Radico Khaitan :: In high spirits ::Motilal oswal

In high spirits
Premiumization to help expand margins, pricing environment improving
 Focus on premiumization to help expand operating margins by 250bp over FY12-15
 Incrementally better pricing environment - has received price hikes in several states
in 1HFY13
 Supportive valuations, 23% EPS CAGR to drive stock performance - expect 30% upside

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Premiumization to help expand margins
We estimate 10.3% volume CAGR over FY12-15, backed by 20% volume growth
in Magic Moments. Earlier a mass/economy segment participant, RDCK identified
premiumization as its key strategy post FY06. In the last three years, RDCK has
launched Morpheus brandy, After Dark whisky and recently Florence brandy in
the premium segment. Increased thrust on the brandy segment would improve
positioning in the key South India market and also help arrest the decline in
brandy market share. The success of RDCK's premiumization strategy is reflected
in the improving salience of premium brands in overall volumes. We expect
premium brands to contribute 20% of overall volumes by FY15 against 15% in
FY12 and 8% in FY09, enabling 170bp gross margin expansion over FY12-15. Radico
has recently received a 10% cut in Glass prices which should support near term
margins, we believe.
Pricing environment turning favorable
Our discussions with industry players suggest better pricing environment for
IMFL, especially in South India. The time lag between demand and approval of
price hike has come down. RDCK has received price hikes in Karnataka, Kerala,
Bihar, Madhya Pradesh, Chattisgarh in 1QFY13. Price increase in Andhra Pradesh
is likely to happen in October 2012. Karnataka is expected to grant price hikes in
November 2012. Also, we believe that the focus of the industry leader has
shifted from volumes to realizations and profits, thus improving the pricing
environment for the industry. In our view, this is a key enabler for structural
margin improvement.
Supportive valuations plus margin expansion = potential upside of 30%
RDCK's leverage has improved significantly post FY09. In FY12, it redeemed FCCBs
by refinancing them through low cost (3.5%) 7-year ECBs with a two-year
moratorium. Given the expected margin improvement, sustained double digit
volume growth and 23% EPS CAGR over FY12-15, we believe there is a case for a
re-rating. However, we value RDCK at 17x FY14E P/E, in line with historical
averages. We initiate coverage with a Buy rating and a target price of INR152 -
30% upside. A spike in input costs and lower than expected margin expansion
are the key risks to our investment thesis.