Radio Khaitan is valued by SMIFS Ltd at 19x to FY2021e EPS of INR 22.53 to arrive at a target price of INR 428. This gives an upside potential of 40% with an investment horizon of 9-12 months. It has recommended a “Strong Buy” rating on the Radico Khaitan stock.
Radico Khaitan Ltd (RKL) is one of the oldest and the largest liquor manufacturers in India. RKL formerly known as Rampur Distillery Company has commenced its operations in 1943. Over the years the Company has transformed itself from a bulk and country liquor manufacturer to branded Indian-made foreign liquor (IMFL) manufacturer and bottler to other spirit manufacturers. With over 15 brands and their distinct variants it has significant market presence and enjoys considerable market share in the industry. RKL is also one of the largest providers of branded IMFL to the Canteen Stores Department (CSD), which has significant business barriers to entry. The company has been successfully building its brand equity in international markets and currently exports its products to over 85 countries.
RKL’s premium brand portfolio is distinguished by its completely organic growth, which is a testament to its research and development prowess and strong understanding of consumer preferences.
Radico Khaitan became the first company to conceptualize the innovative idea of offering scotch blended whisky and the first company to position 8PM as India's premium whisky. Having entered in branded IMFL segment in late 90s, RKL has established a wide range of products with 15 brands.
Company’s premium brands 8PM whisky, Contessa rum, Old Admiral brandy and Magic Moments vodka sell more than a million cases each year.
Its other brand portfolio includes Rampur Indian Single Malt whisky, Jaisalmer Indian craft gin, Morpheus Blue XO premium brandy, Morpheus XO brandy, Magic Moments Verve vodka, Magic Moments vodka, After Dark whisky, 8PM Premium Black whisky, Pluton Bay rum, Regal Talons whisky, Whytehall brandy, 1965 – The Spirit of Victory Premium XXX rum.
Company’s popularity can be easily recognized as its flagship brand 8PM is 11th fastest growing whisky & its Magic Moments is the 7th fastest selling vodka brand as per the IWSR, International Wines and Spirits Record.
The Company has three distilleries in Rampur (Uttar Pradesh) of which two operating as joint ventures with Radico NV Distilleries (RNV) in Aurangabad, Maharashtra in which RKL owns 36% equity. These have a total capacity of over 100 million litres. It owns 5 bottling units and maintains 23 contract bottling units.
The company has one of the largest distilleries in India at Rampur with molasses based distilling capacity of 75 million litres p.a. and grain-based distillation capacity of 27 million litres p.a.
The plant in Rampur is self-sufficient in meeting the fuel and power requirements through backward integration, utilizing its effluents for generating bio-gas which, in turn, is used to generate the steam and power for its captive requirement.
New Launches and Expansion
In October 2019, RKL completed the expansion of the malt plant for Rampur Indian Single Malt. After a strong traction in the international markets, the company launched Jaisalmer Indian Craft Gin in India in selected states such as Goa and Delhi. Management is planning to launch it in several other states in coming months.
Supply Chain Management
The company has robust distribution system that enables RKL to ensure availability of products across channels and geographies. It continues to introduce best practices to become more agile such as demand-driven supply chain, total productivity management and six-sigma.
Its products are sold through over 75,000 retail and 8,000 on-premise outlets. Apart from wholesalers, a total of around 300 employees divided into four zones to ensure an adequate on-ground sales and distribution presence across the country.
The company is focused on increasing branding for which it has launched marketing and advertisement campaign with Bollywood stars Tiger Shroff, Jacqueline Fernandez and Kartik Aryan. As a result of these initiatives, the selling and distribution expenses for FY19 have increased by over 20% YoY.
RKL has a distribution agreement with Suntory (Japan) and E.& J.Gallo Winery (USA) for marketing its premium brands in Indian Market.
Spirit Industry in India
Indian spirits industry showed signs of growth in an improved operating environment led by state-wide price increases and favourable policy changes.
As per Euromonitor International, IMFL volume is expected to reach 350 million cases in CY2023. During the CY2019-2023 period, IMFL sales volume is expected to grow at a CAGR of 2.8%. During the same period IMFL industry value is expected to grow by 5.1% making a case for the ongoing premiumisation trend. Overall vodka industry volume is expected to grow by 4.2% CAGR and value by 8.7% during the CY2019-2023 period.
Towards the later part of FY2019, spirits industry experienced raw materials cost pressures with increase in Extra Neutral Alcohol (ENA) price by ~15% and glass bottles prices by ~20%. Change in the government’s policy to promote ethanol blending program resulted in driving the ENA prices higher.
There is huge growing popularity of the spirits among the young generation and also women which will led to its growth curve. Further, RKL is well positioned with the market leading share in its premium brands.
Valuation & Outlook
Near-term outlook remains robust for RKL led by premium product portfolio, strong brand equity, robust manufacturing platform, diverse selling & distribution network, strong parentage, volume growth, its niche segment, premiumisation, increase in price, raw material tailwinds and its various cost optimization measures.
Company’s strategic focus on premium segments are further likely to lead to an improvement in the profitability margins going forward. Moreover, its focus on innovation, R&D strength, inhouse capabilities and customer preferences would add to its overall growth.
Significant improvement in its financial risk profile characterized by enhanced profitability & strengthening of its capital structure and improved liquidity position represents significant growth opportunities for the Company.
We have valued the stock at 19x to FY2021e EPS of INR 22.53 to arrive at a target price of INR 428. This gives an upside potential of 40% with an investment horizon of 9-12 months. We thus maintain a “Strong Buy” rating on the stock.
Radico Khaitan is a great stock to buy now for 40% gain
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