Sharekhan reiterates ‘Buy’ on Radico Khaitan, sees over 17% upside; here’s why
The brokerage house reported that Radico Khaitan’s premiumisation strategy has enabled it to consistently generate double-digit volume-led revenue growth, surpassing the industry for the previous few years with the exception of FY2021.
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Prestige & Above’s (P&A) sales volume contribution increased from 30% in FY2022 to 40%+ in Q2FY2024. The management projects a 15–18% increase in P&A brand sales volume in the near future, the brokerage said in its report.
The white spirit (vodka & gin) segment is growing faster than the industry, so the company is concentrating on this rising consumption trend. In the domestic gin category, Jaisalmer gin holds a 55% market share, while Radico Khaitan commands a market share of over 60% in the vodka category.
In the upcoming years, the recent introduction of Happiness Gin and Pink Vodka will gradually increase P&A volumes due to their strong reception. From exit margins of 14–15% in FY2024, the company anticipates reaching an EBIDTA margin of approximately 18% over the following three years. As cash flows improve, debt will drop significantly by FY2026.
However, according to the brokerage, a major risk to the company’s near- to medium-term earnings growth would be a slow expansion of the EBIDTA margins as a result of changes in liquor policies in important states, a persistent increase in the liquor excise tax, or a volatile increase in the price of raw materials.
Outlook and Valuation
Sector Outlook – Structural change in the alcohol industry
Indian Made Indian Spirits (IMIL) is changing from a commoditised, quota-driven market to a consumer-driven, brand-based industry, claims the brokerage. Its main draw is its sizable base, which includes SEC-D and could translate into about 40% of the total population below it (not including the Below Poverty Line).
Growth in this market is anticipated to be driven by an expanding customer base, increasing rural income, consumption, the shift from illicit to legal marijuana with growing public awareness of its quality and health, favourable regulatory policies, and population growth.
“In the short run, the IMIL industry could benefit from lower discretionary incomes, which would drive demand for lower priced liquor. The government is targeting to achieve 20% blending of ethanol by 2025, which would result in higher demand for grain-based molasses in the coming years,” the brokerage explained.
Company Outlook – Premiumisation remains the key growth driver
The brokerage reports that the company has good H1FY2024 results, with revenue growing by 23.7% year over year, OPM rising by 79 bps year over year, and adjusted PAT rising by 13.6% year over year.
Premium IMFL brands are becoming more and more popular among consumers. Radico Khaitan’s efforts to strengthen each brand’s position in important markets and to create favourable liquor laws in important states will, in the short to medium run, contribute to the faster growth of branded liquor products. Owing to the high demand for its premium brands, the company anticipates double-digit volume growth in the P&A segment over the medium term.
In the near future, margins will continue to be stressed by inflationary pressure. The management has kept its long-term goal of reaching high-teen OPM over the next two to three years, though, because of the P&A segment’s improved mix and backward integration, which will ultimately secure raw material supply.
Also Read: Radico Khaitan adds premium vodka and whisky to portfolio
Valuation
“Premiumisation and the support of backward integration will drive consistent strong double-digit earnings growth in the coming years. We like the company’s focus on launching new products in the brown and white spirits, targeting the premium/luxury segment to consistently gain share in key markets and outpace the industry.
Margins have bottomed-out and we should expect consistent improvement in profitability and cash flows in the coming years. The stock trades at 49x/40x its FY2025E/26E EPS. We maintain a Buy rating with a revised price target of Rs. 1,965 (rolling over to Sept-25 earnings),” the brokerage said.
Also Read: Flurry of spirit launches raises competition in alcobev sector
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 07 Dec 2023, 01:15 PM IST
