For 2QFY2016, Radico Khaitan (RKL)s results have come in above our estimates.
The company’s top-line grew by 2% yoy, mainly due to growth in Prestige and
above products segment. On the operating front, the company reported
margin expansion, primarily on account of lower selling & distribution and other
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 by ~2% yoy to ~Rs370cr (our estimate was of ~
Rs364cr), mainly due to healthy volume growth in Prestige and above products
segment (up ~8.5%). Prestige and above brands’ contribution to total Indian
made foreign liquor (IMFL) volumes increased from 21.2% in 2QFY2015 to
24.7% in 2QFY2016. However, de-growth in Regular & others products segment
which contribute more than 75% of total sales, restricted the overall top-line
growth of the company. The company is continuously focusing on the Premium
products segment to increase sales which is a high margin business.
PAT grew ~25% yoy: The reported net profit for the quarter grew by 25% yoy to
~Rs19cr (our estimate was of ~Rs15cr) 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 a strong earnings CAGR of ~18%
to ~`95cr over FY2015-17E. Hence, we recommend a Buy rating on the stock
with a target price of Rs128.

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