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Radico Khaitan Ltd Research Report - 16th Dec 2015

Miscellaneous | Published on Jul 14th 2015


Radico Khaitan Ltd (RKL) is a leading manufacturer of Indian made foreign liquor (IMFL). It has a strong pan-India presence with growing sales in the premium brands category. Raw material prices expected to ease: We expect the price of extra neutral alcohol (ENA), a key raw material for the company, to remain stable and potentially even decline going forward. This is because sugar production during the October 2014 to May 2015 period has risen by ~16% yoy to 27.9mn tonne, which is an 8-year high production level. As a result ENA (a by-product of sugarcane) production too would be higher this year. Secondly, demand for ethanol (a by-product of sugarcane) from Indian oil marketing companies for blending with petrol, is also expected to be lower as the price of petrol is around ~Rs34/liter (excluding taxes) and that of ethanol is around Rs48-49/liter, thus making it unviable to blend ethanol with petrol. Pricing environment expected to be favourable for IMFL industry: Our interaction with liquor companies suggests that the industry has now bottomed out. We expect the industry’s pricing environment to likely get better going ahead mainly because there has not been any significant price hike in products in recent times due to delay in approval by various state governments. Hence, the industry is now expecting significant price hike in the coming financial year. Also, the industry leader – United Spirits - has been facing pressure at the operating level and the company has a huge debt on its balance sheet. Hence we believe that the company’s new Management would shift focus on profitability over volume growth, which in turn, would lead to increased scope for other liquor companies to hike prices. Higher proportion of Premium products in volume mix to drive profitability: In the IMFL segment, more than 20% of the company’s volumes come from prestige and above products, which is a high margin business, and the balance volumes come from regular and others brands. Since the last seven years, the company’s prestige and above brands’ volume has reported a CAGR of ~26% and their share in the product mix has increased from 7.9% in FY2009 to 20.7% in FY2015. We expect volume contribution of prestige and above products in the IMFL segment to increase further on back of higher ad spend. The company has roped in Hrithik Roshan as its brand ambassador. Also, RKL’s presence in the prestige Vodka segment is under penetrated which leaves scope for growth. Thus, this would improve the overall margin for the company and result in higher profitability. Valuation: On a trailing basis, RKL is trading at 1.2x EV/Sales, which is at a discount compared to its close peers like United Spirits (trading at 5.9x EV/Sales). Further, Tilaknagar Industries is trading at 1.5x EV/Sales in spite of it having lesser presence in the premium brands segment and in spite of its small size and regional focus. Considering consensus numbers of FY2017, RKL is trading at a 78% discount (in terms of P/E valuation) to United Spirits, which is unjustified in our view. At the current market price, RKL trades at a P/E of 12x FY2017E EPS. We initiate coverage on the stock with a Buy rating and target price of Rs112 (17x FY2017E EPS), indicating an upside of ~37% from the current levels.

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CMP 82
Target Price 112
Investment Period12 Months

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