Buy Radico Khaitan, target Rs 547: Emkay

Emkay Global Financial Services has a buy call on Radico Khaitan with a target price of Rs 547.

The current market price of Radico Khaitan is Rs 353.

Time period given by the brokerage is one year when Radico Khaitan price can reach the defined target.


View of the brokerage on the company:
Sustainable earnings growth, not just a one shot: RDCK is delivering on all fronts: sales volume growth, margin expansion, earnings growth and debt reduction. We believe that RDCK is on track to generate 49 per cent earnings growth in FY19 and 28 per cent in FY20. This earnings growth should lead to solid cash flow generation and ROCE improvement. The company expects to become debt free by FY20. ROCE should expand to 21.6 per cent in FY20 from 14 per cent in FY18.

Results beat on all fronts: The premium/regular product sales growth of 15 per cent/11 per cent YoY was as expected. This momentum should sustain in FY19-20E. EBITDA margin improved 305bps YoY, driven by premiumization, low raw material costs (molasses), and price hikes in the Southern states. Gross margin improved 420bps YoY to 51 per cent - the highest-ever reported by the company.

Premiumization and debt reduction matter: RDCK management’s premiumization and deleveraging strategy is reaping benefits now. The product mix is constantly improving, resulting in a margin improvement. EBITDA margins should improve to 16.9 per cent in FY19 from 14.8 per cent in FY18. FCF proceeds are being used to cut debt. RDCK has repaid Rs2.1bn of debt in FY18 and Rs2bn in 1HFY19 (D/E down to 0.2x from 0.5x). The lower interest cost is further boosting net profit.

Catalysts from new product launches and price hikes; Buy: RDCK launched three new brands in the premium segment this year: 8PM Black, Morpheus Black Brandy, and Jaisalmer Gin. Premium brands’ contribution in 1HFY19 was 29 per cent vs. 26 per cent in FY18. There is a strong case for price hikes given the expected increase in molasses prices and a slight increase in packaging costs. Any price hike could spark a rally in the stock price.