Radico Khaitan -  Time to Take a Sip, Undervalued After the Recent Correction

India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/16979" target="_blank">Radico Khaitan (RDCK IN)</a> 2QFY19 financial performance was in line with our estimates. Margins continued to be strong in the second consecutive quarter at ~17.7% in 2QFY19. EBITDA margins were at 14.8% in FY18 and at 17.7% in 1QFY19. RDCK reported an overall volume growth of 11% YoY at 5.21 mn cases in 2QFY19 including the volume growth of ~15% YoY in the premium segment (‘Prestige &amp; Above’ products).  The growth was on a lower base in 2QFY18 due to the impact of the highway ban on liquor sale in India in that period.
Free cash flow generation from operating activities has been ~28% higher YoY at ~Rs 1,544 mn in 1HFY19 (v/s Rs 1,204 mn in 1HFY18). RDCK repaid a debt of Rs 2,000 mn in 1HFY19. The debt reduction has led to a decrease in finance expenses by ~47% from Rs 177 mn in 2QFY18 to Rs 92 mn in 2QFY19.
We have revised our FY19E-20E EPS estimates by +13%/ +7% to Rs 14.8 / Rs 17.8 respectively and we expect FY21E EPS of Rs 20.7. The volume growth in 2HFY18 and 1HFY19E is on a lower base.  The factors which contributed to the robust growth in this period were price hikes in government regulated states, relaxation of the highway liquor sale ban and the new state manufacturing tax policy in Uttar Pradesh. These are not likely to recur in the next 2-3 years. We forecast the YoY margin expansion to be the growth driver in 2HFY19E and new product launches in the premium segment to be the growth driver in FY20E and FY21E. Our fair value estimate of RDCK comes to Rs 530/- (v/s Rs 495/- earlier) for the next 12 months, valued at 28x the EPS estimate of Rs 19 for the year ended September 20E.
<table class="table table-striped">
<tbody>
<tr>
<td>
 
</td>
<td style="text-align: right;">
 FY17 
</td>
<td style="text-align: right;">
 FY18 
</td>
<td style="text-align: right;">
 FY19E 
</td>
<td style="text-align: right;">
 FY20E 
</td>
<td style="text-align: right;">
 FY21E 
</td>
</tr>
<tr>
<td>
PE (x)
</td>
<td style="text-align: right;">
         64
</td>
<td style="text-align: right;">
       42
</td>
<td style="text-align: right;">
       26
</td>
<td style="text-align: right;">
       22
</td>
<td style="text-align: right;">
       18
</td>
</tr>
<tr>
<td>
ROE
</td>
<td style="text-align: right;">
8%
</td>
<td style="text-align: right;">
11%
</td>
<td style="text-align: right;">
15%
</td>
<td style="text-align: right;">
16%
</td>
<td style="text-align: right;">
16%
</td>
</tr>
<tr>
<td>
ROCE
</td>
<td style="text-align: right;">
16%
</td>
<td style="text-align: right;">
20%
</td>
<td style="text-align: right;">
24%
</td>
<td style="text-align: right;">
24%
</td>
<td style="text-align: right;">
25%
</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source: RDCK Annual Report 2018, Trivikram Consultants Research as of 30th October 2018</div>
<div class="content-caption">E = Estimates</div>

Radico Khaitan (RDCK IN) 2QFY19 financial performance was in line with our estimates. Margins continued to be strong in the second consecutive quarter at ~17.7% in 2QFY19. EBITDA margins were at 14.8% in FY18 and at 17.7% in 1QFY19. RDCK reported an overall volume growth of 11% YoY at 5.21 mn cases in 2QFY19 including the volume growth of ~15% YoY in the premium segment (‘Prestige &amp; Above’ products).  The growth was on a lower base in 2QFY18 due to the impact of the highway ban on liquor sale in India in that period.
Free cash flow generation from operating activities has been ~28% higher YoY at ~Rs 1,544 mn in 1HFY19 (v/s Rs 1,204 mn in 1HFY18). RDCK repaid a debt of Rs 2,000 mn in 1HFY19. The debt reduction has led to a decrease in finance expenses by ~47% from Rs 177 mn in 2QFY18 to Rs 92 mn in 2QFY19.
We have revised our FY19E-20E EPS estimates by +13%/ +7% to Rs 14.8 / Rs 17.8 respectively and we expect FY21E EPS of Rs 20.7. The volume growth in 2HFY18 and 1HFY19E is on a lower base.  The factors which contributed to the robust growth in this period were price hikes in government regulated states, relaxation of the highway liquor sale ban and the new state manufacturing tax policy in Uttar Pradesh. These are not likely to recur in the next 2-3 years. We forecast the YoY margin expansion to be the growth driver in 2HFY19E and new product launches in the premium segment to be the growth driver in FY20E and FY21E. Our fair value estimate of RDCK comes to Rs 530/- (v/s Rs 495/- earlier) for the next 12 months, valued at 28x the EPS estimate of Rs 19 for the year ended September 20E.




 


 FY17 


 FY18 


 FY19E 


 FY20E 


 FY21E 




PE (x)


         64


       42


       26


       22


       18




ROE


8%


11%


15%


16%


16%




ROCE


16%


20%


24%


24%


25%




Source: RDCK Annual Report 2018, Trivikram Consultants Research as of 30th October 2018
E = Estimates

Radico Khaitan - 2QFY19 – Great Going so Far, Can It Continue in FY20E?