Liquor major Radico Khaitan has outperformed most peers with overall volume growth of 10 percent and Prestige & Above category (P&A) volume growth of 14 percent over the last three years, compared to 5-7 percent volume growth for larger peers.
The company seems attractively-placed to exploit the opportunity in Vodka with a leadership position in the premium vodka segment with a market share of more than 60 percent.
Vodka accounts for 20-30 percent of global consumption versus 4-5 percent in India due to premium pricing. According to Emkay Global, rising affordability, greater acceptance among youth and women and preferred choice of base for cocktails offer faster growth in the category versus other spirits and Radico Khaitan with a dominant position should be a key beneficiary.
Radico Khaitan has been more innovative than peers, and the stronger innovation pace and success in new launches have accelerated growth and diversified the company’s P&A franchise, analysts said.
Source: Company Reports, Emkay Research
Excluding Magic Moments, growth in other P&A brands has been stronger at a 25 percent CAGR, with its share rising to 40 percent of P&A from 22 percent in FY15, led by continued success in niche and emerging categories and recent success in premium Whisky, the brokerage noted.
The company’s Q1 performance was better than the industry, which is expected to continue due to faster recovery in core states, particularly Uttar Pradesh, Uttaranchal, Karnataka and Telangana. Despite a steep 34 percent sales decline in Q1, the brokerage expects Radico to report marginal growth in FY21 led by a strong volume performance in the coming quarters.
The company delivered a strong improvement in margins over the last five years with EBITDA margins expanding by nearly 400 bps. Margin expansion was high till FY19 but after a steep increase in ENA and glass prices in FY19-20 gross margins reduced by 330 bps in FY20 and EBITDA margins by 140 bps.
“Margin pressure is behind us and input prices have started to moderate since Q4FY20, which should aid strong margin expansion ahead. ENA prices have declined 1015% from peak levels and are expected to remain soft. In addition, management increased focus on cost savings, cut in discretionary spends and reduced competition can drive gains on operating margins,” Emkay Global said.
The brokerage’s forecast factors in gross margin expansion of 90 bps and EBITDA margin expansion of 180 bps over FY20-23, which can see potential upsides.
“We expect continued improvement in cash flows and ROCE (net cash position by FY22, increase in dividend payouts and ROCE to increase to 20%+ by FY23). We believe that strong earnings visibility and improved balance sheet should lead to a re-rating. At 18x FY22E, valuations are still close to a 10-year mean,” it added.
The brokerage retained Buy rating on the stock and increased the target price to Rs 600, valuing it at 25x Sep’22E versus 20x earlier.
The shares of Radico Khaitan has risen over 42 percent in the last year. The stock is up almost 95 percent since its 52-week low of Rs 220.00 hit on March 25, 2020.