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Double-digit volume growth continues

Premiumisation drives growth  

Radico Khaitan (RDCK IN) posted yet another strong quarter, with 20.1% YoY volume growth in prestige & above (P&A), led by: 1) adoption of luxury portfolio and 2) healthy growth in existing brands (lower prestige segment). RDCK continues to drive a wide portfolio of premium brands across various categories of spirits. Brands such as Rampur Single Malt, Jaisalmer Gin, Royal Ranthambore, 1965 Rum and 8PM Black have paved way for strong consistent growth in the luxury/P&A segment, which also propped realisation growth as product mix change was a major driver. Pressures persist in the regular segment, as its volumes declined 11.6% YoY, due to a deliberate attempt by the management to scale down volumes in order to avoid the hit from lower margin and no price hikes in some states. Expect this segment to bounce back, near-to-medium term with volume growth of 5-6% YoY. Going ahead, drivers for P&A growth are launches of existing luxury brands in more states and launch of more new brands in the portfolio.

EBITDA margin hit by high grain prices

Gross margin for RDCK grew 52bps YoY, but was 230bps lower QoQ at 41.8%, as grain prices increased sharply hitting overall profitability. Backward integration measures have started, and the management expects to use entire ENA produced for captive use over a period of next three years. We continue to maintain our view that with cool off in grain prices, EBITDA margin could potentially see an uptick by 300-350bps in the medium term. Further, higher growth in the luxury portfolio too is a driver for better profitability overall.

Valuations: Maintain Accumulate; TP raised to INR 1,900

RDCK’s revenue contribution from P&A (as % of IMFL revenue) may grow to 75% in FY26E (66% in 9MFY24; 52% in FY22), which may help command better valuations. Higher revenue contribution from P&A may also drive better realisations and in turn improve EBITDA margin. We believe this will potentially take RDCK closer to larger peer UNSP, which saw 85% revenue contribution from P&A in 9MFY24. We up FY25E/26E earnings estimate 16.8%/11.0%, factoring in: 1) sale of extra neutral alcohol (ENA) externally, near term, which may be phased off, medium-to-long term, 2) higher revenue from country liquor due to volume (Q3 volume up 31% YoY) and price increase and 3) higher realisation growth in P&A. We roll forward to March-25E TP and retain Accumulate with higher TP of INR 1,900 on 42x one year forward P/E.

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