In high spirits

PENNY WISE

New brands and operational efficiencies are expected to drive Radico Khaitan's growth.

The domestic liquor industry is on a high, driven by increasing urbanisation higher disposable income levels and changing social dining trends. Also there is a shift from cheap country liquor to high value added products such as whisky, rum, brandy and vodka, which come under the the Indian made foreign liquor (IMFL) category.

While market leader UB group is miles ahead of competition, the growth plans of Radico Khaitan, the second largest and fastest growing IMFL manufacturer, cannot be overlooked.

Earlier, a distiller and bottler for other liquor companies, the company today has its own millionaire club brands such as 8PM whisky, Contessa rum and Old Admiral. From seven brands under its fold in 1999, the company today has 34 brands serving every segment and price category. It has a pan-India presence covering 80 per cent of retail points, clubs and bars.

The company still has been on the look out for innovative brands either by introducing own brands across new segments or by acquiring brands.

For example, it recently launched extension of brands such as Old Admiral whisky and rum as an extension of Old Admiral brandy and 8PM Royale whisky and 8PM Bermuda rum and Bermuda white rum as an extension of 8PM whisky brand.

It also ventured into the fastest growing white spirits market such as gin and vodka in the premium segments with Magic Moments Gin and Magic Moments Vodka.

The company acquired eight Brihan brands from Brihan Maharashtra Sugar Syndicate last year for Rs 35 crore. Brihan is registered in the Central Store Department and has a nationwide presence and predominance in the restricted market of Delhi and Tamil Nadu.

This is expected to give a further foothold to the company in the defence segment. Abhijeet Khaitan, managing director, says, "We expect to double the volumes of Brihan Brands in more than 12 months from the current 8 lakh cases."

With the introduction of innovative brands, the company's volumes have increased five fold in five years times at 10.02 million cases in FY05. It has cornered a market share of 11 per cent in 100 mn cases Indian liquor market as compared to 4.5 per cent in FY02.

Rohan Soares, assistant vice-president-sales of SSKI Securities, says, "Radico Khaitan's performance has been commendable as it has become the second largest IMFL player in a very short span of time. This is in veiw of the fact that Indian liquor business is complex as there are many entry barriers preventing the creation and sustainability of successful brands, government control in terms of pricing, distribution and licensing in several states and high incidence of indirect taxes among others."

Inspired by the current spurt in exports revenues, which grew by 300 per cent year on year (y-oy) at Rs 50 crore in Q3FY06, the company is planning to increase its focus on exports. It recently set up an overseas subsidiary, Radico Global, in Dubai to deal in global trading and to route future acquisitions or joint ventures outside India.

Currently, the company exports to over 30 countries including the UAE, South Africa, Canada and South East Asia. The company expects exports to grow at 300 per cent y-o-y at Rs 70-75 crore in FY06 and 100 per cent in FY07.

Vipul Sanghavi, portfolio manager of Fortis Securities, says, "Exports are expected to be successful in neighbouring countries. But the key trigger would be to acquire a brand and penetrate in developed markets."

The company has appointed Rabo India Securities to identify suitable acquisition and joint venture targets in domestic and international markets and Kotak Mahindra Capital Company for advising on the feasibility of funding, time, quantum and the most suitable instrument for the same.

To forge better relations with foreign manufacturers and enter into premium segment, the company has set up a separate cell, Radico International, for tying up with foreign brands for distribution of their products in India.

It recently tied up with Highland Distillers for distribution of prestigious brands such as- The Famous Grouse The Macallan and Highland Park Single Malts, as well as extensions from The Famous Grouse stable.

Apart from growing its sales, the company also plans to reduce its costs by diversifying its raw material source. Having one of the largest distilleries (based on molasses) in India with a production capacity of 60 million litres at Rampur, the company set up a 30 million litre grain-based plant in UP for Rs 85 crore.

This move will not only ramp up exports, which are basically grain based but also insulate it from the volatility of molasses- major by-product while crushing sugar.

Molasses form about 20 per cent of total cost and prices had doubled in last two years. However R K Mehrotra, president-finance says, "We foresee molasses price to decline by10-15 per cent from current price of Rs 350 per quintal. This means margins will only improve."

Vikram Suryavanshi, sugar analyst of Karvy Stock Broking, also agrees. "With substantial capacity expansion plans announced by UP sugar mills, prices of molasses (by product while crushing sugarcane) especially in UP is expected to stabilise," he added.

The company has 29 bottling units all over India, of which four are owned. According to analysts, owning bottling units are cheaper as they charge at a wider gap.

Soares says, "Radico has better opportunity of acquiring bottling units as the UB group has adequate units after its acquisition of Shaw Wallace. So now I feel, bottling charges for Radico could come under pressure." 
 

FINANCIALS
(Rs crore)	Q3FY06	Q3FY05	% chg
Net sales	195.00	177.00	10.17
RM/Netsales (%)	32.40	38.00	(560bps)
Operating profit	79.10	58.90	34.43
OPM (%)	40.60	33.20	740bps
Net profit	12.60	9.70	29.90
NPM (%)	6.50	5.50	100bps
EPS*	1.31	1.13	16.00
* on stock-split basis

After reporting strong growth in revenues and profitability, the company continued its reobust performance in Q3FY06. Net sales increased by 10 per cent y-o-y at Rs 195 crore with higher contribution in growth coming from the tied-up bottling units. Operating profit increased by 34 per cent at Rs 79 crore and operating margin improved by 740 bps at 40.6 per cent owing to substantial decline in molasses prices.

Net profit improved by 30 per cent at Rs 12.6 crore and net margin improved by 100 bps at 9.1 per cent owing to higher interest costs and depreciation.

Lalit Khaitan, chairman of Radico Khaitan, says, "We expect our company to post a growth of 25-30 per cent in volumes and top line in next two years owing to new brand launches, new markets, the acquisition of Brihan's portfolio and efficiencies in operations." He expects profit to increase at 30-35 per cent for two years.

The stock trades at an estimated price to earnings multiple of 25 times and 21 times for FY07E and FY08E. Soares says, "Radico is a good bet on the fast growing Indian liquor industry."

Sanghavi adds, "The stock can be considered with a long term perspective. If the company is able to sustain its double-digit growth rate then valuations of 20-25 times may be justified."