In high spirits
Radico Khaitan
Initiating Coverage | 31 October 2012
Sector: Consumer
Investors are advised to refer through disclosures made at the end of the Research Report.
Gautam Duggad ([email protected]); +9122 3982 5404
Sreekanth P V S ([email protected]); +9122 3029 5120
Radico Khaitan
231 October 2012
Radico Khaitan: In high spirits
Page No.
Summary ............................................................................................................ 3
Premiumization to help expand margins ..................................................... 4-6
Pricing environment turning favorable ....................................................... 7-9
Well positioned to capitalize on rising IMFL consumption ..................... 10-14
Financials: Premiumization led 23% EPS CAGR ........................................ 15-18
Radico NV Distilleries JV: Receives Mega project status ................................ 19
Valuations attractive, given strong earnings growth ahead ................... 20-21
Annexure .................................................................................................... 22-26
Financials and valuation ........................................................................... 27-28
Radico KhaitanCMP: INR117 TP: INR152 BuyBSE SENSEX S&P CNX
18,431 5,598
Bloomberg RDCK IN
Equity Shares (m) 132.6
52-Week Range (INR) 135/92
1,6,12 Rel. Perf. (%) 0/-16/-10
M.Cap. (INR b) 15.5
M.Cap. (USD b) 0.3
Initiating Coverage |31 October 2012
Sector: Consumer
3
Stock performance (1 year)
Financial summary (INR b)
Y/E March 2012 2013E 2014E
Sa les 11.4 13.0 15.0
EBITDA 1.7 2.1 2.6
NP 0.8 0.9 1.2
EPS (INR) 6.0 6.9 8.9
EPS Gr. (%) 10.9 14.6 29.2
BV/Sh. (INR) 52.4 58.3 65.7
P/E (x) 19.4 16.9 13.1
P/BV (x) 2.2 2.0 1.8
EV/EBITDA (x) 12.6 10.6 8.8
EV/Sales (x) 1.9 1.8 1.5
RoE (%) 11.9 12.5 14.4
RoCE (%) 10.0 11.0 12.6
In high spiritsPremiumization to help expand margins, pricing environment improving
Focus on premiumization to help expand operating margins by 250bp over FY12-15
Incrementally better pricing environment - has received price hikes in several states
in 1HFY13
Supportive valuations, 23% EPS CAGR to drive stock performance - expect 30% upside
Premiumization to help expand marginsWe 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 favorableOur 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.
Shareholding pattern %
As on Jun-12 Mar-12 Jun-11
Promoter 40.4 40.4 40.0
Dom. Inst 10.1 10.6 14.7
Foreign 26.4 26.2 27.5
Others 23.1 22.8 17.8
31 October 2012
Radico Khaitan
431 October 2012
Premiumization to help expand marginsExpect operating margins to expand by 250bp over FY12-15
Premium IMFL segment outperforming regular and economy segments
RDCK's new launches in the last three years in the premium to super premium segments
Increasing focus on brandy to augment market share, improve competitive positioning in
South
Salience of premium brands to increase from 15% currently to 20% of volumes by FY15
Premiumization is THE mantraRDCK has identified premiumization as a key strategy. Favorable demographics, rising
disposable income and changing social attitude towards drinking are the key factors
driving demand for premium liquor. Besides, state governments have consistently
been increasing excise duties on liquor, making it imperative for IMFL companies to
focus on premium brands to drive profitability.
Excise duties as a percentage of gross sales have increased considerably
Source: Company, MOSL
Before 2006, RDCK was a regular/economy segment player, participating in the sub-
INR300/unit pyramid. In 2006, it launched Magic Moments, positioned in the premium
segment. This was its first attempt at moving up the value chain. Gross profit/case in
semi-premium brands is 5x the regular brands. Similarly, gross profit/case in the
premium segment is 1.5x the semi-premium segment.
Magic Moments: Volumes up 3.8x since FY06 Radico continues to gain market share in Vodka (%)
Source: Company, MOSL
Radico Khaitan
531 October 2012
After 40% CAGR in volumes since FY07, and having experienced the benefits of its
premiumization strategy, RDCK launched three more brands in the premium to super-
premium segments in the last three years. It launched Morpheus brandy in the super-
premium segment in 2009 and After Dark whisky in the premium segment in June
2010. Buoyed by the success of Morpheus brandy (volumes up 4.5x since FY10), in
1QFY13, RDCK launched Florence brandy in the super-premium segment in Tamil Nadu.
Florence is at a higher price point than Morpheus premium brandy and further augments
RDCK's premium portfolio. Going forward, RDCK intends to roll out a premium version
of Magic Moments vodka.
Morpheus After Dark Florence Morphues Verve -latest launch
RDCK sold 0.36m cases of Morpheus brandy in FY12 and we model 35% CAGR over
FY12-15. We expect premium brands to account for ~20% of volumes by FY15, up from
15% in FY12.
Salience of premium brands increasing
Source: Company, MOSL
Focusing on brandy segment to augment market shareRDCK's recent thrust in the brandy segment is dictated by the need to improve its
market positioning in South India, a key brandy market, in our view. It acquired Yezdi
Group's Royal Lancer and Elkays whisky brands in FY12 and also took on lease their
entire bottling capacity. Both these brands are selling over 0.5m cases per annum,
primarily in Karnataka and Andhra Pradesh. We believe these brands would be further
strengthened in RDCK's distribution fold. This is a strategic acquisition and should
reinforce RDCK's presence in Karnataka, Andhra Pradesh and other South Indian states.
Radico Khaitan
631 October 2012
To leverage its strong pan India distribution network, RDCK is tying up with global
players to market their premium and super-premium products in India. It has a tie-up
with Earnest & Julio Gallo of California, one of the largest wineries in the world, to
distribute its wines in India. It has also tied up with Suntory (Japanese major with
annual revenue of USD20b) to market Yamazaki single malt and Hibiki blended whiskies
in India.
South India accounts for 90% of brandyBrandy market share has been declining consumption Geography-wise revenue distribution
Regionwise IMFL split of Radico(%)
Radico Khaitan
731 October 2012
Pricing environment turning favorableAugurs well for sector-wide gross margins
70% of the industry is government controlled, and hence, pricing is government
determined
The pricing regime is incrementally turning favorable for the industry - the quantum and
frequency of price increases has improved
Also, sector leader has shifted focus from volumes to profits
IMFL pricing environment turning favorable at the marginOur discussions with industry players suggest improvement in the pricing environment
for the IMFL industry. There has been modest increase in the quantum of price hikes
received by the industry, especially from South Indian states. Secondly, the time lag
between demand and approval of price hike has come down. RDCK has received price
hikes from (1) Kerala in 1QFY13, (2) Madhya Pradesh, Jharkhand, Bihar, Orissa, and
CSD in 1HFY13. Andhra Pradesh price hike is likely to happen in October 2012, which is
the single largest contributor for RDCK (16%). Karnataka is expected to grant price
hikes in November 2012.
Has received price hikes in several states in 1HFY13
SL. State Brand-Name % Effetive
No. Name Increase Date
1 Karnataka 8PM-Whisky 6.0 1st-April,2012-Onwards
Old-Admiral Brandy 6.0 1st-April,2012-Onwards
Crown Whisky 7.0 1st-April,2012-Onwards
Radico-Gold-Whisky 6.0 1st-April,2012-Onwards
Royal-Lancer-Whisky 6.0 1st-April,2012-Onwards
After-Dark-Whisky 1st-April,2012-Onwards
Magic-Moments-Vodka 11.0 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 33.0 1st-April,2012-Onwards
Morpheus-Xo-Brandy 19.0 1st-April,2012-Onwards
2 Bihar 8PM-Whisky 19.0 1st-April,2012-Onwards
Magic-Moments-Vodka 18.0 1st-April,2012-Onwards
3 Jharkhand 8PM-Whisky 20.0 1st-April,2012-Onwards
Magic-Moments-Vodka 13.0 1st-April,2012-Onwards
4 Madhya 8PM-Whisky 13.0 1st-April,2012-Onwards
Pradesh Magic-Moments-Vodka 12.0 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 9.0 1st-April,2012-Onwards
5 Chattisgarh 8PM-Whisky 12.0 1st-April,2012-Onwards
Magic-Moments-Vodka 10.0 1st-April,2012-Onwards
Magic-Moments-Flavours-Vodka 19.0 1st-April,2012-Onwards
6 Orissa 8PM-Whisky 14.0 1st-September,2012-Onwards
Magic-Moments-Vodka 9.0 1st-September,2012-Onwards
Black Cat Rum 16.0 1st-September,2012-Onwards
8 Kerala 8PM-Whisky 6.0 1st-August,2012-Onwards
Contessa-Rum 6.0 1st-August,2012-Onwards
8 Bermuda rum 6.0 1st-August,2012-Onwards
m2 6.0 1st-August,2012-Onwards
OAB 6.0 1st-August,2012-Onwards
MXO 6.0 1st-August,2012-Onwards
EXCELLENCY 6.0 1st-August,2012-Onwards
CWR 6.0 1st-August,2012-Onwards
BGB 6.0 1st-August,2012-Onwards
Source: Company, MOSL
Radico Khaitan
831 October 2012
Top 6 states contribute 50% of Radico's IMFL revenues
Source: Company, MOSL
Our discussions with industry sources also indicate that the focus of industry leader,
United Spirits (UNSP) has shifted from volumes to profitability post the change in
management. Rising state-level excise duties, volatility in raw material prices and
challenging leverage position (net debt of INR80b) could be some of the reasons for
the change in strategy. This augurs well for RDCK as well as other players as far as
pricing and realizations are concerned. In the last two years, Pernod Ricard, the second
largest player in IMFL, has driven the premiumization theme to the hilt. Its operating
profits have doubled during the said period.
Pernod Ricard has outperformed the industry led by superior performance in premium segments
Source: Penod Ricard,MOSL
Radico Khaitan
931 October 2012
Transformational deal involving industry leader could provide window ofopportunity to RadicoUNSP and Diageo have announced recently that they are in dialogue with respect to
possible transactions for Diageo plc to acquire an interest in United Spirits Limited.
However there is no certainty that these discussions will lead to a transaction.
Various media reports have been speculating about the potential deal. We try to
assess the impact of possible transaction from sector's viewpoint.
As discussed in the previous sections, IMFL market is seeing stronger growth in the
premium segments led by favorable demographic factors like rising disposable
incomes and aspiration levels of consumers. Consequently, the focus of most of
the IMFL participants in India has shifted towards driving Premiumisation as a
strategy in the medium to long term. Pernod Ricard has been clearly at the forefront
of this trend having doubled its sales and operating profits in two years. Despite
being 1/6th in market share compared to industry leader UNSP, it has achieved
similar levels of profit before taxes, thus underscoring the inherent benefits of
Premiumisation strategy.
If Diageo acquires strategic stake in UNSP we expect a further shift in focus of
industry players towards premium IMFL segments. Diageo's India portfolio is geared
to capitalize on the unfolding premium IMFL consumption story in India. Post the
acquisition, it will be able to drive its premium-super premium brands through a
wider distribution footprint. Given the lackluster growth in mature markets and its
underperformance vs. Pernod in India, we expect disproportionate focus from
Diageo to enhance its market footprint in India.
Combination of improving pricing environment as indeed the shift in the focus of
industry leader towards realizations/profitability could help drive the sector
profitability and margins in our view. This, in turn, can act as a potential re-rating
trigger for Radico, we believe.
From Radico's viewpoint, the UNSP-Diageo deal could give RDCK a window of
opportunity to explore market share improvement in the regular/semi-premium/
premium segments. If Diageo gets management control, there would be a transition
period (at least two quarters in our view), which RDCK could exploit to its advantage.
Such transition usually consumes significant management bandwidth and diverts
the top management's focus disproportionately towards deal completion,
integration of operations, financial deal closing, employee integration, etc.
Availability of stock in trade suffers, giving competitors a small window of
opportunity to enhance their trade presence.
Radico Khaitan
1031 October 2012
Well positioned to capitalize on rising IMFL consumptionContribution of IMFL increasing; volumes to grow in double digits
Third largest IMFL player, with strong CSD positioning
Contribution of branded IMFL to revenues increasing; top-4 brands constitute 70% of
volumes
8PM and Magic Moments - crucial volume drivers
Expect 10.3% volume CAGR over FY12-15
Play on the attractive IMFL opportunity in IndiaRadico Khaitan (RDCK) is a play on the growth opportunity in the Indian made foreign
liquor (IMFL) space, which is expected to witness 10% volume CAGR over FY12-15,
aided by a confluence of favorable demographics and rising disposable income. It has
a presence across segments and a distribution network of more than 486 wholesalers
and 36,000 retailers. RDCK has integrated operations, with 150m liters of distillation
capacity (including JV, Radico NV Distilleries), five owned bottling units and 28 contract
bottling units. It has a strong presence in CSD (Canteen Stores Department), with 18
registered brands. Hitherto a regular segment player, RDCK has shifted its focus to
premiumization and has launched four new brands in the premium to super-premium
segments in the last three years.
Third largest player in volume termsIn terms of cases sold, RDCK is the third largest player in the IMFL space, with sales of
17.7m cases in FY12.Having entered the branded IMFL space in the late-90s, it has
created four new millionaire brands (8PM, Magic Moments, Old Admiral and Contessa)
across product segments like whisky, vodka, brandy and rum. RDCK was earlier focused
on the value for money segment, with price points of less than INR300/750ml. It has
four pillar brands and a host of mid-size and regional brands. It entered the semi-
premium segment with the launch of Magic Moments vodka in 2006, followed by
Morpheus brandy in 2009, After Dark whisky in 2010 and Florence brandy, recently.
Radico's IMFL market share has stabilized at 8% Industry market share (FY11)
Source: Company, MOSL
Radico Khaitan
1131 October 2012
Market share of industry leader in various IMFL segments
Category UNSP Market Share (%)
BII Scotch
Premium Scotch 44
Regular Scotch 6
Whiskey
Premium 60
Prestige 61
Regular 55
Vodka
Prestige 7
Regular 83
Regular Rum 56
Regular Brandy 67
Regular Gin 79
Source: Company, MOSL
8PM and Magic Moments crucial volume drivers8PM whisky is RDCK's first success in the branded IMFL space. However, it
underperformed in FY07-09, with 23% volume decline. This was due to change in
formulation and spike in input cost. Subsequently, RDCK reverted to grain-based
formulation and re-launched 8PM with new packaging, supported by heavy
investments. Since its re-launch, 8PM has registered 10.3% volume CAGR over FY09-
12. We build in 10% volume CAGR for FY12-15.
Radico Khaitan: Brand architecture
Price Range/
750ml
Whisky
Rum
Brandy
Vodka
Gin
Economy
<INR150
Big Hit, Windies,
Radico Choice,
Gold Supereme,
Special
Appointment
Big Hit, Windies,
Black Cat, Rampur
No1, Tropicana
White
Whitefield, Big
Hit
Regular
INR150-200
8PM, Old
Admiral
Contessa,
Bermuda, Load
Nelson, Old
Admiral
Brihans Grape,
Whitefield
Special
Appointment,
Red Russian
Contessa, Blue
Bird, Goa Dry
Gin
Deluxe
INR201-300
Whytehall
Bermuda White,
Contessa White
Old Admiral, 8PM
Semi Prem
INR301-450
Brihan's Gold,
Napolean
Magic Moments
Premium
INR451-550
After Dark
Super Prem
>INR550
Morpheus
Radico Khaitan
1231 October 2012
Magic Moments vodka has achieved strong market positioning, with volume CAGR of
40% over FY07-12. Affordable price point (INR350-400/750ml), attractive packaging
and launch of various flavors and variants have enabled the brand to maintain strong
momentum. It has cornered ~30% share in the vodka market and 90% share in the
semi-premium segment. We expect vodka as a category to continue gaining share
and maintain 20% volume CAGR on account of the following reasons:
Increasingly, the youth is preferring white spirits to brown spirits, which are
conceived as drinks for the older generation.
India's current demographic profile suggests that 50% of the population is below
25 years and 65% is in the 25-35 year age group. The drink favored by the youth
population (with rising purchasing power) will grow at a faster pace than the
market.
Vodka can be mixed with water, juice, soda and cold drinks, which increases the
taste options for the drinker.
Vodka gives smoother taste, less 'kick' and no bad breath.
Heavy investments in the category through celebrity endorsements.
Magic Moments to continue growing at ~20% CAGR - Vodka
M cases Sales Gr. % Magic Moments Gr. % Key Brand Sh. %
FY06 0.1 0.1 100.0
FY07 0.5 400 0.4 300 80.0
FY08 0.8 60 0.7 75 87.5
FY09 1.1 37.5 1.0 42.9 90.9
FY10 1.5 36.4 1.4 40.0 93.3
FY11 2.0 34.2 1.89 35.0 93.9
FY12 2.4 17.4 2.2 17.6 94.0
FY13E 2.8 16.9 2.6 17.0 94.1
FY14E 3.3 19.6 3.1 20.0 94.4
FY15E 4.0 21.5 3.8 22.0 94.8
Source: Company, MOSL
We expect consolidated volume CAGR of 10.3% over FY12-15, aided by double-digit
volume growth in Magic Moments, 8PM and Old Admiral.
8PM to continue growing at ~10% CAGR - Whisky
M cases Sales Gr. % 8PM Gr. % Key Brand Sh. %
FY06 5.7 4.2 73.7 73.7
FY07 6.1 7.0 4.4 4.8 72.1
FY08 5.5 -9.8 3.5 -20.5 63.6
FY09 4.6 -16.4 3.4 -2.9 73.9
FY10 5.1 10.9 3.6 5.9 70.6
FY11 5.6 10.6 4.0 11.9 71.4
FY12 6.3 11.9 4.6 13.4 72.4
FY13E 6.9 9.6 5.0 10.0 72.6
FY14E 7.6 9.5 5.5 10.0 73.0
FY15E 8.3 9.5 6.1 10.0 73.4
Source: Company, MOSL
Radico Khaitan
1331 October 2012
Radico's volumes to grow at 10.3% CAGR over FY12-15… …driven by the vodka, whisky and brandy segments (% growth)
Source: Company, MOSL
Branded IMFL ~74% of sales; contribution of country liquor, bulk spiritsdecliningBranded IMFL contributes ~70% of RDCK's revenue, with country liquor (5%), bulk
spirits (16%, molasses and grain based) and others (9%) accounting for the rest. The
contribution of IMFL to overall revenue has increased by 500bp since FY09. We expect
it to move up further by 300bp over the next three years owing to lower growth in
country liquor and bulk spirits. RDCK's strategy of driving premium IMFL brands should
also augment overall salience of IMFL, in our view.
The sale of country liquor is restricted to the state where the distillery is situated and
as such this segment is growing at a CAGR of just 5%. Also, country liquor sales are
strongly correlated with the election cycle in India. Country liquor sales were up 9%
in FY10, when the general elections were held. Spirit sales are a function of surplus
production over in-house requirements. As the branded IMFL and country liquor sales
increase, the availability of spirits for bulk sale declines.
Expect IMFL contribution to rise further Segment-wise sales growth trends (%)
Source: Company, MOSL
Radico Khaitan
1431 October 2012
Top four brands account for ~70% of volumes
Source: Company, MOSL
Share of Magic Moments to increase; top four brands to account for 71% of sales by FY15
Source: Company, MOSL
Radico Khaitan
1531 October 2012
Financials: Premiumization led 23% EPS CAGRExpect 10.3% volume CAGR, 250bp margin expansion over FY12-15
Volumes to post 10.3% CAGR, driven by 20% CAGR in premium brands
Operating margins to expand 250bp over FY12-15, leading to EPS CAGR of 23%
Leverage has improved significantly since FY09; material change unlikely
Expect sales CAGR of 14.5% over FY12-15We expect RDCK's sales to grow at a CAGR of 14.5% over FY12-15, driven by:
Robust 22% volume CAGR in premium brands. We expect the premium segment
to grow ahead of the market, as consumers trade up, driven by favorable
macroeconomic factors.
16% sales CAGR in IMFL, 8% CAGR in country liquor and 13% CAGR in bulk spirits.
Sales and EBITDA growth trends
Source: Company, MOSL
Gross margin to expand by 170bp, EBITDA margin by 250bp over FY12-15RDCK reported gross margin of 49.8% and EBITDA margin of 15.1% for FY12, a decline
of 260bp and 70bp, respectively. We believe there is significant scope of margin
expansion in the coming years, led by improving pricing environment in the IMFL
industry, better product mix (led by 22% volume CAGR in premium brands) and benign
input costs. We expect gross margin to expand 170bp over FY12-15. EBITDA margin
should expand 140bp in FY13 followed by 60bp expansion in FY14. Upside risks to our
margin estimates include higher than expected price increases (we build in annual
price increase of 5-6% on weighted average basis for the next two years). Downside
risks include higher than expected increase in input costs (we build in 8% increase
over FY12-15).
Radico Khaitan
1631 October 2012
Gross and EBIDTA margin
Source: Company, MOSL
Expect input costs to increase 6-8%Molasses: Molasses prices increased 19% in FY12 after correcting by 32% in FY11 due
to bumper sugarcane output. Sugar production for sugar year 2012 (SY12; year ended
September 2012) is estimated at 26m tons. The industry expects molasses prices to
remain stable in FY13. Announcement of higher ethanol prices (INR27.5/liter) by the
government would prevent significant softening in prices of molasses. We expect
molasses prices to be INR417/quintal in FY13 and INR450/quintal in FY14.
Grain/ENA: Grain prices should gradually increase in line with the increase in support
prices by the government. ENA prices are currently ruling at INR33-34/liter.
Packaging/Glass: The cost of RDCK's packing material/case is directly correlated with
glass prices, which are in turn directly correlated with crude prices. Glass bottle prices
were increased 8% in February 2012 to pass on input cost inflation but HNG has cut
Glass prices by 10% recently w.e.f 15th September. We are building in a modest 5%
increase in packaging cost per case over FY12-15.
Molasses and grain price trends Trend in packaging cost/case (INR)
Source: Company, MOSL
Radico Khaitan
1731 October 2012
Molasses and grain price trends
Source: Company, MOSL
New launches, premiumization focus will keep ad spends high (% of sales)
Source: Company, MOSL
Adjusted PAT to grow at a CAGR of 23% over FY12-15RDCK has posted sales CAGR of 16.2% and adjusted PAT CAGR of 19.6% over FY07-12.
Over FY12-15, we expect the company to post sales CAGR of 14% and EBITDA CAGR of
22%, led by 200bp margin expansion. In FY13, we expect interest cost to increase 50%
owing to higher working capital debt. Given the working capital intensive nature of
the IMFL industry, we do not expect material change in RDCK's working capital position
in the medium term. Assuming effective tax rate of 27% for the next three years, we
estimate 23% CAGR in adjusted PAT over FY12-15.
Adjusted PAT growth and interest as a percentage of sales
Source: Company, MOSL
Radico Khaitan
1831 October 2012
Significant decline in leverage unlikelyRDCK raised INR3.42b through QIP in March 2010, which was utilized to retire debt. It
redeemed FCCBs in July 2011 by refinancing the entire USD44m through low cost
(3.5%) 7-year ECBs with a two-year moratorium. Repayments will begin in FY14.
Consequently, leverage declined from 3x in FY09 to 0.9x in FY12. Given the nature of
the industry, we do not expect significant decline in leverage hereon.
Higher debtor days from government controlled markets drive high working capital
intentisy for the sector. IMFL players are required to pay duties upfront at the time of
sale while they receive payments after three-four months in case of government
controlled states. Controlling debtors and advances is critical to long term cash flows
and return ratios.
Capital return ratios to improve by 300-400bp over the next three yearsRDCK's RoCE and RoE are in low double digits. Increase in EBITDA margin in FY13 and
lower interest burden post FY14 should help improve capital ratios by 300-400bp over
the next three years. However, the ratios are unlikely to show material improvement,
given controlled pricing and high proportion of sales to auction contractors and
government-controlled wholesale agencies.
Expect modest improvement in capital ratios led by operating margin expansion
Net working capital high as government controls 70% of theLeverage has come down significantly after FY09 (x) market (Nos' of days)
Source: Company, MOSL
Source: Company, MOSL
Radico Khaitan
1931 October 2012
Radico NV Distilleries JV: Receives Mega project statusProvides strategic option value to Radico
Radico Khaitan owns 36% in a Joint Venture with NV Distilleries, Radico NV Distilleries.
The distillery is located in the Aurangabad district of Maharashtra for the manufacture
of rectified spirit, ENA, IMFL and related products.
Recently, Government of Maharashtra has conferred the status of "Mega Project" to
the new manufacturing facilities of Radico NV Distilleries.
This project is entitled to receive certain subsidies and duty exemptions for a period
of seven years from the date of commencement of commercial production.
The benefits include:
Subsidy to the extent of 100% of eligible investment with a period of seven year
by way of set off /credit for Tax liability under Maharashtra Value Added Tax Act
2002 and Central Sales Tax Act 1956;
Electricity duty exemption for the period of seven years; and
100% exemption from payment of stamp duty.
The subsidy benefits should start accruing in FY13e. This JV, we believe, offer an
option value for Radico Khaitan in future, which it may monetise.
As per the FY12 balance sheet, Radico has invested INR 480m in the JV; INR 280m
through equity route and balance through preference shares (10% Cumulative non-
convertible preference shares).
It has also given a guarantee of INR 564m for loans taken by Radico NV Distilleries.
Radico NV Distilleries Maharashtra Ltd.
INR Million
FY12 FY11
% Ownership Interest (%) 36 36
Assets 1,023 936
Liabi l i t ies 721 713
Income 715 622
Expenses 677 628
Contingent Liabilities 56 8.8
Capital Commitments 0.1 8.8
Radico Khaitan
2031 October 2012
Valuations attractive, given strong earnings growth aheadExpect 30% upside; Buy
Valuations are supportive, given the expected 23% earnings CAGR over the next three
years
We value RDCK at P/E of 17x FY14 EPS and arrive at a target price of INR152.
Valuation multiples are in line with historical averages.
Supportive valuations plus 23% earnings CAGR = 30% upsideRDCK is an attractive play on the growing IMFL opportunity, underpinned by favorable
demographic factors like rising disposable income, growing youth population, and
changing social attitudes towards drinking. It has 33 bottling units spread across India,
through which it covers 90% of the retail outlets. Its premiumization strategy is working
and we expect the contribution of premium brands to increase from 15% of total
volumes to 20% by FY15. This would be the key driver for a robust 22% and 23% CAGR
in EBITDA and PAT over FY12-15,respectively, in our view.
The stock has traded at an average EV/EBITDA of 12.8x and P/E of 20.7x since FY10. We
believe there is a case for re-rating on account of:
RDCK's decisive focus on premiumization.
Improved pricing environment in the IMFL industry, boosting operating margins.
Any potential deal involving sector leader can have a positive rub-off effect on
peer valuations, including RDCK's, in our view.
We value RDCK at a P/E of 17x FY14 EPS and initiate coverage with a Buy rating and a 12
month forward target price of INR152 - 30% upside. At our target price, RDCK will
trade at 10.6x FY14E EV/EBITDA, modest discount to recent averages.Global liquor
companies trade at average 12-13x EV/EBITDA. Given the superior long-term growth
prospects of Indian liquor companies, we believe Indian players should trade at a
premium to their global counterparts. Any valuation re-rating owing to potential
UNSP-Diageo deal will provide upside to our target price.
Risks to our investment thesis Lower than expected price hikes will restrict margin expansion. Regulated pricing
for two-third of industry sales is a structural hangover on capital efficiency ratios.
Higher than expected input costs will restrict margin expansion.
Frequent changes in distribution increase debtor days.
Steady increase in excise duties by states adds to working capital cycle.
Radico Khaitan
2131 October 2012
Global Alocholic Beverage Cos
EPS Growth (%) P/E (x) P/B (x) EV/EBITDA (x)
FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E
Diageo PLC 32.1 11.8 17.2 15.4 6.3 5.2 13.5 12.2
Heineken NV 20.9 18.8 26.0 21.9 1.3 1.2 - -
Carlsberg A/S 0.3 12.7 16.3 14.5 3.8 3.3 12.2 11.0
Anheuser-Busch InBev NV 18.2 28.7 13.5 10.5 5.7 4.2 9.0 6.5
SABMiller PLC 27.0 36.8 18.8 13.8 7.2 5.1 12.4 8.8
Takara Holdings Inc 12.1 15.0 20.6 17.9 2.5 2.3 12.7 11.1
Thai Beverage PCL 48.8 18.0 24.2 20.5 3.9 3.5 16.6 13.8
Luzhou Laojiao Co Ltd 5.8 11.3 24.9 22.4 6.0 5.2 15.2 13.8
Pernod-Ricard SA 19.8 14.9 16.9 14.7 2.1 2.0 12.6 11.2
Source: Company, MOSL
Radico P/E band chart P/B band chart
Valuation comparison to FMCG - table
Annual Performance EPS (INR) PE (x) EV/EBIDTA (x) RoE (%)
CMP Reco FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E
Asian Paints 3,884 Neutral 103.1 121.5 142.9 37.7 32.0 27.2 24.1 20.2 16.6 36.0 34.7 33.8
Britannia 484 Se l l 15.6 18.4 23.7 31.0 26.3 20.4 22.3 17.1 12.3 34.9 35.1 37.9
Colgate 1,285 Neutral 32.8 40.0 46.5 39.1 32.1 27.6 29.4 23.6 19.9 109.4 114.7 108.7
Dabur 125 Neutral 3.7 4.4 5.5 33.4 28.7 22.8 26.0 21.2 17.1 37.9 34.7 35.8
Godrej Consumer 726 Neutral 16.3 21.6 26.3 44.6 33.5 27.6 31.3 23.6 19.3 25.2 23.1 24.3
GSK Consumer 2,997 Neutral 84.5 101.7 113.5 35.5 29.5 26.4 22.2 19.1 16.7 31.0 31.4 29.8
Hind. Unilever 550 Neutral 11.9 15.5 18.0 46.2 35.5 30.5 35.0 27.5 23.6 74.6 72.1 63.4
ITC 284 Buy 7.9 9.5 11.3 36.0 30.0 25.1 23.8 19.5 16.0 32.8 33.2 33.4
Marico 205 Buy 5.2 6.8 8.5 39.5 30.3 24.3 28.5 21.1 16.8 28.0 21.6 21.8
Nestle 4,673 Neutral 105.7 117.1 138.5 44.2 39.9 33.8 29.4 24.2 20.0 95.7 73.6 63.5
Pidilite Inds. 193 Buy 7.0 8.4 10.1 27.6 22.9 19.1 19.1 14.4 11.6 26.3 24.6 24.8
United Spirits 1,144 Neutral 19.5 19.3 35.1 58.6 59.3 32.6 17.8 15.8 14.2 4.9 4.7 7.9
Radico Khaitan 117 Buy 6.0 6.9 8.9 19.4 16.9 13.1 12.6 10.6 8.8 11.9 12.5 14.4
Radico Khaitan
2231 October 2012
Annexure
Indian IMFL Industry
520m cases Spirits market
is growing at 8-9% CAGR.
IMFL is growing at 10-11%
CAGR and Country Liquor
is growing at 5-6% CAGR.
Share of IMFL in spirits
has increased from 38%
to 44% in past six years
Spirit market CY2005 (%) Spirits market CY2011 (%)
Indian IMFL Industry
Source: Company, MOSL
Whisky is the single largest segment and accounts for 69%
of IMFL value sales. Vodka and Gin account for just 5% of
IMFL sales. Vodka is growing at 25% CAGR while Gin is
growing at low single digits.
Spirit Market (Value) CY2011 South and west India accounts for 65% of IMFL sales
Source: Company, MOSL
South and west India accounts for 65% of IMFL sales;
North India accounts for 25% while East India accounts
for only 10%
Source: Company, MOSL
Radico Khaitan
2331 October 2012
IMFL Market Share
Source: Company, MOSL
United Spirits acquired
Herbertsons, Triumph
dist, Carew and Shaw
Wallace increasing its
market share to 54%
India has favorable economic and demographic conditions for the growth of IMFL industry
Source: Company, MOSL
Per capita consumption (ltrs)
Source: Company, MOSL
Indian market offers
huge growth potential
due to young population,
rising income levels and
affordability, greater
social acceptability and
low per capita
consumption. Expect
IMFL volumes to grow at
11-12% CAGR in the
medium term
Radico Khaitan
2431 October 2012
Distribution system
Wholesaler
Retai lers
Retailer Margin
Sellers bargaining
power
Methodology
Key States
Government controlled
State through its entity
State operated or
private
12-15%
Low to average
Annual tender from
manufacturers
Karnataka, Kerala,
Uttaranchal
Tamilnadu,
Andhra Pradesh
Orissa, Bihar,
Rajasthan
Uttaranchal
Auction Market
State auctions
distribution rights to
private parties for
selected areas and time
Private vendors
20%+
Very low
Private parties negotiate
with liquor companies
Punjab, Haryana,
Chandigarh
Uttar Pradesh,
Madhya Pradesh
Himachal Pradesh
Free Market
Manufacturers sell
to wholesalers/
retailers
Private parties
obtain license for
nominal fee
8-10%
High
Private wholesalers
directly procure from
manufacturers
Goa, Maharashtra,
Assam
Delhi, West Bengal,
Tripura, Pondicherry
Chandigarh,
Jharkhand
Multiple distribution
systems across states
make India a tough
market to operate. Govt
controlled system
provides low pricing
flexibility while free
market works best for
the industry. Monopoly
distributor and auction
markets impact industry
profitability
Key markets with changes in distribution/pricing system
State Market in 2007 Market in 2010 Industry Pricing Power
Puduchery Govt. controlled Free Market Significantly Improved
Jharkhand Auction Free Market Significantly Improved
Bihar Auction Govt Controlled Improved
Rajasthan Auction Govt Controlled Improved
UP Free Market Auction Deteriorated
Punjab Free Market Auction Deteriorated
Haryana Free Market Auction Deteriorated
Madhya Pradesh Free Market Auction Deteriorated
Source: Company, MOSL
Liquor industry reforms
have suffered a setback
as north India has moved
back to auction system;
Bihar, Rajasthan,
Jharkhand and
Puducherry have seen
improvements
Advertising for liquor is not allowed in India, industry is forced to undertake
surrogate advertising; ban on advertising is a key entry barrier
Liquor industry falls in the state subject by the GOI. Consequently it is subjected to
very strict distribution controls by the state governments. Currently three types of
distribution systems are prevalent in India i.e. Government controlled, Auction market
and free market. Each distribution system has its own characteristics, some of which
have been impeding the growth of the liquor industry in India.
Government Controlled; Under the Government controlled system, state government
either own its own or through an agency purchases liquor from various entities through
negotiated prices and sells at certain markup to the consumer through its own shops.
This system currently exists in southern India. It indirectly imposes limits on the
availability of the product.
Radico Khaitan
2531 October 2012
Auction Market; Under the auction market state government auctions the right to sell
liquor to various parties by auction of a certain fixed fee annually. The winners of
these contracts then negotiate prices with the liquor companies and sell to the
consumers through their own distribution network. This creates distribution
monopolies in small regions, which results in high consumer prices and fat margins
for the retailers.
Free Market; Open market system is most favorable to the trade and industry. It
improves the availability of the products and ensures fairness to both the consumer
and retailer. Under this system interested parties can open the liquor shops by taking
licenses from the state for a certain fee. Manufacturers sell the liquor directly to the
retailers at negotiated prices. This ensures fair play for the manufacturer as no one
retailer can force it to reduce the prices.
High entry barriers to work in favor of existing playersStrong entry barriers characterize liquor industry. These have resulted in very few
new players having successfully entered and established new brands in the market.
The industry is dominated by few players like United Spirits, Pernod Ricard, Radico
Khaitan, Jagatjit, Mohan Maekin and Seagram.
Media advertising of liquor is banned in India. Manufacturers undertake surrogate
advertising and sponsorships of various sports events to create brand awareness.
Surrogate advertising is generally done for Soda, bottled water and sports
equipment. This makes it difficult for any player to launch a new brand and make
it a success. This has thwarted the attempts of many global majors to make a
strong foot hold in the Indian liquor industry.
Taxes and duties constitute nearly 40-45% of the final consumer price. In addition
to excise taxes, there are high taxes on interstate movement of liquor. There are
more than 100 different types of taxes on liquor in India, which raises the entry
barriers for any new player.
Liquor is subject to 100% import duty and 150% countervailing duty, which raises
the prices of imported liquor to very high levels. This results in very high prices
for imported liquor, thus limiting their consumer reach.
High taxes on interstate movement of liquor results in manufacturers having small
bottling units in various states, thus creating inefficiencies in manufacturing. Thus
operating in India is akin to operating in 30 countries.
Reforms in liquor industry have received a setbackLiquor industry reforms have received a setback in the past few years. This is on
account of 1) steady increase in excise duty by various states 2) shift from free market
to auction system of distribution in entire north India. Although we note that some of
the states have moved from auction system and Govt controlled one, broad pace of
reforms have been back and forth. Switchover to auction system is a big negative in
North India as it entails higher credit period to wholesale trade. Higher credit period
coupled with increase in excise results in increase in credit period and working capital
requirements. Debtor's days for Radico have increased from 23 to 41 in past five
years; consequently net working capital has increased from 63 days of sales to 92 days
of sales. Steady increase in working capital is a drag as it impacts the cash flows.
Radico Khaitan
2631 October 2012
Recent changes in distribution of Alcoholic Beverages
State Market in 2007 Market in 2010 Industry Pricing Power
Puduchery Govt. controlled Free Market Significantly Improved
Jharkhand Auction Free Market Significantly Improved
Bihar Auction Govt Controlled Improved
Rajasthan Auction Govt Controlled Improved
UP Free Market Auction Deteriorated
Punjab Free Market Auction Deteriorated
Haryana Free Market Auction Deteriorated
Madhya Pradesh Free Market Auction Deteriorated
Source: Company, MOSL
Radico Khaitan
2731 October 2012
Financials and Valuation
Income Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Net Sales 9,469 11,445 12,986 14,977 17,191
Change (%) 12.9 20.9 13.5 15.3 14.8
Total Expenditure 7,975 9,714 10,842 12,409 14,162
EBITDA 1,494 1,731 2,143 2,568 3,029
Change (%) 9.3 15.9 23.8 19.8 17.9
Margin (%) 15.8 15.1 16.5 17.1 17.6
Depreciation 271 328 376 423 454
Int. and Fin. Charges 293 375 515 526 537
Financial Other Income 47 1 2 3 3
PBT 977 1,028 1,255 1,621 2,041
Change (%) 94.7 5.3 22.0 29.2 25.9
Margin (%) 10.3 9.0 9.7 10.8 11.9
Tax 257 229 339 438 551
Tax Rate (%) 26.3 22.3 27.0 27.0 27.0
PAT 720 799 916 1,183 1,490
Change (%) 72.4 11.0 14.6 29.2 25.9
Margin (%) 7.6 7.0 7.1 7.9 8.7
Extraordinary Income 8 -163 0 0 0
Reported PAT 728 637 916 1,183 1,490
Balance Sheet (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
Share Capital 265 265 265 265 265
Reserves 6,249 6,687 7,476 8,452 9,680
Net Worth 6,514 6,953 7,742 8,717 9,946
Loans 4,935 6,547 7,568 7,518 7,158
Deferred Tax 498 563 689 851 1,055
Capital Employed 11,947 14,063 15,999 17,086 18,159
Gross Block 5,728 6,870 7,670 8,470 9,270
Less: Accum. Depn. 1,539 1,847 2,223 2,647 3,101
Net Fixed Assets 4,189 5,022 5,446 5,823 6,169
Capital WIP 219 48 300 200 200
Investments 1,207 1,113 1,134 1,134 984
Curr. Assets, L&A 8,059 10,139 11,620 12,917 14,312
Inventory 1,269 1,774 1,920 2,218 2,370
Account Receivables 3,191 3,478 4,216 4,634 5,329
Cash and Bank Balance 94 218 283 282 251
Others 3,506 4,669 5,201 5,783 6,361
Curr. Liab. and Prov. 1,728 2,528 2,770 3,256 3,774
Account Payables 840 1,187 1,212 1,443 1,669
Other Liabilities 295 1,148 1,320 1,518 1,746
Provisions 593 193 238 295 359
Net Current Assets 6,332 7,611 8,850 9,661 10,538
Miscelleneous Exp./Others 0 268 268 268 268
Application of Funds 11,947 14,063 15,999 17,086 18,159
E: MOSL Estimates
Radico Khaitan
2831 October 2012
Financials and Valuation
Ratios
Y/E March 2011 2012 2013E 2014E 2015E
Basic (INR)EPS 5.4 6.0 6.9 8.9 11.2
Cash EPS 7.5 8.5 9.7 12.1 14.6
BV/Share 49.1 52.4 58.3 65.7 74.9
DPS 1.0 1.3 1.7 0.0 0.0
Payout % 15.0 15.4 17.6 17.6 17.6
Valuation (x)
P/E 19.4 16.9 13.1 10.4
Cash P/E 13.7 12.0 9.6 8.0
EV/Sales 1.9 1.8 1.5 1.3
EV/EBITDA 12.6 10.6 8.8 7.4
P/BV 2.2 2.0 1.8 1.6
Dividend Yield (%) 1.1 1.4 0.0 0.0
Profitability Ratios (%)
RoE 11.6 11.9 12.5 14.4 16.0
RoCE 10.2 10.0 11.0 12.6 14.2
Turnover Ratios
Debtor (Days) 47 42 45 43 43
Asset Turnover (x) 0.8 0.8 0.8 0.9 0.9
Leverage Ratio
Debt/Equity (x) 0.8 0.9 1.0 0.9 0.7
Cash Flow Statement (INR Million)
Y/E March 2011 2012 2013E 2014E 2015E
OP before Tax 930 1,028 1,253 1,619 2,038
Int./Div. Received 47 1 2 3 3
Depreciation and Amort. 271 328 376 423 454
Interest Paid 293 375 515 526 537
Direct Taxes Paid 210 163 213 276 347
Incr in WC 1,256 1,155 1,174 812 908
CF from Operations 75 413 758 1,483 1,777
Extraordinary Income 8 -163 0 0 0
Incr in FA -88 971 1,052 700 800
Other Assets 13 268 0 0 0
Pur of Investments 314 -94 20 0 -150
CF from Invest. -217 -1,040 -1,072 -700 -650
Issue of Shares -7 -70 0 0 0
Interest Paid 293 375 515 526 537
Incr in Debt 474 1,612 1,021 -50 -360
Dividend Paid 92 108 123 161 208
Others Inflows -178 -308 -4 -47 -54
CF from Fin. Activity -96 751 379 -784 -1,159
Incr/Decr of Cash -238 124 66 -1 -31
Add: Opening Balance 332 94 218 283 282
Closing Balance 94 218 283 282 251
E: MOSL Estimates
Radico Khaitan
2931 October 2012
N O T E S
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Disclosure of Interest Statement Radico Khaitan1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No
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