 "Radico Khaitan: IMFL stake sale to trigger further re-rating")
Shareholders of Radico Khaitan have recorded good gains in the last few months, largely due to speculation Japan-based Suntory Holdings is set to acquire 26% stake in Radico’s Indian-made foreign liquor business, reportedly for Rs 900 cr
Shareholders of liquor company Radico Khaitan have recorded good gains in the last few months. This is largely due to speculation Japan-based Suntory Holdings (Suntory) is set to acquire 26 per cent stake in Radico’s Indian-made foreign liquor (IMFL) business, reportedly for about Rs 900 crore. The company’s IMFL segment has brands such as 8PM whisky and Magic Moments vodka.
Analysts are bullish on the company, as the move will reduce its debt of Rs 750 crore, besides strengthening its domestic business. Radico reported net sales of Rs 1,070 crore (up 19 per cent year-on-year) and earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 179 crore (up seven per cent) for the first nine months of FY14 and paid Rs 63 crore in interests costs (up 20 per cent) during the same period. Its net profit stood at Rs 61.4 crore (flat year-on-year). The company’s debt-to-equity ratio is about one.
“If media articles are to be believed, Radico Khaitan is valued at enterprise value (ev)/Ebitda 17 times FY13 and 15 times FY14, on consensus estimates. Recent transactions in the alcoholic beverages sector (Suntory Holding-Bean deal, the Pernod Ricard-Absolut deal and the United Spirits-Diageo deal) had similar multiples — 18-20 times EV/Ebitda,” says Nitin Mathur, consumer research analyst at Espirito Santo Securities. “We believe Radico Khaitan’s debt will be reduced by the fund infused. However, it depends on the deal multiple, the structure and the company actually paying off debt from the funds infusion.”
While the deal will benefit Radico, it will also enable Suntory to have stronger presence in the Indian liquor market. In January, Suntory had acquired US-based whiskey company Beam, making it the third-largest liquor maker globally (earlier, it was the 15th-largest). Through that deal, Suntory also acquired Teacher’s, the highest selling Scotch whisky brand in India. Suntory already has a tie-up with Radico for distributing its premium whiskies—-Hibiki blended whisky and Yamazaki single malt.
Analysts believe the Suntory deal could lead to further re-rating of the Radico stock. “Our sense is within the next three months, Radico will induct a potential strategic partner into its branded IMFL business, while retaining the manufacturing rights of its brands (annuity income). We believe this potential development will be a significant re-rating trigger for Radico and will accelerate the premiumisation drive for the company,” said Harit Kapoor, analyst at IDFC Securities.
Currently, the Radico stock is being traded at 16 times the estimated FY15 earnings, much lower than fast-moving consumer goods sector’s average of about 30 times and at a whopping 65 per cent discount to United Spirits’ FY15 estimated price/earnings ratio of 45.9 times. To an extent, the discount is justified, considering the strong position of United Spirits in the sector, with well-known brands, extensive distribution reach and huge scale (about eight times bigger in sales). Usually, companies with such difference in scale trade at 30-35 per cent discount to the larger peer.
Nevertheless, the outlook for Radico remains strong, as the company pushes premiumisation, which could drive margins and support volume growth. Key risks include a rise in key raw material costs (extra-neutral spirit) and higher excise duty.
Shareholders of liquor company Radico Khaitan have recorded good gains in the last few months. This is largely due to speculation Japan-based Suntory Holdings (Suntory) is set to acquire 26 per cent stake in Radico’s Indian-made foreign liquor (IMFL) business, reportedly for about Rs 900 crore. The company’s IMFL segment has brands such as 8PM whisky and Magic Moments vodka.
Analysts are bullish on the company, as the move will reduce its debt of Rs 750 crore, besides strengthening its domestic business. Radico reported net sales of Rs 1,070 crore (up 19 per cent year-on-year) and earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 179 crore (up seven per cent) for the first nine months of FY14 and paid Rs 63 crore in interests costs (up 20 per cent) during the same period. Its net profit stood at Rs 61.4 crore (flat year-on-year). The company’s debt-to-equity ratio is about one.
“If media articles are to be believed, Radico Khaitan is valued at enterprise value (ev)/Ebitda 17 times FY13 and 15 times FY14, on consensus estimates. Recent transactions in the alcoholic beverages sector (Suntory Holding-Bean deal, the Pernod Ricard-Absolut deal and the United Spirits-Diageo deal) had similar multiples — 18-20 times EV/Ebitda,” says Nitin Mathur, consumer research analyst at Espirito Santo Securities. “We believe Radico Khaitan’s debt will be reduced by the fund infused. However, it depends on the deal multiple, the structure and the company actually paying off debt from the funds infusion.”
While the deal will benefit Radico, it will also enable Suntory to have stronger presence in the Indian liquor market. In January, Suntory had acquired US-based whiskey company Beam, making it the third-largest liquor maker globally (earlier, it was the 15th-largest). Through that deal, Suntory also acquired Teacher’s, the highest selling Scotch whisky brand in India. Suntory already has a tie-up with Radico for distributing its premium whiskies—-Hibiki blended whisky and Yamazaki single malt.
Analysts believe the Suntory deal could lead to further re-rating of the Radico stock. “Our sense is within the next three months, Radico will induct a potential strategic partner into its branded IMFL business, while retaining the manufacturing rights of its brands (annuity income). We believe this potential development will be a significant re-rating trigger for Radico and will accelerate the premiumisation drive for the company,” said Harit Kapoor, analyst at IDFC Securities.
Currently, the Radico stock is being traded at 16 times the estimated FY15 earnings, much lower than fast-moving consumer goods sector’s average of about 30 times and at a whopping 65 per cent discount to United Spirits’ FY15 estimated price/earnings ratio of 45.9 times. To an extent, the discount is justified, considering the strong position of United Spirits in the sector, with well-known brands, extensive distribution reach and huge scale (about eight times bigger in sales). Usually, companies with such difference in scale trade at 30-35 per cent discount to the larger peer.
Nevertheless, the outlook for Radico remains strong, as the company pushes premiumisation, which could drive margins and support volume growth. Key risks include a rise in key raw material costs (extra-neutral spirit) and higher excise duty.