2QFY2016 Result Update | Breweries & Distilleries
November 10, 2015
Radico Khaitan
BUY
CMP
`109
Performance Highlights
Target Price
`128
Quarterly Data
Investment Period
12 months
(` cr)
2QFY16 2QFY15
% yoy 1QFY16
% qoq
Revenue
370
363
2.1
395
(6.3)
EBITDA
50.2
43
17.1
47
6.5
Stock Info
Margin (%)
13.6
11.8
174bp
11.9
163bp
Sector
Breweries & Distilleries
Adj. PAT
19
15
25.1
18
3.1
Market Cap (` cr)
1,450
Source: Company, Angel Research
Net Debt (` cr)
741
For 2QFY2016, Radico Khaitan (RKL)’s results have come in above our estimates.
Beta
0.8
The company’s top-line grew by 2% yoy, mainly due to growth in Prestige and
above products segment. On the operating front, the company reported
52 Week High / Low
117 / 76
margin expansion, primarily on account of lower selling & distribution and other
Avg. Daily Volume
1,17,668
expenses. Further, on the bottom-line front, the company reported a healthy
Face Value (`)
2
growth due to strong operating performance and lower interest cost.
BSE Sensex
26,121
Regular & others products segment de-grew which restricted overall top-line
Nifty
7,915
growth but Healthy volume growth in Prestige & above products segment: For the
Reuters Code
RADC.BO
quarter, RKL’s top-line grew by ~2% yoy to ~`370cr (our estimate was of ~
`364cr), mainly due to healthy volume growth in Prestige and above products
Bloomberg Code
[email protected]
segment (up ~8.5%). Prestige and above brands’ contribution to total Indian
made foreign liquor (IMFL) volumes increased from 21.2% in 2QFY2015 to
24.7% in 2QFY2016. However, de-growth in Regular & others products segment
Shareholding Pattern (%)
which contribute more than 75% of total sales, restricted the overall top-line
Promoters
40.5
growth of the company. The company is continuously focusing on the Premium
MF / Banks / Indian Fls
13.3
products segment to increase sales which is a high margin business.
FII / NRIs / OCBs
21.1
PAT grew ~25% yoy: The reported net profit for the quarter grew by 25% yoy to
Indian Public / Others
25.1
~`19cr (our estimate was of
~`15cr) on account of strong operating
performance and lower interest cost (in FY2015 the company has repaid a
significant amount of its debt; further debt reduction is also on the cards).
Abs. (%)
3m 1yr 3yr
Outlook and valuation: RKL has not performed well in the last two years due to
Sensex
(7.5)
(6.3)
39.8
increasing material costs (ENA is a key raw material) and with it not receiving
RKL
9.8
23.0
(10.2)
significant price hikes from various states. We expect the company to perform well
going forward in anticipation of easing material costs and on expectation of
better price hikes. This would result in an overall improvement in the operating
3-year price chart
margin of the company. Also, with the company having reduced significant debt
180
from its balance sheet, it would be able to report an improvement in its
160
profitability. We expect the company to report a strong earnings CAGR of ~18%
140
to ~`95cr over FY2015-17E. Hence, we recommend a Buy rating on the stock
120
with a target price of `128.
100
Key financials
80
Y/E March (` cr)
FY2014
FY2015
FY2016E
FY2017E
60
Net sales
1,452
1,488
1,565
1,687
% chg
15.4
2.5
5.1
7.8
Net profit
71
68
75
95
Source: Company, Angel Research
% chg
(7.8)
(5.1)
11.2
25.7
EBITDA margin (%)
13.3
11.4
12.2
13.0
EPS (`)
5.4
5.1
5.7
7.1
P/E (x)
20.4
21.4
19.3
15.3
P/BV (x)
1.9
1.7
1.6
1.5
RoE (%)
9.1
8.1
8.3
9.6
RoCE (%)
9.2
7.8
8.6
9.8
Amarjeet S Maurya
EV/Sales (x)
1.5
1.5
1.4
1.3
022-39357800 Ext: 6831
EV/EBITDA (x)
11.5
12.9
11.4
9.8
[email protected]
Source: Company, Angel Research, Note: CMP as of November 9, 2015
Please refer to important disclosures at the end of this report
1
Radico Khaitan | 2QFY2016 Result Update
Exhibit 1: Quarterly performance
Y/E March (` cr)
2QFY16
2QFY15
% yoy
1QFY16
% qoq
FY2015
FY2014
% chg
Net Sales
370
363
2.1
395
(6.3)
1,488
1,452
2.5
Consumption of RM
178
164
8.2
179
(0.7)
717
653
9.8
(% of Sales)
48.0
45.3
45.3
48.2
45.0
Staff Costs
29
26
12.6
27
7.7
107
93
15.1
(% of Sales)
7.8
7.1
6.8
7.2
6.4
Selling & Administrative Exps.
64.4
66
(2.4)
72.3
(10.9)
284
286
(0.9)
(% of Sales)
17.4
18.2
18.3
19.1
19.7
Operating Expense
49
64
(23.3)
70
(29.8)
210
226
(7.1)
(% of Sales)
13.2
17.6
17.7
14.1
15.6
Total Expenditure
320
320
0.0
348
(8.0)
1,318
1,258
4.8
Operating Profit
50
43
17.1
47
6.5
170
193
(11.9)
OPM (%)
13.6
11.8
11.9
11.4
13.3
Interest
21
23
(8.4)
21
(2.2)
90
85
Depreciation
10
11
(4.8)
10
-
38
39
(1.1)
Other Income
7
11
(33.3)
10
(26.6)
45
36
23.3
PBT
26
20
30.9
25
4.0
87
106
(18.1)
(% of Sales)
7.1
5.6
6.4
5.9
7.3
Provision for Taxation
8
5
47.6
7
6.2
19
35
(44.6)
(% of PBT)
29.4
26.0
28.7
22.4
33.0
Minority Interest
-
-
-
-
-
-
-
-
Reported PAT
19
15
25.1
18
3.1
68
71
(5.1)
PATM
5.0
4.1
4.6
4.5
4.9
Source: Company, Angel Research
November 10, 2015
2
Radico Khaitan | 2QFY2016 Result Update
Regular & others products segment de-grew which restricted
overall top-line growth but Healthy volume growth in Prestige &
above products segment
For the quarter, RKL’s top-line grew by ~2% yoy to ~`370cr (our estimate was of
~ `364cr), mainly due to healthy volume growth in Prestige and above products
segment (up ~8.5%). Prestige and above brands’ contribution to total Indian made
foreign liquor (IMFL) volumes increased from 21.2% in 2QFY2015 to 24.7% in
2QFY2016. However, de-growth in Regular & others products segment restricted
the overall top-line growth of the company, which contributes more than 75% of
total sales. Radico Khaitan strategically defocused the sale of low margin category
brands in the state of Tamil Nadu. This resulted in a decline of volumes in Tamil
Nadu from 3.47 lakh cases in 2QFY2015 to just 4,000 cases in 2QFY2016.
Exhibit 2: Top-line growth trend
450
20
400
15
350
10
300
5
250
-
200
(5)
150
(10)
100
50
(15)
0
(20)
Net sales
QoQ growth (%)
Source: Company, Angel Research
Operating margin expansion due to lower selling & distribution
and other expenses
On the operating front, the company’s reported margin expanded by 174bp yoy to
13.6%, primarily on account of lower selling & distribution and other expenses. During
the quarter, foreign exchange fluctuation loss was `3.6cr in 2QFY2016 compared
to a loss of `4.6cr in 2QFY2015.
November 10, 2015
3
Radico Khaitan | 2QFY2016 Result Update
Exhibit 3: Operating profit and margin trend
60
16
14
50
12
40
10
30
8
6
20
4
10
2
0
0
Operating Profit
Margin (%)
Source: Company, Angel Research
PAT grew ~25% yoy
The reported net profit grew by 25% yoy to ~`19cr (our estimate was of ~`15cr)
on account of strong operating performance and lower interest cost (in FY2015 the
company has repaid a significant amount of its debt; further debt reduction is also
on the cards).
Exhibit 4: Net Profit and growth trend
25
80
60
20
40
20
15
-
10
(20)
(40)
5
(60)
0
(80)
Net Profit
QoQ growth (%)
Source: Company, Angel Research
November 10, 2015
4
Radico Khaitan | 2QFY2016 Result Update
Investment rationale
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.
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 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 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 celebrity 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.
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.
Apart from this, the company has strong brands likes Magic Moments Vodka,
Morpheus Brandy, Verve Vodka, Florence Brandy, After Dark Whisky etc.
November 10, 2015
5
Radico Khaitan | 2QFY2016 Result Update
Outlook and valuation
RKL has not performed well in the last two years due to increasing 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 easing material costs and on expectation of better price hikes. This
would result in an overall improvement in the operating margin of the company.
Also, with the company having reduced significant debt from its balance sheet, it
would be able to report an improvement in its profitability. We expect the company
to report a strong earnings CAGR of ~18% to ~`95cr over FY2015-17E. Hence,
we recommend a Buy rating on the stock with a target price of `128.
Exhibit 5: One-year forward P/E band
300
250
200
150
100
50
0
Share Price
12x
18x
24x
30x
36x
Source: Company, Angel Research
Company Background
Radico Khaitan Ltd is an India-based spirits company 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 After Dark Whisky, 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.
November 10, 2015
6
Radico Khaitan | 2QFY2016 Result Update
Profit & Loss Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E
FY2017E
Total operating income
1,144
1,258
1,452
1,488
1,565
1,687
% chg
20.9
10.0
15.4
2.5
5.1
7.8
Total Expenditure
987
1,074
1,258
1,318
1,374
1,468
Raw Material Cost
546
585
653
717
735
789
Personnel Expenses
71
79
93
107
117
132
Selling & Administrative Exp.
205
235
286
284
316
327
Others Expenses
166
176
226
210
205
219
EBITDA
157
184
193
170
191
219
% chg
3.9
17.7
5.0
(11.9)
12.0
14.9
(% of Net Sales)
13.7
14.6
13.3
11.4
12.2
13.0
Depreciation& Amortisation
33
35
39
38
41
42
EBIT
124
149
155
132
150
178
% chg
0.1
20.4
3.9
(14.6)
13.6
18.3
(% of Net Sales)
10.8
11.8
10.7
8.9
9.6
10.5
Interest & other Charges
58
70
85
90
84
84
Other Income
21
30
36
45
45
45
(% of PBT)
24.6
27.8
34.3
51.6
40.7
32.4
Share in profit of Associates
-
-
-
-
-
-
Recurring PBT
87
109
106
87
111
139
% chg
(12.6)
25.7
(2.6)
(18.1)
26.9
25.7
Prior Period & Extra. Exp./(Inc.)
-
-
-
-
-
-
PBT (reported)
87
109
106
87
111
139
Tax
23
32
35
19
35
44
(% of PBT)
26.8
29.3
33.0
22.4
32.0
32.0
PAT (reported)
64
77
71
68
75
95
% chg
(12.6)
21.4
(7.8)
(5.1)
11.2
25.7
(% of Net Sales)
5.6
6.1
4.9
4.5
4.8
5.6
Basic EPS (`)
4.8
5.8
5.4
5.1
5.7
7.1
Fully Diluted EPS (`)
4.8
5.8
5.4
5.1
5.7
7.1
% chg
(12.7)
21.2
(7.9)
(5.1)
11.2
25.7
November 10, 2015
7
Radico Khaitan | 2QFY2016 Result Update
Balance Sheet
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E FY2017E
SOURCES OF FUNDS
Equity Share Capital
27
27
27
27
27
27
Reserves& Surplus
642
702
754
812
876
956
Shareholders Funds
668
728
781
839
902
983
Total Loans
650
768
904
849
840
830
Deferred Tax Liability
65
70
85
85
85
85
Total Liabilities
1,384
1,566
1,770
1,773
1,827
1,898
APPLICATION OF FUNDS
Gross Block
687
744
821
831
851
871
Less: Acc. Depreciation
185
214
250
288
329
371
Net Block
502
529
571
542
521
500
Capital Work-in-Progress
5
5
8
8
8
8
Investments
111
109
108
98
98
98
Current Assets
1,016
1,161
1,330
1,379
1,463
1,576
Inventories
179
186
211
212
223
236
Sundry Debtors
348
435
523
538
570
615
Cash
21
16
15
10
23
41
Loans & Advances
382
314
441
470
474
506
Other Assets
86
209
139
149
172
179
Current liabilities
259
249
262
270
278
299
Net Current Assets
757
912
1,067
1,109
1,184
1,277
Deferred Tax Asset
9
11
15
15
15
15
Mis. Exp. not written off
-
-
-
-
-
-
Total Assets
1,384
1,566
1,770
1,773
1,827
1,898
November 10, 2015
8
Radico Khaitan | 2QFY2016 Result Update
Cashflow Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E FY2017E
Profit before tax
87
109
106
87
111
139
Depreciation
33
35
39
38
41
42
Change in Working Capital
(15)
(242)
(53)
(47)
(62)
(75)
Interest / Dividend (Net)
37
42
50
90
84
84
Direct taxes paid
(18)
(23)
(26)
(19)
(35)
(44)
Others
18
13
22
-
-
-
Cash Flow from Operations
142
(66)
137
149
138
145
(Inc.)/ Dec. in Fixed Assets
(118)
48
(141)
11
(20)
(20)
(Inc.)/ Dec. in Investments
(9)
(3)
(0)
(10)
-
-
Cash Flow from Investing
(128)
46
(141)
0.2
(20)
(20)
Issue of Equity
1
1
1
-
-
-
Inc./(Dec.) in loans
109
97
99
(55)
(9)
(10)
Dividend Paid (Incl. Tax)
(11)
(12)
(12)
(10)
(11)
(14)
Interest / Dividend (Net)
(101)
(71)
(84)
(90)
(84)
(84)
Cash Flow from Financing
(2)
15
3
(154)
(105)
(108)
Inc./(Dec.) in Cash
12
(5)
(1)
(5)
13
17
Opening Cash balances
9
21
16
15
10
23
Closing Cash balances
21
16
15
10
23
41
November 10, 2015
9
Radico Khaitan | 2QFY2016 Result Update
Key Ratios
Y/E March
FY2012
FY2013
FY2014
FY2015
FY2016E FY2017E
Valuation Ratio (x)
P/E (on FDEPS)
22.7
18.7
20.4
21.4
19.3
15.3
P/CEPS
15.0
12.9
13.2
13.7
12.5
10.6
P/BV
2.2
2.0
1.9
1.7
1.6
1.5
Dividend yield (%)
0.7
0.7
0.7
0.7
0.8
1.0
EV/Sales
1.7
1.7
1.5
1.5
1.4
1.3
EV/EBITDA
12.5
11.4
11.5
12.9
11.4
9.8
EV / Total Assets
1.2
1.2
1.1
1.1
1.0
1.0
Per Share Data (`)
EPS (Basic)
4.8
5.8
5.4
5.1
5.7
7.1
EPS (fully diluted)
4.8
5.8
5.4
5.1
5.7
7.1
Cash EPS
7.3
8.5
8.3
8.0
8.7
10.2
DPS
0.8
0.8
0.8
0.8
0.8
1.1
Book Value
50.4
54.8
58.7
63.0
67.8
73.9
Returns (%)
ROCE
9.4
10.0
9.2
7.8
8.6
9.8
Angel ROIC (Pre-tax)
10.4
10.9
9.9
8.4
9.3
10.6
ROE
9.5
10.6
9.1
8.1
8.3
9.6
Turnover ratios (x)
Asset Turnover (Gross Block)
2.3
2.4
2.5
2.7
3.0
3.4
Inventory / Sales (days)
57
54
53
52
52
51
Receivables (days)
111
126
132
132
133
133
Payables (days)
38
36
33
33
32
31
WC cycle (ex-cash) (days)
130
144
152
151
153
153
November 10, 2015
10
Radico Khaitan | 2QFY2016 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
Radico Khaitan
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
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%)
November 10, 2015
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