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New launches, back-end integration to revive margins

About the stock: Radico Khaitan (earlier Rampur Distillery Company) is among the largest manufacturers of Indian made foreign liquor (IMFL) in India. The company is also a supplier of Indian made Indian liquor (IMIL) and bulk alcohol in India.

* IMFL segment comprises ~80% of consolidated revenues. The rest is contributed by IMIL and bulk alcohol

* P&A volumes contribute 30% to overall IMFL volumes (rest by popular)

Q4FY22 Results: Margins were impacted due to a sharp rise in input costs.

* Net revenues grew 18% YoY to | 813 crore, IMFL volume grew 16% YoY

* EBITDA de-grew 21% to | 80 crore with margins at 9.8% (vs. 14.7% in Q4FY21)

* Subsequently, PAT de-grew 32% to | 50 crore

What should investors do? In spite of the current inflationary environment being faced by the liquor sector, Radico has been steadily building up its premium portfolio (31% of volumes). Also, with its vertically integrated model and price hikes in a few states, it remains resilient in the medium to long term.

* We remain positive on the stock and maintain our BUY recommendation

Target Price & Valuation: We value the stock at | 960 i.e. 33x P/E on FY23E EPS

Key triggers for future price performance: Newer capacities would ensure enough availability of grain based ENA to address Radico’s higher growth expectations (expect margins to remain at elevated levels).

* Pan-India launch of new super premium spirits and gaining favourable foothold in the fast growing segment

* Continued launches in premium whisky space

* Nearing net-debt free status with return ratios reaching 20%+ levels

Alternate Stock Idea: Besides Radico Khaitan, we remain positive on United Spirits.

* United Spirits (USL) is India’s leading alcoholic beverage company and subsidiary of global leader Diageo plc. It manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan

* We have a BUY rating on the stock, with a target price of | 960

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