Recommendation From Breweries & Distilleries Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year
RADICO KHAITAN
GRAB THIS STOCK FOR A SPIRITED PERFORMANCE
HERE IS WHY
Strengthening Balance Sheet
Product portfolio expansion
Prices hiked to offset rise in input cost
Radico Khaitan Ltd. (RKL) is a manufacturer of Indian Made Foreign Liquor (IMFL) in India. It developed its entire brand portfolio organically. RKL is one of the largest providers of branded IMFL to the Canteen Stores Department, which has significant business barriers to entry. Currently, it exports its products to over 85 countries. The company has a total capacity of over 157 mn litres and operates 28 bottling units. The company's brand portfolio includes After Dark whisky, Contessa rum, Magic Moments vodka, Morpheus brandy, Old Admiral brandy and 8 PM whisky. The company operates its business in two categories, ‘prestige & above’ and ‘regular & others’.
On a consolidated basis, the total income from operations rose by 26.55 per cent to Rs2677.07 crore in Q1FY20 from Rs2115.28 crore in Q1FY19. The EBITDA grew by 9.3 per cent to Rs98.94 crore in Q1FY20 from Rs90.56 crore in Q1FY19. EBITDA margin stood at 15.9 per cent in June quarter of FY20 as against 17.5 per cent in the same quarter of FY19. Pressure on margin is observed due to increased input costs. The introduction of ethanol blending policy led to increase in prices of extra neutral alcohol (ENA) by 15 per cent and increased prices of glass bottles led to expansion of input cost. Net profit climbed 12.6 per cent to Rs294.59 crore in Q1FY20 from Rs261.6 crore in Q1FY19 due to volume growth as well as price hikes in Rajasthan, Maharashtra and Tamil Nadu. RKL recorded total volume growth of 12 per cent and 16 per cent volume growth was recorded in prestige and above category.
In the June quarter, the Central Pollution Control Board allowed Radico Khaitan to restore capacity of its molasses plant from 77 KLD to 200 KLD. CPCB, which had conducted an inspection of its molasses plant, found the company compliant with the additional requirements for its zero liquid discharge system. Rapid urbanisation, rising affluence and changing consumption patterns towards higher quality and lifestyle products are the key growth drivers for the growth in the Indian consumer market. India has a young demographic profile with a median age of 28 years and around 67% of the population is within the legal drinking age. These two demographic indicators represent significant growth opportunities.
The company is continuously deleveraging its balance sheet and it is expected that it will be completely debt-free in the coming one-and-half years. RKL is also planning to launch two new premium brands. IMFL holds 80 per cent share in the revenue of RKL and it is trying to increase that share. Only 4.55 per cent of promoters' holding was pledged because of some business purpose. The demand prospects seem exciting from a long term perspective. The management of RKL is confident that the takeover of retail liquor business by Andhra Pradesh government will not impact the financial numbers of RKL. The strategy of portfolio expansion and more focus on premium segment will help RKL to improve its earnings. By virtue of these factors, we recommend our readerinvestors to BUY this stock.
