due to its wide
distribution footprint, which captures 95% of sale points.
Premium brands to contribute >50% of Radico’s net profit
Over last few years, Radico has enhanced its focus on brand premiumisation
through new launches (After Dark, Eagles Dare and Morpheus), as rising
consumer income has enabled up-trading. Management is confident about
premiumisation strategy and expects premium products to grow at 30% CAGR.
Going forward, changes in product mix due to higher contribution from premium
products will also improve Radico’s margin, as these products enjoy up to 3x the
gross margin of mass products. Management also affirmed that the premium
segment will contribute more than 50% of its net profit, going forward.
Management guided 15% volume and 20% revenue growth
Management is confident of 15% volume growth for FY12E driven by new
premium launches and growth revival in flagship whisky brand 8PM (24% of
sales volume). 8PM whisky has arrested the volume decline in FY10 and grew
7.4% in 1H’FY11 after the brand was relaunched.
Radico’s sales have been weak in South Indian states (biggest liquor markets)
due to a weak distribution network compared to North India, and Radico has
improved its reach in southern states over a period, which is likely to help. Thus,
volume and sales growth would also be aided by increase in distribution reach.
Dual-feed production capacity reduces margin volatility
The spirit industry’s’ gross margins have been volatile due to the molasses price
cycle. Radico’s ~25% spirit capacity is dual-feed (both molasses- and grainbased), which provides it the raw material flexibility and can help it maintain
margin in a rising cost environment. We believe molasses prices are likely to
remain soft due to the robust sugarcane crop this year.
Deleveraging to have a multiplier effect on earnings growth
Radico has de-levered its balance sheet through a Rs3.4bn equity raising in
March 2010. Its debt-equity and debt service coverage ratios have declined to
0.7x and 3.3x in FY10 from 2.8x and 14.3x in FY09, respectively. We believe
deleveraging will positively affect its earnings growth (earnings grew 33% in
1H’FY11) as high interest costs were eating into profitability earlier.
Trading at 35% discount to #1 player, gap should narrow
Radico, the #2 spirit player in India, is trading at 15.4x FY12E Bloomberg
consensus earnings estimates whereas market leader United Spirits (UNSP IN)
is trading at 24x FY12E earnings. We believe this valuation discount is large and
could narrow as Radico delivers strong earnings growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
MacVisit – Radico Khaitan
Spirited recovery
We met Radico Khaitan (RDCK IN, Not Rated) management in Delhi recently.
Radico, the second-largest Indian spirit player, has been witnessing robust
volume and earnings growth on the back of a rise in consumer discretionary
spending and balance sheet deleveraging. Radico is now increasing its focus on
premiumisation. It is well placed to capture IMFL volume growth due to its wide
distribution footprint, which captures 95% of sale points.
Premium brands to contribute >50% of Radico’s net profit
Over last few years, Radico has enhanced its focus on brand premiumisation
through new launches (After Dark, Eagles Dare and Morpheus), as rising
consumer income has enabled up-trading. Management is confident about
premiumisation strategy and expects premium products to grow at 30% CAGR.
Going forward, changes in product mix due to higher contribution from premium
products will also improve Radico’s margin, as these products enjoy up to 3x the
gross margin of mass products. Management also affirmed that the premium
segment will contribute more than 50% of its net profit, going forward.
Management guided 15% volume and 20% revenue growth
Management is confident of 15% volume growth for FY12E driven by new
premium launches and growth revival in flagship whisky brand 8PM (24% of
sales volume). 8PM whisky has arrested the volume decline in FY10 and grew
7.4% in 1H’FY11 after the brand was relaunched.
Radico’s sales have been weak in South Indian states (biggest liquor markets)
due to a weak distribution network compared to North India, and Radico has
improved its reach in southern states over a period, which is likely to help. Thus,
volume and sales growth would also be aided by increase in distribution reach.
Dual-feed production capacity reduces margin volatility
The spirit industry’s’ gross margins have been volatile due to the molasses price
cycle. Radico’s ~25% spirit capacity is dual-feed (both molasses- and grainbased), which provides it the raw material flexibility and can help it maintain
margin in a rising cost environment. We believe molasses prices are likely to
remain soft due to the robust sugarcane crop this year.
Deleveraging to have a multiplier effect on earnings growth
Radico has de-levered its balance sheet through a Rs3.4bn equity raising in
March 2010. Its debt-equity and debt service coverage ratios have declined to
0.7x and 3.3x in FY10 from 2.8x and 14.3x in FY09, respectively. We believe
deleveraging will positively affect its earnings growth (earnings grew 33% in
1H’FY11) as high interest costs were eating into profitability earlier.
Trading at 35% discount to #1 player, gap should narrow
Radico, the #2 spirit player in India, is trading at 15.4x FY12E Bloomberg
consensus earnings estimates whereas market leader United Spirits (UNSP IN)
is trading at 24x FY12E earnings. We believe this valuation discount is large and
could narrow as Radico delivers strong earnings growth.
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