Radico Khaitan: Strong Performance and Market Position, But Caution Warranted

Radico Khaitan, a prominent player in the Indian alcoholic beverages market, has continued to impress with its robust execution both on the product and business fronts. 

Despite the challenges posed by a competitive industry environment, Radico has managed to gain market share, a feat substantiated by its exceptional first-quarter results. 

The company's stock surged to all-time highs in the first week of August, reflecting its strengthening market position and positive investor sentiment.

A Remarkable Quarter

 

The first quarter proved to be a remarkable period for Radico Khaitan, marked by impressive year-on-year (YoY) growth across several key financial indicators. 

Notably, revenues, operating profits, and cash flows witnessed significant growth, underscoring the company's operational excellence. Particularly noteworthy was the substantial volume growth of 27 percent YoY within the premium segment (Prestige & Above). 

The performance of royalty brands was equally impressive, surging by an impressive 73 percent YoY, albeit from a favorable base. However, a persistent weakness in the Regular segment weighed on overall volumes.

 

Margin Expansion and Product Mix

 

One of the highlights of Radico's quarter was the sequential expansion of gross margins by approximately 300 basis points to 43.6 percent. 

This remarkable improvement was attributed to price increases and a more favorable product mix. 

This uptick in gross margin had a cascading effect on the expansion of operating margins, further enhancing the company's profitability.

 

Market Leader in Key Segments

 

Radico Khaitan has positioned itself as a market leader in the rapidly growing vodka segment in India, capitalizing on its strong foothold. 

The introduction of new products across white and brown spirits has enabled the company to capture market share within the domestic market aggressively. 

The success story extends to the premium segment, with the inclusion of Morpheus Premium Brandy and 1965 Spirit of Victory Premium Rum in the millionaire club during FY23. With these additions, Radico boasts an impressive seven brands within this elite club.

 

Diversification and International Expansion

 

The company's recent product launches, including Rampur Single Malt, Jaisalmer Gin, and After Dark Whisky, have gained traction not only in domestic markets but also internationally. 

Furthermore, the revitalization of the 8PM Premium Black Whisky, complete with contemporary packaging, has contributed to enhancing the brand's equity. Radico's strategy of consistently introducing new products across various price points underscores its commitment to expanding its market reach. 

In this vein, management has set its sights on achieving a 10 percent volume growth in FY24, with the introduction of new offerings such as After Dark Whisky Blue and a forthcoming premium whiskey brand.

 

Margin Volatility and Challenges

 

While Radico's performance has been commendable, it's important to acknowledge ongoing challenges in the form of margin volatility. Factors such as rising raw material costs and supply chain disruptions have impacted the company's margins in FY23. 

The management, however, anticipates stabilization in input costs. Of note, glass costs have risen by approximately 15 percent, while paper and packaging costs have weakened. 

Additionally, ENA prices have witnessed an 8 percent YoY increase, potentially impacting margins. The interplay of rising grain prices and sugarcane production shortfalls adds further uncertainty to ENA prices.

 

Valuation and Recommendations

 

Radico Khaitan's stock has delivered remarkable returns, outpacing both its peer group (United Spirits and United Breweries) and broader market indices with over 30 percent growth in the past year. This performance has helped close the valuation gap. 

However, despite these achievements, caution is advised due to the inherent risks on the horizon. The current valuation, at 48 times FY25 estimated earnings, lacks a sufficient margin of safety, necessitating a prudent approach.

 

Therefore Radico Khaitan's strategic execution and financial performance merit recognition. The company's gains in market share and impressive quarterly results highlight its resilience and competitive edge. 

However, potential challenges in the form of margin volatility and valuation concerns suggest that investors should exercise vigilance and consider trimming positions.