3QFY2017 Result Update | Breweries & Distilleries

February 13, 2017

Radico Khaitan

ACCUMULATE

CMP

`128

Performance Highlights

Target Price

`147

Quarterly Data

Investment Period

12 months

(` cr)

3QFY17

3QFY16

% yoy

2QFY17

% qoq

Revenue

415

401

3.6

447

(7.2)

Stock Info

EBITDA

51.4

(12.1)

(9.5)

Sector

Breweries & Distilleries

Margin (%)

12.4

14.6

(221bp)

12.7

(32bp)

Market Cap (` cr)

1,700

Adj. PAT

(22.3)

(9.7)

Net Debt (` cr)

742

Source: Company, Angel Research

Beta

0.8

Radico Khaitan’s (RKL) results for 3QFY2017 were below our estimates both on

52 Week High / Low

151 / 81

top-line as well as bottom-line fronts. The company’s top-line grew by ~4% yoy to

Avg. Daily Volume

98,071

`415cr owing to the impact of demonetization, which led to a decline in

Face Value (`)

consumer spending. Moreover, lower sales volume and subdued operating

BSE Sensex

28,334

performance led to the de-growth in bottom-line by ~22% yoy to `20cr.

Nifty

8,794

Top-line line subdued on back demonetization: Overall, the volume growth

Reuters Code

RADC.BO

during the quarter de-grew by ~7% yoy, which resulted in the subdued top-line

Bloomberg Code

RDCK@IN

growth i.e. ~4% yoy to `415cr. This subdued volume and top-line performance

was due to the demonetization led decline in consumer spending. The company

Shareholding Pattern (%)

has consciously shifted its focus in favor of Prestige & above products, which

Promoters

40.5

command better margins over higher volume mass market products. Prestige &

above brands’ volume grew by ~0.3% yoy, while their contribution to total IMFL

MF / Banks / Indian Fls

13.3

volumes increased from 24.6% in 3QFY2016 to 26.5% in 3QFY2017.

FII / NRIs / OCBs

21.1

Indian Public / Others

25.1

Lower sales impacted the overall PAT growth yoy: On the operating front, the

company’s margin contracted by 221bp yoy to 12.4%, primarily due to a

combination of lower sales and an increase in ENA prices. The company reported

Abs. (%)

3m 1yr 3yr

~22% yoy fall in its net profit to `20cr for the quarter.

Sensex

3.0

19.3

39.3

RKL

2.7

19.4

(21.1)

Outlook and Valuation: Going forward, we believe that the company has the

potential to perform better on the bottom-line front on the back of (a) volume

growth, (b) higher sales of premium products, (c) anticipation of better price

3-year price chart

hikes, and (d) gradual reduction in debt, which should lead to significant savings

180

160

in interest costs. Hence, we recommend an ACCUMULATE rating on the stock

140

with a target price of `147.

120

100

Key financials

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

Net sales

1,488

1,543

1,636

1,811

% chg

2.5

3.7

6.0

10.7

Net profit

108

% chg

(5.1)

13.7

11.5

25.7

EBITDA margin (%)

11.4

12.6

13.0

13.2

Source: Company, Angel Research

EPS (`)

5.1

5.8

6.4

8.1

P/E (x)

25.2

22.1

19.9

15.8

P/BV (x)

2.0

1.9

1.7

1.6

RoE (%)

8.1

8.5

8.8

10.1

RoCE (%)

7.8

8.8

9.8

11.0

Amarjeet S Maurya

EV/Sales (x)

1.6

1.4

1.3

022-39357800 Ext: 6831

EV/EBITDA (x)

14.3

12.6

11.0

9.6

[email protected]

Source: Company, Angel Research; Note: CMP as of February 10, 2017

Please refer to important disclosures at the end of this report

Radico Khaitan | 3QFY2017 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr)

3QFY17

3QFY16

% yoy

2QFY17

% qoq

9MFY17

9MFY16

% chg

Net Sales

415

401

3.6

447

(7.2)

1,293

1,165

10.9

Consumption of RM

209

179

16.4

261

(19.8)

698

535

30.6

(% of Sales)

50.3

44.8

58.2

54.0

45.9

Staff Costs

2.6

2.1

106

25.2

(% of Sales)

8.4

8.5

7.6

8.2

7.3

Selling & Administrative Exps.

(31.8)

(16.6)

149

208

(28.4)

(% of Sales)

11.7

17.8

13.0

11.5

17.8

Operating Expense

24.0

90.5

175

182

(4.0)

(% of Sales)

17.2

14.4

8.4

13.5

15.6

Total Expenditure

364

342

6.2

390

(6.8)

1,128

1,010

11.7

Operating Profit

(12.1)

(9.5)

165

156

5.6

OPM (%)

12.4

14.6

12.7

13.4

Interest

(0.7)

(5.2)

(0.3)

Depreciation

4.8

(0.4)

5.0

Other Income

5.96

6.82

(12.6)

4.43

34.6

(39.1)

PBT

(23.3)

(9.1)

(2.0)

(% of Sales)

6.6

8.9

6.7

(2.1)

6.6

7.5

Provision for Taxation

(25.7)

0.9

(12.2)

(% of PBT)

27.9

28.8

25.1

25.9

28.9

Other Comprehensive Inc /Exp (Net of Tax)

Reported PAT

(22.3)

(9.7)

2.2

PATM

4.7

6.3

4.9

5.3

Source: Company, Angel Research

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Top-line plunges on the back demonetization

Overall, the volume growth during the quarter de-grew by ~7% yoy, which

resulted in the subdued top-line growth i.e. ~4% yoy to `415cr. This subdued

volume and top-line performance was due to the demonetization led decline in

consumer spending. The company has consciously shifted its focus in favor of

Prestige & above products, which command better margins over higher volume

mass market products. Prestige & above brands’ volume grew by ~0.3% yoy,

while their contribution to total IMFL volumes increased from 24.6% in 3QFY2016

to 26.5% in 3QFY2017.

Exhibit 2: Top-line growth trend

500

450

400

350

300

250

200

(5)

150

100

(10)

(15)

(20)

Net sales

QoQ growth (%)

Source: Company, Angel Research

Subdued operating performance

On the operating front, the company’s margin contracted by 221bp yoy to 12.4%,

primarily due to a combination of lower sales and an increase in ENA prices.

Exhibit 3: Operating profit and margin trend

Operating Profit

Margin (%)

Source: Company, Angel Research

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Investment rationale

Pricing environment expected to be favorable for IMFL industry

Our interaction with liquor companies suggests that prices have now bottomed out.

We expect the industry’s pricing environment to 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 a 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 an 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 eight years, the

company’s prestige and above brands’ volume has reported a CAGR of ~23%

and their share in the product mix has increased from 7.9% in FY2009 to 24% in

FY2016. We expect volume contribution of prestige and above products in the

IMFL segment to increase further on back of higher ad spends. The company has

roped in celebrity Hrithik Roshan as its brand ambassador. Also, the company’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.

Wide distribution network with strong brands

RKL has a strong sales and distribution network with a presence in retail and off-

trade outlets in the relevant segments in different parts of India. Currently, the

company is selling its products through over 45,000 retail outlets and over 5,000

on-premise outlets. Apart from wholesalers, a total of around 300 employees

divided into four zones, each headed by regional profit centre head, ensure an

adequate on-the-ground sales and distribution presence across the country.

The company has strong brands likes Magic Moments Vodka, Morpheus Brandy,

Verve Vodka, Florence Brandy, After Dark Whisky, etc.

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Outlook and valuation

The company has not performed well in the last two years due to increasing raw

material costs (ENA is a key raw material) and with it not receiving significant price

hikes from various states. We expect the company to perform well going forward in

anticipation of better price hikes and healthy sales growth in premium products.

This would result in an overall improvement in the operating margin of the

company. We expect the company to report strong earnings CAGR of ~18% to

~`109cr over FY2016-18E. Hence, we recommend an ACCUMULATE rating on

the stock with a target price of `147.

Exhibit 5: One-year forward P/E band

10.0 X

15.0 X

20.0 X

25.0 X

30.0 X

250

200

150

100

Source: Company, Angel Research

Company Background

Radico Khaitan Ltd is an India-based spirits company engaged in the

manufacturing 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 After

Dark Whisky, Magic Moments Vodka, Morpheus Brandy, Contessa Rum, Old

Admiral Brandy and 8 PM. Its liquor business also includes rectified spirit and

country liquor. 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.

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Profit & Loss Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Total operating income

1,258

1,452

1,488

1,543

1,636

1,811

% chg

10.0

15.4

2.5

3.7

6.0

10.7

Total Expenditure

1,074

1,258

1,318

1,348

1,423

1,571

Raw Material Cost

585

653

717

721

761

838

Personnel Expenses

107

131

128

141

Selling & Administrative Exp.

235

286

284

273

286

317

Others Expenses

176

226

210

224

249

275

EBITDA

184

193

170

195

213

239

% chg

17.7

5.0

(11.9)

14.2

9.5

12.4

(% of Net Sales)

14.6

13.3

11.4

12.6

13.0

13.2

Depreciation& Amortisation

EBIT

149

155

132

154

170

195

% chg

20.4

3.9

(14.6)

16.8

10.4

14.4

(% of Net Sales)

11.8

10.7

8.9

10.0

10.4

10.8

Interest & other Charges

Other Income

(% of PBT)

27.8

34.3

51.6

35.4

31.7

25.2

Share in profit of Associates

Recurring PBT

109

106

108

126

158

% chg

25.7

(2.6)

(18.1)

23.6

17.1

25.7

Prior Period & Extra. Exp./(Inc.)

PBT (reported)

109

106

108

126

158

Tax

(% of PBT)

29.3

33.0

22.4

28.6

32.0

PAT (reported)

108

% chg

21.4

(7.8)

(5.1)

13.7

11.5

25.7

(% of Net Sales)

6.1

4.9

4.5

5.0

5.2

6.0

Basic EPS (`)

5.8

5.4

5.1

5.8

6.4

8.1

Fully Diluted EPS (`)

5.8

5.4

5.1

5.8

6.4

8.1

% chg

21.2

(7.9)

(5.1)

13.7

11.5

25.7

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Balance Sheet

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

702

754

812

877

950

1,042

Shareholders Funds

728

781

839

904

977

1,068

Total Loans

768

904

849

851

755

700

Deferred Tax Liability

Total Liabilities

1,566

1,770

1,773

1,840

1,816

1,853

APPLICATION OF FUNDS

Gross Block

744

821

831

851

871

891

Less: Acc. Depreciation

214

250

288

329

371

416

Net Block

529

571

542

522

499

475

Capital Work-in-Progress

Investments

109

108

Current Assets

1,161

1,330

1,379

1,471

1,500

1,646

Inventories

186

211

212

220

233

258

Sundry Debtors

435

523

538

562

596

660

Cash

Loans & Advances

314

441

470

492

524

565

Other Assets

209

139

149

185

131

145

Current liabilities

249

262

270

274

304

389

Net Current Assets

912

1,067

1,109

1,197

1,195

1,257

Deferred Tax Asset

Mis. Exp. not written off

Total Assets

1,566

1,770

1,773

1,840

1,816

1,853

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Cashflow Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

109

106

108

126

158

Depreciation

Change in Working Capital

(242)

(53)

(47)

(87)

(59)

Interest / Dividend (Net)

Direct taxes paid

(23)

(26)

(19)

(31)

(40)

(51)

Others

Cash Flow from Operations

(66)

137

149

115

219

169

(Inc.)/ Dec. in Fixed Assets

(141)

(20)

(Inc.)/ Dec. in Investments

(3)

(0)

(10)

Cash Flow from Investing

(141)

0.2

(20)

Issue of Equity

Inc./(Dec.) in loans

(55)

(97)

(55)

Dividend Paid (Incl. Tax)

(12)

(10)

(12)

(13)

(16)

Interest / Dividend (Net)

(71)

(84)

(90)

(85)

(84)

(76)

Cash Flow from Financing

(154)

(94)

(194)

(147)

Inc./(Dec.) in Cash

(5)

(1)

(5)

Opening Cash balances

Closing Cash balances

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

22.0

23.9

25.2

22.1

19.9

15.8

P/CEPS

15.1

15.5

16.1

14.5

13.3

11.2

P/BV

2.3

2.2

2.0

1.9

1.7

1.6

Dividend yield (%)

0.6

0.7

0.8

0.9

EV/Sales

1.9

1.7

1.6

1.4

1.3

EV/EBITDA

12.7

12.8

14.3

12.6

11.0

9.6

EV / Total Assets

1.3

1.2

1.1

1.0

Per Share Data (`)

EPS (Basic)

5.8

5.4

5.1

5.8

6.4

8.1

EPS (fully diluted)

5.8

5.4

5.1

5.8

6.4

8.1

Cash EPS

8.5

8.3

8.0

8.8

9.7

11.4

DPS

0.8

0.9

1.0

1.2

Book Value

54.8

58.7

63.0

67.9

73.4

80.3

Returns (%)

ROCE

10.0

9.2

7.8

8.8

9.8

11.0

Angel ROIC (Pre-tax)

10.9

9.9

8.4

9.4

10.5

11.8

ROE

10.6

9.1

8.1

8.5

8.8

10.1

Turnover ratios (x)

Asset Turnover (Gross Block)

2.4

2.5

2.7

3.0

3.3

3.8

Inventory / Sales (days)

Receivables (days)

126

132

133

Payables (days)

WC cycle (ex-cash) (days)

144

152

151

153

154

February 13, 2017

Radico Khaitan | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL

and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a

registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

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contrary view, if any.

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Disclosure of Interest Statement

Radico Khaitan

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

February 13, 2017