CoValue Markets

Radico Khaitan: High on Spirits

On the strength of its robust brands, Radico Khaitan is leveraging in the premium segment. Know its Value!

With over 75 years of experience, Radico Khaitan is amongst the oldest and largest liquor manufacturers in India. The company is essentially engaged in manufacturing Indian made Foreign Liquor (IMFL), Country Liquor, and Bulk Spirits. Company’s brands Morpheus Brandy and Magic Moments Vodka boast a market share of 56% and 58% in their respective segments selling over a million cases. On the Strength of 28 bottling units spread across the country, the company has a total capacity of over 157 million liters. Apart from a strong distribution network in India (75,000 retail, 8000 premise outlets) the company exports to over 85 countries.

Radico Khaitan reported net revenues of INR 23.93 Billion for the Year FY2020 (Company compounded its business by 16% on YOY basis) with an Operating Profit Margin of close to 13.5%. Over the past 5 Years, Radico Khaitan clocked CAGR of nearly 10.6%. Net Revenue for the quarter ended June 2020 was INR 4.09 Billion (Company saw a quarterly decline of 34% on a YOY basis) with an Operating Profit Margin of 15.4%.

Riding the Lucrative wave of Premiumisation

The alcohol beverage industry in India is segmented into IMFL (Indian made Foreign Liquor), IMIL (Indian made Indian Liquor), Wine, Beer, and imported alcohol. The IMFL contributes over 70% of the total sales in the Indian alcobev market. India’s liquor market was estimated to be $35 Billion in FY17 wherein the contribution of the organized sector was a mere 50%.

Although Covid-19 will be detrimental to industry growth, the ramifications are expected to be short-lived largely due to the inelastic nature of the industry. Factors such as rapid urbanization of Tier II & Tier III cities, rising disposable income, favorable demographics (By 2030 the working-age population is expected to cross 1 billion marks with a median age of 31), and growing prevalence of social drinking are expected to aid the growth of alcohol beverage industry over the medium to long term.

The management is bullish on the growing contribution of premium brands to the company’s sales given the ‘Prestige and Above’ segment has grown to account for 50% of the total IMFL sales in value terms. With an unwavering focus on premiumization the company has launched 11 premium brands such as Jaisalmer Indian Craft Gin, After Dark Whiskey, Magic Moments Verve, 8PM Premium Black Whiskey over the last decade. The Company has signed endorsement deals with Bollywood stars for Magic Moments vodka and 8PM Premium Black whiskey.

Radico Khaitan’s revenue primarily hinges upon its organically grown IMFL brands owing to the fact that 24.3 million IMFL cases sold last fiscal accounted for nearly 81.5% of profits. 

By 2025 the top two categories are anticipated to account for 40% of the total consumption. Seeking to expand its margins and to be a part of this growth story, the company has planned the launch of more premium products in the whiskey segment post normalization.

Narrative

The company has strong growth potential owing to favorable fundamentals and its distinction among very few domestic players. Entry barriers such as high tax rates and regulations are expected to secure market shares of incumbents. The Company has exciting demand prospects in the medium to long term owing to increasing penetration, improving social acceptance, the rapid growth of the organized sector, and rising urban population.

Based on the above narrative, the following inputs for the Business Valuation of Radico Khaitan Ltd. has been considered. The last trading price was INR 389 on 17th August 2020, when this valuation was undertaken.

Business Valuation Inputs for Radico Khaitan Ltd:

  • Forecast Period is taken at 30 years
  • Inflation is taken at 5%
  • Sales Growth in nominal terms is assumed at -20% for 1st Year, 33% for 2nd Year, 13% CAGR for 3 – 10 Years, 11% for 11 – 20 Years and 9% for 21 – 30 Years
  • Operating Profit Margin is assumed to be 4% for 1st Year and is assumed to improve to 20% due to operating efficiencies and economies of scale and stabilize at 20% during the end of the Forecast Period. (The Company reported about 15.74% OPM for Financial Year ended March 2020)
  • Incremental Fixed Asset Investment Rate is assumed to be 0% for 1st Year and is assumed to be 38% for the forecasted period.
  • Incremental Net Working Capital Investment is assumed at 45% of Incremental Sales.
  • Income Tax is taken at 25.17% during the Forecast Period and Residual Period.
  • The Cost of Debt is taken as 8% over the Forecast and Residual period.
  • Debt Equity Ratio: 6.05% Debt, 94.05% Equity
  • The Cost of Equity is taken as 11.9% over the Forecast & Residual period. (As per CAPM model, Inflation of 5% is assumed in Computing Expected Market Returns of 12.24%, Beta is 0.91, and Risk-Free Rate is taken at 6.16%)

There is a Gap in Price and Value.

Import Valuation to analyze/iterate all the Value Drivers to understand its Value and you can also edit the plan and build your own assumptions to Compute Value. Also, check Valuation Report for Future Value Per Share. 

Intrinsic Valuation

The Intrinsic Value of Radico Khaitan Ltd. has been computed based on the above assumptions. For detailed reports, assumptions, and in-depth valuation, import the valuation from CoValue App. You must view the Free Cash Flow Report, Valuation Report, and Shareholder Value Augmented Report to get a better insight and perspective. The estimated Future Value Per Share is also mentioned in the Valuation Report.

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About the author

Gurjot Singh Narang

Gurjot Singh Narang

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