Sunday, September 27, 2009


Radico Khaitan, the country’s second largest IMFL producer, would report improved margins in FY10 as molasses price is probably past its peak for the current sugar cycle. An aboveindustry
volume growth of ~15% in IMFL and increased focus on main line brands (~75% of total volumes in FY10) would provide revenue CAGR of ~10.6% over FY09-11.

However, we believe ongoing volume growth is more likely a recovery from FY08 lows of 12.8mn cases (vs. 13.5mn in FY07) rather than an indicator of a more stable uptrend. Albeit we note the improving outlook on margin and volumes and revise our FY11 EPS estimates by 16%. The stock trades at a ~38% premium to United Spirits FY11 PER which is unjustified in our view. Raise target price to Rs81 but maintain SELL on an expensive 22.7x 1-yr fwd PE.

Lower molasses, improved input mix to boost OPM
Molasses price have likely peaked out in Q3/Q4 of FY09. Current industry estimates peg sugar output between 14-16mn tonnes in the upcoming crushing season beginning from Nov’ 09 with the possibility of a strong rebound in the next season based on previous cyclical performance. Also the company has ~30mn ltrs/pa of dual feed capacity which would utilize grain to counter higher priced molasses, thereby improving input mix.

IMFL volumes to recover, driven by main line brands
In FY08, Radico experienced a ~23% yoy volume decline in its flagship brand, 8PM Whisky which has now been arrested but even then the brand volume may not reach FY06 levels in the current fiscal. We expect the five main line brands to achieve ~17% growth over next two years while overall IMFL sales would witness a steady 15% growth during the same period.

Raise EPS estimates but retain SELL on rich valuations
We note the improved outlook on margin and recovery in IMFL volumes and revise our FY11 EPS by 16%. However, the stock is trading at a ~38% premium to United Spirits FY11E PER which is unjustified given the scale, OPM and profitability of the latter. Retain SELL with revised target price of Rs81 (from earlier Rs66).

To see full report: RADICO KHAITAN LIMITED