BUY RADICO KHAITAN

Wide Distribution Network: After United Spirits, Radico Khaitan has the widest distribution network in India. The company has strong presence in North & East India followed by widespread presence in West & South India. Radico operates through ~35,000 retail outlets and ~5,000 bars. Additionally, the registration of 18 brands with canteen stores department (CSD) further increases the revenue visibility (CSD constitute 15% of liquor consumption in India). Liquor distribution network in India is controlled by the government. Hence, it is very difficult for a new entrant to establish a distribution network. As a result, India Nivesh believes that players, like Radico Khaitan, that have established networks will do well in the long-run.

Presence Across Segments: Radico’swell diversified presence across all types of liquor, reduce revenue risk. The company ~58% of volume come from country liquor and regular segments,which helps Radico to build strong distribution network and tap low-income consumers. Further, ~25% of its volume was contributed from industrial alcohol, which absorbs excess capacity. And remaining 16% of the total volume was delivered from prestige & above (Premium) segments.

Expect ~4% price hike in FY14: In India liquor prices are determined by state governments. The government controls price of ~70% of the liquor consumed in India. Meaning the pricing power of liquor companies is weak. Radico is trying to overcome the price hike issue by using a premiumization strategy to pass on the volatile prices of molasses and glass. As consumers are upgrading from country liquor to IMFL and from regular to premium alcohol, it is believed that brands with premiumization strategies will continue to do well.

Premiumi will lead to margin expansion: Radico’s focuse to strengthen its position in the premium category, will aid margin expansions. In last four years, the company launched several premium and super premium products (whisky, brandy and vodka), IndiaNivesh believes that this should help the company to capture market share in high growth premium segment. As revenue contribution from prestige and above segment increases from 35% to 50% over medium-term, the operating margin is also expected to expand.

8PM Whisky, back on track: 8PM has been the forerunner for the company, with its record sales of 1mn cases in the first year of launch. However, a change in its formulation led to some moderation in volumes. Further, higher growth in the premium segment (up-trading) and the molasses price spike impacted the regular segment, where 8PM is a dominant brand. However, the company changed the blend to a complete grain-based whisky and offered it in an innovative packaging, which resulted in volume growth picking from FY10 onwards.

Magic Moments Vodka growing at magical speed: Radico successfully fulfilled its quest to create space in the fast-growing premium vodka segment with the launch of Magic Moments Vodka in 2006. The brand now has a market share of around 30% across all segments of Vodka of in the country and has been growing at revenue CAGR of 45% from the last four years. Even during the Q1FY14, Magic Moments Vodka volume grew by 18% Y/Y. Going ahead management expects 19% Y/Y volume growth in Prestige and Magic Moments.

Valuation: At CMP of Rs.117, the stock is trading at 14.6x FY14E and 11.7x FY15E Bloomberg earnings estimates. Over the last three years, the stock on an average, has traded at P/E multiples of 20.0x one-year forward earnings. The revival in flagship brands, premiumi, and strong macro demand in tier-2 and tier-3 cities, along with expected stable molasses prices (due to favourable monsoon) remain positive for the stock. Further, the l deal of Diageo plc with United Spirits Limited could provide window of opportunity to Radico. Investors are recommended to buy the stock for a price target of Rs.165

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