Radico Khaitan - Key takeaways from management meet - Anand Rathi

- Price hikes in South augur well for Radico, particularly since inflation in its key inputs (glass and molasses) appears benign. Also, the company's revenue mix is improving, which could expand its mediumterm margins and earnings. We retain a Buy, with a target of Rs.161.

- Price hikes to expand margins. The Kerala govt recently allowed 6-8% price hikes in IMFL. Radico expects other South Indian states to follow suit and hike prices in 2QFY13, which would propel its margins.

- Aggressive focus on older brands. Some brands (8PM, Old Admiral, Contessa) have had low single-digit growth rates in 1QFY13. The company clarified that it would be running new campaigns to rejuvenate them once price hikes are in place. It indicated more ad-spend and promotions for these brands in 2HFY13. The company is also planning to introduce premium vodka under Magic moments brand.

- Better revenue mix to drive margins. Radico's revenue mix is veering from country liquor to IMFL. Its country liquor and bulk spirit EBITDA margin is less than 7%; in IMFL, it crosses 14%. The company expects the altered revenue mix to drive its EBITDA margin by 200-300bps in the next three years but anticipates quarterly volatility to continue.

- Benign raw material price inflation. Price of molasses is likely to remain low, until Oct'12, owing to a decent sugarcane output so far. Glass prices were hiked 8% in Feb'12, with no further rise since then.

- Valuation. We value the stock at Rs.161. At our target price, it would trade at a PE of 19.7x FY13e and 15.1x FY14e earnings. Risks: Higher raw material prices and poorer response to launches.

Source : Equity Bulls

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