Strong margins in challenging demand scenario…
Radico Khaitan reported strong margins in Q1FY21 in spite of a decline in revenues. Net revenues for Q1FY21 declined 34% YoY to |409 crore due to 43% decline in IMFL volumes to 3.54 million cases. Prestige and above segment volumes declined 47% while regular segment volumes declined 41% YoY. Gross margin increased 660 bps YoY to 54.6%.In spite of negative operating leverage, the company reported a 230 bps YoY improvement in EBITDA margin to 18.4%, which restricted the decline in EBITDA to 25%. Consequently, PAT declined 20% YoY to | 44 crore owing to lower tax rate (24%in Q1FY21 vs. 34% in Q1FY20).
Better product/state mix aid improvement in margins
The company is seeing a good recovery as June sales were only down ~10% YoY and the company expects to reach normal revenue trajectory in H2FY21. On profitability front, gross margin expanded owing to combination of factors like better price realisation and favourable state and product mix and price increase in key southern state of Telangana. Benign input cost and higher product realisation are expected to aid in gross margin improvement and stringent cost control and judicious spend on sales promotion will enable the company to improve EBITDA margin over next two years.
New product launches to focus on premiumisation
RKL has an established brand portfolio with brands like Magic Moments vodka (62% share in overall Vodka market) and Morpheus brandy. The company has been constantly launching new products focussed on the prestige and above segment with new product launches like 8PM Premium Black whisky, Jaisalmer Indian Craft gin, Rampur Indian Single Malt, Morpheus Blue Brandy, 1965 rum and Electra in ready to drink category. The company is planning to launch more premium products in the whisky segment post normalisation of the industry scenario, which has been impacted due to Covid-19 pandemic.
Valuation & Outlook
In a tough market scenario, Radico continues to outperform peers. For Q1FY21, the management indicated industry volumes were down more than 50% due to lockdown in April, May, whereas Radico volumes fell 44%. The company’s premiumisation trend continued with Prestige & above share rising to 29% in FY20 from 28.3% in FY19 and over the medium to longer term the company is planning to introduce premium products. The company has constantly reduced debt from | 950 crore in FY16 to | 382 crore in FY20, enabling it to report higher profitability over the last few years. In Q1FY21, RKL further reduced debt by ~ | 120 crore due to strong overdue receivable collection. With continued focus on brand development, newer premium IMFL launches and strong distribution network built over the years, RKL is poised to enhance its financial performance. We maintain our BUY rating on the stock with a revised target price of | 460/share (~19x FY22E EPS).
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