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Delivering ahead of expectations

* RDCK reported strong performance with sales/PAT growth of 47%/36% - 15-26% above estimates. Sales grew 47% as volume rose 59% yoy (volume was down 13% qoq but lower vs. peers). Against Q1FY20, sales/volumes were lower by 3%/10% due to lockdown.

* P&A growth was lower at 41% yoy due to the lockdown impact, but overall performance remains ahead of the industry with market share gains in the last three years. Q1 volume growth of 59% was also ahead of the industry’s volume growth of 52%.

* Management indicated a stable margin outlook, with moderate inflation expected in key inputs, particularly in glass and packaging materials. With the reopening of on-premise, the company expects an improvement in the coming quarters due to better product mix.

* Delivery on growth and execution remains ahead of peers/our expectations and should reduce the valuation discount vs. larger peers. The appointment of noted audit firm Walker & Chandiok is a positive and boosts investor confidence. We raise FY22-24E EPS by 2- 5%. Maintain Buy with a revised TP of Rs1,000, now valuing RDCK at 33x Sept-23E EPS.

Sales/volume beat estimates with 47%/59% growth:

IMFL industry volumes grew 52% while Radico’s growth was higher at 59% to 5.6mn cases (domestic growth: ~55%). Volumes in P&A/Regular grew 41%/67%. While the quarter was impacted by Covid, volumes picked up in mid-June and have been growing MoM, led by P&A (double-digit growth in July). Exports grew in double-digits and contributed to 7% of the turnover.

Management has increased focus on the whiskey segment, where it currently has a much lower market share. It plans to launch two super-premium whiskies and one super-premium vodka in the next 12 months. Besides scaling up new launches, the company is also focusing on stepping up its presence in the key markets - UP, AP, Karnataka and Telangana.

Margin outlook stable; working capital efficiencies sustain:

Gross margin declined 710bps due to high comparables, unfavorable product mix and higher input prices. The sequential decline was only 90bps, impacted by the weak product mix. EBITDA grew 22% with margin decline being lower at 320bps, as lower employee and other overhead costs mitigated the gross margin impact.

Management expects raw material trends to remain stable, with moderate inflation in glass and packaging. It expects gross margin to return to 50-51% in the near term. RDCK expects ROCE to improve to 20-25%. It targets to achieve a debtfree position by FY23 and will look at raising the dividend/buyback given healthy cash flows.

Raise estimates by 2-5%; consistent outperformance offers further re-rating potential; Buy: With consistent outperformance on the growth and execution fronts, we expect the valuation discount vs. larger peers to reduce further. The appointment of renowned audit firm Walker & Chandiok is a positive and should increase investor confidence. Maintain Buy with a revised TP of Rs1,000 (Rs830 earlier), now valuing RDCK at 33x Sept-23E EPS.

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