12 JUL 2018 Alcohol Beverages - HDFC securities Beverages...SECTOR REPORT 12 JUL 2018 Alcohol...

SECTOR REPORT 12 JUL 2018

Alcohol Beverages

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Top down heady, bottom up insipid India’s liquor industry looks attractive on a top down basis, presenting a strong case for long term investors. High barriers to entry, inelastic demand (?), increasing social acceptance and premiumisation provide most of the rationale for this view. A closer look, however, reveals structural pain that dampens both volume and value growth. The industry remains at the mercy of a quagmire of state-specific regulations, ever increasing taxes, price control, distribution model changes and political interference. Reiterate SELL on United Spirits (UNSP) and initiate coverage on Radico Khaitan (RDCK) with a BUY, driven by more visible improvement in business trajectory and relatively affordable valuations.

Good business, but for whom? The liquor business does look good on gross revenue basis, but we are not sure who it is good for. A consistent rise in tax/unit leads to (1) Govt’s revenue share rising, with most states posting double-digit tax growth, (2) Low volume growth, and (3) Downtrading, that offsets premiumisation gains achieved with much effort (and spend) by liquor cos.

Competition heating up as dark clouds recede. Over FY17-18, the industry ran into highway sales bans, demonetisation, GST, route-to-market changes in UP, West Bengal and Chhattisgarh. But, it also benefited from tailwinds like stable/declining raw material prices, a decrease in taxes in Maharashtra, and price hikes (a normally difficult ask) in 14-15 states.

This is leading to rising competitive activity with existing players entering new segments, undertaking selective price cuts to gain market share. Most of the

aggregate industry profits are derived from the deluxe, semi-premium and premium segments. In 3Q FY18, Allied Blenders (ABD) launched new brands (Sterling Reserve B7 and B10) in the semi-premium and premium segments. Pernod Ricard and UNSP have a strong presence here.

Meanwhile, ABD has also cut prices in the deluxe segment (Officer’s Choice Blue) in Maharashtra. OC Blue competes with McDowell’s No 1. We see these moves as negative and expect margins to remain under pressure.

UNSP is a SELL. We have factored optimistic assumptions, despite near term competitive and regulatory challenges in Karanataka and Maharashtra (~40% of volumes, revenue and EBITDA). The potential excise increase in Maharashtra to offset LBT loss of FY18 is unlikely to be passed on to consumers. Rich valuations (60x/46x FY19/20E EPS) further bolster our SELL case, with a TP of Rs 570 (40x Jun-20E EPS).

Radico a BUY: Radico has well-positioned itself by focusing on (1) The fast growing and niche vodka segment (Magic Moments has ~50% market share) and super premium brandy (Morpheus). High margin P&A brands are 26/43% of IMFL volumes/revenues. UNSP is at 47/63%, suggesting significant relative headroom for Radico to premiumise. (2) Govt supplies (CSD is 17% of IMFL revenue vs. ~6-8% for UNSP) with high entry barriers, and (3) Non-IMFL business (25/15% of revenue/EBITDA). RDCK trades much cheaper (32/27x FY19/20E EPS). BUY with TP of Rs 473 (32x Jun-20E EPS).

CMP (Rs) Rating TP

(Rs)

United Spirits 620 SELL 570 Radico 387 BUY 473

Himanshu Shah [email protected] +91-22-6171-7315

ALCOHOL BEVERAGES : SECTOR REPORT

Page | 2

IMFL: Soft growth, dull outlook India’s IMFL industry’s volume growth has been a

modest 2% over CY13-18E. This is despite under penetration, rising aspirations and social acceptance, increasing income levels etc

Notably the growth outlook as per research agencies remains lull over CY18-22E owing to high taxations,

regulatory and political uncertainties associated with the industry.

This is in contrast to most management’s optimism of high single-low double digit volume growth and mid-high teen’s value growth.

Volume Mix of Spirits (Mn Cases) Volume Mix of Spirits (%)

Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research

Value Mix of Spirits (Rs Bn) Value Mix of Spirits (%)

Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research

Indian IMFL industry has witnessed soft growth, outlook too remian modest Whisky (brown spirit) constitute 60% of the market volume followed by Brandy, Rum and White spirits (mainly Vodka) Vodka has been the fastest growing category, Rum the slowest Globally Vodka is the largest category in IMFL segment

165 187 210

61 65

71 44 43

44 9

12 14

-

50

100

150

200

250

300

350

CY13 CY18E CY22E

Whisky Brandy Rum White Spirits

Mn cases

1,304 1,714

2,155 215

250

280

204

222

274

111

147

210

-

500

1,000

1,500

2,000

2,500

3,000

CY13 CY18E CY22E

Whisky Brandy Rum White SpiritsRs bn

71.1 73.5 73.8

11.7 10.7 9.6 11.1 9.5 9.4 6.1 6.3 7.2

-

20.0

40.0

60.0

80.0

100.0

CY13 CY18E CY22E

Whisky Brandy Rum White Spirits%

59.2 61.0 61.9

21.8 21.1 21.0

15.6 14.1 13.1 3.4 3.8 4.0

-

20.0

40.0

60.0

80.0

100.0

CY13 CY18E CY22E

Whisky Brandy Rum White Spirits


Page | 3

South drives quantity, North+West profitability Southern states with annual volumes of ~185-190mn

cases account for ~60% of overall IMFL market. With high penetration of liquor (~7-8 litres per head) volume growth in Southern states has been muted, thus pulling down the overall industry growth.

Within South, Tamilnadu and Kerala contribute ~75-77mn cases (~40%). Both this markets are highly regulated by the government with strong presence of local players. National branded players have thus franchiseed their brands (mostly on fixed fee). This markets offer inconsequential growth opportunity.

Karnataka, Telangana and AP are important markets from volume perspective. However since this are large low-priced Popular segment market and due to limited price increases (once in two to three years); their share of profitability is lower than volumes. Norther and western states take precende over here.

Surprisingly post seperation from Andhra Pradesh, Telangana has been witnessing healthy double digit growth in volumes over FY16-18. One of the reasons we believe is liquor factories were located in Telangana region and thus it was getting exported to Andhra Pradesh.

UNSP has a significantly higher dependence on Karnataka. UNSP enjoys a ~50% market share in 55-56mn cases market. Karnataka alone accounts for ~33% of UNSP’s overall volumes. Telangana and Andhra Pradesh contributes additional ~10% and 8% to UNSP volumes.

Radico Khaitan (RDCK) derives ~31% of its IMFL revenues from Souther market.

Southern India IMFL Volumes

Source : State government/s, HDFC sec Inst Research Southern India IMFL Volume growth YoY

Source : State government/s, HDFC sec Inst Research

Southern states account for a significant portion of the industry volumes primarily in regular category Growth in Southern markets espeically Karnataka and premiumisation are inevitable for healthy industry growth Volumes in Karnataka has been flat over FY15-18 at ~55mn cases In FY19, Karnataka govt took a steep increase in excise duty per unit/liquor by~ 12% ~(8% in excise policy and recently 4% owing to farm loan waiver). This may further impact the volume growth.Taxation on Beer has been flat since FY16. With exception of Telangana, all other major states has been struggling to grow

-

10.0

20.0

30.0

40.0

50.0

60.0

Andhara Pradesh

Telangana Tamilnadu Karnataka Kerala

FY14 FY15 FY16 FY17 FY18Mn cases

1.6

6.1

-2.0

6.4

-8.3

5.4

18.2

0.4 1.2

-8.5

13.8

-1.5

1.8

13.1

0.1 1.

5

-10.0

-5.0

-

5.0

10.0

15.0

20.0

Andhara Pradesh

Telangana Tamilnadu Karnataka Kerala

FY15 FY16 FY17 FY18

%


Page | 4

Indian Whisky Market : Key players, brand and competitive positioning

Category

Gross Profits /

Case (Rs)

UNSP Pernod ABD Radico John Distillery Total

Volume Brand Volume Brand Volume Brand Volume Brand Volume Brand Volume

Cheap / Local or Unbranded

- 30.0

Regular

X

Hayward's Fine 8.9

Officer's Choice (OC)

25.5 8 PM 7.0 Origin

al Choice

10.3 51.7

Old Tavern 7.4 7.4

Bagpiper 6.0 6.0

Director's Special 4.2 4.2

Prestige and Above

Deluxe ~1.5-2X McDowell’s No. 1 26.6 Imperial

Blue 19.0 OC Blue 6.5 52.1

Semi-Premium ~3-4X Royal

Challenge 4.5 Royal Stag 18.7 Sterling

Reserve B7 - 23.2

Premium ~6-7X Signature Antiquity 1.8 Blenders

Pride 6.4 Sterling Reserve B10

- 8.2

Super Premium Black & White,

VAT69 etc 1.0

Scotch Johnnie Walker Chivas Regal - Total 59.4 44.1 32.0 7.0 10.3 183.8 Source : Industry, HDFC sec Inst Research

UNSP‘s dervies a significant portion of its profit from McDowell’s No 1 category vs. fair distribution for Pernod Ricard from the three leading brands across categories ABD has launched new brands Sterling Reserve B7 and B10 in Semi Premium and Premium categories


Page | 5

Company, brand and Category-wise volume salesCategory Company Brand CY13 CY14 CY15 CY16 CY17

Regular

UNSP

Hayward's Fine 8.3 9.6 7.4 8.2 8.9 Old Tavern 8.7 8.6 9.4 8.8 7.4 Bagpiper 9.5 7.9 7.2 7.0 6.0 Director's Special 4.3 4.4 4.6 4.7 4.2 Sub total 30.8 30.5 28.6 28.7 26.5

ABD OC 23.8 28.4 32.9 32.9 32.0 John Distilleries Original Choice 10.0 10.5 10.7 10.1 10.3

Bangalore Malt Whisky 0.1 0.8 1.1 2.1 3.5 Radico 8 PM 4.8 4.3 4.1 5.7 7.0

Total 69.4 73.7 76.3 77.4 75.8

Deluxe UNSP McDowell's No 1 24.9 25.8 25.9 26.7 26.6 Pernod Imperial Blue 10.9 14.1 17.5 18.0 19.0

Total 35.8 39.9 43.4 44.7 45.6

Semi Premium UNSP Royal Challenge 1.8 2.5 3.6 4.7 4.5 Pernod Royal Stag 14.8 16.1 17.3 18.0 18.7

Total 16.6 18.6 20.9 22.7 23.2

Premium UNSP Signature 1.6 1.6 1.5 1.6 1.8 Pernod Blender's Pride 4.2 4.8 5.6 6.2 6.4

Total 5.8 6.4 7.1 7.8 8.2 Total 127.8 139.8 150.0 156.1 157.9 Source : Industry, HDFC sec Inst Research Company-wise whisky sales (only key brands as stated above) Company CY13 CY14 CY15 CY16 CY17

Allied Blenders (ABD) 23.8 28.4 32.9 32.9 32.0

UNSP 59.1 60.4 59.6 61.7 59.4

Pernod 29.9 35.0 40.4 42.2 44.1

John Distilleries 10.1 11.3 11.8 12.2 13.8

Radico 4.8 4.3 4.1 5.7 7.0

Alco Brew 0.1 0.4 1.2 1.4 1.6 Total 127.8 139.8 150.0 156.1 157.9 Source : Industry, HDFC sec Inst Research

UNSP has shown a healthy growth in Royal Challenge while its Regular category brands continues to struggle Pernod has shown growth across its categiories/brands and so is Radico in 8 PM Both Pernod and ABD witnessed major growth in CY11-13 viz. time frame during which UNSP’s faced internal disturbances


Page | 6

Brandy, Rum and Vodka Brandy is second largest category after Whisky in

IMFL industry with ~65mn cases. However nearly 50-60% of this volume is in unbranded/cheap category.

Tamilnadu and Kerala account for ~70% of the brandy market. Both this markets are difficult to penetrate due to stringent distribution control by the government of both wholesale and retail. Local player grab a lion’s share in these states.

As can be seen from the table below, both UNSP and Radico has been struggling to sustain volumes of their leading brands in the category.

Rum with ~45mn cases is third largest category after Whisky and Brandy. However Rum has been struggling to grow its foothold.

After relatively flat volumes over CY11-13, UNSP’s Mc Dowell’s No 1 Rum has seen a sharp decline in volumes over CY15-17. Similar has been the case with Radico.

Vodka: Vodka (white spirit) is a smaller segment with ~9-10mn cases. This is in contrast to global trend where consumption of Vodka leads in IMFL category. Whisky (brown spirit) with ~185mn cases leads in India with ~55-60% of the global share.

However, Vodka has been the fastest growing IMFL segment. More importantly 68% of the share in Vodka is constituted by Premium and Super premium segment (up from ~50% in CY12).

Radico Khaitan is a prominent player in this niche category with ~50% market share in Super Premium/Premium segment.

Top selling brands in categories of Brandy, Rum, Vodka, Gin etc Company Brand CY13 CY14 CY15 CY16 CY17 UNSP McDowell's No 1 (Brandy) 2.4 2.4 2.7 2.2 1.7 UNSP McDowell's No 1 (Rum) 16.2 16.6 16.2 14.9 12.5 Radico Magic Moments (Vodka ) 2.9 3.2 3.5 3.6 3.7 Radico Old Admiral (Brandy) 3.9 3.5 3.3 3.5 3.1 Radico Contessa (Rum) 2.6 2.7 2.7 2.0 1.8 Bacardi Bombay Sapphire (Gin) 2.8 3.0 3.3 3.8 4.0 Total 30.8 31.4 31.7 30.0 26.8 Source : Industry, HDFC sec Inst Research

Brandy, Rum and Vodka are other categories of IMFL segment ~120mn cases market Brandy and Rum are large segment but consistently declining for branded liquor players Vodka though fastest growing is just ~9-10mn cases market. 68% of the Vodka market in premium and super premium. Radico has strong footprint in Vodka category.


Page | 7

Whisky: Competitive intensity on rise Profit Mix: Is UNSP at risk?

Deluxe, Premium and Super-Premium category account for bulk of the industry profitability in the Whisky segment.

McDowell’s No 1 contributes a large proportion to the profits of UNSP.

This is in contrast to equitable distribution of profits from three different segments for Pernod Ricard.

Increase in competition in Deluxe segment (McDowells No 1) may impact the profitability of UNSP.

Competition raising its ugly head as industry recovers:

Liquor industry has been coming out of regulatory challenges of highway ban, demonetization, GST, route to market changes etc

Industry also saw tailwinds on raw material prices, decrease in duty in Maharashtra, price increases (a daunting task) in 14-15 states.

This is leading to increased competitive activity with existing players entering into new segments, undertaking price cuts for market share gains etc

ABD cuts prices of OC Blue in Maharashtra

Maharashtra is ~20mn cases IMFL market. UNSP is a leader with ~45-50% share. Mc Dowells No 1 contributes ~40% of UNSP's volumes (4mn cases).

McD no 1 sells for MRP of Rs 640/bottle and competes with Imperial Blue of Pernod Ricard (Rs 560/bottle) and Officer's Choice Blue (OC Blue) of Allied Blenders (ABD) at Rs 620/bottle. Our channel check reveals, ABD has reduced price of OC Blue from Rs 620 to Rs 560 from current month (Jun18).

ABD's market share in Maharashtra is modest with OC volumes of 1.5mn cases and OC Blue at 0.6mn cases (i.e. ~10%).

UNSP is also likely to cut it prices (a) to ensure price war doesn't spread to other brands/segments and also in other states and (b) to defend market share which is more important as recovery of lost share is throbbing.

UNSP had plans to reduce prices in Maharashtra in 2Q/3Q FY18 posts LBT withdrawal and plough back the windfall gains but then had pulled back.

Assuming UNSP also reduces its price for McD No 1 by Rs 80/bottle and bring it at par with Imperial Blue and OC Blue at Rs 560/bottle; UNSP's revenue/EBITDA could get impacted by ~Rs 1bn.

UNSP: EBITDA impact of price cut in Maharashtra No of IMFL cases sold in Maharashtra ~20 UNSP share ~50% McD No 1 contribution ~40% No of McD No1 cases sold 4 Bottles/case 12 Price cut/bottle Rs 80 Revenue impact/bottle ~25% Revenue impact/bottle (Rs) 20 Impact on revenue/GP/EBITDA (Rs Mn) 960 Source : Industry, HDFC sec Inst Research

UNSP reduced price of Royal Challenge in West Bengal

Our channel check also reveals UNSP has reduced price of its Royal Challenge brand in the West Bengal market from Rs 540/bottle (750ml) to Rs 500 in Feb-18 to bring it at par with Royal Stag. It has again restored it back to Rs 540.

Maharashtra is amongst one of the more profitable states for UNSP with significantly higher market share Increased competitive intensity in Maharashtra to impact UNSP profitability


Page | 8

ABD ups its competitive ante in Premium segment

ABD had been a single brand company 'Officers Choice' with variants OC Blue and OC Black that competes in deluxe segment.

In 3QFY18, ABD launched semi premium brand ‘Sterling Reserve B7' that competes with Royal Challenge of UNSP and Royal Stag of Pernod. It has also launched premium brand ‘Sterling Reserve B10' against Signature and Antiquity of UNSP and Blenders Pride of Pernod. Differentiated packaging of Sterling Reserve B7 is the key factor vs. the established brands.

ABD is swiftly launching its new brands across states. Increase in competition from ABD in core profitable segments of UNSP and Pernod to hamper growth for later.

Even if volumes don’t decline due to increased competitive intensity, margins may remain under pressure owing to higher advertising and promotions.

Our channel check reveals the impact of ABD’s new brand launch is higher on Royal Stag of Pernod then on Royal Challenge. Pernod has been a rationale player in terms of pricing and marketing spend (~6% of revenues). However, price cuts by Pernod in Semi-premium category or increased marketing spend wouldn’t bode well for the overall industry.

Pull back of LBT windfall gains in Maharashtra

UNSP and all the other major liquor players had windfall gain in Maharashtra in FY18 owing to

removal of Local Body Taxes (LBT). UNSP gained ~Rs 500mn/qtr or ~Rs 1.5bn for FY18 from 2Q-4Q.

Maharashtra liquor policy is not yet announced and is expected in couple of months. Govt is likely to increase the excise rate to offset the LBT loss.

Our channel check reveals that liquor players may not pass on the entire hike in excise to consumers as volumes in Maharashtra are already struggling posts the highway ban.

This may pose a major setback for liquor players in Maharashtra especially UNSP.

Recently Karnataka government increased the excise duty by 4% (after raising it by 7-8% from Apr18) to mobilize resources to meet the farm loan waiver of ~Rs 340bn.

Even Maharashtra state government had announced farm loan waiver of ~Rs 340bn last year.

Distribution expansion in Maharashtra

Maharashtra government is also considering allowing hotel owners (bars etc) to allow selling liquor at MRP. It may amount to significantly large expansion to number of existing outlets.

Government is thus considering imposing one-time license fee from owners who may seek to sell liquor at MRP from bar. No new shop license has been issued in Maharashtra since 1975.

UNSP being a market leader may see major gain in volumes from the expansion in distribution outlets.

Increased competitive intensity to keep margin under pressure owing to higher marketing and promotional spends though in the medium term it could lead to expansion of category


Page | 9

Growth opportunity: Liquor player or state governments? The bull thesis on liquor rests primarily on the

inelastic demand, high barriers to entry and thus the underlying growth opportunity.

However our concern stems from ever increasing taxation on liquor companies which either impacts volumes or may force consumers to downgrade.

Notably, a significant portion of the industry value growth is captured by the state governments than the liquor players.

For example, the net revenue for UNSP has come down to 31% in FY18 from 58% in FY10.

Net / Gross Revenue: Consistently trending lower YoY growth: GR outperforms NR by ~8% p.a.

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Gross revenue growth outdo the net revenue growth of companies by ~8% p.a. 20.0

30.0

40.0

50.0

60.0

-

45

90

135

180

225

270

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Gross Revenue Net Revenue Net / Gross Rev (%)

Rs bn

-10.0

-5.0

-

5.0

10.0

15.0

20.0

25.0

30.0

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Gross Revenue Net Revenue


Page | 10

Steep increase in taxation is also reflected in the robust excise revenue growth of major state governments. We highlight below of Karnataka and Uttar Pradesh as a reference.

Karnataka and UP excise revenue (Rs Bn)

Source: State excise website, HDFC sec Inst Research Karnataka IMFL excise revenue growth YoY (%)

Source: State excise website, HDFC sec Inst Research

Uttar Pradesh excise revenue growth YoY (%)

Source: State excise website, HDFC sec Inst Research

Most of the state witness a excise revenue growth (double digit) despite modest volume growth

-

30

60

90

120

150

180

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Karnataka Uttar PradeshRs bn

-5.0

5.0

15.0

25.0

35.0

45.0

55.0

65.0

75.0

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Excise rev growth YoY Vol growth YoY%

16.1

6.2 6.7

10.5

16.9 17.7

12.2

21.2

19.0

14.7

10.6

20.2 19.0

15.8

4.5 1.3

21.3

-

5.0

10.0

15.0

20.0

25.0

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

%


Page | 11

Our discussion with industry reveals that majority of the states continues to increase per unit taxation on IMFL every-year or two. This is one of the prime reasons leading to consistent rise in gross revenue from liquor companies but little translating to net revenues.

Haryana is one of the most affordable states with tax friendly policies. However as can be seen from table below over the last two years government has significantly raised the excise duty (a) by increasing per unit taxation and (b) more importantly introducing more slabs.

Haryana: Excise duty per unit increased IMFL

(Brands with Ex Distillery Price upto on per case basis)

Excise duty per Proof litre** (Rs)

Ex Distillery Price per PL (Rs)

Excise duty as % of EDP per PL

FY16 & FY17 FY18 & FY19 FY16 FY17 FY18 FY19 FY16 & YF17

FY18 & FY19

FY16 & YF17 FY18 FY19

A* B C D E F G = A/6.78

H = B/6.78

I = (C or D)/G J = E/H K = F/H

Rs 1,200 Rs 1,000 43.0 43.0 48.0 54.0 177.0 147.5 24.3% 32.5% 36.6% Rs 1,200 - 3,000 Rs 1,001 - 1,500 53.0 53.0 64.0 70.0 442.5 221.2 12.0% 28.9% 31.6% Rs 3,001 - 6,000 Rs 1,501 - 2,500 63.0 63.0 81.0 87.0 885.0 368.7 7.1% 22.0% 23.6%

Rs 6,001 and above Rs 2,501 - 3,500 73.0 73.0 103.0 110.0 516.2 20.0% 21.3%

Rs 3,501 - 5,000 - - 113.0 120.0 737.5 15.3% 16.3%

Rs 5,001 - 7,000 - - 153.0 165.0 1,032.4 14.8% 16.0%

Rs 7,001 and above - - 203.0 215.0 Source: State excise website, HDFC sec Inst Research EDP is ex distillery price *Liquor companies mostly price the product at the upper end of the slab/range to maximize the realization and minimize the impact of taxation ** One proof litre (LPL London proof litre) is equivalent to ~1.7litre

Even Karnataka state increased per unit taxation on liquor twice in FY19. Earlier it increased excise duty across slabs by ~7-8% and recently by further 4% to raise resources for farm loan waivers. It has been consistently raising taxes either by tinkering slabs or by raising the per unit taxation.

Uttar Pradesh state too has substantially increased the tax/unit and brought down the ex-distillery price of liquor companies. However our channel check reveals it is unlikely to impact the net realization owing to substantial reduction in trade spends. This is on account of abolition of monopolistic distribution in the state.

Most of the states increase taxation on liquor every one or two years, either by tinkering with the slabs or increasing the excise duty in the existing slabs As can be seen from the table aside for Haryana there is sharp increase in excise duty per proof litre. For example a liquor case with ex distillery price of Rs 3,000/case would have required to pay in FY16/17 excise of Rs 53/proof litre vs. Rs 110 in FY19.


Page | 12

Premiumisation: Inevitable! Premiumisation is inevitable for the liquor players to

improve profitability. This is owing to (a) low industry volume growth (b) restriction on distribution which further hampers volume uptick (c) restriction on price increases that curtails value growth.

Besides above the most important reason for premiumisation we believe is owing to (a) lower net to gross revenue realization on lower price products across majority of the states. For example as highlighted in table above of Haryana, excise duty decreases from 36% of ex distillery price to 16% as one moves up the value chain.

Also in case of UP as can be seen from below table, Net realization as % of MRP increases from 13% to 30% as one moves up the value chain and (b) Gross Profit per bottle/case of semi-premium/premium segment is equivalent to 3-6x of Popular brands due to lower taxes and higher net realization. Thus, liquor companies don’t mind losing volumes in the Popular segment for more profitable value growth in the premium segment.

This is one of the reasons we believe, why UNSP has franchised its operations for regular segment brands across thirteen states with lower contribution to overall profitability and focus on premium brands.

UP trade dynamics (MRP per 750ml bottle)

Brand Company

In Rs % Ex

Distillery Price

Tax Trade Margin MRP

Ex Distillery

Price Tax Trade

Margin MRP

8PM Special Rare Blend of Scotch & Indian Whisky Radico 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0% 8PM Bermuda XXX Rare Caribbean Rum Radico 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0% Officer's Choice Original Whisky ABD 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0% Bagpiper Superior Whisky UNSP 54.3 289.5 76.2 420.0 12.9% 68.9% 18.2% 100.0% Officer's Choice Blue Reserve Grain Whisky ABD 82.7 334.5 82.8 500.0 16.5% 66.9% 16.6% 100.0% McDowell's No.1 Select Whisky UNSP 82.7 334.5 82.9 500.0 16.5% 66.9% 16.6% 100.0% Imperial Blue Premier Grain Whisky Pernod 99.6 343.7 86.7 530.0 18.8% 64.9% 16.4% 100.0% M2 Magic Moments Premium Vodka Radico 102.5 350.1 87.4 540.0 19.0% 64.8% 16.2% 100.0% Regal Talons Premium Rare Generation Whisky Radico 102.5 350.1 87.4 540.0 19.0% 64.8% 16.2% 100.0% Royal Stag Premier Whisky Pernod 121.7 366.6 91.7 580.0 21.0% 63.2% 15.8% 100.0% 8 PM Premium Black Rare Whisky Radico 122.5 365.6 91.9 580.0 21.1% 63.0% 15.9% 100.0% Royal Challenge Classic Premium Whisky UNSP 122.6 365.5 91.9 580.0 21.1% 63.0% 15.9% 100.0% Royal Stag Barrel Select Whisky Pernod 140.8 382.2 97.0 620.0 22.7% 61.6% 15.6% 100.0% Pluton Bay Superior Exotic Rum Radico 141.4 381.5 97.1 620.0 22.8% 61.5% 15.7% 100.0% M2 Magic Moments Verve Premium Vodka Radico 141.4 381.5 97.1 620.0 22.8% 61.5% 15.7% 100.0% Morpheus XO Blended Reserve Brandy Radico 224.7 447.5 107.8 780.0 28.8% 57.4% 13.8% 100.0% Blenders Pride Rare Premium Whisky Pernod 233.3 457.8 108.9 800.0 29.2% 57.2% 13.6% 100.0% Signature Premier Grain Whisky UNSP 234.4 456.6 109.0 800.0 29.3% 57.1% 13.6% 100.0% Antiquity Blue Ultra Premium Whisky UNSP 250.0 469.0 111.0 830.0 30.1% 56.5% 13.4% 100.0% Blenders Pride Reserve Collection Whisky Pernod 278.3 506.8 114.8 900.0 30.9% 56.3% 12.8% 100.0% Source: State excise website, HDFC sec Inst Research

Net realization increases, both on absolute and as % of gross revenue (or MRP) as one moves up the ladder


Page | 13

While we agree with the liquor player’s strategy of premiumisation, it is a difficult and slow process. The Indian alcohol market is a media-dark industry, where advertising is restricted. Stringent state-wise regulations and restrictions on advertising pose challenges for new players to enter the market, and create a loyal customer base for their products. These aspects act as a strong entry-barrier. But, Shifting consumer preferences to premium brands in a ‘media dark’ industry is also counter-productive to premiumisation strategy.

We believe in the inelastic nature of liquor demand. However, owing to consistently rising per unit taxation and thus consumer prices (a) it brings down the overall industry volumes even if temporary (and may be sometime permanent). This is visible from the low volume growth trajectory of industry and (b) persistently rising prices may force consumer to down trade and partly offset the premiumisation effort.

Price slab-wise % mix of cases sold in Karnataka in last five years

FY14 FY15 FY16 FY17 FY18 Remarks No of cases sold (Mn) 51.8 54.9 55.2 54.3 55.0

Price Slabs (Rs)* Volume mix (%) in each slabs

FY14, FY15 & FY16 FY17 & FY18 0-414 0-449 10.0 8.9 9.2 8.9 9.0

414-464 450-499 50.5 50.5 44.1 46.7 47.6 465-514 500-549 18.7 18.4 22.8 18.0 16.4 515-564 549-599 7.4 8.9 10.6 13.0 14.1 565-664 599-699 0.6 0.7 0.8 1.0 1.1 665-764 699-799 1.1 1.0 0.9 0.8 0.7 765-864 799-899 3.0 3.3 3.6 3.5 3.3 865-964 899-999 0.6 0.5 0.5 0.5 0.5

965-1064 999-1099 2.9 3.1 3.3 3.5 3.4 1065-1164 1099-1199 0.9 0.9 1.4 1.5 1.6 1165-1264 1199-1299 1.0 0.9 0.2 0.2 0.2 1265-1364 1299-1399 1.3 1.1 0.8 0.6 0.5 1365-1764 1399-1799 0.6 0.5 0.5 0.4 0.3 1765-2164 1799-2199 0.3 0.2 0.2 0.2 0.1 2165-4889 2199-4924 0.9 0.8 0.8 0.8 0.7 4890-7615 4924-7650 0.3 0.3 0.3 0.4 0.4

7616 and above 7651- 15000 0.1 0.1 0.1 0.1 0.1

Total 100.0 100.0 100.0 100.0 100.0 Source: State website, HDFC sec Inst Research *In general the liquor companies price case at the upper end of the slab

Karnataka state has seen marginal uptrading, however it has also been offset by downtrading in higher slabs


Page | 14

Industry dynamics are unlikely to improve in the near term. Given that alcohol is now amongst the very few items for states from a tax revenue perspective post GST, we see no reason why government may follow a different path.

Summary Despite being media dark and rising taxation, we

remain cognizant of rising disposable incomes, increasing social acceptance, high barriers to entry and companies push for premiumisation and margin improvements.

We will closely watch-out for (a) stable taxation policies (b) volume or mix surprises despite rising taxation (c) price increases from state or (d) liberal distribution policies.

Awkward industry dynamics and rich valuations even with reasonable growth assumptions leaves limited margin of safety for UNSP. Sell.

Radico’s relatively cheap valuation, niche positioning in fast growing Vodka and super premium brandy segment and improving dynamics in state of UP (20% of volumes) are the key factors. BUY.

Valuation summary

FMCG companies Mcap (Rs bn)

CMP* (Rs) Rating TP

(Rs) P/E (x) P/BV (x) ROE % EPS

CAGR (%) FY18 FY19E FY20E FY18 FY19E FY20E FY17 FY18E FY19E (FY18-20E)

Britannia 763 6,358 NEU 6,307 76.0 61.6 48.0 22.5 17.9 14.1 33.0 32.4 32.8 25.8 Colgate 311 1,143 NEU 1,219 46.9 39.3 33.5 19.3 19.3 15.8 46.0 49.0 51.7 18.2 Dabur 667 379 BUY 423 48.7 40.3 33.4 11.6 11.0 9.2 25.9 28.0 30.1 20.7 Emami 242 534 BUY 627 47.1 38.1 32.1 12.0 11.1 10.4 27.3 30.4 33.4 21.1 Godrej Consumer 902 1,325 - 1,143 59.9 49.4 43.0 15.1 13.5 11.9 34.3 36.0 36.5 18.1 Hindustan Unilever 3,719 1,718 NEU 1,709 72.4 58.5 48.3 49.5 42.8 36.0 72.0 78.4 81.0 22.5 ITC 3,350 276 BUY 367 29.9 27.2 24.6 6.6 6.0 5.5 23.1 23.2 23.4 10.1 Marico 443 343 BUY 388 53.7 41.5 32.2 17.6 16.0 14.0 34.1 40.4 46.3 29.1 Radico Khaitan 51 387 BUY 473 41.7 31.8 27.3 4.5 4.0 3.5 11.4 13.3 13.7 23.7 United Spirits 450 620 SELL 570 64.7 60.3 46.3 18.9 14.4 11.0 33.4 27.0 26.8 18.2 Source: HDFC sec Inst Research * as on 11th July, 2018

COMPANY UPDATE 12 JUL 2018

United Spirits SELL

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Short term challenges United Spirits’ (UNSP) management has pushed for premiumisation, cost control, de-leveraging and has franchised out low-end brands. UNSP’s premiumisation drive and BS cleanup are enticing, as they can drive up margins and return ratios. We think this transformation is mostly happening and have more than built it into our assumptions.

UNSP’s faces higher competitive intensity, risk of further excise increases (especially in Maharashtra) which may not be passed on to the consumers. Even in Karnataka (33% of its volumes), both volume growth and premiumisation has been weak. UNSP’s rich valuations (46x FY20E EPS) and reasonable assumptions leave limited upside potential. SELL with TP of Rs 570 (40x Jun-20E EPS).

Competitive intensity on rise: UNSP is an undisputed leader in IMFL space. However, it face challenges of rising competitive intensity from Allied Blenders entry into semi-premium and premium segment. ABD has also cut price of OC Blue in Maharashtra which competes with McDowell’s No 1. It could potentially impact UNSP’s EBITDA by ~Rs0.8-1bn. UNSP too resorted to price cut in West Bengal for Royal Challenge before pulling it back.

Potential increase in excise duty in Maharashtra: Maharashtra is likely to increase excise duty and it may not be fully passed on to the consumers due to already high prices and struggling volume growth.

Liquor companies may partly offset the excise increase against the LBT windfall gains of last year. This would further impact UNSP.

Premiumisation inevitable, but slow with hiccups: Consistent rise in unit taxation impairs the ability of liquor companies to capture the value share of industry pie. It also leads to subdued industry volume growth as well as downtrading that offset the premiumisation gains. Higher ad spends (~10% vs. 6% for Pernod) doesn’t ensure sustained premiumisation in event of pullback. Increased aggression from competition is a risk.

Low bad debt provision-bright spot: UNSP made a provision of ~Rs 1.4bn for bad debt owing to route to market changes in certain. In absence of any such provision requirement in subsequent years, it could lead to ~150bps margin expansion.

Consolidated Financial Summary (Rs mn) FY17 FY18 FY19E FY20E FY21E

Net Sales 88,635 85,906 92,512 101,704 112,550 EBITDA 10,352 12,007 14,647 17,129 20,313 APAT 5,071 6,964 7,466 9,722 12,290 Diluted EPS (Rs) 7.0 9.6 10.3 13.4 16.9 P/E (x) 88.8 64.7 60.3 46.3 36.7 EV / EBITDA (x) 47.1 39.9 32.1 27.0 22.3 RoE (%) 29.7 33.4 27.0 26.8 26.0 Source: Company, HDFC sec Inst Research

INDUSTRY ALCO BEV

CMP (as on 11 Jul 2018) Rs 620

Target Price Rs 570 Nifty 10,948

Sensex 36,266

KEY STOCK DATA

Bloomberg UNSP IN

No. of Shares (mn) 727

MCap (Rs bn) / ($ mn) 450/6,546

6m avg traded value (Rs mn) 1,491

STOCK PERFORMANCE (%)

52 Week high / low Rs 801/468

3M 6M 12M

Absolute (%) (10.4) (19.0) 17.4

Relative (%) (17.3) (24.1) 3.2

SHAREHOLDING PATTERN (%)

Promoters 58.5

FIs & Local MFs 4.3

FPIs 23.3

Public & Others 13.9 Source : BSE


UNITED SPIRITS : COMPANY UPDATE

Page | 16

Key Model Assumptions

FY17E FY18E FY19E FY20E FY21E CAGR FY18-20

Volumes (Mn Cases) 90.1 78.5 83.9 89.7 96.0 6.9 - P&A 36.8 37.2 40.5 44.2 48.2 9.0 - Popular 53.3 41.3 43.4 45.5 47.8 5.0

Realization/bottle 936 1,021 1,047 1,078 1,117 2.8 - P&A 1,358 1,378 1,402 1,437 1,487 2.1 - Popular 644 698 716 730 744 2.2

Standalone Revenue 85,936 81,701 89,568 98,555 109,180 9.8 - P&A 49,960 51,280 56,838 63,502 71,640 11.3 - Popular 34,330 28,830 31,028 33,231 35,591 7.4 - Other operating income 1,646 1,591 1,702 1,822 1,949 Contribution Margin 42.1% 46.5% 46.8% 47.1% 47.5% - P&A 46.5% 50.1% 50.3% 50.6% 50.8% - Popular 35.6% 40.0% 40.3% 40.5% 40.8% Contribution (Rs Mn) 37,092 38,809 42,803 47,406 52,874 - P&A 23,241 25,686 28,612 32,126 36,422 - Popular 12,204 11,532 12,489 13,459 14,503 - Other operating income 1,646 1,591 1,702 1,822 1,949 Advtg & Prom 6,668 7,882 8,513 9,279 10,114 8.5 % of revenue 7.8% 9.6% 9.5% 9.4% 9.3% Employee costs 6,674 6,601 6,469 6,922 7,406 2.4 % of revenue 7.8% 8.1% 7.2% 7.0% 6.8% Other operating expenses 13,591 14,112 14,068 15,052 16,106 3.3 % of revenue 15.8% 17.3% 15.7% 15.3% 14.8%

We estimate 9.8% revenue CAGR over FY18-20 led by volume growth and modest price increase. Management targets 12-13% revenue CAGR Our assumptions seem fair considering industry challenges of increasing competition, price cuts, increase in taxation etc Led by mix change, RM tailwind and lower PDD we forecast a healthy 290bps EBITDA margin expansion in FY19 and further 100bps in FY20. FY18 includes incremental PDD charge of Rs 1.5bn owing to route to market changes in UP, Chhattisgarh, Haryana (pulled back subsequently) etc


Page | 17

FY17E FY18E FY19E FY20E FY21E CAGR FY18-20

Total operating expenses 26,934 28,595 29,049 31,253 33,626 4.5 % of revenue 31.3% 35.0% 32.4% 31.7% 30.8% EBITDA 10,158 10,214 13,754 16,153 19,248 25.8 % of revenue 11.8% 12.5% 15.4% 16.4% 17.6% Subsidiaries Revenue 2,699 4,205 2,944 3,150 3,370 0.8 Operating costs 2,505 2,413 2,051 2,174 2,305 Subsidiaries EBITDA 194 1,792 892 975 1,065 19.1

Consolidated Revenue 88,635 85,906 92,512 101,704 112,550 9.5 EBITDA 10,352 12,006 14,647 17,129 20,313 25.3 Margin % 11.7% 14.0% 15.8% 16.8% 18.0% Depreciation 1,886 1,923 2,159 2,281 2,403 Interest Costs 3,751 2,710 2,550 1,602 896 Other Income 1,053 2,189 1,206 1,266 1,329 PBT 5,768 9,562 11,143 14,511 18,343 Tax 697 2,599 3,677 4,789 6,053 APAT 5,071 6,963 7,466 9,722 12,290 43.9 O/s shares 727 727 727 727 727 EPS 7.0 9.6 10.3 13.4 16.9 43.9 Source: Company, HDFC Sec Inst Research

Higher growth in subsidiaries owing to government grant to Pioneer Distilleries from the State of Maharashtra for setting up projects in notified rural areas in two phases. These grants are receivable in the form of VAT refunds Higher other income owing to sale of properties


Page | 18

Valuation and view At CMP, UNSP is trading at 60x FY19E and 46x FY20E

EPS. We foresee strong earnings CAGR of 18% over FY18-20, led by recovery in volumes, lower PDD and improvement in mix.

Optimistic assumptions, though plausible, are fraught with risk. Rich valuations and persistent regulatory adversity associated with the business leave limited room for upsides hereon. We await a better entry-point. SELL with a TP of Rs 570 @ 40x Jun-20E EPS.

Sensitivity Of TP At Various EPS And Multiples

Multiple (x) EPS

FY19 FY20 FY21 10.3 13.3 16.8

30 308 399 505 35 360 465 589 40 411 532 673 45 463 598 757 50 514 664 841

Upbeat assumptions and rich valuations leave limited room for complacency Sell with TP of Rs 570


Page | 19

Financials Volume Break-up: Prestige Vs. Regular (%) Value Break-up: Prestige Vs. Regular (%)


UNSP’s Regular And Premium Volumes (Mn Cases) Trend In EBITDA And Margins


Premiumisation to play out as contribution of the higher end P&A segment to UNSP’s volumes and revenue to increase P&A to contribute to 66% to UNSP’s revenue and 49% to volumes by FY20E Volumes of P&A to grow at 9% CAGR, while regular volumes at 5% EBITDA margins to improve on the back of acceleration of premiumisation and price increases

37% 41% 47% 48% 49% 50%

63% 59% 53% 52% 51% 50%

0%

20%

40%

60%

80%

100%

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Prestige & Above Regular

53% 59% 64% 65% 66% 67%

47% 41% 36% 35% 34% 33%

0%

20%

40%

60%

80%

100%

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Prestige & Above Regular

34 37 37 41 44 48

59 5341 43 46 48

0

20

40

60

80

100

120

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Regular (mn cases) Prestige & above (mn cases)

0%2%4%6%8%10%12%14%16%18%20%

0.0

3.0

6.0

9.0

12.0

15.0

18.0

21.0

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

EBITDA (in Rs Bn) EBITDA margin (%) - RHS


Page | 20

Company background UNSP was acquired by Vithal Mallya in 1951. Post his

demise, Vijay Mallya was appointed Chairman in 1983.

In 2013, Diageo Plc, the UK-based spirits company, acquired ~25% in UNSP for Rs 1,440 per share through three routes viz (1) Acquiring 14.98% stake by entering into a share purchase agreement with five companies (UBHL, Kingfisher Finvest India Ltd., SWEW Benefit Company, Palmer investment Group Ltd. and UB Sports Management Overseas Ltd., (2) 10% by preferential allotment agreement and (3)

0.04% through an open offer made to public shareholders

Post this, in 2014, Diageo again made an open offer to UNSP shareholders of Rs 3,030 per share. Moreover, Diageo acquired 3.76% by way of on-market purchases in 2013-14. Currently, Diageo is the promoter and holds ~55% stake in UNSP. The cumulative investment for this stake is ~USD 3bn.

Currently, Anand Kripalu is the MD and CEO of UNSP, and Sanjay Churiwala is the CFO.

United Spirits: The Story So Far.. Year Key Milestone 1951 Vithal Mallya acquired McDowell's 1968 McDowell's No.1 Whiskey launched. 1973 Vijay Mallya inducted as Director in McDowell & Co. 1983 Company board unanimously appoints Vijay Mallya as the Chairman of McDowell’s, after the demise of Vithal Mallya

2005 McDowell's completes acquisition of Shaw Wallace & Company - brands Royal Challenge, Antiquity, Director’s Special, White Mischief amongst others become part of the company portfolio.

2006 United Spirits Ltd, is created through the merger of McDowell & Co Ltd, Herbertsons Ltd, Triumph Distillers and Vintners Private Ltd, Baramati Grape Industries India Ltd, Shaw Wallace Distilleries Ltd and four other companies. UNSP acquires Bouvet Ladubay, subsidiary of France-based Taittinger.

2007 UNSP acquires Whyte & Mackay, UK's scotch whiskey distiller, for GBP 595 mn 2013-14 Diageo plc acquires ~55% shareholding in United Spirits. Currently, UNSP is a subsidiary of Diageo plc

2014 In September 2014, UNSP’s board of directors directed an enquiry into certain matters referred to in company’s financial statements and auditor’s report for FY14. This enquiry was headed by the MD and CEO of UNSP and covered various matters, including certain doubtful debts, receivables, advances, deposits etc.

2015 Sale of Whyte & Mackay to Emperador, for a consideration of GBP 430 mn In April 2015, UNSP board discussed and considered the outcome of this inquiry. Subsequently, UNSP made provisions for doubtful debtors, loan and advances to UBHL, etc., which were reflected in financials of FY14 and FY15

Renovation of key regular brands such as McDowell No.1 and Royal Challenge completed 2015-16 UNSP continued to implement rationalisation initiatives, such as sale of select non-core assets

2016 USL entered into a settlement agreement with Vijay Mallya pursuant to which he resigned from his positions as a director and chairman of UNSP and of the boards of its subsidiaries

Source: Company, HDFC sec Inst Research

Vijay Mallya was appointed Chairman of the company in 1983 Diageo has made two open offers to UNSP shareholders – the second in 2014 being more successful Currently, Diageo is UNSP’s promoter, with a ~55% stake Diageo has driven various rationalisation initiatives in UNSP, after assuming control in 2013-14


Page | 21

Income Statement (Consolidated) Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 88,635 85,906 92,512 101,704 112,550 Growth (%) 4.3 (3.1) 7.7 9.9 10.7 Material Expenses 49,297 43,406 46,765 51,149 56,306 Power & Fuel expenses 348 364 392 431 477 Employee Expenses 6,882 6,809 6,469 6,922 7,406 Other Operating Expenses 21,756 23,320 24,239 26,074 28,047 EBITDA 10,352 12,007 14,647 17,129 20,313 EBITDA Margin (%) 11.7 14.0 15.8 16.8 18.0 EBITDA Growth (%) 7.3 16.0 22.0 16.9 18.6 Depreciation 1,886 1,923 2,159 2,281 2,403 EBIT 8,466 10,084 12,487 14,847 17,910 Other Income (Including EO Items) (3,088) 1,744 1,206 1,266 1,329 Interest 3,751 2,710 2,550 1,602 896 PBT 1,627 9,118 11,143 14,511 18,343 Tax (Incl Deferred) 697 2,599 3,677 4,789 6,053 Minority Interest & Profit/loss from associates - - - - -

RPAT 930 6,519 7,466 9,722 12,290 EO (Loss) / Profit (Net Of Tax) (4,141) (445) - - - APAT 5,071 6,964 7,466 9,722 12,290 APAT Growth (%) 196.9 37.3 7.2 30.2 26.4 Adjusted EPS (Rs) 7.0 9.6 10.3 13.4 16.9 EPS Growth (%) 196.9 37.3 7.2 30.2 26.4


Balance Sheet (Consolidated) As at March (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 1,453 1,453 1,453 1,453 1,453 Reserves 16,403 22,438 29,904 39,626 51,916 Total Shareholders Funds 17,856 23,891 31,357 41,079 53,369 Minority Interest (25) 136 - - - Secured loans 8,697 7,628 7,197 6,197 5,197 Unsecured loans 29,069 23,013 25,569 22,569 19,569 Total Debt 37,766 30,641 32,766 28,766 24,766 Net Deferred Taxes 1,536 2,863 2,200 2,531 2,365 Long Term Provisions & Others 442 526 600 600 600 TOTAL SOURCES OF FUNDS 57,575 58,057 66,922 72,976 81,100 APPLICATION OF FUNDS Net Block (excluding goodwill) 18,486 17,552 17,904 17,622 17,219 CWIP 1,993 1,018 2,080 2,287 2,531 Goodwill 680 361 361 361 361 Investments 1 1 5 5 5 Other non-current assets 8,528 12,973 8,873 9,050 9,231 Total Non-current Assets 29,688 31,905 29,222 29,325 29,347 Inventories 19,276 19,197 22,103 24,845 26,484 Debtors 29,534 26,812 31,642 35,353 40,069 Loans and advances 7,808 7,075 7,864 8,645 9,567 Cash & Equivalents 872 2,560 12,962 16,807 21,480 Total Current Assets 57,490 55,644 74,569 85,650 97,600 Creditors 12,247 14,551 14,661 15,977 17,495 Other Current Liabilities & Provns 17,356 14,941 22,209 26,022 28,351 Total Current Liabilities 29,603 29,492 36,870 41,999 45,847 Net Current Assets 27,887 26,152 37,700 43,651 51,753 TOTAL APPLICATION OF FUNDS 57,575 58,057 66,922 72,976 81,100



Page | 22

Consolidated Cash Flow Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 1,627 9,118 11,143 14,511 18,343 Interest expenses 3,751 2,710 2,550 1,602 896 Depreciation 1,886 1,923 2,159 2,281 2,403 Working Capital Change (2,993) (411) 2,291 (1,952) (3,776) Tax Paid (697) (2,599) (3,677) (4,789) (6,053) Others (1,353) (1,328) (1,206) (1,266) (1,329) OPERATING CASH FLOW ( a ) 2,221 9,413 13,260 10,388 10,484 Capex (1,129) (525) (3,062) (2,207) (2,244) Free cash flow (FCF) 1,092 8,888 10,198 8,182 8,240 Investments 8 - (4) - - Non-operating Income 5,194 2,189 1,206 1,256 1,329 INVESTING CASH FLOW ( b ) 4,073 1,664 (1,861) (951) (915) Debt Issuance/(Repaid) 492 (7,125) 2,125 (4,000) (4,000) Interest Expenses (3,751) (2,710) (2,550) (1,602) (896) FCFE (2,167) (947) 9,773 2,579 3,344 Share Capital Issuance - - - - - Dividend - - - - - Others (3,532) 446 (573) 10 - FINANCING CASH FLOW ( c ) (6,791) (9,389) (998) (5,592) (4,896) NET CASH FLOW (a+b+c) (497) 1,688 10,402 3,845 4,673 Opening bal of Cash & Cash Equ 1,369 872 2,560 12,962 16,807 Closing Cash & Equivalents 872 2,560 12,962 16,807 21,480 Source: Company, HDFC sec Inst Research

Key Ratios FY17 FY18 FY19E FY20E FY21E PROFITABILITY (%) GPM 44.4 49.5 49.4 49.7 50.0 EBITDA Margin 11.7 14.0 15.8 16.8 18.0 APAT Margin 5.7 8.1 8.1 9.6 10.9 RoE 29.7 33.4 27.0 26.8 26.0 RoIC (or Core RoCE) 11.8 10.8 15.3 17.1 20.0 RoCE 12.7 15.4 14.7 15.4 16.7 EFFICIENCY Tax Rate (%) 42.8 28.5 33.0 33.0 33.0 Fixed Asset Turnover (x) 4.8 4.8 5.2 5.7 6.5 Inventory (days) 79.4 81.6 87.2 89.2 85.9 Debtors (days) 121.6 113.9 124.8 126.9 129.9 Other Current Assets (days) 32.2 30.1 31.0 31.0 31.0 Payables (days) 50.4 61.8 57.8 57.3 56.7 Other Current Liab & Provns (days) 71.5 63.5 87.6 93.4 91.9 Cash Conversion Cycle (days) 111.2 100.2 97.6 96.3 98.2 Debt/EBITDA (x) 3.6 2.6 2.2 1.7 1.2 Net D/E (x) 2.1 1.2 0.6 0.3 0.1 Interest Coverage (x) 2.3 3.7 4.9 9.3 20.0 PER SHARE DATA (Rs) EPS 7.0 9.6 10.3 13.4 16.9 CEPS 3.9 11.6 13.2 16.5 20.2 Dividend - - - - - Book Value 24.6 32.9 43.2 56.5 73.5 VALUATION P/E (x) 88.8 64.7 60.3 46.3 36.7 P/BV (x) 25.2 18.9 14.4 11.0 8.4 EV/EBITDA (x) 47.1 39.9 32.1 27.0 22.3 EV/Revenues (x) 5.5 5.6 5.1 4.5 4.0 OCF/EV (%) 0.5 2.0 2.8 2.2 2.3 FCF/EV (%) 0.2 1.9 2.2 1.8 1.8 FCFE/Mkt Cap (%) (0.5) (0.2) 2.2 0.6 0.7 Dividend Yield (%) - - - - - Source: Company, HDFC sec Inst Research

INITIATING COVERAGE 12 JUL 2018

Radico Khaitan BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Spirited and soaring RDCK is an attractive play in the IMFL space with ~20mn cases sales (6.5-7% market share). Our optimism on RDCK is premised on (1) Its strong presence in fast growing and niche segment of Vodka (~50% share) and super premium Brandy. Prestige and above constitutes ~20% of its total revenue but 50% of its EBITDA, leaving significant headroom for RDCK to premiumise, (2) CSD sales at ~17% in the IMFL revenue, with high entry barriers, (3) Captive ENA manufacturing in largest sugar producing state of UP that provides raw material tailwinds, and (4) Balance sheet deleveraging. Net debt/EBITDA declined from 5x in FY15 to 2x in FY18.

Initiate with BUY and TP of Rs 473 at 32x Jun-20E EPS vs. 40x for United Spirits (UNSP). Our lower valuation multiple for RDCK vs. UNSP owes to the latter’s leadership and bigger brands.

Key highlights IMFL the growth lever led by premiumisation:

RDCK’s business comprises of IMFL (branded liquor) and Non-IMFL. IMFL contributes 76% of RDCK’s revenue and 85% of EBITDA (16-18% margin).

Within IMFL, high margin (22-24%) Prestige and above segment though contribute 26% of volumes and 43% of revenues but ~60% of EBITDA; rest by low margin (11-13%) Popular segment. UNSP’s 47% volumes, 63% revenues are from premium segment.

Niche positioning – strategic driver of growth: RDCK’s strategic focus on vodka and premium brandy with low competitive intensity (10% volume CAGR over FY13-18), customer segment (CSD, exports) and geography (UP) enables to drive growth.

RDCK enjoys 50% share in fast growing segment of Vodka. CSD contribute ~17% of its revenue and it enjoys a healthy ~23% volume share. Entry into CSD segment is difficult with stringent process and compliance norms. UP is a major market for RDCK (~20% of volumes). Abolition of monopolistic distribution is driving strong growth in Popular category for RDCK in the state.

Deleveraging to further boost profitability: RDCK’s net debt declined from peak of Rs 9.1bn in FY16 to Rs 5.4bn in FY18 led by healthy 20% EBITDA and 30% earnings CAGR, modest capex and better working capital management. We expect this trajectory to continue. Management expects to be debt free by FY21 though we remain conservative.

Consolidated Financial Summary (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Sales 16,799 18,228 19,831 21,259 22,744 EBITDA 2,121 2,698 3,155 3,501 3,874 APAT 809 1,235 1,617 1,889 2,203 Diluted EPS (Rs) 6.1 9.3 12.2 14.2 16.6 P/E (x) 63.7 41.7 31.8 27.3 23.4 EV / EBITDA (x) 27.8 21.0 17.8 15.6 13.7 RoE (%) 8.1 11.4 13.3 13.7 14.0 Source: Company, HDFC sec Inst Research

INDUSTRY ALCO BEV

CMP (as on 11 Jul 2018) Rs 387

Target Price Rs 473 Nifty 10,948

Sensex 36,266

KEY STOCK DATA

Bloomberg RDCK IN

No. of Shares (mn) 133

MCap (Rs bn) / ($ mn) 52/749

6m avg traded value (Rs mn) 712

STOCK PERFORMANCE (%)

52 Week high / low Rs 496/125

3M 6M 12M

Absolute (%) 4.0 21.6 191.0

Relative (%) (2.8) 16.5 176.8

SHAREHOLDING PATTERN (%)

Promoters 40.4

FIs & Local MFs 5.1

FPIs 22.9

Public & Others 31.5 Source : BSE


RADICO KHAITAN : INITIATING COVERAGE

Page | 24

Company Overview Radico Khaitan (RDCK) is one of the largest players in

the Indian Spirits industry. It was formerly known as Rampur Distillery and Chemical Company. It was one of the largest and most efficiently run distilleries, manufacturing high grade ENA (extra neutral alcohol) from molasses and grain and as a bottler for other’s spirits before entering the branded liquor space in 1999.

RDCK’s marquee brands include 8PM whisky (fastest selling 1mn cases in the year of launch itself), Morpheus brandy, Contessa rum, Old Admiral brandy, Magic Moments Vodka, After Dark, Regal Talons etc

The company is one of the largest providers of branded IMFL to the Canteen Stores Department (CSD), which has significant entry barriers.

Business Segment: IMFL and Non IMFL

Radico’s business segment comprises of IMFL (Indian Made Foreign Liquor) and Non-IMFL segment.

IMFL business comprises of branded liquor sales and is the key growth driver.

Non-IMFL segment comprises of bulk alcohol sales, country liquor in UP state and PET / printed bottles.

IMFL and Non-IMFL: Revenue and EBITDA mix (%)

Source : HDFC sec Inst Research (estimate) IMFL and Non-IMFL: Revenue mix (%)

Source : Company, HDFC Sec Inst Research

RDCK is one of the largest providers of branded IMFL to CSD IMFL business is the key growth driver Revenue contribution of IMFL business has increased from 70% in FY12 to 76% in FY18; We expect the contribution of IMFL to overall revenue to increase to 79% by FY21E

76%85%

24%15%

0%

20%

40%

60%

80%

100%

Revenue EBITDA

IMFL Non IMFL

69%

70%

74%

73%

72%

72%

76%

77%

78%

79%

31%

30%

26%

27%

28%

28%

24%

23%

22%

21%

0%

20%

40%

60%

80%

100%

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

IMFL Non IMFL


Page | 25

IMFL: key growth driver RDCK is one of the few companies in India that has

developed its entire brand portfolio of IMFL organically with four millionaire brands viz. 8 PM Whisky, Contessa Rum, Old Admiral Brandy and Magic Moments Vodka.

Revenue contribution of IMFL has increased from 70% in FY12 to 76% inFY18. With healthy 9% revenue CAGR, we expect contribution of IMFL to increase to 79% by FY21.

IMFL revenue trend and growth YoY (%)

Non IMFL revenue trend and growth YoY (%)


RDCK’s portfolio constitute of four millionaire brands viz. 8 PM Whisky, Contessa Rum, Old Admiral Brandy and Magic Moments Vodka Despite healthy growth in premium brands, RDCK’s IMFL revenue declined in FY15 and FY16 owing to curbing the sales of low margin ‘Popular; brands. This was on account of steep increase in raw material prices, taxation and lack of price increases from government

-15

-10

-5

0

5

10

15

6,000

9,000

12,000

15,000

18,000

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

IMFL revenue (Rs Mn) % change YoY (RHS)

-15

-10

-5

0

5

10

15

4,000

4,300

4,600

4,900

5,200

5,500

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Non IMFL revenue (Rs Mn) % change YoY (RHS)


Page | 26

Focus on niche segment drives growth in IMFL Product positioning Consumer MRP (Rs) Whisky Rum Brandy Vodka Ready to Drink

Luxury > Rs 4000 Rampur Single Malt Jaisalmer

Super Premium > Rs 700 Morpheus Magic Moments Verve

Semi Premium/Premium Rs 500-700

After Dark Whisky Pluton Bay Magic Moments

Deluxe Rs 300-500 Regal Talon Contessa White Regular Rs 225-300 8PM Contessa Rum, Bermuda

Rum Old Admiral

Brandy

Ready to Drink Rs 80-125 Magic Moment

Family Source: Company, HDFC sec Inst Research All prices for 750 ML bottle except for ready to drink, which is for 275 ML bottle

RDCK’s product innovation and brand building history Year Key Milestone Category Competing brands

1998 Started the branded IMFL division and launched its first brand 8 PM Whisky; Became a millionaire brand in first year of launch Regular Bagpiper, Haywards, Director Special,

Officers Choice

2002 Launched Old Admiral Brandy; Became one of the leading brands in CSD Regular Amrut’s Silver Cup Brandy

2006 After creating brands in high volume regular categories, launched the first product in the semi premium category, Magic Moments Vodka

Semi-Premium Oxygen Apple Vodka, White Mischief Vodka Ultra

2009 Launched Morpheus Super Premium Brandy; Magic Moments became a millionaire brand Super Premium Bajois Napoleon Brandy, Bols Brandy

X O Excellence 2011 Launched After Dark, a premium category whisky Semi-Premium Royal Stag and Royal Challenge

2012 Launched Magic Moments Verve, a super premium vodka followed by flavors of Verve Super Premium Seagram's Fuel Vodka, Eristoff- Red

Vodka

2013 Launched Morpheus Blue, an upgraded version of Morpheus super premium brandy Super Premium

2014 Launched two new flavors of Magic Moments Verve Vodka Super Premium 2015 Launched ELECTRA, a premium ready to drink product Super Premium Breezer

2016 Launched Rampur Indian Single Malt luxury whisky Luxury (only exports) Paul John Single Cask, Amrut Cask Strength, Paul John Brilliance

2016 Launched Regal Talons Semi Deluxe whisky Imperial Blue, McDowells No 1

2017 Launched Pluton Bay Premium Rum and 1965-The Spirit of Victory Premium Rum Semi-Premium McDowell’s No. 1 Celebration XXX

Rum, Revolution Premium XXX Rum 2018 Launched Jaisalmer, a luxury Indian craft gin Luxury (only exports)


RDCK’s product portfolio offers broad choice for consumers across segments with focus on premiumisation RDCK launched six new brands in last five years, all in premium segment


Page | 27

IMFL: Volume, Revenue and EBITDA Mix (%) IMFL revenue trend


Revenue trend: P&A and Popular Volume trend: P&A and Popular


P&A volume contribution though modest at 26%, it accounts for ~60% of the EBITDA in the IMFL segment (50% of overall) Higher volume growth in P&A to significantly improve the profitability of RDCK Drop in P&A revenues in FY16 is owing to change in accounting from IGAAP to IndAS

26%43%

59%

74%57%

41%

0%

20%

40%

60%

80%

100%

Volume Revenue EBITDA

P&A Popular

-15

-10

-5

0

5

10

15

6,000

9,000

12,000

15,000

18,000

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

IMFL revenue (Rs Mn) % change YoY (RHS)

-

3,000

6,000

9,000

12,000

15,000

18,000

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A PopularRs mn

-

4.00

8.00

12.00

16.00

20.00

24.00

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A Popular


Page | 28

Revenue growth: P&A and Popular Volume growth: P&A and Popular

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Revenue mix: P&A and Popular Volume mix: P&A and Popular


20.8

8.6 8.9 8.0 6.2

9.3 9.0 9.0

4.5

(7.2)(10.7)

(2.0)

7.0 6.2 5.0 5.0

(12.0)(9.0)(6.0)(3.0)

-3.0 6.0 9.0

12.0 15.0 18.0 21.0

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A Popular%

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A Popular%

30%

33%

38%

41%

44%

43%

44%

45%

46%

70%

67%

62%

59%

56%

57%

56%

55%

54%

0%

20%

40%

60%

80%

100%

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A Popular

16%

18%

21%

24%

26%

26%

26%

27%

28%

84%

82%

79%

76%

74%

74%

74%

73%

72%

0%

20%

40%

60%

80%

100%

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

P&A Popular

P&A has witnessed consistent volume (10% CAGR over FY13-18) and revenue growth Decline in Popular segment volumes over FY15 and FY16 has been strategic owing to steep increases in raw material prices and lack of price increases by state government leading to curtailment of volumes of loss making brands


Page | 29

Volume mix: P&A brands Volume mix: Popular brands

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research 8PM Whisky: founding stone of success: With 8PM launch in 1999, not only RDCK successfully

entered the branded liquor sector but also managed to achieve a million cases in sales within a year of its launch.

8PM whisky continues to be the flagship brand of the company and deliver healthy volume growth year-after-year. In FY18 alone the brand registered 29% growth led by strong sales in UP market.

The phenomenally successful Old Admiral Brandy, launched in 2002 is another millionaire brand from RDCK’s straddle.

Magic Moment Vodka: Sweet spot Vodka is a smaller and niche segment that accounts

for a significantly large portion of the profit pool of RDCK.

Though the whisky segment was and is the largest in the Indian spirits market (~60%) it is also the most competitive. India also accounts for ~60% of the world’s whisky consumption.

With 8PM whisky, RDCK was jostling with the likes of UNSP and multinational Pernod Ricard who spends big bucks on their brands. This is when RDCK decided to go where there was less chance of being pushed off the road.

This is when RDCK decided to launch a brand but in a segment that was untapped. However, globally Vodka is the largest segment (bigger than whisky) and becoming even more popular. Trends in Indian demographics were similar. This is when management decided to capitalize on this opportunity.

In 2005, another millionaire brand Magic Moments Vodka was launched. The brand became a huge

8PM laid the growth foundation for RDCK and continuos to be an important contributor 8PM grew by 29% in volumes in FY18 led by strong growth in UP market, change in packaging from PET bottles to tetra packs etc The brand has been consistently registering healthy growth (15% CAGR over FY14-18)

-10 20 30 40 50 60 70 80 90

100

FY14

FY15

FY16

FY17

FY18

Magic Moments Vodka Morpheus Brandy Others

%

-10 20 30 40 50 60 70 80 90

100

FY14

FY15

FY16

FY17

FY18

8 PM Whisky Old Admiral Brandy Contessa Rum Others%


Page | 30

success. The packaging and direct printing has been a huge hit of Magic Moments vodka.

Magic Moments crossed the million-case mark in 2010. Based on the success of Magic Moments, RDCK has also launched Magic Moments Remix Vodka- an extension of Magic Moments vodka into the flavoured category. Remix has 6 flavours – orange, green apple, lemon, lemongrass & ginger, raspberry and chocolate. The variants have invoked an extremely positive response. The experimental attitude of consumers and their thirst for premium variety was the key reason behind RDCK launching flavored Magic Moments Vodka.

Historically the growth rates of white spirits (Vodka, Gin etc) have been nearly double the growth of other segments (whisky, brandy, rum etc). Future growth outlook is expected to be similar.

Super Premium and Premium Vodka remained one of the fastest growing segments with CY12-17 volume growth of 16.7% and 9.4% respectively (overall Vodka industry growth of 4.3% during same period).

Recently company has launched premium variant Magic Moments Black. In UP Magic Moments sells for Rs 100/180ml nip vs. Rs 180 for black.

Morpheus brandy: Small but highly profitable Brandy is second largest volume contributor in IMFL

industry after Whisky. Size of brandy market is ~65mn cases. However a significant portion of this (~50-60%) is either in unbranded/cheap category or low priced Popular segment.

More importantly Tamilnadu and Kerala account for ~70% of the brandy market. Both this markets are difficult to penetrate due to stringent distribution control by the government of both wholesale and retail.

RDCK has thus uniquely positioned itself in low-quantity but highly profitable super-premium brandy segment. As per the management it enjoys ~50-60% share in this super-premium segment.

RDCK enjoys a healthy 22-24% margin in the Prestige and above category of IMFL led by Magic Moments Vodka and Morpheus Brandy.

These segments enjoy high margin, growth and low competitive intensity vs. whisky segment where the likes of UNSP, Pernod and ABD push around.

Increase in competition from branded liquor players is a risk. However it may also expand the size of this niche market. With its strong brand presence for more than a decade, RDCK is well-positioned.

Magic moment has been the eureka product for RDCK Since its launch in 2005, hitting a million cases in 2010; the brand has grown to almost 3.5-4mn cases p.a.


Page | 31

Geographic and customer segment split RDCK customer and geographic concentration of

revenue is fairly distributed. No single customer or state contributes more than 20% of its revenue in IMFL segment. This minimizes the risk of adverse regulations in any specific segment or loss of customers. That said, UP is one of the largest contributing market including Non-IMFL business.

With exception of South, all the other states witnessed a healthy double digit growth.

IMFL revenue mix


CSD: High entry barriers As per the management, RDCK enjoys a 23% volume

market share in CSD segment. This is lower than that of UNSP. CSD contributes ~17% of RDCK’s revenues. For UNSP, we believe this to be ~6-8%.

A prior registration is required to sell brands through CSD outlets. The registration process is lengthy and time consuming. It has stringent policies on quality, supply chain and fee structure. This act as an entry barrier.

RDCK has 18 products registered with CSD across categories and one of the largest providers of branded IMFL to CSD.

Uttar Pradesh market boost: Uttar Pradesh (UP) is an important market for RDCK

RDCK’s enjoys a healthy 20-25% market share in UP. It accounts for ~15% of RDCK’s IMFL revenues. This is on upswing led by distribution model change from Apr’18 vs. monopolistic distribution.

This is positive for strong brands including RDCK’s 8PM whisky and Magic Moment Vodka. Erstwhile private players used to push for their own brands. Adulteration of branded liquor was also an issue.

The robust growth in 8PM whisky sales (+29% YoY) in FY18 was significantly contributed by UP.

Besides IMFL, RDCK also sells bulk alcohol and country liquor only in the state of UP. Including bulk alcohol and country liquor, revenue contribution from state of UP would increase to ~30-35%.

In-house distilleries ensure RM availability: RDCK has 5 distilleries strategically located in two of

the largest sugarcane producing states - Maharashtra and Uttar Pradesh. 3 distilleries are in Rampur, Uttar Pradesh and 2 in Aurangabad, Maharashtra. The strategic location of distilleries allows availability of molasses and unhindered operations in the distillery. Availability of molasses is crucial to the liquor industry being the key raw material.

The Rampur Distillery plant has an ENA (Extra Neutral Alcohol) capacity of 102 mn litres per annum. It is one of the largest distilleries in India and is operating at ~90-95% of its capacity. It also has an ENA storage capacity of 3 months thereby, safeguarding partly to the price volatility of ENA.

The company has 28 bottling units out of which 5 are owned. The company has a bottling unit across all states, thereby reducing the transport costs.

RDCK enjoys a healthy 25% volume share in CSD segment, similar to UNSP CSD has high entry barriers CSD contributes ~17% of RDCK’s revenue vs. ~5-7% for UNSP as per our estimate Monopolistic distribution by a single party earlier led to push for their own brands Distribution model change in UP to provide boosts to sales of branded liquor players UP excise collection in FY18 grew by 21% (2HFY18 by 32%), for Apr18 it was up 84%)

32.0% 32.4%

33.8% 30.5%

17.3% 16.7%

7.0% 8.8%5.6% 5.9%4.3% 5.7%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

FY17 FY18

North South CSD East West Export


Page | 32

RDCK has a strong distribution network; ~55,000 retail outlets and ~5,000 on premise outlets. The distribution is supported by regional marketing services.

Key Raw Materials: Consumption and price trend

The Extra Neutral Alcohol or ENA is a high distillated alcohol without any impurities and is used for the production of alcoholic beverages such as whisky, vodka, gin etc

Raw material prices have been relatively stable over FY17-18 with downward bias. With all time high sugarcane and sugar production for Sugar Season 19 (October18 to Sep19), prices of molasses based ENA is expected to remain soft. Molasses is a byproduct while manufacturing sugar.

Cost of goods sold mix


ENA prices (Rs): Quarterly trend ENA prices (Rs): Annual trend


36.0

40.0

44.0

48.0

52.0

1QFY

132Q

FY13

3QFY

134Q

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

Rs

43.0

45.7

48.5

45.7

48.9 48.6

42.0

43.0

44.0

45.0

46.0

47.0

48.0

49.0

50.0

FY13

FY14

FY15

FY16

FY17

FY18

Rs

Increase in proportion of packaging goods in RM mix in FY18 is owing to sale of 8PM whisky in tetra packs which is treated as part of packaging vs. pet bottles which is part of raw materials Steep increase in ENA prices over FY13-15 and lack of price increases from state government forced RDCK to curb sale of Popular brands with low margin/profitability

65.2 63.0 64.0 55.1 57.7 51.0

34.8 37.0 36.0 44.9 42.3 49.0

-

20.0

40.0

60.0

80.0

100.0

FY13

FY14

FY15

FY16

FY17

FY18

Raw Materials Packaging goods%


Page | 33

Key raw materials and price trend

Consumption units Consumption (Rs Mn) Cost/Unit (Rs)

FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Rectified Spirit/ENA 519 831 901 1,646 1,524 - - - - - Molasses (Qtls in Mn) 2.45 2.88 2.10 2.24 2.90 1,019 1,373 1,200 997 1,373 415 477 571 446 473 Broken Rice (Qtls in Mn) 0.59 0.43 0.43 0.72 0.43 743 606 596 963 670 1,259 1,395 1,399 1,334 1,557 Resin (Mn Kgs) 8.01 7.24 7.74 7.47 7.37 793 776 740 583 579 99 107 96 78 79 Maize (Qtls in Mn) - 0.08 0.33 0.08 0.27 - 103 408 100 412 - 1,318 1,254 1,189 1,516 Others 281 508 449 565 650 3,354 4,198 4,294 4,855 5,208 Source: Company, HDFC sec Inst Research EBITDA margin set to expand:

RDCK’s margin after being flat for three years from FY12-14, witnessed a decline in FY15 owing to lack of price increases from state government and consistently adverse raw material movement.

However, RDCK’s EBITDA margin has consistently improved (+500bps since FY15) led by (a) improving product mix (b) price increases from state government in FY18 and relatively stable raw material prices.

RDCK’s focus on (a) launching products in the premium segment (b) raw material tailwinds and (c) focus on costs optimization will lead to margin expansion. We expect the EBITDA to grow at a CAGR of 13% (FY18-21E) to Rs 3.9bn from Rs 2.7bn in FY18.

EBITDA and margin trend


8.0

10.0

12.0

14.0

16.0

18.0

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Adjusted EBITDA (Rs Mn) EBITDA margin % (RHS)

Volume growth, mix improvement and stable raw material prices to lead to healthy 14% EBITDA and 24% earnings CAGR


Page | 34

Debt repayment to boost profitability

RDCK has successfully reduced its net debt by Rs 3.7bn from peak of Rs 9bn in FY16 to Rs 5.3bn in FY18. Reduction in net debt has been led by better working capital management especially recovery of inter-corporate deposits. Net debt/EBITDA declined from 5x in FY15 to 2x in FY18.

Management targets to become debt free by FY21 end. Nevertheless, we remain conservative and estimate the net debt to decline to Rs 1.5bn by FY21 end from Rs 5.3bn in FY18.

The reduction in debt will boost profitability along with expansion of net margins. Healthy revenue and EBITDA growth led by better mix and raw material tailwinds, reducing debt and the associated savings in the interest costs will lead to PAT CAGR (FY18-20E) of 24%.

Leverage ratio


Key risks

Increase in competitive activity: RDCK significant portion of EBITDA and earnings is from niche segment of vodka and brandy which witnesses’ limited competition from leading MNC players like UNSP and Pernod Ricard. Any increase in competitive activity by this player remains a key risk.

Lack of price increases: In addition to premiumisation, RDCK is dependent on state government for price increases. Lack of price increases from state government or steep increase in taxation may hamper volume growth.

Increases in input costs: Raw material prices have been relatively stable over FY17-18 with downward bias. With all time high sugarcane and sugar production for Sugar Season 19 (October18 to Sep19), prices of molasses based ENA is expected to remain soft. Molasses is a byproduct while manufacturing sugar. However abnormal increase in ENA prices remains a risk.

Increase in competitive intensity especially in the niche category of Vodka and super premium brandy

-

1.00

2.00

3.00

4.00

5.00

6.00

-

2,000

4,000

6,000

8,000

10,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Net Debt (Rs Mn) Net Debt/EBITDA (x) (RHS)


Page | 35

Key Revenue Assumptions

FY13 FY14 FY15 FY16* FY17 FY18 FY19E FY20E FY21E Volumes (Mn Cases) P&A 3.08 3.72 4.04 4.40 4.75 5.05 5.51 6.01 6.55 Popular 15.93 16.64 15.44 13.79 13.51 14.45 15.34 16.11 16.92 Total 19.01 20.36 19.48 18.19 18.26 19.50 20.86 22.12 23.47 Growth YoY (%) 2.49 P&A - 20.8 8.6 8.9 8.0 6.2 9.3 9.0 9.0 Popular - 4.5 (7.2) (10.7) (2.0) 7.0 6.2 5.0 5.0 Total - 7.1 (4.3) (6.6) 0.4 6.8 7.0 6.1 6.1 Mix (%) P&A 16.2 18.3 20.7 24.2 26.0 25.9 26.4 27.2 27.9 Popular 83.8 81.7 79.3 75.8 74.0 74.1 73.6 72.8 72.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Realization (Rs/Case) P&A 1,187 1,220 1,255 1,111 1,120 1,174 1,204 1,227 1,245 Popular 523 553 541 510 500 543 558 568 577 Total 631 675 689 656 661 706 729 747 763 Growth YoY (%) P&A - 2.8 2.8 (11.4) 0.8 4.8 2.6 1.9 1.5 Popular - 5.7 (2.2) (5.7) (2.0) 8.6 2.6 1.9 1.5 Total - 7.0 2.1 (4.9) 0.9 6.8 3.1 2.5 2.2 Revenue (Rs Mn) P&A 3,656 4,540 5,070 4,890 5,319 5,922 6,639 7,373 8,157 Popular 8,331 9,203 8,354 7,036 6,759 7,853 8,650 9,252 9,861 IMFL subtotal 11,987 13,743 13,424 11,926 12,077 13,775 15,289 16,625 18,018 Non IMFL 5,176 4,829 5,041 4,592 4,722 4,453 4,542 4,633 4,726 Total 17,163 18,572 18,465 16,518 16,799 18,228 19,831 21,259 22,744 Growth YoY (%) P&A 15.4 24.2 11.7 (3.6) 8.8 11.3 12.1 11.1 10.6 Popular 12.1 10.5 (9.2) (15.8) (3.9) 16.2 9.0 7.0 6.6 IMFL 13.1 14.6 (2.3) (11.2) 1.3 14.1 10.3 8.7 8.4 Non IMFL 9.4 (6.7) 4.4 (8.9) 2.8 (5.7) 2.0 2.0 2.0 Total 11.9 8.2 (0.6) (10.5) 1.7 8.5 8.3 7.2 7.0 Mix (%) P&A 21.3 24.4 27.5 29.6 31.7 32.5 33.6 34.8 36.0 Popular 48.5 49.6 45.2 42.6 40.2 43.1 43.4 43.3 43.1 IMFL 69.8 74.0 72.7 72.2 71.9 75.6 77.0 78.1 79.1 Non IMFL 30.2 26.0 27.3 27.8 28.1 24.4 23.0 21.9 20.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC sec Inst Research * FY16 onwards revenues are as per IndAS vs. IGAAP earlier ** FY13-15 reported revenues are different from above as in financials revenues from third party were accounted on net basis. For comparison purpose they have are restated.

Financials upto FY15 are basis IGAAP and from FY16 onwards basis IndAS Decline in realization in FY16 is owing to change in accounting from IGAAP to IndAS RDCK’s Non-IMFL business comprises of (a) Bulk alcohol (b) Country liquor and (c) bottles etc RDCK’s earns a modest margin of 8-10% on Non-IMFL business


Page | 36

Key P&L assumptions P&L (Rs Mn) FY16 FY17 FY18 FY19E FY20E FY21E Net revenue 16,518 16,799 18,228 19,831 21,259 22,744 COGS 8,938 9,214 9,522 10,139 10,765 11,404 Gross Profit 7,580 7,585 8,706 9,692 10,493 11,339 Employee cost 1,283 1,403 1,549 1,738 1,859 1,973 Other operating exps 4,419 4,060 4,458 4,798 5,134 5,493 Total Exps 5,703 5,464 6,008 6,536 6,992 7,466 EBITDA 1,877 2,121 2,698 3,155 3,501 3,874 PBT 987 1,097 1,873 2,450 2,862 3,338 PAT 718 793 1,219 1,617 1,889 2,203

% of revenue FY16 FY17 FY18 FY19E FY20E FY21E COGS 54.1 54.8 52.2 51.1 50.6 50.1 Gross Profit 45.9 45.2 47.8 48.9 49.4 49.9 Employee cost 7.8 8.4 8.5 8.8 8.7 8.7 Other operating exps 26.8 24.2 24.5 24.2 24.1 24.2 Total Exps 34.5 32.5 33.0 33.0 32.9 32.8 EBITDA 11.4 12.6 14.8 15.9 16.5 17.0 PBT 6.0 6.5 10.3 12.4 13.5 14.7 PAT 4.3 4.7 6.7 8.2 8.9 9.7 Other operating expenses: Key items

Rs Mn % of revenue

FY16 FY17 FY18 FY16 FY17 FY18 Consumption of stores and spares 284 280 211 1.7 1.7 1.2 Power and fuel 286 278 355 1.7 1.7 1.9 Repairs & Maintenance 168 181 206 1.0 1.1 1.1 Rates & taxes 457 445 457 2.8 2.6 2.5 Freight, Travelling & Conveyance 879 924 990 5.3 5.5 5.4 Advertising & Promotions 782 805 873 4.7 4.8 4.8 Rebate disc & supervision chgs 228 371 423 1.4 2.2 2.3 Provision for doubtful debts 334 (0) 89 2.0 (0.0) 0.5 Forex fluctuations (net) 198 (8) (33) 1.2 (0.1) (0.2) Bottling charges 254 223 210 1.5 1.3 1.2 Other overheads 550 562 676 3.3 3.3 3.7 Total 4,419 4,060 4,458 26.8 24.2 24.5 Source: Company, HDFC sec Inst Research

Led by revenue growth, mix change and raw material tailwinds, we expect gross margin to improve by ~150bps over FY18-20 Radico spends ~5% p.a. on advertising and promotions


Page | 37

Consolidated Income Statement Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Sales 16,799 18,228 19,831 21,259 22,744 Growth (%) 1.7 8.5 8.8 7.2 7.0 RM Costs 9,214 9,522 10,139 10,765 11,404 Gross Profit 7,585 8,706 9,692 10,493 11,339 Employee cost 1,403 1,549 1,738 1,859 1,973 S&D 1,979 2,159 2,322 2,485 2,659 Other Exps 2,082 2,300 2,476 2,649 2,835 Total Operating Cost 5,464 6,008 6,536 6,992 7,466 EBIDTA 2,121 2,698 3,155 3,501 3,874 EBIDTA (%) 12.6 14.8 15.9 16.5 17.0 EBIDTA Growth (%) 13.0 27.2 17.0 11.0 10.6 Depreciation 417 409 429 461 493 EBIT 1,704 2,289 2,726 3,039 3,380 Interest 804 682 566 474 340 Other Income 196 267 290 296 297 PBT 1,097 1,873 2,450 2,862 3,338 Tax 288 638 833 973 1,135 RPAT/APAT 809 1,235 1,617 1,889 2,203 APAT Growth (%) 10.1 52.7 30.9 16.8 16.6 AEPS 6.1 9.3 12.2 14.2 16.6 EPS Growth (%) 10.1 52.7 30.9 16.8 16.6


Consolidated Balance Sheet As at March (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 266 266 266 266 266 Reserves 10,036 11,155 12,643 14,403 16,478 Total Shareholders Funds 10,302 11,421 12,909 14,670 16,744 Long Term Debt 1,033 344 172 86 43 Short Term Debt 6,994 5,628 5,178 4,039 2,625 Total Debt 8,027 5,972 5,350 4,125 2,668 Other Non current liabilities 784 1,034 1,148 1,276 1,420 TOTAL SOURCES OF FUNDS 19,114 18,427 19,407 20,071 20,832 APPLICATION OF FUNDS Net Block 7,060 7,057 6,976 6,839 6,771 Other Non current assets 3,505 2,865 2,865 2,865 2,865 Non Current Assets 10,565 9,922 9,841 9,705 9,636 Inventories 2,930 3,109 3,377 3,651 3,886 Trade Receivables 6,240 6,300 6,859 7,299 7,659 Other Current Assets 1,829 2,257 2,498 2,686 3,122 Current Assets 10,999 11,666 12,734 13,637 14,667 Trade Payables 1,853 2,141 2,210 2,404 2,593 Other CL & Provisions 1,238 1,743 1,680 1,792 1,998 Current Liabilities 3,091 3,885 3,890 4,196 4,591 Net current Assets 7,908 7,781 8,844 9,441 10,076 Cash & Equivalents 641 724 722 925 1,120 TOTAL APPLICATION OF FUNDS 19,114 18,427 19,407 20,071 20,832



Page | 38

Consolidated Cash Flow Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E PAT from Operations 809 1,235 1,617 1,889 2,203 Interest 804 682 566 474 340 Depreciation 417 409 429 461 493 Working Capital Change 1,359 127 (1,063) (597) (635) OPERATING CASH FLOW ( a ) 3,388 2,453 1,550 2,227 2,401 Capex (164) (406) (349) (325) (425) Free Cash Flow 3,224 2,048 1,201 1,902 1,975 Investments & Others (663) 889 114 128 143 INVESTING CASH FLOW ( b ) (827) 484 (234) (197) (282) Capital Issuance - - - - - Debt Issuance (1,606) (2,055) (622) (1,225) (1,457) Interest (804) (682) (566) (474) (340) Dividend (138) (116) (128) (128) (128) FINANCING CASH FLOW ( c ) (2,548) (2,854) (1,317) (1,827) (1,925) NET CASH FLOW (a+b+c) 14 83 (1) 203 194 Closing Cash 641 724 722 925 1,120 Source: Company, HDFC sec Inst Research

Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) GPM 45.2 47.8 48.9 49.4 49.9 EBITDA Margin 12.6 14.8 15.9 16.5 17.0 APAT Margin 10.1 12.6 13.7 14.3 14.9 RoE 4.8 6.8 8.2 8.9 9.7 RoIC (or Core RoCE) 8.1 11.4 13.3 13.7 14.0 RoCE 6.7 8.3 9.9 10.6 11.5 EFFICIENCY 6.4 8.0 9.5 10.2 10.9 Tax Rate (%) Asset Turnover (x) 26.3 34.1 34.0 34.0 34.0 Debtors (days) 2.4 2.6 2.8 3.1 3.4 Payables (days) 136 126 126 125 123 Cash Conversion Cycle (days) 40 43 41 41 42 Net Debt/EBITDA (x) 172 156 163 162 162 Net D/E 3.5 1.9 1.5 0.9 0.4 Interest Coverage 0.7 0.5 0.4 0.2 0.1 PER SHARE DATA (Rs) EPS 6.1 9.3 12.2 14.2 16.6 CEPS 9.2 12.4 15.4 17.7 20.3 Dividend 0.8 0.8 0.8 0.8 0.8 Book Value 77.4 85.8 97.0 110.3 125.9 VALUATION P/E (x) 63.7 41.7 31.8 27.3 23.4 P/BV (x) 5.0 4.5 4.0 3.5 3.1 EV/EBITDA (x) 27.8 21.0 17.8 15.6 13.7 EV/Revenues (x) 5.8 4.3 2.8 4.1 4.5 OCF/EV (%) 5.5 3.6 2.1 3.5 3.7 FCF/EV (%) 4.7 2.7 1.2 2.8 3.2 FCFE/Mkt Cap (%) 3.5 3.1 2.8 2.6 2.3 Dividend Yield (%) 0.2 0.2 0.2 0.2 0.2 Source: Company, HDFC sec Inst Research


Page | 39

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 4-Oct-17 490 SELL 412

28-Oct-17 605 SELL 488 12-Jan-18 766 SELL 510 24-Jan-18 698 SELL 508 11-Apr-18 671 SELL 538 28-May-18 650 SELL 570

9-Jul-18 636 SELL 570 12-Jul-18 620 SELL 570

RECOMMENDATION HISTORY

300

400

500

600

700

800

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

United Spirits TP

Date CMP Reco Target 12-Jul-18 387 BUY 473

100

200

300

400

500

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov-

17

Dec-

17

Jan-

18

Feb-

18

Mar

-18

Apr-

18

May

-18

Jun-

18

Jul-1

8

Radico TP


Page | 40

Disclosure: I, Himanshu Shah, CA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

mailto:[email protected]


Page | 41

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171-7330 www.hdfcsec.com

Date post:	10-Mar-2020
Category:	Documents
Upload:	others
View:	3 times
Download:	0 times

12 JUL 2018 Alcohol Beverages - HDFC securities Beverages...SECTOR REPORT 12 JUL 2018 Alcohol...

Documents