For 3QFY2016, Radico Khaitan (RKL) outperformed our estimates on the earnings
front although the top-line came in flat yoy. On the operating front, the company
reported margin expansion, primarily on account of lower raw material and selling
& distribution expenses. Further, on the bottom-line front, the company reported a
healthy growth due to strong operating performance and lower interest cost.
Regular & others products segment de-grew which restricted overall top-line
growth but healthy volume growth in Prestige & above products segment: For the
quarter, RKL’s top-line grew flat yoy to ~Rs401cr (our estimate was of ~ Rs432cr),
mainly due to the company’s shift in focus towards prestige and above products
over higher volume mass market products. During the quarter, Prestige & above
brands’ volume grew ~10.7% yoy. Prestige and above brands’ contribution to
total Indian made foreign liquor (IMFL) volumes increased from 21.4% in
3QFY2015 to 24.6% in 3QFY2016. However, de-growth in Regular & others
products segment which contribute more than 75% of total sales volume, restricted the
overall top-line growth of the company. The company is continuously focusing on the
high-margin Premium products segment to increase revenue.
PAT grew ~19% yoy: The reported net profit for the quarter grew by 19% yoy to
Rs25.4cr (our estimate was of Rs23.4cr) on account of strong operating
performance and lower interest cost (in FY2015 the company has repaid a
significant amount of its debt; further debt reduction is also on the cards).
Outlook and valuation: RKL has not performed well in the last two years due to
increasing 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 easing material costs and on expectation of
better price hikes. This would result in an overall improvement in the operating
margin of the company. Also, with the company having reduced significant debt
from its balance sheet, it would be able to report an improvement in its
profitability. We expect the company to report strong earnings CAGR of ~18% to
~Rs95cr over FY2015-17E. Hence, we recommend a Buy rating on the stock with
a target price of Rs156.

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