BSE ID : 532497 NSE ID : RADICO
RECOMMENDED PRICE 137.45
PEAK FROM RECO 495.00 260.13%
CURRENT PRICE 399.50 190.65%
Radico Khaitan Limited posted strong numbers posted net profit of 22.46 for q2. Total income from operations also increased by 18.7 percent to Rs 1211 crs.
Result Update: Maintain Strong buy, Volume Growth Margins improvement catalyst for further rerating target raised from 210 to 225.
Radico Khaitan Limited posted strong numbers posted net profit of 22.46 for q2. Total income from operations also increased by18.7 percent to Rs 1211 crs.
Quarter 3 looks promising as its seasonally strongest quarter for the company. Debt levels further reduced easing pressure and as pointed earlier Related party transactions reduction will remove overhang on stock and rerate stock further.
We build in 7 percent increase in EBITDA (FY18E) and debt rationalization by further 350 bps thus debt reduction to reduce cost by over 4.6% on reduced base.
CMP 137.45: Target 210 (A POTENTIAL MULTIBAGGER : Read rationale before investment).
Radico Khaitan Ltd (RKL) is an India-based spirits company. It is engaged in the manufacture of liquor. The company has three distilleries and one JV with total capacity of 150mn litres and 33 bottling units spread across the country. The company is one of the largest providers of branded IMFL to the Canteen Stores Department (CSD), which has significant entry barriers. RKL's brands include Magic Moments Vodka, Morpheus Brandy, Contessa Rum, Old Admiral Brandy and 8 PM. Its liquor business also includes rectified spirit, country liquor and IMFL. Its alcohol products include rectified spirit, silent spirit, cane juice spirit, malt spirit, grain spirit and ethanol. The company’s PET division produces a range of PET bottles and jars for industries, such as pharmaceutical, cosmetics, home and personal care, edible oil and confectionery.
Key Trigger: Radico Khaitan has controlled its balance sheet size by working on its debt over last two years and a book cleaning drive on Related party transaction such balance sheet attempt signals likely change of hands. The debt and have reduced significantly pointing towards a clean balance sheet structure. If one recall we pointed out Radico Suntory deal a big question mark in 2014 for the simple reason the foreign management try to look for cleaner balance sheet and always wants a low levered stock despite having receivables.
The stock is reasonably priced on all parameters Market Cap to Sales , P/E multiple and Return ratios are quite favorable given the raw material prices of ENA not to increase substantially and company because of its debt exercise is likely to save more from interest outflow and higher growth in earnings.
Considering the EV to sales we expect stock to atleast give a value of 210 per share.
Brand Visibility: 8 PM , Morpheus , Magic Moments After dark and Contessa are few recognizable and respected brands of Radico list
Lower Raw material due to flexible ENA pricing: Company will benefit from raw material prices and will have 100-150 bps margin improvement going forward.
Cleaner Balance Sheet: A possible attempt to sell the stake or form JV interest: 2014 to 2016 has been a story of consolidation but in mean time balance sheet has cleaned and strengthened. Transactional shift from 2013 to 2016 on related party transaction pointing towards management seriousness to improve books.
Market Cap to sales too attractive at 1.4x with recognizable brands from magic moments to 8 PM having good demand and recognition makes us believe company will get better valuation post consolidation exercise. Across the brand value chain radico can be in top three of IMFL and other categories barring the original United Spirits (Multi-bagger of FY14) but it is not getting rerated faster.
Dec Jan: The party months for liquor industry huge demand growth expected this year.
Technical WAVE likely to break 171 hurdle . Technically the chart plot to our QUANT MODEL is pointing to a chance of 210 as the volumes have been strong.
Fundamental Value ZONE 185-210.
If balance sheet clean up has happened for deal making with a Foreign tie up than likely 250+
Key challenge is GST outcome on rate
Key developments to watch Consolidation in the sector likely as foreign players are evaluating various players, one single deal in sector will rerate entire stocks of the sector. GLOBUS, RADICO and UNITED SPIRITS preffered pick.
Disclosure (SEBI Registration Number for Aashish Tater: INA300001206)
Stock Ownership - No
Stock traded in Last 30 days ( No trading or investment activities done) - No
Stock Recommended to Clients - Yes
Remuneration/Benefits received from company in 12 months - No
Merchant Banking Market Making activities / projects - No
Any arrangement with co. to affect the report write up - No
Disclaimer: Aashish Tater is an investment adviser based in Kolkata, INDIA. At the time of writing this article, he, his firm and dependent family members have no position in the stocks mentioned above. The author invites readers to send him email and welcomes comments, feedback & queries at firstname.lastname@example.org. This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.