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Radico Khaitan, a leading producer of Indian Made Foreign Liquor, has exceeded expectations in Q3, showing a 29.1% YoY net revenue growth. The notable growth came from The Prestige & Above segment, which saw a 29.1% YoY increase and a remarkable 174% YoY growth in the non-IMFL segment. This was driven by strong performance in the CL segment with price hikes (~60-65%) and bulk alcohol sales from the newly established Sitapur plant. Despite challenges in commodity prices, the company maintained robust gross margins by strategic pricing and capitalizing on premiumization trends. With current debt at Rs. 669.5 crores in Q3FY24, Radico Khaitan aims to achieve a debt-free status by FY26. The company plans to continue making prudent marketing investments in core brands and new launches to sustain growth and market share. While we are positive about the company's future success, caution regarding valuations leads us to recommend a "HOLD" rating.

Improved P&A movement: In Q3FY24, there was a strong performance, highlighted by a remarkable 29.1% YoY growth in the Prestige & Above category brands. Volume in the Prestige & Above category surged by 20.2%. The significant increase in Non-IMFL revenue (174% YoY) was driven by higher volumes of country liquor from the Sitapur bottling plant and the implementation of price hikes from April 1, 2023. It's notable that the contribution of the Prestige & Above category to IMFL volume rose from 42.4% in Q3FY2023 to 49.9% in Q3FY24.

Healthy Margins: The Gross Profit has shown impressive growth with a substantial 46.7% YoY increase in gross margins, reaching 41.8% in Q3FY2024. This notable improvement is attributed to price hikes and the ongoing premiumization trend in the Indian Made Foreign Liquor (IMFL) sector, along with upward price adjustments in the Country Liquor business. Despite challenges like commodity inflation in Extra Neutral Alcohol (ENA) and grain prices, the company has successfully maintained Gross Margins on a quarter-on-quarter basis. While some packaging materials have experienced recent price softening, vigilance remains high, particularly regarding ENA and glass bottles, due to persistent volatility. With current net debt at Rs. 669.5 crores in Q3FY24, Radico Khaitan aims for a debt-free status by FY26. The commencement of production at the Sitapur facility, combined with the expansion of the Prestige & Above mix and management's commitment to achieving a debtfree status by FY26, is expected to further strengthen the company's margins. Management's guidance of reaching EBITDA Margins in the range of 14-15% over the next two to three years supports this outlook.

Outlook & Valuation: Radico Khaitan showcased strong performance in Q3FY24, achieving noteworthy revenue growth. The company's consistent focus on premiumization, new product introductions, and a reinforced presence in the Defense segment are anticipated to bolster profit margins in the forthcoming years. Management's confidence in attaining mid-teens growth for Prestige & Above volumes and mid-single digits growth for the regular portfolio, along with strategic launches in the premium segment and the ongoing premiumization trend, positions the company for sustained robust performance. While concerns persist regarding margin recovery due to factors like raw material volatility and growth in the regular portfolio, as well as potential capex-related

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