Radico Khaitan - Premiumization to help expand margins - Motilal Oswal

We estimate 10.3% volume CAGR over FY12-15, backed by 20% volume growth in Magic Moments. Earlier a mass/economy segment participant, RDCK identified premiumization as its key strategy post FY06. In the last three years, RDCK has launched Morpheus brandy, After Dark whisky and recently Florence brandy in the premium segment. Increased thrust on the brandy segment would improve positioning in the key South India market and also help arrest the decline in brandy market share. The success of RDCK's premiumization strategy is reflected in the improving salience of premium brands in overall volumes. We expect premium brands to contribute 20% of overall volumes by FY15 against 15% in FY12 and 8% in FY09, enabling 170bp gross margin expansion over FY12-15. Radico has recently received a 10% cut in Glass prices which should support near term margins, we believe.

Pricing environment turning favorable

Our discussions with industry players suggest better pricing environment for IMFL, especially in South India. The time lag between demand and approval of price hike has come down. RDCK has received price hikes in Karnataka, Kerala, Bihar, Madhya Pradesh, Chattisgarh in 1QFY13. Price increase in Andhra Pradesh is likely to happen in October 2012. Karnataka is expected to grant price hikes in November 2012. Also, we believe that the focus of the industry leader has shifted from volumes to realizations and profits, thus improving the pricing environment for the industry. In our view, this is a key enabler for structural margin improvement.

Supportive valuations plus margin expansion = potential upside of 30%

RDCK's leverage has improved significantly post FY09. In FY12, it redeemed FCCBs by refinancing them through low cost (3.5%) 7-year ECBs with a two-year moratorium. Given the expected margin improvement, sustained double digit volume growth and 23% EPS CAGR over FY12-15, we believe there is a case for a re-rating. However, we value RDCK at 17x FY14E P/E, in line with historical averages. We initiate coverage with a Buy rating and a target price of INR152 - 30% upside. A spike in input costs and lower than expected margin expansion are the key risks to our investment thesis.

Source : Equity Bulls

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