Radico Khaitan - Diwali Picks 2012 - IIFL

Premium brands' share to rise over FY12-14

Radico's two premium brands Magic Moments vodka and Morpheus brandy have clocked a strong 25% and 112% volume cagr respectively over FY10-12 resulting in a combined 31% vol cagr over the same period. Other mainline brands reported a slower 9.5% cagr which implied that premium brands' share of total volumes rose to 15% in FY12 from 10% in FY10. We expect the momentum to continue as indicated by the 20% yoy growth in premium brands in H1 FY13 and project premium brands' share at 19% of total volumes by end of FY14.

Margins to improve on premiumisation focus

Radico operating margin has been about 15% in the past two years as revenue mix was more aligned towards regular, economy brands. However, as share of higher priced brands like Magic Moments vodka, After Dark whisky and Morpheus brandy increases over the next 2-3 years, we believe this would support margin expansion; we model ~175bps margin expansion over FY12-14 which would drive 18% EBIDTA cagr during the same period.

Multiple factors to drive secular growth in spirits

Spirits sales totaled ~247mn cases in CY11 which is likely to post ~10% cagr and reach 395mn cases in CY16; importantly, single malt scotch whisky and vodka are expected to lead volumes between CY12-16 with 19% cagr each while brandy would sport 13% cagr over the same period. Radico has brand presence in above segments which would provide a sustainable platform for volume growth in the faster growing segments of the spirits market.

We expect above consumption theme to be supported by multiple drivers such as 1) growth in per capita income which doubled from US$540 in FY07 to US$1,100 in FY12 and would boost demand for lifestyle products including premium alcoholic beverages 2) Favourable demographics with more than 60% of population in the 15-45 age group; ~485mn people in the drinking age with ~150mn to be added to this target group and 3) under penetrated market with per capita consumption at just 0.9ltrs per annum compared to world average of 4.6ltrs.

Stable leverage, improved return ratios warrant a re rating: 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 on the back of ~27% volume cagr over next 2 years. Consequently, we build in improved OPM and ~30% PAT cagr over the same period. Encouragingly, leverage is expected to remain in comfortable territory at 0.7x in FY14 while RoE/RoCE is likely to inch up from FY12 levels. The stock trades at 9.6x FY14 EV/EBIDTA which is at the lower end of its historic 1-yr fwd trading range and above factors justify a valuation re rating in our view; recommend BUY.

Source : Equity Bulls

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