Radico Khaitan Q4: Top line on a steady footing, but input cost risks lurk
– Premium segment volumes grew in excess of 20 percent
– Sharp decline in finance costs helped bottom line
– Increased ad spends to enhance brand visibility– Valuations have turned reasonable, post stock correction
Liquor manufacturer Radico Khaitan reported a steady Q4 as top line and operating profit came in higher at mid-single digits. Overall performance in FY19 was also impressive as revenue and profits increased by 15 percent and 52 percent, respectively.
Quarterly results highlights
– The company recorded revenue of Rs 510 crore in a seasonally weak quarter, a jump of around 6 percent year-on-year (YoY). Continued traction in the premium segment drove the overall growth in top line.
– Overall volume growth for the quarter stood at 6.2 percent on the back of higher sales from the premium category (Prestige and above segment). This segment’s volume stood at 13.8 lakh in January-March, up 22.1 percent. However, this was offset by the regular segment, which saw a muted 1.3 percent increase in volume to 37.6 lakh.
– Richer product mix (higher share from the premium segment) offset the higher raw material costs (ENA as well as glass bottle) and aided the expansion in gross margins. However, increase in selling and distribution expenses (up 24 percent YoY) squeezed the operating margin, which declined to 14 percent in Q4, from 17.3 percent in Q3 FY19.
– EBITDA (Earnings before interest, tax, depreciation and amortisation) came in 7 percent higher in comparison to last year at Rs 72 crore while profit after tax improved 14 percent to Rs 39 crore. Debt repayment led to a significant reduction in interest expenses and helped bottom line.
– Interest expenses for the quarter came in at Rs 7.7 crore compared to Rs 14.8 crore in the corresponding quarter last year. Healthy cash flow from operations has enabled the firm to repay Rs 250 crore of debt over the course of the year. The balance sheet continues to strengthen as the leverage ratio (net Debt/EBITDA) has improved to 0.9x in the period under review, from 2.1x a year ago.
– Benign raw material prices (molasses) have been a key lever for Radico’s earnings growth in the past 12-18 months. The ethanol policy is having an inflationary impact on the raw material cost and poses a threat to its medium-term margins. The near-term margins, however, are expected to remain stable as the company maintains sufficient inventory to meet its production requirements over the next 1-2 quarters.
– The company is focusing on strengthening its brand through extension of distribution network as well as marketing investments. Advertising expenditure surged in FY19 (6.6 percent of net revenue) in comparison to FY18 (4.8 percent) as the company signed endorsement deals with Bollywood stars (Tiger Shroff, Kartik Aryan and Jacqueline Fernandez) to promote its Magic Moments and 8PM brands.
Outlook and recommendation
– The sector continues to expand at a healthy rate as per capita consumption of liquor continues to be on the upswing. Demand prospects seem very exciting from a long-term perspective, but near-term challenges such as excise duty revisions and policy changes cannot be ruled out as the sector continues to be under the regulatory ambit of the government.
– Radico Khaitan has displayed strong earnings growth in the past couple of years. Considering the opportunity size and scope of penetration, the company has the potential to expand at a healthy pace over the next few years. However, we anticipate the pace of earnings to moderate (15 percent +) going forward because of high base and input cost pressures.
– The company offers an interesting investment opportunity at current levels as stock is trading at a FY20 price-earnings multiple of 22x, which is at a steep discount of 50 percent to sector leader – United Spirits. Deleveraging as well as portfolio premiumisation remain the key triggers for growth and improvement on both aspects could narrow its valuation gap with the market leader.
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