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Resilient off-trade and margin performance

Strong Prestige & Above segment and a resilient off-trade channel aided volume print of +8% in 4QFY21. Restrictions in on-trade and issues in West Bengal and Andhra Pradesh continued to impact. Favourable gross margins, costs controls and operating leverage helped deliver a superior margin performance (EBITDA margin up 490 bps YoY to 18.5%). Improved cash generation aided net debt reduction to Rs5bn. OCF/FCF generation in FY21 was Rs17.3bn / Rs16.2bn (highest in many years).

New distribution model (online ordering and home delivery), if sustained, can be a structural positive for the industry. Hina Nagarajan succeeds Anand Kripalu as CEO effective July 1 – some investors view it as a potential stock re-rating event (See report Leadership matters). Retain ADD; TP Rs650.

* Decent Q4 recovery amidst the constraints:

Revenue / EBITDA / PAT was up 12% / 52% / 125%; 2-year revenue CAGR was down 0.6%. Underlying sales (exbulk Scotch sale in base) was up 16%. Volume growth of 8% (2-year CAGR still down 3%) was on the back of resilience in off-trade with on-trade continuing to see weakness. However, contraction of Andhra Pradesh business continued to impact volumes. Prestige & Above volumes were up 19% (2-year CAGR: -2%) and Popular was down 2% (2-year CAGR of -4%). Recovery in the scotch portfolio benefitted the P&A segment while popular portfolio was impacted by weak performance particularly in West Bengal (higher taxes).

* EBITDA margin expands to 18.5%:

Gross margin expanded 180bps to 43.9% on the back of (1) superior product and state mix, (2) benign commodity prices, and (3) overall productivity focus. Reported EBITDA margin expanded 490 bps to 18.5%. This was driven by operating leverage benefit (other opex -170bps and largely flat staff costs as % of revenues); cut of 15% in ad-spends also aided margin expansion. Ad-spends in the previous two quarters were high to support renovation of McDowell’s No. 1 and Royal Challenge Whisky.

* Other highlights:

Cash generation improved driven by increase in other liabilities and lower capex intensity (down 33% YoY). OCF / FCF grew 2.6x / 3.5x to Rs17.3bn / Rs16.2bn. Cash was utilised towards repayment of short-term borrowings (net debt is down to only Rs5bn).

* Valuation and risks:

We largely maintain our earnings estimate; modelling revenue / EBITDA / PAT CAGR of 16% / 39% / 65% over FY21-23E. Maintain ADD with a DCF-based revised target price of Rs 650. At our target price, the stock will trade at 41x P/E multiple Mar-23E. Key downside risks are significant downtrading due to tax hikes, continued weakness in on-trade due to operating restrictions and a potential ban of spirits in states.

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