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Margin miss drives earnings cut; downgrade to Hold

RDCK’s Q3 earnings came in 4-5% below our estimates due to higher cost pressures. Net sales increased by 12% to Rs7.7bn, in line with estimates, led by 8% volume growth. Gross/EBITDA margins declined 460bps/250bps

P&A growth momentum was intact, with sales/volume growth of 22%/18%, increasing its contribution to 55% of IMFL sales. Popular growth was slow at 3%. Management continues to focus on P&A and plans to invest for growth ahead.

RDCK will incur a capex of Rs7.4bn to meet its growing requirement for grain spirit in UP, addressing the shift to grain based country liquor. The capex will also help RDCK meet growing demand for P&A segment and increase in-house ENA production, leading to RM cost savings. RDCK expects the project to add ~Rs1.5bn to EBITDA and generate 20%+ ROCE.

Due to margin pressures, we cut FY22E/FY23E EPS by 6-11% and lower FY24E EPS by 3%, factoring in generous savings from capex. After strong re-rating, near-term catalysts appear low. Downgrade to Hold with a revised TP of Rs1,050 (from Rs1,170). We now value RDCK at 31x Mar’24 EPS (vs. 35x Dec’23), factoring in high COE and ROIC dilution

P&A sales growth of 21% drives overall sales growth: Total sales grew by 12% to Rs7.7bn, led by strong 22% growth in P&A, increasing its sales/volume contribution within IMFL to 55.5%/34% vs. 51.5%/30.8% in Q3FY21. The Popular segment recorded muted growth of 3% in sales and volumes, whereas the non-IMFL segment posted 10% sales growth. P&A momentum has been strong, indicating market share gains. 8PM Black has crossed a monthly run rate of 200,000 cases, while 8PM family crossed a monthly run rate of 1.1mn cases. RDCK introduced Rampur Single malt and Jaisalmer Craft Gin in CSD and received its first order in Q3. It plans to introduce them in more markets with increased capacity from FY24. Exports remained impacted but should recover from FY23

Margin pressure continues to impact earnings: Gross margins declined 460bps on account of high input prices. EBITDA fell 4% with a margin decline of 250bps, mitigated by lower selling expenses (down 7%). Other overheads increased by 14%. Debt was down 47% yoy, driving a 42% decline in interest expenses.

Capex of Rs7.4bn announced, expected to be return accretive with 20%+ ROCE: Capex to be incurred towards: 1) converting the existing Rampur plant into dual feed. This will increase grain capacity and help address the shift to grain-based country liquor and protect its volumes/margins in UP; 2) a greenfield project (Rs5.5bn) in Sitapur (UP), which will include grain ENA capacity of 330 KLPD (~120mn litres), malt maturation hall, gin distillation and 10mn cases bottling plant. RDCK will utilize ~40% of this capacity for in-house consumption in year 1, replacing external procurement and meeting growing demand in later years. Extra ENA capacity will be sold in the market. It expects ~Rs1.5bn addition to EBITDA post the capex. Debt is likely to peak at Rs6bn in FY23 and will be debt free by FY25.

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