4QFY2016 Result Update | Breweries & Distilleries

May 12, 2016

Radico Khaitan

BUY

CMP

`92

Performance Highlights

Target Price

`125

Quarterly Data

Investment Period

12 months

(` cr)

4QFY16 4QFY15

% yoy 3QFY16

% qoq

Revenue

378

343

10.0

401

(5.8)

EBITDA

17.0

33.6

Stock Info

Margin (%)

10.3

9.7

61bp

14.6

(430bp)

Sector

Breweries & Distilleries

Adj. PAT

(0.8)

(41.8)

Market Cap (` cr)

1,221

Source: Company, Angel Research

Net Debt (` cr)

742

For 4QFY2016, Radico Khaitan (RKL) outperformed our estimates on the top-line

Beta

0.8

front although the bottom-line came in flat yoy. The company’s top-line grew by

52 Week High / Low

131 / 78

~10% to `378cr on back of higher sales of premium products while the bottom-

Avg. Daily Volume

71,845

line came in flat on a yoy basis at `15cr due to higher interest costs and taxes.

Face Value (`)

During the quarter the Karnataka government gave a price increase (`35/case) to

BSE Sensex

25,597

the company which would be effective from July 1, 2016 and would contribute

Nifty

7,849

towards margin improvement. Further, the government of Uttar Pradesh has

reduced the excise duty on Indian made foreign liquor (IMFL) by 20-25% with

Reuters Code

RADC.BO

effect from April 1, 2016, which is expected to result in an increase in IMFL sales

Bloomberg Code

RDCK@IN

volume in the state going forward. These policy actions should significantly benefit

the company as the two states account for ~20% of its volumes.

Shareholding Pattern (%)

We believe that the company has the potential to perform better on the bottom-

Promoters

40.5

line front on back of (a) improvement in volume growth (b) higher sales of

MF / Banks / Indian Fls

13.3

premium products (c) anticipation of better price hikes and (d) gradual reduction

in debt which should lead to significant savings in interest costs. Hence, we

FII / NRIs / OCBs

21.1

recommend a Buy rating on the stock with a target price of `125.

Indian Public / Others

25.1

Top-line grew ~10% on back of higher sales in premium products: Despite of

overall volumes declining by 4.5% during the quarter, the company’s top-line was

Abs. (%)

3m 1yr 3yr

able to report a ~10% yoy growth to `378cr (our estimate was of `351cr), mainly

Sensex

11.4

(4.8)

30.0

due to the company’s shift in focus towards prestige & above products over higher

RKL

(4.9)

3.8

(21.6)

volume mass market products. During the quarter, prestige & above brands’

volume grew ~7% yoy while their contribution to total IMFL volumes increased

3-year price chart

from 19.5% in 4QFY2015 to 22% in 4QFY2016.

180

OPM improved but PAT was flat yoy: On the operating front, the company’s

160

margin improved by 61bp yoy to 10.3%, primarily on account of lower selling &

140

120

distribution expenses and other expenditure. However, raw material cost as a

100

percentage of sales increased by 331bp yoy. The company reported a net profit

of `14.8cr, which is flat yoy, on account of higher interest costs and taxes.

Key financials

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

Net sales

1,488

1,543

1,659

1,802

Source: Company, Angel Research

% chg

2.5

3.7

7.5

8.6

Net profit

% chg

(5.1)

13.7

9.6

16.4

EBITDA margin (%)

11.4

12.6

13.0

13.2

EPS (`)

5.1

5.8

6.3

7.4

P/E (x)

18.1

15.9

14.5

12.5

P/BV (x)

1.5

1.4

1.3

1.2

RoE (%)

8.1

8.5

8.6

9.3

RoCE (%)

7.8

8.8

9.6

10.4

Amarjeet S Maurya

EV/Sales (x)

1.3

1.2

1.1

022-39357800 Ext: 6831

EV/EBITDA (x)

11.5

10.1

9.0

8.1

[email protected]

Source: Company, Angel Research, Note: CMP as of May 11, 2016

Please refer to important disclosures at the end of this report

Radico Khaitan | 4QFY2016 Result Update

Exhibit 1: Quarterly performance

Y/E March (` cr)

4QFY16

4QFY15

% yoy

3QFY16

% qoq

FY2016

FY2015

% chg

Net Sales

378

343

10.0

401

(5.8)

1,543

1,488

3.7

Consumption of RM

183

155

18.0

179

2.5

721

720

0.1

(% of Sales)

48.5

45.2

44.6

46.7

48.3

Staff Costs

21.9

16.3

131

120

9.6

(% of Sales)

8.9

8.1

7.2

8.5

8.0

Selling & Administrative Exps.

(3.4)

71.4

(9.2)

273

284

(3.8)

(% of Sales)

17.2

19.5

17.8

17.7

19.1

Operating Expense

(5.2)

(9.8)

224

195

14.7

(% of Sales)

15.1

17.6

15.8

14.5

13.1

Total Expenditure

339

310

9.2

342

(1.0)

1,348

1,318

2.3

Operating Profit

17.0

(33.6)

195

170

14.2

OPM (%)

10.3

9.7

14.6

12.6

11.4

Interest

6.0

16.8

(5.8)

Depreciation

24.3

3.4

5.3

Other Income

14.8

14.9

(1.1)

6.8

116.5

(15.2)

PBT

11.8

(43.1)

108

23.6

(% of Sales)

5.4

5.3

8.9

7.0

5.9

Provision for Taxation

70.1

(46.2)

58.1

(% of PBT)

27.2

17.9

28.8

28.6

22.4

Minority Interest

Reported PAT

(0.8)

(41.8)

13.7

PATM

3.9

4.3

6.3

5.0

4.5

Source: Company, Angel Research

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Top-line grew

~10% on back of higher sales in premium

products

Despite of overall volumes declining by 4.5% during the quarter, the company’s

top-line was able to report a ~10% yoy growth to `378cr (our estimate was of

`351cr), mainly due to the company’s shift in focus towards prestige & above

products over higher volume mass market products. During the quarter, prestige &

above brands’ volume grew ~7% yoy while their contribution to total IMFL volumes

increased from 19.5% in 4QFY2015 to 22% in 4QFY2016.

Exhibit 2: Top-line growth trend

450

400

350

300

250

200

(5)

150

(10)

100

(15)

(20)

Net sales

QoQ growth (%)

Source: Company, Angel Research

Operating margin expansion due to lower selling & distribution

and other expenses

On the operating front, the company’s margin improved by 61bp yoy to 10.3%,

primarily on account of lower selling & distribution expenses and other

expenditure. However, raw material cost as a percentage of sales increased by

331bp yoy.

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Investment rationale

Pricing environment expected to be favorable for IMFL industry

Our interaction with liquor companies suggests that prices have now bottomed out.

We expect the industry’s pricing environment to likely get better going ahead

mainly because there has not been any significant price hike in products in recent

times due to delay in approval by various state governments. Hence, the industry is

now expecting a significant price hike in the coming financial year. Also, the

industry leader United Spirits has been facing pressure at the operating level and

the company has a huge debt on its balance sheet. Hence we believe that the

company’s new Management would shift focus on profitability over volume growth,

which in turn, would lead to increased scope for other liquor companies to hike

prices.

Higher proportion of premium products in volume mix to drive

profitability

In the IMFL segment, more than 20% of the company’s volumes come from

prestige and above products, which is a high margin business, and the balance

volumes come from regular and others brands. Since the last eight years, the

company’s prestige and above brands’ volume has reported a CAGR of ~23%

and their share in the product mix has increased from 7.9% in FY2009 to 24% in

FY2016. We expect volume contribution of prestige and above products in the

IMFL segment to increase further on back of higher ad spend. The company has

roped in celebrity Hrithik Roshan as its brand ambassador. Also, the company’s

presence in the prestige Vodka segment is under penetrated which leaves scope

for growth. Thus, this would improve the overall margin for the company and

result in higher profitability.

Wide distribution network with strong brands

RKL has a strong sales and distribution network with a presence in retail and off-

trade outlets in the relevant segments in different parts of India. Currently, the

company is selling its products through over 45,000 retail outlets and over 5,000

on-premise outlets. Apart from wholesalers, a total of around 300 employees

divided into four zones, each headed by regional profit centre head, ensure an

adequate on-the-ground sales and distribution presence across the country.

The company has strong brands likes Magic Moments Vodka, Morpheus Brandy,

Verve Vodka, Florence Brandy, After Dark Whisky etc.

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Outlook and valuation

The company has not performed well in the last two years due to increasing raw

material costs (ENA is a key raw material) and with it not receiving significant price

hikes from various states. We expect the company to perform well going forward in

anticipation of better price hikes and healthy sales growth in premium products.

This would result in an overall improvement in the operating margin of the

company. We expect the company to report strong earnings CAGR of ~13% to

~`98cr over FY2016-18E. Hence, we recommend a Buy rating on the stock with a

target price of `125.

Exhibit 5: One-year forward P/E band

Series1

10.0 X

15.0 X

20.0 X

25.0 X

30.0 X

200

180

160

140

120

100

Source: Company, Angel Research

Company Background

Radico Khaitan Ltd is an India-based spirits company engaged in the manufacture

of liquor. The company has three distilleries and one JV with total capacity of

150mn litres and 33 bottling units spread across the country. The company is one

of the largest providers of branded IMFL to the Canteen Stores Department (CSD),

which has significant entry barriers. RKL's brands include After Dark Whisky, Magic

Moments Vodka, Morpheus Brandy, Contessa Rum, Old Admiral Brandy and 8

PM. Its liquor business also includes rectified spirit and country liquor. Its alcohol

products include rectified spirit, silent spirit, cane juice spirit, malt spirit, grain spirit

and ethanol. The company’s PET division produces a range of PET bottles and jars

for industries such as pharmaceutical, cosmetics, home and personal care, edible

oil and confectionery.

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Profit & Loss Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Total operating income

1,258

1,452

1,488

1,543

1,659

1,802

% chg

10.0

15.4

2.5

3.7

7.5

8.6

Total Expenditure

1,074

1,258

1,318

1,348

1,443

1,564

Raw Material Cost

585

653

717

721

771

834

Personnel Expenses

107

131

129

141

Selling & Administrative Exp.

235

286

284

273

290

315

Others Expenses

176

226

210

224

252

274

EBITDA

184

193

170

195

216

238

% chg

17.7

5.0

(11.9)

14.2

11.0

10.3

(% of Net Sales)

14.6

13.3

11.4

12.6

13.0

13.2

Depreciation& Amortisation

EBIT

149

155

132

154

173

194

% chg

20.4

3.9

(14.6)

16.8

12.3

11.7

(% of Net Sales)

11.8

10.7

8.9

10.0

10.4

10.7

Interest & other Charges

Other Income

(% of PBT)

27.8

34.3

51.6

35.4

32.3

27.7

Share in profit of Associates

Recurring PBT

109

106

108

124

144

% chg

25.7

(2.6)

(18.1)

23.6

15.1

16.4

Prior Period & Extra. Exp./(Inc.)

PBT (reported)

109

106

108

124

144

Tax

(% of PBT)

29.3

33.0

22.4

28.6

32.0

PAT (reported)

% chg

21.4

(7.8)

(5.1)

13.7

9.6

16.4

(% of Net Sales)

6.1

4.9

4.5

5.0

5.1

5.4

Basic EPS (`)

5.8

5.4

5.1

5.8

6.3

7.4

Fully Diluted EPS (`)

5.8

5.4

5.1

5.8

6.3

7.4

% chg

21.2

(7.9)

(5.1)

13.7

9.6

16.4

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Balance Sheet

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

702

754

812

877

949

1,032

Shareholders Funds

728

781

839

904

976

1,059

Total Loans

768

904

849

851

830

810

Deferred Tax Liability

Total Liabilities

1,566

1,770

1,773

1,840

1,890

1,954

APPLICATION OF FUNDS

Gross Block

744

821

831

851

871

891

Less: Acc. Depreciation

214

250

288

329

371

416

Net Block

529

571

542

522

499

475

Capital Work-in-Progress

Investments

109

108

Current Assets

1,161

1,330

1,379

1,471

1,560

1,684

Inventories

186

211

212

220

232

252

Sundry Debtors

435

523

538

562

604

657

Cash

Loans & Advances

314

441

470

492

518

562

Other Assets

209

139

149

185

192

198

Current liabilities

249

262

270

274

290

326

Net Current Assets

912

1,067

1,109

1,197

1,270

1,358

Deferred Tax Asset

Mis. Exp. not written off

Total Assets

1,566

1,770

1,773

1,840

1,890

1,954

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Cashflow Statement

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

109

106

108

124

144

Depreciation

Change in Working Capital

(242)

(53)

(47)

(87)

(70)

(87)

Interest / Dividend (Net)

Direct taxes paid

(23)

(26)

(19)

(31)

(40)

(46)

Others

Cash Flow from Operations

(66)

137

149

115

146

145

(Inc.)/ Dec. in Fixed Assets

(141)

(20)

(Inc.)/ Dec. in Investments

(3)

(0)

(10)

Cash Flow from Investing

(141)

0.2

(20)

Issue of Equity

Inc./(Dec.) in loans

(55)

(21)

(20)

Dividend Paid (Incl. Tax)

(12)

(10)

(12)

(13)

(15)

Interest / Dividend (Net)

(71)

(84)

(90)

(85)

(89)

Cash Flow from Financing

(154)

(94)

(123)

(124)

Inc./(Dec.) in Cash

(5)

(1)

(5)

Opening Cash balances

Closing Cash balances

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

15.8

17.2

18.1

15.9

14.5

12.5

P/CEPS

10.9

11.1

11.6

10.4

9.6

8.6

P/BV

1.7

1.6

1.5

1.4

1.3

1.2

Dividend yield (%)

0.9

0.8

0.9

1.0

1.2

EV/Sales

1.5

1.4

1.3

1.2

1.1

EV/EBITDA

10.1

10.4

11.5

10.1

9.0

8.1

EV / Total Assets

1.0

0.9

0.8

Per Share Data (`)

EPS (Basic)

5.8

5.4

5.1

5.8

6.3

7.4

EPS (fully diluted)

5.8

5.4

5.1

5.8

6.3

7.4

Cash EPS

8.5

8.3

8.0

8.8

9.5

10.7

DPS

0.8

0.9

1.0

1.1

Book Value

54.8

58.7

63.0

67.9

73.3

79.6

Returns (%)

ROCE

10.0

9.2

7.8

8.8

9.6

10.4

Angel ROIC (Pre-tax)

10.9

9.9

8.4

9.4

10.2

11.0

ROE

10.6

9.1

8.1

8.5

8.6

9.3

Turnover ratios (x)

Asset Turnover (Gross Block)

2.4

2.5

2.7

3.0

3.3

3.8

Inventory / Sales (days)

Receivables (days)

126

132

133

Payables (days)

WC cycle (ex-cash) (days)

144

152

151

153

May 12, 2016

Radico Khaitan | 4QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with

CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is

a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

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While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

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Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Radico Khaitan

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15%)

May 12, 2016