For 4QFY2016, Radico Khaitan (RKL) outperformed our estimates on the top-line
front although the bottom-line came in flat yoy. The company’s top-line grew by
~10% to Rs378cr on back of higher sales of premium products while the bottomline
came in flat on a yoy basis at Rs15cr due to higher interest costs and taxes.
During the quarter the Karnataka government gave a price increase (Rs35/case) to
the company which would be effective from July 1, 2016 and would contribute
towards margin improvement. Further, the government of Uttar Pradesh has
reduced the excise duty on Indian made foreign liquor (IMFL) by 20-25% with
effect from April 1, 2016, which is expected to result in an increase in IMFL sales
volume in the state going forward. These policy actions should significantly benefit
the company as the two states account for ~20% of its volumes.
We believe that the company has the potential to perform better on the bottomline
front on back of (a) improvement in 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
recommend a Buy rating on the stock with a target price of Rs125.
Top-line grew ~10% on back of higher sales in premium products: Despite of
overall volumes declining by 4.5% during the quarter, the company’s top-line was
able to report a ~10% yoy growth to Rs378cr (our estimate was of Rs351cr), mainly
due to the company’s shift in focus towards prestige & above products over higher
volume mass market products. During the quarter, prestige & above brands’
volume grew ~7% yoy while their contribution to total IMFL volumes increased
from 19.5% in 4QFY2015 to 22% in 4QFY2016.
OPM improved but PAT was flat yoy: On the operating front, the company’s
margin improved by 61bp yoy to 10.3%, primarily on account of lower selling &
distribution expenses and other expenditure. However, raw material cost as a
percentage of sales increased by 331bp yoy. The company reported a net profit
of Rs14.8cr, which is flat yoy, on account of higher interest costs and taxes.

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