We interacted with the management of Radico Khaitan to get an outlook for the companyâ€™s IMFL business especially the growth prognosis for premium brands. From a ~10% share of overall volumes in FY10, premium brands (Magic Moments vodka & Morpheus brandy) are likely to raise their share to 19.7% by FY15. Company expects premium brands to post 18-20% annual growth over the next 1-2 years while other main line brands like 8PM whisky are likely to post 6-7% rise in the next fiscal. However, the focus would remain on portfolio premiumization as a driver of margin and profitability given higher EBIDTA/case. Radico expects 100-150bps rise in margin over the next 3 years which in turn would support improvement in return ratios. Given the growth of premium whisky segment, we believe a portfolio of premium brands is necessary to counter sustained cost pressures and Radicoâ€™s premium focus is a step in the right direction. Retain BUY for 9-12 mth target of Rs160.
Premium brands share to rise ~20% by FY15
Premium brands are likely to double their share to 19.7% in next two years from just ~10% in FY10, led by ~17%/30% compounded increase over FY12-15 in the two brands. Overall premium brands portfolio can record a~19% cagr in the next two years. Rest of the mainline brands like 8PM whisky and Old Admiral VSOP brandy are likely to grow at a subdued 6-7% annual pace.
Margin, RoE set to improve; valuations supportive, retain BUY
A better revenue mix and select price hikes would raise margin by ~85bps in the next two years, which in turn would support higher return ratios. We expect company to be FCF positive in the next fiscal as operating cash flow turns around. Stock trades at the lower end of its historic 1-yr fwd EV/EBIDTA range and given the scope of improvement in OPM and return ratios, we believe it deserves a higher multiple; we marginally tweak our EPS estimates but retain BUY for 9-12 month target of Rs160.
|Y/e 31 March (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||20.9||11.9||9.2||10.0|
|yoy growth (%)||(12.6)||28.3||25.3||21.9|
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