Growing faster than peers
* RDCK’s performance was ahead of expectations, with sales growing 11% and EBITDA/PBT growing 24%/37%. IMFL volumes grew 5% despite industry decline, led by market share gains, stronger recovery in core states and sharp increase in exports.
* Volume outperformance is likely to continue with market share gains and faster recovery in key states. The reopening of on-trade, recovery in CSD and further unlocking across states should drive higher volume growth in coming quarters.
* In our view, lower ENA prices should continue to offer margin gains ahead. Debt reduction has been impressive at Rs1.3bn in H1FY21, and RDCK remains on track to become net debt free by FY22E. Further reduction in working capital and better cash flows should result in an increase in dividend payouts going ahead.
* We like RDCK given its strong positioning in the high-growth Vodka segment and increasing success in new launches. The company’s strong balance sheet as well as improving cash flows and ROEs offer re-rating potential. Maintain Buy with a TP of Rs600.
Volume growth significantly ahead of the industry: IMFL volumes grew 5%, with Regular/P&A growing 5%/4%. Domestic volumes were flat vs. industry decline of 9%. Exports grew 60-65% in volume terms and now contribute ~8% of volumes. Industry growth remained muted and disproportionate across states. Uttaranchal, Karnataka, Uttar Pradesh and Telangana have recovered to pre-Covid levels and are recording growth, while Kerala, Maharashtra, Assam, Pondicherry, Andhra Pradesh and Rajasthan are still lower although we see a gradual improvement. With the reopening of on-trade, upcoming festive season and easing in lockdown rules, management expects the industry to fully recover by Q4FY21 and be on a growth curve from Q1FY22. The outlook on exports remains positive.
Margin expansion to continue; debt reduction on track: Gross margin expanded 90bps, driven by lower ENA prices and better realization from a favorable state mix and a robust increase in high-margin exports. EBITDA margin expanded 180bps, driven by cost optimization. Ad spends were down 24% and were lower at 6% of sales vs. 7% of sales last year. Gross margin outlook remains positive with ENA prices expected to remain benign. Debt was reduced to Rs2.5bn from Rs3.8bn in Mar’20. The company expects to be debt-free by FY22 and raise dividend and/or consider buyback after that.
Consistent outperformance; maintain Buy: RDCK offers stronger growth outlook within the alcobev space with improving cash flows/ROCE. Valuations at 20x FY22E EPS appear attractive given 19% earnings CAGR over FY22-23. We maintain Buy rating with a TP of Rs600, valuing RDCK at 25x Sept-22E EPS.
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