1QFY2017 Result Update | Breweries & Distilleries

August 18, 2016

Radico Khaitan

BUY

CMP

`101

Performance Highlights

Target Price

`125

Quarterly Data

Investment Period

12 months

(` cr)

1QFY17 1QFY16

% yoy 4QFY16

% qoq

Revenue

430

417

3.1

378

14.0

Stock Info

EBITDA

56.3

21.9

45.1

Sector

Breweries & Distilleries

Margin (%)

13.1

11.1

201bp

10.3

281bp

Market Cap (` cr)

1,349

Adj. PAT

25.2

45.7

Net Debt (` cr)

742

Source: Company, Angel Research

Beta

0.8

For 1QFY2017, Radico Khaitan’s results have come in line with our estimates.

52 Week High / Low

131 / 81

The company’s top-line grew by ~3% yoy to `430cr on back of higher sales of

Avg. Daily Volume

67,796

premium products while the bottom-line grew by ~25% yoy to `22cr on the back

Face Value (`)

of a strong operating performance and lower taxes.

BSE Sensex

28,005

Top-line grew ~3% yoy: Volume growth during the quarter was of 3.6% yoy

Nifty

8,624

which resulted in the top-line growing by 3% yoy to `430cr (our estimate was of

Reuters Code

RADC.BO

`427cr). The company has consciously shifted its focus in favor of prestige &

Bloomberg Code

RDCK@IN

above products which command better margins, over higher volume mass market

products. Prestige & above brands’ volume grew

~11% yoy while their

Shareholding Pattern (%)

contribution to total IMFL volumes increased from 25.2% in 1QFY2016 to 26.9%

in 1QFY2017.

Promoters

40.5

MF / Banks / Indian Fls

13.3

Despite lower sales, PAT grew by ~25% yoy: On the operating front, the

FII / NRIs / OCBs

21.1

company’s margin improved by 201bp yoy to 13.1%, primarily on account of a

Indian Public / Others

25.1

favorable shift in the product mix from regular to premium products. The

company reported a ~25% yoy rise in its net profit to `21.5cr for the quarter on

the back of a strong operating performance and lower taxes.

Abs. (%)

3m 1yr 3yr

Sensex

9.4

0.7

50.9

Outlook and Valuation:

Going forward, we believe that the company has the potential to perform better

RKL

5.8

15.9

9.5

on the bottom-line front on the back of (a) volume growth (b) higher sales of

premium products (c) anticipation of better price hikes and (d) gradual reduction

in debt which should lead to significant savings in interest costs. Hence, we

3-year price chart

recommend a Buy rating on the stock with a target price of `125.

180

160

Key financials

140

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

120

100

Net sales

1,488

1,543

1,659

1,802

% chg

2.5

3.7

7.5

8.6

Net profit

% chg

(5.1)

13.7

9.6

16.4

EBITDA margin (%)

11.4

12.6

13.0

13.2

EPS (`)

5.1

5.8

6.3

7.4

Source: Company, Angel Research

P/E (x)

19.9

17.5

15.9

13.7

P/BV (x)

1.6

1.5

1.4

1.3

RoE (%)

8.1

8.5

8.6

9.3

RoCE (%)

7.8

8.8

9.6

10.4

Amarjeet S Maurya

EV/Sales (x)

1.4

1.2

1.1

022-39357800 Ext: 6831

EV/EBITDA (x)

12.2

10.7

9.5

8.6

[email protected]

Source: Company, Angel Research, Note: CMP as of August 17, 2016

Please refer to important disclosures at the end of this report

Radico Khaitan | 1QFY2017 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr)

1QFY17

1QFY16

% yoy

4QFY16

% qoq

FY2016

FY2015

% chg

Net Sales

430

417

3.1

378

14.0

1,543

1,488

3.7

Consumption of RM

229

226

1.1

183

25.0

721

720

0.1

(% of Sales)

53.1

54.2

48.5

46.7

48.3

Staff Costs

20.4

9.9

131

120

9.6

(% of Sales)

8.6

7.4

8.9

8.5

8.0

Selling & Administrative Exps.

2.2

(35.1)

273

284

(3.8)

(% of Sales)

9.8

9.9

17.2

17.7

19.1

Operating Expense

(9.3)

15.6

224

195

14.7

(% of Sales)

15.4

17.5

15.1

14.5

13.1

Total Expenditure

374

371

0.8

339

10.4

1,348

1,318

2.3

Operating Profit

21.9

45.1

195

170

14.2

OPM (%)

13.1

11.1

10.3

12.6

11.4

Interest

0.5

(7.0)

(5.8)

Depreciation

(2.0)

1.5

5.3

Other Income

3.85

9.77

(60.6)

14.77

(73.9)

(15.2)

PBT

17.9

39.6

108

23.6

(% of Sales)

6.6

5.8

5.4

7.0

5.9

Provision for Taxation

(0.3)

23.4

58.1

(% of PBT)

24.0

28.4

27.2

28.6

22.4

Minority Interest

Reported PAT

25.2

45.7

13.7

PATM

5.0

4.1

3.9

5.0

4.5

Source: Company, Angel Research

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Top-line grew ~3% yoy

Volumes during the quarter grew by 3.6% yoy, which resulted in the top-line

growing by 3% yoy to `430cr (our estimate was of `427cr). The company has

consciously shifted its focus in favor of prestige & above products which command

better margins, over higher volume mass market products. Prestige & above

brands’ volume grew ~11% yoy while their contribution to total IMFL volumes

increased from 25.2% in 1QFY2016 to 26.9% in 1QFY2017.

Exhibit 2: Top-line growth trend

(20)

(40)

(60)

(80)

Net Profit

QoQ growth (%)

Source: Company, Angel Research

Strong operating performance

On the operating front, the company’s margin improved by 201bp yoy to 13.1%,

primarily on account of a favorable shift in the product mix from regular to

premium products which command higher margins.

Exhibit 3: Operating profit and margin trend

Operating Profit

Margin (%)

Source: Company, Angel Research

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Investment rationale

Pricing environment expected to be favorable for IMFL industry

Our interaction with liquor companies suggests that prices have now bottomed out.

We expect the industry’s pricing environment to likely get better going ahead

mainly because there has not been any significant price hike in products in recent

times due to delay in approval by various state governments. Hence, the industry is

now expecting a significant price hike in the coming financial year. Also, the

industry leader United Spirits has been facing pressure at the operating level and

the company has a huge debt on its balance sheet. Hence we believe that the

company’s new Management would shift focus on profitability over volume growth,

which in turn, would lead to increased scope for other liquor companies to hike

prices.

Higher proportion of premium products in volume mix to drive

profitability

In the IMFL segment, more than 20% of the company’s volumes come from

prestige and above products, which is a high margin business, and the balance

volumes come from regular and others brands. Since the last eight years, the

company’s prestige and above brands’ volume has reported a CAGR of ~23%

and their share in the product mix has increased from 7.9% in FY2009 to 24% in

FY2016. We expect volume contribution of prestige and above products in the

IMFL segment to increase further on back of higher ad spend. The company has

roped in celebrity Hrithik Roshan as its brand ambassador. Also, the company’s

presence in the prestige Vodka segment is under penetrated which leaves scope

for growth. Thus, this would improve the overall margin for the company and

result in higher profitability.

Wide distribution network with strong brands

RKL has a strong sales and distribution network with a presence in retail and off-

trade outlets in the relevant segments in different parts of India. Currently, the

company is selling its products through over 45,000 retail outlets and over 5,000

on-premise outlets. Apart from wholesalers, a total of around 300 employees

divided into four zones, each headed by regional profit centre head, ensure an

adequate on-the-ground sales and distribution presence across the country.

The company has strong brands likes Magic Moments Vodka, Morpheus Brandy,

Verve Vodka, Florence Brandy, After Dark Whisky etc.

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Outlook and valuation

The company has not performed well in the last two years due to increasing raw

material costs (ENA is a key raw material) and with it not receiving significant price

hikes from various states. We expect the company to perform well going forward in

anticipation of better price hikes and healthy sales growth in premium products.

This would result in an overall improvement in the operating margin of the

company. We expect the company to report strong earnings CAGR of ~13% to

~`98cr over FY2016-18E. Hence, we recommend a Buy rating on the stock with a

target price of `125.

Exhibit 5: One-year forward P/E band

Share Price

10x

15x

20x

25x

30x

200

180

160

140

120

100

Source: Company, Angel Research

Company Background

Radico Khaitan Ltd is an India-based spirits company engaged in the manufacture

of liquor. The company has three distilleries and one JV with total capacity of

150mn litres and 33 bottling units spread across the country. The company is one

of the largest providers of branded IMFL to the Canteen Stores Department (CSD),

which has significant entry barriers. RKL's brands include After Dark Whisky, Magic

Moments Vodka, Morpheus Brandy, Contessa Rum, Old Admiral Brandy and 8

PM. Its liquor business also includes rectified spirit and country liquor. Its alcohol

products include rectified spirit, silent spirit, cane juice spirit, malt spirit, grain spirit

and ethanol. The company’s PET division produces a range of PET bottles and jars

for industries such as pharmaceutical, cosmetics, home and personal care, edible

oil and confectionery.

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Profit & Loss Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Total operating income

1,258

1,452

1,488

1,543

1,659

1,802

% chg

10.0

15.4

2.5

3.7

7.5

8.6

Total Expenditure

1,074

1,258

1,318

1,348

1,443

1,564

Raw Material Cost

585

653

717

721

771

834

Personnel Expenses

107

131

129

141

Selling & Administrative Exp.

235

286

284

273

290

315

Others Expenses

176

226

210

224

252

274

EBITDA

184

193

170

195

216

238

% chg

17.7

5.0

(11.9)

14.2

11.0

10.3

(% of Net Sales)

14.6

13.3

11.4

12.6

13.0

13.2

Depreciation& Amortisation

EBIT

149

155

132

154

173

194

% chg

20.4

3.9

(14.6)

16.8

12.3

11.7

(% of Net Sales)

11.8

10.7

8.9

10.0

10.4

10.7

Interest & other Charges

Other Income

(% of PBT)

27.8

34.3

51.6

35.4

32.3

27.7

Share in profit of Associates

Recurring PBT

109

106

108

124

144

% chg

25.7

(2.6)

(18.1)

23.6

15.1

16.4

Prior Period & Extra. Exp./(Inc.)

PBT (reported)

109

106

108

124

144

Tax

(% of PBT)

29.3

33.0

22.4

28.6

32.0

PAT (reported)

% chg

21.4

(7.8)

(5.1)

13.7

9.6

16.4

(% of Net Sales)

6.1

4.9

4.5

5.0

5.1

5.4

Basic EPS (`)

5.8

5.4

5.1

5.8

6.3

7.4

Fully Diluted EPS (`)

5.8

5.4

5.1

5.8

6.3

7.4

% chg

21.2

(7.9)

(5.1)

13.7

9.6

16.4

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Balance Sheet

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

702

754

812

877

949

1,032

Shareholders Funds

728

781

839

904

976

1,059

Total Loans

768

904

849

851

830

810

Deferred Tax Liability

Total Liabilities

1,566

1,770

1,773

1,840

1,890

1,954

APPLICATION OF FUNDS

Gross Block

744

821

831

851

871

891

Less: Acc. Depreciation

214

250

288

329

371

416

Net Block

529

571

542

522

499

475

Capital Work-in-Progress

Investments

109

108

Current Assets

1,161

1,330

1,379

1,471

1,560

1,684

Inventories

186

211

212

220

232

252

Sundry Debtors

435

523

538

562

604

657

Cash

Loans & Advances

314

441

470

492

518

562

Other Assets

209

139

149

185

192

198

Current liabilities

249

262

270

274

290

326

Net Current Assets

912

1,067

1,109

1,197

1,270

1,358

Deferred Tax Asset

Mis. Exp. not written off

Total Assets

1,566

1,770

1,773

1,840

1,890

1,954

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Cashflow Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

109

106

108

124

144

Depreciation

Change in Working Capital

(242)

(53)

(47)

(87)

(70)

(87)

Interest / Dividend (Net)

Direct taxes paid

(23)

(26)

(19)

(31)

(40)

(46)

Others

Cash Flow from Operations

(66)

137

149

115

146

145

(Inc.)/ Dec. in Fixed Assets

(141)

(20)

(Inc.)/ Dec. in Investments

(3)

(0)

(10)

Cash Flow from Investing

(141)

0.2

(20)

Issue of Equity

Inc./(Dec.) in loans

(55)

(21)

(20)

Dividend Paid (Incl. Tax)

(12)

(10)

(12)

(13)

(15)

Interest / Dividend (Net)

(71)

(84)

(90)

(85)

(89)

Cash Flow from Financing

(154)

(94)

(123)

(124)

Inc./(Dec.) in Cash

(5)

(1)

(5)

Opening Cash balances

Closing Cash balances

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

17.4

18.9

19.9

17.5

15.9

13.7

P/CEPS

11.9

12.2

12.7

11.5

10.6

9.4

P/BV

1.8

1.7

1.6

1.5

1.4

1.3

Dividend yield (%)

0.8

0.9

1.1

EV/Sales

1.6

1.5

1.4

1.2

1.1

EV/EBITDA

10.8

11.0

12.2

10.7

9.5

8.6

EV / Total Assets

1.1

1.0

0.9

Per Share Data (`)

EPS (Basic)

5.8

5.4

5.1

5.8

6.3

7.4

EPS (fully diluted)

5.8

5.4

5.1

5.8

6.3

7.4

Cash EPS

8.5

8.3

8.0

8.8

9.5

10.7

DPS

0.8

0.9

1.0

1.1

Book Value

54.8

58.7

63.0

67.9

73.3

79.6

Returns (%)

ROCE

10.0

9.2

7.8

8.8

9.6

10.4

Angel ROIC (Pre-tax)

10.9

9.9

8.4

9.4

10.2

11.0

ROE

10.6

9.1

8.1

8.5

8.6

9.3

Turnover ratios (x)

Asset Turnover (Gross Block)

2.4

2.5

2.7

3.0

3.3

3.8

Inventory / Sales (days)

Receivables (days)

126

132

133

Payables (days)

WC cycle (ex-cash) (days)

144

152

151

153

August 18, 2016

Radico Khaitan | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Radico Khaitan

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 18, 2016