Premiumisation is the key margin driver for Radico Khaitan Ltd
Radico Khaitan Ltd (Radico) is one of the India’s oldest and largest player in Indian spirit industry. It is one of the few companies in India to have developed its entire brand portfolio organically. Its product portfolio comprises IMFL, country liquor, bulk spirits and it has also tied up with bottling units in various parts of the country to boost its production capacity and also enhance its geographical reach. The company owns four millionaire brands namely ‘8PM Whisky’, ‘Contessa Rum’, ‘Old Admiral Brandy’ and ‘Magic Moments Vodka’.
Over the years Radico has been focusing on the Premiumisation of its portfolio. The Company has launched six new brands in the past five years, all of which are in the premium category. They are also one of the largest providers of branded IMFL to the Canteen Stores Department (CSD), which has significant entry barriers. The company has transformed itself from a bulk and country liquor manufacturer to a branded IMFL manufacturer.
Today, Radico operates three distilleries and one JV with total capacity of 157 million liters and operates 28 bottling units spread across the country. It has a strong pan-India presence with sales through over 55,000 retail and 5,000 on premise outlets. The company has made significant progress in building the brand equity in the overseas markets with exports to over 70 countries.
On financial front, the company has shown steadily growth on all fronts. During the period between FY15-FY17, revenue grew at a CAGR of 6.2%, while EBITDA grew at CAGR of 12.9% over the same period, despite the volatile operating environment in FY17. The growth in FY17 was driven by 7.9% growth in volume of prestige and above brands.
Until 2006, Radico was a regular/economy segment player. In 2006, Radico strategically entered into premium segment with launch of Magic Moments. Magic Moments has become one of the leading Vodka brands worldwide with volume of 3.5m cases while Morpheus Brandy’s volume has increased 55% in the last 3 years. Due to shift towards higher margin segment, the company’s average net realization grew from Rs.662 per cases in FY13 to Rs.920 in FY17.
Favorable demographics, rising disposable incomes and changing social attitude towards alcohol consumption are the key factors driving demand for premium liquor. Entry into this segment will help Radico to drive growth and margins and positioned itself in premium segment.
Going ahead, other premium brands including Regal Talons, Pluton Bay and 1965 rums are also expected to drive growth. Company plans to launch five premium brands (launch three white spirits and two brown spirits) over the next two years as it pushes for higher margins in the extremely competitive domestic market.
During Q3 FY18, Radico reported a strong IMFL sales volume growth of 17.7% compared to Q3 FY17. This performance was driven by a combination of recent price increases and premiumization. EBITDA margin during the quarter expanded by 321 bps to 15.5%. Radico is also de-leveraging its balance sheet and has reduced debt by Rs.520mn in Q3 FY18, and Rs.1300mn overall in FY18. The company is focusing more on free cash flow generation targeting to have no long term borrowings by end of FY19.
Radico’s long term potential remains strong given its strong brand positioning in the market, increase share of premium product, improved EBITDA margin backed by Premiumisation, low raw material costs and price hikes in Southern states and strong cash flow generation resulting in debt reduction.
Going ahead we expect the company’s overall revenue to grow by 10% CAGR over the next three years driven by a combination of recent price increases, Premiumisation and structural change in industry. On valuation front, currently, the stock is trading at PE of 35x its FY18E EPS & 27x its FY19E EPS. Long term investors can consider buying the stock at current levels.