Dolly Khanna + Madhu Kela Portfolio Stock Recommendation – Radico Khaitan

Branded liquor play available at compelling valuation

Radico Khaitan (earlier Rampur Distillery Company) is among the largest manufacturers of Indian made foreign liquor (IMFL) in India. The company is also a supplier of Indian made Indian liquor (IMIL) and bulk alcohol in India. It has the distinction of being among very few domestic players that have over the years entered and generated brand equity in the prestige and above liquor segment.

The company has three distilleries in Rampur (Uttar Pradesh) and two other distilleries operating in JV in Aurangabad (Maharashtra), with overall capacity of 157 million litre. Radico has progressively enhanced its return ratios (reached RoE, RoCE of 14.8%, 18.3%, respectively, in FY19) while investing into newer, existing brands, and also staying on the organic growth path.

The management expects EBITDA margins to remain at 16-17% despite the hardening of input prices (ENA, packaging material) in FY20, and also expects to become debt free in two years. We expect, Radico to grow its revenues, EBITDA and PAT at 12%, 12% and 24% FY19-21 CAGR, respectively.

Continued play on premiumisation front

Radico has four millionaire brands 8PM whisky, Contessa Rum, Old Admiral brandy and Magic Moments vodka (sell more than a million cases each year). Within P&A category, semi-premium brands such as Magic Moments dominate the share in its category while the share from the super-premium brands such as Morpheus brandy continues to rise.

Also, luxury brands such as Rampur single malt and Jaisalmer Gin have shown considerable growth in overseas demand, focused on US, Europe and travel retail market. Radico plans to launch two more brands in the premium space, imparting further momentum to the trend.

Strong free cash flow generation

Radico clocked RoE & RoCE of 14.8% & 18.3%, respectively, in FY19 (earlier 8% and 9.9% in FY16). With rising revenues and profitability and lack of any major capex in the medium term, return ratios are expected to remain healthy at 16.5% and 19.7%, respectively, in FY21.

Similarly, with focus on priority states and better working capital management and lower capex, cash flows are expected to remain strong. FCF is expected to remain robust at | 185 crore in FY21E (implied 4.2% yield).

Favourable product mix to aid robust growth

A steep correction in the stock (~30%), despite superior performance parameters (with strong cash flow generation) and continued strong future prospects, makes it a preferred pick in the alcobev sector.

In spite of the dominance of two global players in the ‘prestige and above’ segment, Radico has been able to penetrate the segment and create an own niche for itself.

With a continued focus on brand development, newer premium IMFL launches and strong distribution network built over the years, we ascribe a BUY rating to Radico Khaitan with a target price of Rs 400 (18x FY21E P/E).