Rampur Single Malt Launch And Premiumization Ignite Global Luxury Spirits Growth

Key Takeaways

• Expansion into international luxury markets is set to boost revenue and enhance margins through high-margin product sales.
  
• Strategic packaging innovations and policy changes aim to improve net margins by reducing costs and optimizing cash flow.
  
• Growth in luxury categories is tempered by degrowth in other segments, cost volatility, cash flow challenges, and competitive pressures in the Indian alcohol market.

Catalysts

Engages in the manufacture and trading of Indian made foreign liquor (IMFL) and country liquor in India and internationally.

• Radico Khaitan is focusing on expanding its luxury portfolio, with the launch of Rampur Indian Single Malt and other premium expressions internationally in markets like the U.S., U.K., and Europe, which is expected to boost revenue through increased sales in high-margin markets.
  
• The introduction of packaging innovations, such as 100% recyclable and cost-effective pocket packs for Magic Moments, is aimed at supporting brand growth, likely improving net margins by reducing packaging costs and catering to consumer preference trends.
  
• The new policy in Andhra Pradesh is anticipated to improve cash flow and profitability by ensuring faster payment cycles and fostering a private retail environment, which could enhance net margins through more efficient working capital management.
  
• Ongoing premiumization and the strategic focus on Prestige & Above category, which accounted for a significant shift in product mix, are poised to impact earnings positively by improving gross margins and driving top-line growth.
  
• Radico Khaitan’s efforts in increasing market presence and brand recognition through high-profile advertising campaigns and strategic brand management are expected to stimulate revenue growth and aid margin expansion, particularly in the Premium & Above segment.

Radico Khaitan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Radico Khaitan's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 11.7% in 3 years time.
• Analysts expect earnings to reach ₹7.6 billion (and earnings per share of ₹48.65) by about January 2028, up from ₹2.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹5.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 74.4x on those 2028 earnings, down from 120.3x today. This future PE is greater than the current PE for the IN Beverage industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 5.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Radico Khaitan Future Earnings Per Share Growth

Risks

• The company's growth in the Prestige & Above (P&A) category is countered by a 2.5% year-on-year degrowth in total IMFL volume, notably due to state-specific disruptions and strategic rationalization impacting the regular category. This could affect overall revenue growth.
  
• The gross margin decreased from 44.1% to 43.6% compared to the same quarter last year due to significant foodgrain inflation, although ameliorated somewhat by premiumization. Persistent input cost volatility introduces risk to future profit margins.
  
• Increasing net debt due to cyclical inventory build-up and higher receivables in certain states may strain cash flow and working capital management, posing challenges to profit generation and debt reduction goals.
  
• Dependency on external bottlers in states such as Andhra Pradesh introduces uncertainty in business operations and strategic positioning, potentially impacting revenue if transition plans are disrupted.
  
• Despite strong growth in luxury categories, the competitive intensity within the Indian alcohol market remains high, which could pressure market share and revenue, as the company has to consistently invest to keep pace with competitors.

Valuation

• The analysts have a consensus price target of ₹2574.09 for Radico Khaitan based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2958.0, and the most bearish reporting a price target of just ₹2068.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.2 billion, earnings will come to ₹7.6 billion, and it would be trading on a PE ratio of 74.4x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹2582.1, the analyst's price target of ₹2574.09 is 0.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.