Radico Khaitan BUY. Premium aspirations

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1 BUY Premium aspirations Sector: Breweries Sensex: 17,584 CMP (Rs): 117 Target price (Rs): 165 Upside (%): Week h/l (Rs): 149/108 Market cap (Rscr) : 1,551 6m Avg vol ( 000Nos): 321 No of o/s shares (mn): 133 FV (Rs): 2 Bloomberg code: RDCK IN Reuters code: RADC.BO BSE code: NSE code: RADICO Closing price as on 01 Mar, Shareholding pattern December ' 11 (%) Promoters 39.9 Institutions 38.4 Non promoter corp hold 13.5 Public & others 8.2 Performance rel. to sensex (%) 1m 3m 1yr Radico 4.3 (9.0) (7.2) United Spirits (19.6) (26.9) (46.6) Share price trend Radico Sensex 50 Mar-11 Aug-11 Feb-12 We interacted with the management of Radico Khaitan to get a perspective on IMFL growth, especially the trajectory for premium brands. Company expects After Dark (premium whisky) to gross ~0.3mn cases in next fiscal while Magic Moments would post a healthy 20% yoy increase in volumes. Morpheus brandy could see about 50% volume surge albeit on a low base. Together these 3 brands would account for ~18% of total volumes next fiscal thereby accelerating portfolio premiumization. Working capital in current year has been impacted due to After Dark roll out needs but company expects respite on the same. ENA prices have declined 7-8% from their December highs and benefit is likely to be visible over next 2-3 quarters. We marginally lower FY13 EPS estimates but retain BUY for 9-mth tgt of Rs165. Share of premium 18% of FY13 volumes Premium brands (Magic Moments, Morpheus brandy and After Dark whisky) are likely to post a combined volume cagr of 29% over FY12-14 driven by robust sales of Magic Moments and launch of After Dark whisky. Rest of the portfolio is likely to clock ~7% cagr over same period which would raise the share of premium brands from 15% in current fiscal to 18%/20% by end of FY13/14. A rising component of higher priced brands would help support margins and improve revenue mix. Importantly, After Dark would fill up the gap in Radico s whisky portfolio which hitherto did not have any premium offering. Moreover, the premium end of the whisky market is reportedly growing faster than the mid and low ends which would again help improve overall margin. Valuation discount wrt historic avg to narrow: retain BUY Radico is likely to sport a ~11% volume cagr over FY12-14 driven by 29% growth in premium brands; this would help drive a 17% revenue cagr and an even faster ~28% EPS growth. We also factor in margin expansion on account of rising premium brands share and lower ENA costs. Stock trades at the lower end of its 1-yr fwd EV/EBIDTA band and we expect the discount wrt historic average to narrow given the robust earnings trajectory. Marginally lower FY13 EPS estimate but retain BUY for 9-mth tgt of Rs165. Financial highlights Y/e 31 March (Rs m) Revenues 9,965 12,119 14,218 16,593 yoy growth (%) Operating profit 1,490 1,782 2,147 2,588 OPM (%) Reported PAT ,019 1,310 yoy growth (%) Research Analyst Bhavesh Gandhi research@indiainfoline.com EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) Debt/Equity (x) ROE (%) ROCE (%) March 02, 2012

2 Premium brands have increased their share by 5ppts over -12 aided by robust growth in Magic Moments and Morpheus brandy Premium brands share to rise over FY12-14 Radico s two premium brands Magic Moments vodka and Morpheus brandy have shown robust growth since launch clocking 26% and 108% volume cagr over -12 resulting in a combined 32% vol cagr over the same period. Other mainline brands have grown at ~8% compounded annually. Consequently, the share of premium brands in the overall portfolio has risen from 10% in to an estimated 15% by the end of current fiscal. With the launch of After Dark whisky in at the premium end, we expect the share of premium brands to rise to 20% over next 2 years. In contrast, mainline brands like 8PM whisky, Old Admiral VSOP brandy and Contessa rum recorded 8.2% cagr over past 2 years highlighting the persistent focus on portfolio shift towards the premium end. Premium* brands ~20% of vols in FY % YoY growth trends in premium vs other main line brands % Premium brands Other mainline brands We expect ~11% volume cagr to 21.5mn cases in FY14, driven by 29% jump in premium brands volume Expect 11% volume cagr over next 2 years We have modeled in 10.7% overall volume cagr over FY12-14 driven by ~29% increase in premium brand volumes and 7% rise in other mainline brands. Among the older mature brands, 8PM whisky is likely to report 8% compounded annual increase compared to ~10% over the past 2 years. Expect volumes cagr of 11% over FY mn cases FY01 FY02 FY03 FY04 Q1 Q2 Q3 Q4 Q1 FY12 Q2 FY12 Q3 FY12 *Note: Premium brands include Magic Moments, Morpheus brands and After Dark whisky Company Report 2

3 After Dark whisky to help accelerate the share of premium brands in overall IMFL portfolio After Dark: taking a shot at premium whisky market Radico continues to maintain focus on portfolio premiumization as evident from the rising share of premium brands in the past few quarters. The launch of After Dark whisky positioned at the premium end with a price point of Rs is likely to accelerate this trend. The company launched the brand in and now has a pan-india presence and registration with the important CSD market. It expects After Dark to gross ~0.3mn cases in the next fiscal accounting for ~9% of the premium brand portfolio. Volume break up FY12-14 Volumes (mn cases) Magic Moments Vodka Morpheus Brandy After Dark Premium brands (A) PM Whisky Contessa Rum Old Admiral VSOP Brandy Other main line brands (B) Other brands (C) Total (A+B+C) After Dark is positioned in the premium whisky segment which is growing faster than the mid and lower end Premium end of whisky growing at >20% After Dark launch would look to fill up the gap at the upper end in Radico s whisky portfolio. Along with 8PM, Radico now caters to both regular and premium ends of the segment. Our sense is that the product has been strategically placed between Royal Stag and Blenders Pride, the two best selling whisky brands owned by Pernod Ricard. The premium end of the whisky market is growing at average annual pace of ~22% ahead of the deluxe end (below premium) which is growing at 18% (source: ET, Dec ). Radico is likely to benefit from the higher growth rate which would improve revenue mix as well as margin. Company Report 3

4 Radico brand profile Whisky Rum Brandy Vodka Gin Super Premium (>Rs550) Morpheus Premium (Rs ) After Dark Semi-Premium (Rs ) Deluxe (Rs ) Whytehall Regular (Rs ) 8PM, Old Admiral Big Hit, Windies, Radico Choice, Radico Gold Economy Supreme, Special (<Rs200) Appointment Source: Company Bermuda White, Contessa White Contessa, Bermuda, Load Nelson, Old Admiral Big Hit, Windies, Black Cat, Rampur No.1, Tropicana White Expect respite in working capital intensity Radico s working capital needs on a net sales basis have increased over the past 2 years from about 207 days to 228 days in though on a gross basis (own sales+tie up sales), working cap has remained at ~24% of gross sales. We expect some respite in operating cycle as After Dark volumes pick up over next 2 years. WC to remain of gross sales* % Brihan's Gold, Napolean Old Admiral, 8PM Excellency Brihans Grape, Whitefield Magic Moments, Magic Moments Remix Special Appointment, Red Russian Whitefield, Big Hit Contessa, Blue Bird, Goa Dry Gin *Note: gross sales=own sales+tie up sales Trend in working capital days Debtors days Inventory days Creditors days Loans & advances Other curr assets Other curr lia & provs WC days Company Report 4

5 Q3 FY12 OPM impacted by 13-15% yoy rise in ENA costs which have since come down from their December 2011 highs Price hikes and rising share of premium brands to improve margin Margin to improve on lower RM cost, better rev mix Radico Q3 FY12 margin was lower by ~100bps yoy due to ~13-15% yoy jump in ENA costs. However, the company has secured price increases in the CSD market and states of MP, Rajasthan, Jharkhand, Bihar and Orissa effective from Q4 FY12 while approvals for other regions are likely to come in the next few months. In terms of cost, ENA prices have come down by 7-8% from their December 2011 highs (on increased molasses supply) whose benefit would be visible over 2-3 quarters. Another margin accretive factor is the rising share of premium brands in the overall volume sales from 15% in FY12 to 20% in FY14. Taken together, we expect these factors to support margin expansion in the next two years. Expect margins to improve in FY % D/E to remain at ~0.8x in FY13 while return ratios to improve on higher OPM and PAT margins Leverage remains comfortable, return ratios to move up Radico would incur ~Rs mn capex in current fiscal mostly on maintenance and bottling operations. Since no greenfield expansion is planned, we expect debt levels to remain under manageable levels with debt/equity at a comfortable 0.8x in FY13. Return ratios (RoE, RoCE) too would improve relative to FY12 on improved operating and PAT margin. Debt/equity remains in comfortable territory 4.0 x Return ratios to improve from FY12 levels 4 % RoCE RoE (1) Company Report 5

6 We forecast 17% revenue and ~28% earnings cagr driven by faster growth for premium brands and margin expansion Leverage remains comfortable and stock trades at discount to its historic 1-yr fwd EV/EBIDTA average; BUY Valuation discount to narrow on improved margins, return ratios: retain BUY With the launch of After Dark, Radico has a foot in the premium end of whisky market which along with Magic Moments vodka and Morpheus brandy round up its premium portfolio. We expect these to accelerate the portfolio premiumization trend driven by a ~29% volume cagr over next 2 years. Consequently, we build in improved OPM and ~28% PAT cagr over the same period. Encouragingly, leverage remains in comfortable territory at 0.8x while both RoE and RoCE are likely to inch up from FY12 levels. The stock currently trades near the low end of its historic 1-yr fwd EV/EBIDTA range and we expect the discount to historic average to narrow; marginally lower FY13 EPS estimate but retain BUY with 9-mth tgt of Rs yr fwd EV/EBIDTA bands Rs bn EV Apr-04 Oct-04 May-05 Nov-05 Jun-06 Jan-07 Aug-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Dec-10 Jul-11 Feb-12 Company Report 6

7 Financials Income statement Y/e 31 Mar (Rs m) Revenue 9,965 12,119 14,218 16,593 Operating profit 1,490 1,782 2,147 2,588 Depreciation (271) (318) (344) (367) Interest expense (335) (530) (581) (609) Other income Profit before tax 995 1,099 1,396 1,795 Taxes (267) (297) (377) (485) Net profit ,019 1,310 Balance sheet Y/e 31 Mar (Rs m) Equity capital Reserves 6,240 6,835 7,747 8,951 Net worth 6,514 7,109 8,021 9,225 Debt 4,912 5,762 6,112 6,412 Def tax liability Total liabilities 11,923 13,368 14,631 16,134 Fixed assets 4,242 4,425 4,480 4,513 Intangibles Investments Net working cap 6,311 7,573 8,780 10,251 Inventories 1,275 1,527 1,714 2,000 Sundry debtors 3,191 3,785 4,441 5,182 Cash Other curr assets 3,503 4,266 5,005 5,841 Sundry creditors (1,040) (1,262) (1,480) (1,727) Other current lia (712) (871) (1,021) (1,192) Total assets 11,923 13,368 14,631 16,134 Cash flow statement Y/e 31 Mar (Rs m) Profit before tax 995 1,099 1,396 1,795 Depreciation Def.tax lia Tax paid (267) (297) (377) (485) Working capital (1,235) (1,229) (1,212) (1,446) Operating CF (189) (109) Capital exp (519) (500) (400) (400) Free cash flow (708) (609) (249) (168) Equity raised (58) (101) - - Investments Debt fin/disp Dividends paid (108) (107) (107) (107) Net in cash (238) 33 (5) 25 Key ratios Y/e 31 Mar Growth matrix (%) Revenue growth Op profit growth EBIT growth Net profit growth Profitability ratios (%) OPM EBIT margin Net profit margin RoCE RoNW RoA Per share ratios EPS Dividend per share Cash EPS BV per share Valuation ratio (x) P/E P/CEPS P/B EV/EBIDTA Payout (%) Dividend payout Tax payout Liquidity ratios Debtor days Inventory days Creditor days Leverage ratios Interest coverage Net debt / equity Net debt / op. profit Du-Pont Analysis Y/e 31 Mar (Rs m) Tax burden (x) Interest burden (x) EBIT margin (x) Asset turnover (x) Financial leverage (x) RoE (%) Company Report 7

8 Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between -10% to +10% Sell Absolute return below -10% Published in India Infoline Ltd 2012 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on