Alcoholic Beverage Report

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  • Topic: South India, Price, 2012
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Initiating Coverage | 31 October 2012 Sector: Consumer

Radico Khaitan

In high spirits
Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +9122 3982 5404 Sreekanth P V S (Sreekanth.P@MotilalOswal.com); +9122 3029 5120 Investors are advised to refer through disclosures made at the end of the Research Report.

Radico Khaitan

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

31 October 2012

2

Initiating Coverage |31 October 2012 Sector: Consumer

Radico Khaitan
BSE SENSEX S&P CNX

18,431

5,598

CMP: INR117 In high spirits

TP: INR152

Buy

Premiumization to help expand margins, pricing environment improving 

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

 

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 margins
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.

Financial summary (INR b) Y/E March 2012 2013E 2014E Sales EBITDA NP EPS (INR) EPS Gr. (%) BV/Sh. (INR) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%) 11.4 1.7 0.8 6.0 10.9 52.4 19.4 2.2 12.6 1.9 11.9 10.0 13.0 2.1 0.9 6.9 14.6 58.3 16.9 2.0 10.6 1.8 12.5 11.0 15.0 2.6 1.2 8.9 29.2 65.7 13.1 1.8 8.8 1.5 14.4 12.6

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.

Shareholding pattern %
As on Promoter Dom. Inst Foreign Others Jun-12 Mar-12 Jun-11 40.4 10.1 26.4 23.1 40.4 10.6 26.2 22.8...
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