Radico Khaitan - Re-rating candidate - Antique

Established ability of brand creation in a regulated environment

In a highly regulated environment, Radico's strength of brand creation is un-matched in the Indian spirits industry. It has created four renowned brands and owns six (8PM Whisky, Contessa Rum, Old Admiral Brandy, Magic Moments Vodka, 8PM Excellency Brandy, 8PM Bermuda Rum, Morpheus) of the 20 relevant brands launched industry-wide.

Premiumisation the way ahead

Radico's clear focus on a richer mix in the IMFL segment is expected to aid margins going ahead. From being largely an economy and regular segment IMFL player (sub INR300 per 750ml), it is fast emerging as a premium IMFL player with successful launches in the semi premium and premium category (above INR300 per 750ml) since FY06. We expect premium portfolio contribution to touch 16% of IMFL volumes by FY13e from about 8% in FY09 and 13% in FY11. The premiumisation initiative coupled with declining contribution from country liquor is expected to aid margins in the coming years.

Change in UP governance to aid performance

Post instatement of the new government in Uttar Pradesh led by SP (Samajwadi Party), we expect liberalisation initiatives in the distribution channel to be beneficial for national players like Radico Khaitan. This in turn could increase Radico's market share from 12% in Uttar Pradesh, to about 19%, favorably aiding earnings by about 3-4%.

Improvement in cash flow comes as a positive

Radico Khaitan recorded positive cash flow from operations during FY12 refuting the concerns over cash flow generation. This was led by reduction in Debtors outstanding days to 107 days from about 117 days in the previous fiscal. We believe that going ahead, there would be a further improvement in the company's cash flow position leading to a re-rating of the company.

Better pricing scenario to aid margins

Pricing scenario for the Indian IMFL industry has improved during the last 3 quarters with many of the states approving price hikes. Radico Khaitan plans to hike prices by a total of 4-5% during FY13. This in turn would aid margins in a scenario of moderate in input costs.

Valuations

We are maintaining our EPS estimates for FY13e and FY14e at INR8.1 and INR10.7 respectively. At the CMP of INR117, the stock is trading at a PE of 14.4x FY13e and at 10.9x FY14e. We maintain our BUY recommendation on the stock at the current levels with a target price of INR162.

Source : Equity Bulls

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