SSKI Research report on Radico Khaitan:
High Volumes - Low Margins
With the IMFL industry in India growing at 10% per annum, owing to an uptake in product portfolio, Radico Khaitan, present mostly in the regular segment (consisting of 70% of the market), has shown a volume growth of 12.4%. While its established brands in the regular segment, 8PM whisky and Old Admiral Brandy, have both shown volume growth of only 7% and 10%, its main growth came from its Magic Moments vodka and its acquired brands of Brihans. Radico Khaitan launched Magic Moments vodka in the end of FY06 and in its first complete year of launch has sold 0.35mn cases to acquire 15% of the Indian vodka market, growing at 45% per annum. While Magic Moments has shown a good growth over the year, there has been a huge amount of brand building expenditure that the company has incurred over the period. With the company expected to continue the brand building expenses in FY08, we do not expect much margin expansion. Radico Khaitan in order to enter the international markets has decided to choose the organic route rather than the inorganic way (United Spirits acquired Whyte & Mackay and Bouvet Ladubey and Champagne Indage acquired Vontelnella Tandou). Through its 100% subsidiary, Radico Khaitan Global, in the Middle East, Radico has been beefing up its exports. Apart from the Middle East, Radico has also been exporting into Africa and entering into a JV in UK to export its products there.
Radico- Diageo JV
In December 2006, Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) entered into a 50:50 JV to jointly exploit the large and developing IMFL market in India. Diageo’s business in India prior to the JV was limited only to the locally produced Smirnoff (the largest premium vodka brand in India) and its Johnny Walker brand in the duty free market. It has now recognized that India, the largest whisky market in the world, is an important market for its further expansion and cannot be ignored. While duties and taxes might be an issue for international players entering the Indian markets in a huge way, the biggest hurdle that we see is of the distribution of their alcoholic beverages. With alcohol under the preview of the state, each state has its own distribution structure that has been in place for a very long period of time. Diageo recognized that in order for it to make a serious impact on the Indian alcoholic beverages industry it needs to gain access to a strong pan – India distribution network. Radico Khaitan owing to its pan-India presence provides Diageo with a distribution network covering 29 states in India. While Diageo has entered into a JV with Radico Khaitan, we believe that the long term agenda behind the JV could change. Diageo needs to roll out its own products into India and the JV would not be the viable route for it. Additionally, Radico Khaitan provides Diageo with the distribution structure required for a player to enter India.
Radico Khaitan- Strategically Placed
Emerging markets have been the growth drivers behind the robust performance shown by international players in the alcoholic beverages space over the past 5 years. With the Indian market becoming the largest market for whisky in the world and a noticeable uptrend in product intake, international players need to enter into India quickly. India is a 350mn cases spirits market of which only 1/3rd is IMFL, with the rest being country liquor. With an evident shift from country liquor to IMFL, the Indian spirits market is expected to grow at 10% over the next 3-4yr period with premium and prestige segments leading the way with 20%+ growth. Radico Khaitan, in the alcoholic beverages space, is a logistically strong but a distant second player in the Indian market. With international players vying to enter the Indian market, Radico Khaitan with a strong plethora of brands and a pan-India presence becomes the best positioned player for global majors looking at a strong India centric presence. We expect that Radico will continue to show growth under the favorable domestic market conditions as well as its new avenues (exports). We are also excited about the potential strategic value of Radico Khaitan.
Valuation
Aided by a 12.4% volume growth and a 22.6% growth in net sales, Radico Khaitan, has reported consolidated net sales of Rs 452.5 million. While volumes have grown to 13.5 million cases from 12 million cases, Radico Khaitan has shown an 8-9% realization growth in the year from its semi-premium brands (Magic Moments vodka). However, high expenditures on brand building, especially for Magic Moments vodka (Rs 100 million in Q4FY07 alone) have resulted in a flat net profit for the year. A 12% volume growth for the year is a clear indication of high growth in the Indian alcohol space, owing to change in demographics and higher consumer spending. Radico Khaitan at 13.5 million cases per annum is India’s second largest spirit manufacturer with a distribution network amassing 29 states in the country. Growing on the back of increased exports in the international markets of Africa and Europe, Radico Khaitan Global has reported a net profit of Rs134 million for the year ended FY07. While we believe that Radico Khaitan will continue to grow on the back of changing demographics of the Indian economy and an entry into the international markets, we expect to see margin remaining muted owing to high spends on brand building. Radico Khaitan (India’s second largest spirits manufacturer) and Diageo (world leader) launched the first whisky, Masterstroke, under the JV Diageo Radico Ltd. We believe that Diageo needs to enter India (the world’s largest whisky market), in a big way soon and the JV might not be the most appropriate route to launch its international brands in the country. With Radico Khaitan distribution network spanning the entire nation, the JV with Radico Khaitan might just be the stepping stone for a much larger agenda. Though positive on the space under which Radico Khaitan operates, it is the strategic value hidden in the distribution networks and manufacturing as well as the bottling units of Radico Khaitan that will provide maximum upscale potential. The stock is currently trading at 20xFY09E and has an EV/EBITDA of 14xFY09E. Reiterate Outperformer.