Published on 12/01/2018 3:23:40 PM | Source: Kotak Securities Ltd

Accumulate Radico Khaitan Ltd For Target Rs.320.00 - Kotak Sec

Posted in | #Kotak Securities Ltd #Broking Firm Views Report #Radico Khaitan Ltd #Beverages and Distilleries


Radico Khaitan Ltd (RKL) is expected to be a major beneficiary of decline in molasses prices. Molasses comprises of over 20% of its raw material cost and ~8% of its net sales. As per news reports, molasses prices have declined by upto 90% in the past 3-4 months. As per management, the prices may remain lower than its historical average in coming quarters. We have assumed 150-200 bps improvement in EBITDA margins assuming average prices to be at 25-35% lower i.e. ~Rs 250-300 per quintal for next 1-2 years Vs current ~Rs 40 per quintal. Further, price hike received in southern states like Kerala, Telangana, etc will also strengthen its margins. RKL has witnessed improvement in volume trends with Prestige segment volume growth of 6.5% yoy and regular segment volume growth of 3.5% yoy in Q2FY18. The volume growth is expected to revive in coming quarters, as the impact of highway liquor sale ban started normalizing post Supreme Court's clarification. The company aims for lower single digit growth in regular segment and high single digit growth (8-10%) in prestige and above segment in the longer run. We have upgraded our earning's estimates for FY18E and FY19E by 3.5% and 18.8% respectively factoring in lower raw material prices and introduced FY20 estimates. We maintain Accumulate rating on the stock with revised target price of Rs 320 (Vs Rs 236 earlier), as we roll forward our valuation multiple to FY20E.

Lower molasses prices positive for RKL

Molasses is an important raw material for IMFL players like RKL who are primarily in spirits segment. RKL uses both grain and molasses based ENA (extra natural alcohol) for manufacturing its products. Molasses comprises over 20% of its raw material cost and ~8% of its net sales. As per news reports, molasses prices have declined significantly in the past 3-4 months on robust output of sugarcane. As per news reports, the molasses prices in UP has crashed to the extent of 90% to as low as Rs 40 per quintal in recent time (Vs ~Rs 400 per quintal at the beginning of the year). As per management, the prices may remain lower than its historical average in coming quarters. Even if molasses prices remain at 50% discount to its average, this will have 300-400 bps positive impact on RKL's EBITDA. On a conservative basis, we have assumed further improvement of 150- 200 bps in EBITDA margins assuming average prices to be at 25-35% lower (i.e. ~Rs 250-300 per quintal for next 1-2 years).

Outlook and valuation

The management has maintained positive outlook on volume growth for H2FY18 along with improvement in margins led by increasing focus on prestige and above segment, lower raw material prices and price increase in southern states. We have upgraded our earning's estimates for FY18E and FY19E by 3.5% and 18.8% respectively factoring in lower raw material prices. We have introduced FY20E estimates assuming 10% volume growth in Prestige and above segment and 4% in regular segment. The stock is trading at PE of 24.3x/20.3x on FY19E/ FY20E EPS of Rs 11.7/14 respectively. We maintain Accumulate rating on the stock with revised target price of Rs 320 (Vs Rs 236) as we roll forward our valuation multiple to FY20E and values the stock at 23x FY20E EPS.

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