Radico Khaitan Limited (RKL) is an India-based spirits company. RKL is engaged in manufacturing of liquor. 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. Its Rampur Distillery has a production capacity of 75 Million Litres per annum of molasses ENA and 30 million per annum of Grain Neutral Spirit.
For 1QFY2016, Radico Khaitan (RKL)’s results have come in above our estimates. The company’s top-line grew by a decent 6.7% yoy, mainly due to healthy growth in Prestige and above products segment. On the operating front, the company reported margin contraction, primarily on account of higher other expenses. Further, on the bottom-line front, the company reported a healthy growth due to lower interest cost and taxes. Healthy volume growth in Prestige and above products segment boosted overall top-line growth: For the quarter, RKL’s top-line grew by a healthy ~7% yoy to ~Rs395cr (our estimate was of ~ Rs365cr), mainly due to healthy volume growth in Prestige and above products segment (up ~9%). Prestige and above brands’ contribution to total Indian made foreign liquor (IMFL) volumes increased from 20.8% in 1QFY15 to 25.2% in 1QFY16. PAT grew ~9% yoy: The reported net profit for the quarter grew by 9% yoy to ~Rs18cr (our estimate was of ~Rs17cr) on account of lower interest cost (in FY2015 the company has repaid a significant amount of its debt; further debt reduction is also on the cards) and lower taxes. 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 ~14% to ~Rs88cr over FY2015-17E. Hence, we recommend a Buy rating on the stock with a target price of Rs112.
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