Radico Khaitan is a small cap company with a market capitalisation of about Rs. 2200 crore. All of a sudden, it has attracted attention from top-notch investors who are buying the stock in bulk.
Ashish Dhawan of ChrysCapital was the first to home in on the stock in June 2013. He bought a chunk of 24,34,195 shares (1.83%) at an average price of about Rs. 124 per share. Ashish Dhawan pumped in Rs. 30 crore into the stock and it was a very sensible investment because he has already gained a 30% return from the stock.
Morgan Stanley was the next big ticket investor to smell an opportunity in Radico Khaitan. It bought a chunk of 20,46,942 on 22.01.2014 at Rs. 159 per share for a total consideration of Rs. 32 crore.
However, the biggest endorsement for Radico Khaitan came yesterday when Rakesh Jhunjhunwala, the Badshah of Dalal Street, decided to take a close look and picked up 6,85,112 shares at Rs. 167 each, investing Rs. 11.44 crore.
Now, the all important question is what is so special about Radico Khaitan that has attracted Rakesh Jhunjhunwala and the others.
The answer is that Radico Khaitan is slowly but steadily getting to be a big-ticket and profitable player in the spirits business. It is today the second largest spirits producer in India. It has 33 bottling units across the country producing the different brands. In a brilliant strategic move, Radico Khaitan decided a couple of quarters ago that they had to move away from the crowded whisky segment and get into the low volume but more profitable segments of Vodka and Brandy. Also, within the white spirits industry, Radico has decided to focus on the deluxe and super premium category, which has huge untapped potential and gives higher margins as opposed to the mass-market products where the profitability is low. One example of this strategy is “Verve vodka” which is being advertised heavily and is making its presence felt in Northern India.
Radico is looking to push sales of Verve (about 80,000 + cases for the year) and a 20% Y-O-Y growth. Verve is competitively priced at Rs 540-570 which is on par with other premium vodka brands such as Eristoff, Gorba and Smirnoff.
Another example is “Magic Moments” (Vodka) which is getting to be a market leader in its segment and has a market share of 30%. The best thing is that the brand is growing at a CAGR of 45% over the last four years even though the market for Vodka itself is growing at 20% CAGR.
The other premium brands owned by Radico Khaitan are “Morpheus” (brandy), 8 PM (whisky) and “After Dark” (whisky).
Yet another product from Radico which is making waves is “Florence”, a premium brandy. The brand has been successfully introduced in Tamil Nadu and is expected to provide major revenue contribution for Radico.
The size of the market is huge. In the premium Vodka market, Smirnoff, which is owned by Diageo, holds a stranglehold of 80% share. Radico has a 8% share. In the Indian Made Foreign Liquor (IMFL) market, United Spirits has a 55% market share while Radico Khaitan has a market share of about 15%.
|Radico Khaitan’s Key Financials
|Adjusted Net Profit
Financially, Radico Khaitan has been chugging along nicely. In the September quarter, it reported a healthy 18% growth in sales though the net profit was lower on account of the higher advertisement and raw material (sugarcane) costs. Over a period of 5 years, the profit has grown at 30% CAGR though the ROE is lower at about 10%.
The other kicker for the stock is that it is a potential takeover target for a behemoth like Diageo or United Spirits.
The other point that you must bear in mind is that Rakesh Jhunjhunwala is a connoisseur of liquor. He has tasted the best brands available in the market and if he likes Radioco Khaitan’s products, it means that they are doing everything right.