Multi Baggers

Radico Khaitan Ltd

Company Overview:

Radico Khaitan Ltd (RKL) is the second largest Indian liquor company, after United Spirits Ltd. Its brands are sold in more than 30 countries including Canada, South Africa, South East Asia and the United Arab Emirates.

Incorporated in 1943 as Rampur Distillery & Chemical Company Ltd, the company changed its name to Radico Khaitan Ltd in year 2003 post the reverse merger with Abhishek Cements Ltd (ACL). The company entered into two joint venture in the United Kingdom and western Africa in 2006 and became the first Indian liquor company to have overseas production lines. The whiskies RKL sells outside India are grain-based, while its whiskies in India are made from molasses. 8PM Whisky, Royal Whytehall Whisky, After Dark Whisky, Magic Moments Vodka, Magic Moments Rum, Old Admiral Brandy and Morpheus Brandy are some of its main brands.

Besides RKL has also a PET (Polyethylene Terephthalate) division which produces PET bottles and jars for the pharmaceutical, cosmetics, home & personal care, edible oil and confectionery industries.

Financial Analysis:

Revenue growth:

In Q2FY14 net revenue stood at Rs. 3521 mn witnessing YoY growth of 18.5 percent and sequential degrowth of 1.5 percent. Considering the actual sales from tie up units instead of royalty income only and excluding IMFL (Indian made foreign liquid) trading turnover, the operational sales were about Rs. 4500mn.

Segment-wise volume growth:

Prestige and higher brands' sales volume registered YoY 22.1 percent growth and QoQ 10.8 percent degrowth to 0.89mn cases while sales volume of regular brands was 2.74mn cases reporting YoY rise of 4.6 percent and QoQ decline of 13.1 percent. The total sales volumes were 4.81mn cases up by 7.2 percent YoY but down by 13.2 percent QoQ.

EBITDA and Profit margins:

EBITDA came at Rs. 457mn with 6.9 percent YoY fall and 13.7 percent QoQ fall led by higher raw material prices, higher marketing expense and higher selling & distribution expenses. EBITDA margin was 13 percent as against 14.8 percent in the previous quarter and 16.5 percent in Q2FY13. PAT decreased by 21.4 percent YoY and 22.9 percent QoQ to Rs. 173mn; here it is worth mentioning that lower PAT was a result of Rs. 63mn mark-to-market forex loss and one-time charge of Rs44mn (export fees levied by UP government).

Effective tax rate: The effective tax rate in Q2FY14 was 30.99 percent compared to 28.6 percent in the previous quarter and 33.3 percent in Q2FY13.

Leverage: The leverage was nearly 1 as of 31 March 2013.

Working Capital: Working capital days rose from 54 days in FY12 to ~60 days in FY13 due to increase in accounts receivables and climb in inventory.
 
Profitability: Return on equity was 13.8 percent.

Positives:

Strong growth in premium brands: Volumes of premium brands grew by 22.1 percent YoY while YoY growth in IMFL brands and regular brands was 7.2 percent and 4.6 percent respectively.

Increasing industry focus on premium brands: After Diageo acquired stake in United Spirits, United Spirits is focusing on value (premium brands) rather than volume where Radico already has good position. Further it gives opportunity to Radico to increase its share in mass portfolio.

IMFL segment spin-off: Radico has established a wholly owned subsidiary and transferred the whole IMFL business to it. Spinning off the IMFL division into a 100 percent subsidiary is a strategy that would provide independent existence to the business of IMFL and the business of bulk liquor.

Potential strategic partnership:  There is a likelihood of a strategic partnership with some global strategic partner while the company will keep the manufacturing rights of the brands as well as the country liquor and trading segment of the business. The stake sale to a global partner is most likely to revalue the company to higher level.

Valuations:

The stock is currently trading at Rs. 159.55 and stands at the valuation of 27.5x FY13 EPS. Net sales, EBITDA and net profit are estimated to grow at CAGR of ~15 percent, ~21 percent and ~20 percent respectively in FY13-15E. With the target price of Rs. 210, we value the stock at 24.9x FY14E EPS and 18.6x FY15E EPS. Our bullish view is based on the above positives.