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Radico Khaitan’s 2Q performance was soft but still stronger than industry growth. Liquor industry was impacted by slowdown, flooding, liquidity stress in the trade and stiff RM inflation. We believe these headwinds will moderate in 2H. We value Radico at 22x (45% discount to UNSP) on Sep-21 EPS, arriving at a TP of Rs 498. Maintain BUY.
HIGHLIGHTS OF THE QUARTER
* Radico’s revenues grew by 10% at a time when growth was challenged for the industry (Pernod/UNSP grew by 3%/0% in 2QFY20). Radico’s volumes grew by 11% (exp 9%) led by 11% growth in P&A (15% in 2QFY19; exp 15.5%) and 11% growth in popular (10% in 2QFY19; exp 6.5%). P&A growth was driven by market share gains (Magic Moments) and scaling new launches like 8PM Premium Black Whisky (11 states vs. 8 in 2QFY19). While growth in popular was driven by 8 PM and Old Admiral Brandy. Non-IMFL business (18% revenue mix) de-grew by 11% owing to co’s de-focus on country liquor. We expect IMFL volume growth of 8% over FY19-22E driven by 13/6% growth in P&A/Popular.
* Radico has aggressively spent behind its brands to drive premiumisation and gain market share. Co aims to leverage brand equity of Magic Moments (56% market share in Vodka) by launching more variants (GM accretive) and gaining share in super-premium segment (18-20% share). Radico also plans to launch Jaisalmer Craft Gin (super-premium) in India shortly.
* Gross margins cracked by 304bps vs. exp of 250bps owing to stiff inflation in ENA (25% YoY) and glass bottles (15-20% YoY). We believe the worst is now behind w.r.t. RM pressure and expect inflation to moderate post upcoming harvest. Co has taken 1.75% price hike and is in the process to raise prices by another ~1%.
* Co supported few distributors (Govt controlled and CSD) with additional credit owing to liquidity stress in the trade (similar to peers). As a result, debt rose to Rs 3.5bn (vs. Rs 3bn in Mar-19) instead of gliding on the path of deleveraging. Management does not anticipate any credit risk with these distributors. We expect co to resume deleveraging in 2HFY20 and eventually net cash in FY22E.
During FY17-19, Radico enjoyed an earnings upcycle which is expected to moderate in FY20. However, co is investing in new launches, driving premiumisation and deleveraging B/S which keeps the story alive. Robust cash flow generation over the last 2 years (Rs 4.4bn cumulative FCF) was redeployed to repay debt (Rs 3.5bn in Sep-19 as compared to 7.9bn in Mar-17). We expect deleveraging to sustain, making the co debt free by FY22. We expect the stock to re-rate as premiumisation and deleveraging continues.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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