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Company Visit Note
Radico Khaitan - Leveraging on premiumisation
Radico Khaitan is the third largest branded spirits (IMFL) manufacturer in the
country with sales of 14.6mn cases (FY10).
• Leveraging on premiumisation. There has been substantial shift in product
mix of Radico Khaitan with volume share of premium brands rising from 8%
3 years ago to 18% now with its premium vodka brand, Magic Moments
registering volume CAGR of 40% over this period. Further product mix
enhancement will be aided by recently launched premium Morpheus brandy
and After Dark whisky. Given higher profitability for premium brands (nearly
3x that of regular brands), overall margins should benefit from this shift.
• Volume growth momentum likely to sustain at c15%. During 9MFY11
Radico registered 12% volume growth with mainline brands growing 17%.
Mgmnt expects volume growth rates to sustain at 15-16% over FY12 driven
by targeted 20% growth for the mainline brands. National launch of After
Dark whisky brand, increased distribution for Morpheus brandy, enhancing
bottling capacity in Tamil Nadu and introduction of more brands in CSD will
support growth rates.
• Improved mix and stable molasses costs to drive margin expansion.
Driven by faster growth for premium brands and price hikes (wtd avg price
hike of 2-3%), price/mix growth of 5-6% is easily achievable as per mgmt.
Radico will also be a key beneficiary of stable molasses prices. However glass
prices (c15% of COGS) are firm (up 10% since Mar’11). On better mix and
RM deflation gains, mgmnt expects 100-150bps improvement in operating
margins in FY12.
• Promoters shareholding increased significantly by 233bp q/q over Mar’11
quarter as per BSE filings.
• Balance Sheet concerns have eased now. Post the QIP issue of US$75mn
last year, net debt/equity ratio has come down from 3x in FY09 to 0.7x now
which should further support earnings growth.
• Radico is open for distribution tie up with premium international brands,
recent one being with Japan’s Suntory Liquors.
• Valuations. Stock is trading at 17x FY12E and 15x FY13E consensus EPS.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. JPMORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCHealthy volume growth momentum to sustain; More
introductions in CSD and national rollout for After Dark to
support growth
Radico Khaitan registered 12% volume growth in 9MFY11 with premium brands –
Magic Moments vodka and Morpheus brandy growing at much faster rates. Over past
three years product mix has shifted considerably in favor of high margin products.
Volume share of premium brands has increased from 8% three years ago to 18%
now.
Management expects volume growth for Magic Moments to be around 25-30% in
FY12 on increased penetration and higher growth for flavored vodka variants. There
is higher traction for white spirits, particularly vodka in India which currently forms
just 5-6% of overall spirits consumption in India and these low consumption levels
offer substantial headroom for growth for this category. Vodka sales are growing at
20-25% p.a. in the country and Magic Moments (dominating the semi-premium
vodka segment with c85% share) will be a key beneficiary of this trend. Further the
company is introducing two more variants of Magic Moments in Canteen Stores
(CSD).
Post the re-launch of 8 PM Whisky, there has been a healthy revival in its volumes
with 9MFY11 volume growth at 13% for this brand and management expects this
growth rate to sustain.
Radico’s another launch in premium space – Morpheus brandy has witnessed good
offtake and this brand garnered 0.17mn cases of sales in 9MFY11 as product reach is
extended to whole of South India.
Further upside to volume growth would come from widening distribution of After
Dark whisky brand, which was introduced last year. Initial consumer response to this
brand has been encouraging and management is quite hopeful about the success of
this premium whisky. It is currently sold in Northern and Western markets and by
June this year it will be likely rolled out to all key whisky consuming states as per
management.
In Tamil Nadu (largest liquor consuming state), Radico has tied up with two new
bottlers which will take the total number of bottlers (for Radico) to five in the state
and would further support sales of Morpheus, Magic Moments and After Dark brands
there.
Another important driver for volume sales would be introduction of Morpheus, After
Dark and two variants of flavored Magic Moments in CSD segment in FY12.
Overall Radico Khaitan expects volume growth of 15% for FY12E supported by
c20% volume growth for its mainline brands.
\Margins likely to benefit from improved mix
Radico Khaitan registered flat EBITDA margins over 9MFY11. While gross margins
expanded 300bp y/y during 9MFY11, higher brand spends and other expenses
eroded the gross margin gains. Aggressive media campaigns for 8PM, Magic
Moments, Morpheus and After Dark resulted in higher selling & distribution
expenses (+160bp y/y).
Management noted that molasses costs were stable q/q and are likely to remain stable
at these levels in Q4 and FY12. While there has been significant increase in sugar
and molasses production vs last year, offtake of molasses by ethanol industry has
kept the prices steady. Company’s current molasses procurement costs stand at
Rs450-460/quintal (flat q/q). Grain prices were also steady at Rs9000-9500 during
Q3FY11(vs Rs9500-10,000/tonne in Q2FY11).
Glass prices (which account for 13-15% of COGS) have moved up by 10% since
March 1st and this will weigh negatively (by 60-70bp) on margins as per
management.
Management noted that marketing spends will remain at current levels of 8-8.5% (as
% of sales) in coming quarters as it focuses on building its premium portfolio and
launching After Dark on a national basis.
Overall management is hopeful of increasing margins by 100-150bps in FY12 driven
primarily by 1) Improved product mix as high margin premium brands like Magic
Moments, Morpheus and After Dark grow at a much faster rate than regular brands,
2) Significant cost cutting initiatives including employee rationalization and 3) price
hikes (wtd average price hike of 2-3% likely during FY12) which may help negate
some impact of higher glass costs with molasses costs remaining stable.
Capex plans
Radico is looking to enahnce its ENA capacity at Rampur plant. It also plans to
increase its bottle printing capacity by c50%. Furthere they plan to automate the
bottling plants at Rampur completely. Overall management expects capex
investment of Rs500mn each in FY12 and FY13.
Debt levels
Radico has total debt of Rs5bn including US$34mn of FCCBs which are due for
conversion in July 2011 with an interest payment of 30%. Management noted that
interest charges have risen by 75-100bps for the company to c10% now. Company is
hopeful of reducing leverage via internal accruals.
Shareholding pattern
Promoters shareholding increased significantly by 233bp q/q over Mar’11 quarter as
per BSE filings.
Financial performance
Radico reported net revenue of Rs7.4bn (+20% y/y), EBITDA of Rs1.16bn (+19%
y/y) and Net Profit of Rs554mn (+73% y/y) during 9MFY11.Net profit margins (up
230 bps YoY) were helped significantly due to interest expense reduction post debt
reduction in Q4FY10
Company Overview
Radico Khaitan is third largest branded spirits (IMFL) manufacturer in the country
with sales of 14.6mn cases. It currently manufactures 14 brands selling more than 0.1
mn cases. They have four millionaire brands with annual sales of over 1mn cases.
Radico is a significant player in CSD segment (12% of Radico’s sales) serving
India’s defence forces where they have 24% share. Radico also produces ENA which
is sold to other companies for use in the manufacture of various alcoholic beverages.
They operate three distilleries at Rampur in Uttar Pradesh for the production of
molasses-based, grain based and malt-based spirits. It also owns thirty two bottling
units (5 owned, 27 CBUs) spread across the county along with a pan India
distribution network spanning 468 wholesalers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Company Visit Note
Radico Khaitan - Leveraging on premiumisation
Radico Khaitan is the third largest branded spirits (IMFL) manufacturer in the
country with sales of 14.6mn cases (FY10).
• Leveraging on premiumisation. There has been substantial shift in product
mix of Radico Khaitan with volume share of premium brands rising from 8%
3 years ago to 18% now with its premium vodka brand, Magic Moments
registering volume CAGR of 40% over this period. Further product mix
enhancement will be aided by recently launched premium Morpheus brandy
and After Dark whisky. Given higher profitability for premium brands (nearly
3x that of regular brands), overall margins should benefit from this shift.
• Volume growth momentum likely to sustain at c15%. During 9MFY11
Radico registered 12% volume growth with mainline brands growing 17%.
Mgmnt expects volume growth rates to sustain at 15-16% over FY12 driven
by targeted 20% growth for the mainline brands. National launch of After
Dark whisky brand, increased distribution for Morpheus brandy, enhancing
bottling capacity in Tamil Nadu and introduction of more brands in CSD will
support growth rates.
• Improved mix and stable molasses costs to drive margin expansion.
Driven by faster growth for premium brands and price hikes (wtd avg price
hike of 2-3%), price/mix growth of 5-6% is easily achievable as per mgmt.
Radico will also be a key beneficiary of stable molasses prices. However glass
prices (c15% of COGS) are firm (up 10% since Mar’11). On better mix and
RM deflation gains, mgmnt expects 100-150bps improvement in operating
margins in FY12.
• Promoters shareholding increased significantly by 233bp q/q over Mar’11
quarter as per BSE filings.
• Balance Sheet concerns have eased now. Post the QIP issue of US$75mn
last year, net debt/equity ratio has come down from 3x in FY09 to 0.7x now
which should further support earnings growth.
• Radico is open for distribution tie up with premium international brands,
recent one being with Japan’s Suntory Liquors.
• Valuations. Stock is trading at 17x FY12E and 15x FY13E consensus EPS.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION,
OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. JPMORGAN
DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCHealthy volume growth momentum to sustain; More
introductions in CSD and national rollout for After Dark to
support growth
Radico Khaitan registered 12% volume growth in 9MFY11 with premium brands –
Magic Moments vodka and Morpheus brandy growing at much faster rates. Over past
three years product mix has shifted considerably in favor of high margin products.
Volume share of premium brands has increased from 8% three years ago to 18%
now.
Management expects volume growth for Magic Moments to be around 25-30% in
FY12 on increased penetration and higher growth for flavored vodka variants. There
is higher traction for white spirits, particularly vodka in India which currently forms
just 5-6% of overall spirits consumption in India and these low consumption levels
offer substantial headroom for growth for this category. Vodka sales are growing at
20-25% p.a. in the country and Magic Moments (dominating the semi-premium
vodka segment with c85% share) will be a key beneficiary of this trend. Further the
company is introducing two more variants of Magic Moments in Canteen Stores
(CSD).
Post the re-launch of 8 PM Whisky, there has been a healthy revival in its volumes
with 9MFY11 volume growth at 13% for this brand and management expects this
growth rate to sustain.
Radico’s another launch in premium space – Morpheus brandy has witnessed good
offtake and this brand garnered 0.17mn cases of sales in 9MFY11 as product reach is
extended to whole of South India.
Further upside to volume growth would come from widening distribution of After
Dark whisky brand, which was introduced last year. Initial consumer response to this
brand has been encouraging and management is quite hopeful about the success of
this premium whisky. It is currently sold in Northern and Western markets and by
June this year it will be likely rolled out to all key whisky consuming states as per
management.
In Tamil Nadu (largest liquor consuming state), Radico has tied up with two new
bottlers which will take the total number of bottlers (for Radico) to five in the state
and would further support sales of Morpheus, Magic Moments and After Dark brands
there.
Another important driver for volume sales would be introduction of Morpheus, After
Dark and two variants of flavored Magic Moments in CSD segment in FY12.
Overall Radico Khaitan expects volume growth of 15% for FY12E supported by
c20% volume growth for its mainline brands.
\Margins likely to benefit from improved mix
Radico Khaitan registered flat EBITDA margins over 9MFY11. While gross margins
expanded 300bp y/y during 9MFY11, higher brand spends and other expenses
eroded the gross margin gains. Aggressive media campaigns for 8PM, Magic
Moments, Morpheus and After Dark resulted in higher selling & distribution
expenses (+160bp y/y).
Management noted that molasses costs were stable q/q and are likely to remain stable
at these levels in Q4 and FY12. While there has been significant increase in sugar
and molasses production vs last year, offtake of molasses by ethanol industry has
kept the prices steady. Company’s current molasses procurement costs stand at
Rs450-460/quintal (flat q/q). Grain prices were also steady at Rs9000-9500 during
Q3FY11(vs Rs9500-10,000/tonne in Q2FY11).
Glass prices (which account for 13-15% of COGS) have moved up by 10% since
March 1st and this will weigh negatively (by 60-70bp) on margins as per
management.
Management noted that marketing spends will remain at current levels of 8-8.5% (as
% of sales) in coming quarters as it focuses on building its premium portfolio and
launching After Dark on a national basis.
Overall management is hopeful of increasing margins by 100-150bps in FY12 driven
primarily by 1) Improved product mix as high margin premium brands like Magic
Moments, Morpheus and After Dark grow at a much faster rate than regular brands,
2) Significant cost cutting initiatives including employee rationalization and 3) price
hikes (wtd average price hike of 2-3% likely during FY12) which may help negate
some impact of higher glass costs with molasses costs remaining stable.
Capex plans
Radico is looking to enahnce its ENA capacity at Rampur plant. It also plans to
increase its bottle printing capacity by c50%. Furthere they plan to automate the
bottling plants at Rampur completely. Overall management expects capex
investment of Rs500mn each in FY12 and FY13.
Debt levels
Radico has total debt of Rs5bn including US$34mn of FCCBs which are due for
conversion in July 2011 with an interest payment of 30%. Management noted that
interest charges have risen by 75-100bps for the company to c10% now. Company is
hopeful of reducing leverage via internal accruals.
Shareholding pattern
Promoters shareholding increased significantly by 233bp q/q over Mar’11 quarter as
per BSE filings.
Financial performance
Radico reported net revenue of Rs7.4bn (+20% y/y), EBITDA of Rs1.16bn (+19%
y/y) and Net Profit of Rs554mn (+73% y/y) during 9MFY11.Net profit margins (up
230 bps YoY) were helped significantly due to interest expense reduction post debt
reduction in Q4FY10
Company Overview
Radico Khaitan is third largest branded spirits (IMFL) manufacturer in the country
with sales of 14.6mn cases. It currently manufactures 14 brands selling more than 0.1
mn cases. They have four millionaire brands with annual sales of over 1mn cases.
Radico is a significant player in CSD segment (12% of Radico’s sales) serving
India’s defence forces where they have 24% share. Radico also produces ENA which
is sold to other companies for use in the manufacture of various alcoholic beverages.
They operate three distilleries at Rampur in Uttar Pradesh for the production of
molasses-based, grain based and malt-based spirits. It also owns thirty two bottling
units (5 owned, 27 CBUs) spread across the county along with a pan India
distribution network spanning 468 wholesalers.
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