CMP Rs117, Target Rs165, Upside 41.1%
We interacted with the management of Radico Khaitan to get a perspective on IMFL growth, especially the trajectory for premium brands. Company expects ‘After Dark’ (premium whisky) to gross ~0.3mn cases in next fiscal while Magic Moments would post a healthy 20% yoy increase in volumes. Morpheus brandy could see about 50% volume surge albeit on a low base. Together these 3 brands would account for ~18% of total volumes next fiscal thereby accelerating portfolio premiumization. Working capital in current year has been impacted due to After Dark roll out needs but company expects respite on the same. ENA prices have declined 7-8% from their December highs and benefit is likely to be visible over next 2-3 quarters. We marginally lower FY13 EPS estimates but retain BUY for 9-mth tgt of Rs165.
Share of premium brands @ 18% of FY13 volumes
Premium brands (Magic Moments, Morpheus brandy and After Dark whisky) are likely to post a combined volume cagr of 29% over FY12-14 driven by robust sales of Magic Moments and launch of After Dark whisky. Rest of the portfolio is likely to clock ~7% cagr over same period which would raise the share of premium brands from 15% in current fiscal to 18%/20% by end of FY13/14. A rising component of higher priced brands would help support margins and improve revenue mix.
Importantly, After Dark would fill up the gap in Radico’s whisky portfolio which hitherto did not have any premium offering. Moreover, the premium end of the whisky market is reportedly growing faster than the mid and low ends which would again help improve overall margin.
Valuation discount wrt historic avg to narrow: retain BUY
Radico is likely to sport a ~11% volume cagr over FY12-14 driven by 29% growth in premium brands; this would help drive a 17% revenue cagr and an even faster ~28% EPS growth. We also factor in margin expansion on account of rising premium brands’ share and lower ENA costs. Stock trades at the lower end of its 1-yr fwd EV/EBIDTA band and we expect the discount wrt historic average to narrow given the robust earnings trajectory. Marginally lower FY13 EPS estimate but retain BUY for 9-mth tgt of Rs165.