radico khaitan ltd (rkl) [email protected] +91 22 … › pdf › research-report › 201708...

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

AUGUST 10, 2017

PRIVATE CLIENT RESEARCH INITIATING COVERAGE

RADICO KHAITAN LTD (RKL)

PRICE: RS.146 RECOMMENDATION: BUY TARGET PRICE: RS.200 FY19E PE: 17.3X

Radico Khaitan Ltd (RKL) has established strong foothold in the Indian Made Foreign Liquor (IMFL) industry through its largest selling brands such as 8PM

whisky, Magic Moments vodka, Old Admiral brandy, Contessa rum, etc. RKL has

evolved from a distillery player to a branded IMFL player in India with presence across products categories. The company is increasing its focus on premiumization

with its volume share of prestige and above segment in IMFL business increased

from 10% in FY10 to 26% in FY17. The company is on track to grow this further which will have positive impact on its EBITDA margins in coming years. The

company is focused growing organically by leveraging its marketing and

distribution strength without any major capex. The improvement in margins, rationalization in sales mix and surplus capacity for growth would positively impact

its future cash flows and would help it in achieving its long term vision of zero

long-term debt. We believe that most of the negatives in the industry such as highway ban, prohibition, GST, etc are already factored in and expect growth to

come back in FY19E. The stock is available at a discount to its peer. We recommend

buy on the stock with target price of Rs. 200.

Key Investment argument

Present is high entry barrier consumption sector. IMFL consumption in India is

expected to grow at a CAGR of 8.4% in value terms and 4.7% in volume terms in 2017-21. The consumption is driven by increasing urbanization, high

young population, low per capita consumption, shift from country liquor to

IMFL, etc. India is a highly regulated spirits market with alcohol being the state subject and is regulated by each states in terms of sales, distribution and

pricing. The regulated nature of market also acts as high entry barrier for new

players and is positive for established players like RKL.

Focus on premiumization to drive margins. After establishing strong foothold

in the regular segment, RKL has increased its focus on prestige and above

category with the success of brand ‘Magic Moment’ vodka. Continuing on this strategy, RKL has launched many brands in the segment like, Morpheus

brandy, Verve vodka, etc. As a result, the volume share of prestige brands

increased from 10% in FY10 to 26% in FY17. The growth in the premium segment is expected to be higher than regular in coming years based on its

focus on the segment and new brands launched in the segment. EBITDA

margins in prestige and above category is ~9-10% higher than regular category. Hence, increasing share of prestige and above segments will

positively impact its margins in the longer run.

Surplus capacity to meet organic growth strategy. RKL has been growing organically by launching its own brands across category and has been

successfully able to position those in all markets. It spends 7-8% of its sales on

advertisement and promotional schemes to market its brands and new products. It has established strong manufacturing and distribution setup which

can meet next five years of growth with minimum investments. Its current

capacity can support annual sales of 30 mn cases in IMFL segment as against FY17 annual sales of 18.3 mn cases. The company would continue to follow

organic growth strategy in a longer run by funding growth through internal

accruals.

Pankaj Kumar

[email protected]

+91 22 6218 6434

Stock details

BSE code : 532497

NSE code : RADICO

Market cap (Rs bn) : 19

Free float (%) : 59.4

52 wk Hi/Lo (Rs) : 155/84.5

Avg daily vol (nos) : 604406

Shares (o/s) (mn) : 133.05

Summary table

(Rs mn) FY17 FY18E FY19E

Revenue 16799 17165 18622

Growth (%) 8.9 2.2 8.5

EBITDA 2121 2243 2565

EBITDA margin (%) 12.6 13.1 13.8

PBT 1097 1262 1672

PAT 806 845 1124

EPS 6.1 6.4 8.4

EPS Growth (%) 5 5 33

CEPS (Rs) 9 10 12

Book value (Rs/share) 77 83 90

Dividend per share (Rs) 0.9 1.0 1.2

ROE (%) 8.3 7.9 9.8

ROCE (%) 9.2 9.6 11.3

Net cash (debt) (7700) (6777) (5730)

NW Capital (Days) 195 191 180

P/E (x) 24.1 23.0 17.3

P/BV (x) 1.9 1.8 1.6

EV/EBITDA (x) 12.8 11.7 9.8

EV/Sales (x) 1.6 1.5 1.4

Source: Company, Kotak Securities – Private Client Research

Share holding pattern

Source: Capitaline

One-year performance (Rel to Sensex)

Source: Capitaline

Promoter40%

FII18%

DII14%

Others28%

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

August 10, 2017 INITIATING COVERAGE

Most of the negatives already factored in, volume growth to revive in FY19.

We believe that, the relaxation by the Supreme Court to states in terms of de-

notification of highways in cities would result in reopening of stores in coming quarters and improvement in volumes on qoq. We believe that most of the

negatives in the industry are already factored in and expect earnings growth

to ramp-up from FY19 with 33% yoy growth on a low base of FY18E. The growth would be driven by 5.6% yoy improvement in volume growth in FY19E

after a flattish FY18E. We expect EBITDA margin to be at 13.8% in FY19E led

by change in mix resulting in margin improvement of 120 bps in FY17-19E. This will also have positive impact on its cash flows and returns ratios.

Outlook and Valuation

We expect company’s revenue and PAT to grow at a CAGR of 5.3% and 18% respectively in FY17-19E, led by 1) 2.9% CAGR in IMFL volume 2) 2% CAGR in

IMFL realization led by product mix 3) 120 bps improvement in EBITDA margins on

increased contribution from prestige brands, 4) 12% average decline in interest expenses over FY17-19. The stock is presently trading at FY18E and FY19E PE of

23x and 17.3x based on EPS of Rs 6.4 and Rs 8.4 respectively and is available at a

steep discount to its peer United Spirits Ltd (USL). USL is trading at FY19E PE of 49x (Vs 17.3x of RKL), EV/EBITDA of 28.5x (Vs 9.8x of RKL), P/BV of 10.7x (Vs 1.6x

of RKL) and EV/Sales of 3.9x (Vs 1.4x of RKL). In FY17, USL reported EBITDA

margins of 11.4% as compared to 12.6% of RKL. Currently, RKL is trading at 30% discount to its past averages on EV/EBITDA, P/BV and EV to Sales basis. We

recommend Buy rating on with target price of Rs 200 which is based on average

of all valuation parameters. At our target price, the stock will be trading at FY19E PE of 23.8x.

Key risks & Concerns:

Present in a highly regulated business with low pricing power

GST would negatively impact margins in near term

Low promoter holding creates potential takeover risk



INVESTMENT RATIONALE

Indian liquor industry expected to grow at 8.4% CAGR in value terms

India is the third largest global spirits market by volume in the world, just behind

China and Russia. The consumption of spirits and hard liquor accounts for the

majority of alcohol consumption in India. The size of Indian made foreign liquor (IMFL) was 293 mn cases in 2016 which grew by 2.7% in the year (2016). The

Indian spirits industry has slowed down in recent years from double digits to low

single digit growth in volumes. This is led by increasing duty and prohibition by certain state governments.

Alcoholic beverages industry is expected to grow at 2017-21 CAGR of 8.4% in

value terms and 4.7% in volume terms. IMFL consumption in India is expected to reach 363 million cases by CY2021 (source: Company PPT). This will be driven by

increasing urbanization, high young population, low per capita consumption and

shift from country liquor to IMFL. These are long term drivers while relaxation to state by the Supreme Court in de-notifying highways in cities would be short term

positive. In terms of geographies, south and west dominates the alcohol market in

India and account for about 79% total IMFL sales. In South, Kerala is committed to reduce liquor sales every year and hence poses threat to the demand from the

southern state.

IMFL sales by geography

Source: Industry

White spirits to gain share in longer run

Within liquor segment, Brown spirits which includes whisky (60%), brandy (23%) and rum (14%) comprises largest segment with 97% volume market share. India

is the largest whisky market in the world selling almost 175-180 million cases.

While white spirits have witnessed higher growth in recent time. Within the White Spirits category, vodka continued to demonstrate growth with sales for the year at

70 million litres. In 2011-16, premium and super premium vodka category had

registered 7% CAGR. Vodka is positioned as a drink for women and the younger generation, which has led to the strong volume growth. RKL has strong presence

in Vodka with its brand Magic Moment which is largest selling in its category with

over 50% market share and hence would be benefitted from any change in trend in longer run.

South49%

West30%

North12%

East9%



Sales volume breakup of spirits in India

Source: Industry

Change in consumption pattern in India; positive for industry

According to World Bank, urban population accounts for 33 per cent of the total

population of India and rising incomes has been a key determinant for increasing

preference towards premium products/brands. Besides this, the middle and affluent consumer segment is expected to gain market share and this would be

positive for demand in prestige or premium segment in liquor segment.

Change in consumption pattern

Source: USL PPT, McKinsey, excludes consumers not buying branded goods

Liquor; a high entry barrier in the business

India is a highly regulated spirits market with Alcohol being the state subject and

is regulated by each states in terms of sales, distribution, and pricing. There are

restrictions in terms of advertising and expanding retail footholds. Besides this, alcohol as a product also attracts very high duty in India and price hikes in most of

the markets is governed by respective state government. Hence, this kind of

regulated nature of market also acts as high entry barrier for new players in terms of penetrating presence and promoting brands. This is positive for players who

have established their brands and network in the business.

Established strong foothold in regular segment

Despite being a relatively late entrant in domestic IMFL branded business, RKL has

established strong foothold in the market particularly in the regular segment with

its brands like 8PM whisky, Old Admiral brandy and Contessa rum. 8PM whisky was launched in 1999 and achieved 1 mn cases sales within one year of its launch.

Further, it launched Old Admiral brandy in 2002 which also became successful in

the category and achieved 1 mn cases mark in short span of its launch. Contessa Rum which is also supplied through CSD is another brand in the regular category

and has achieved over 1 mn cases of annual sales. Presently, 8PM is among the

top 10 largest selling brand in whisky segment in India and is 3rd fastest growing

brand in the world (source: Drinksin.com) with 38% yoy volume growth in 2016.

In addition, 8PM along with Old Admiral brandy and Contessa rum is among the

Whisky60%

Brandy23%

Rum14%

White Spirits3%



list of top 100 global brands (as per Drinksin.com). The regular segment

contributed 74% of volume in FY17 and 44% in value terms of IMFL sales. The

segment is expected to grow at a steady rate of low single digit in the longer run.

World fastest growing brands in 2016

Source: drinksint.com

World top Vodka brands in 2016

Source: drinksint.com



Focus on premiumization to drive earning growth in long term

The company has increased its focus on prestige category from FY07 onwards. The

successful launch of brand ‘Magic Moment’ in vodka category helped it to establish its footholds in the prestige segment. Magic Moments Vodka (launched in 2005)

in semi premium category crossed 1 mn cases mark in 2010 and is presently the

market leader in its category. Further, it also launched Magic Moments Remix Vodka, an extension of Magic Moments vodka into flavored category. Continued

with this strategy, RKL has launched many brands in the segment like Morpheus

brandy, Verve vodka, etc. As a result, the volume share of prestige brands of its total IMFL volume increased from 10% in FY10 to 26% in FY17. The growth in

the premium segment is expected to be higher than regular in coming years based

on its focus on the segment and launched in the segment. The company has vision to grow the prestige and above segment at high single digit in volume terms.

Change in Volume Mix

Source: Company

Premiumization would positively impact margins in a longer run

The company has ~44% of IMFL revenue coming from prestige segment and this

is expected to increase further on account of higher growth expected in the segment. EBITDA margins in prestige category are ~9-10% higher than regular

category. Hence, increasing share of prestige and above segments will positively

impact its margins in the longer run. Further, the higher share of prestige brands would also provide cushion to the company against raw material price volatility as

these have higher gross margins.

EBITDA and PAT margins (%)

Source: Company

10%26%

90%74%

0%

20%

40%

60%

80%

100%

FY10 FY17

Prestige & Above % of total Regular

0.0

4.0

8.0

12.0

16.0

FY15 FY16 FY17 FY18E FY19E

EBITDA margins % PAT Margins



Volume Mix Value Mix%

Source: Company, Kotak Private Client Research

Focus on organic growth by leveraging its marketing and distribution strength

RKL has evolved from presence in distillery business to brand sales in past 18 years.

Over the years, the company has been launching new brands across category and has been successfully able to place those in all markets. The company markets its

brands in large retail stores and regularly launches promotional schemes and offers

gifts to retailers which help it in gaining display and shelf spaces in those stores. It spend 7-8% of its sales on advertisement and promotional schemes. Hence, the

scale in the business has come through organic route. As a strategy, the company

would continue to follow organic growth strategy in the longer run.

Adspend % of sales

Source: Company

26% 27% 28%

74% 73% 72%

0%

20%

40%

60%

80%

100%

FY17 FY18E FY19E


0.0%

2.5%

5.0%

7.5%

10.0%

FY12 FY13 FY14 FY15 FY16

44% 46% 49%

56% 54% 51%

0%

20%

40%

60%

80%

100%

FY17 FY18E FY19E




Sufficient capacity to grow organically

RKL has established strong manufacturing and distribution setup which would help

it in meeting organic growth plans. RKL along with its JV company in Maharashtra has distillery capacity of 157 mn litre per annum which can support annual sales

of 30 mn cases in IMFL segment as against FY17 annual sales of 18 mn cases.

Hence, the current distillery capacity is sufficient enough to meet next 5 years of growth with minimum capex of ~Rs 200-250 mn per annum (for strengthening

bottling units). Besides this, it also has supply arrangement in many states for

additional requirement if any.

News brands placed in new segments/price points

RKL has launched several new brands in semi and super premium category in past

two years and would continue to launch more in future to fill the gap in each segment. These include, Magic Moment Electra ready to drink, Pluton Bay rum,

Rampur Indian Single Malt whisky, Regal Talton whisky, etc. The company aims to

achieve decent volume in these new launches in future. This would strengthen its revenue share of prestige and above segment.

New Brands

Rampur Indian Single Malt is launched in

Luxury category in international market only.

Pluton Bay was launched in April 2016 is

premium rum with international design and

world class packaging

Regal Talons is a premium whisky which is made of Indian grains blend with imported

aged scotch malts.

Electra was launched in the premium segment

in June 2015. It is triple distilled and triple filtered ready to drink product initially

launched in three different flavours in India

and then added more flavours.

Source: Company



Highway ban impact to be over in next two quarters

The Supreme Court had banned liquor vendors within 500 meters of national and

state highways from 1 April 2017. As a result, the liquor shops in vicinity, bars and hotels got negatively impacted by the move. Later, the court said that there was

nothing wrong in de-notifying state and district roads in city area that were

previously notified as highways. The ban by the court negatively impacted the performance of liquor companies in Q1FY18 and RKL also witnessed volume

decline. But, post relaxation by the court in terms of de-notification of highways,

the impact would reduce over the next two quarters due to more reopening of stores. We believe that consumption will shift to the stores which have not got

affected by the order. As per industry players, there was a shrinkage of about 30%

of outlets after the highway ban came into existence. Out of that 30%, 10% of stores have reopened thereafter. We believe the negative impact of highway ban

would dwindle in coming quarter.

PAT growth to ramp-up in FY19E

We expect company’s revenue and PAT to grow at a CAGR of 5.3% and 18%

respectively in FY17-19E. The growth would be driven by 5.6% yoy improvement

in volume growth in FY19E after a flattish FY18E due to negative impact of ban on liquor shops by the Supreme Court. The impact would subside steadily over next 2

quarters after the court gave some relaxation to state in de-notifying highways in

cities. We estimate 28% volume contribution and 48.6% value contribution of prestige and above segment in IMFL sales by FY19E. This is inline with company’s

strategy to grow its business where it targets for increased sales contribution from

prestige segment in a longer run. The company aims for lower single digit growth in regular segment and high single digit growth (8-10%) in prestige and above

segment in the longer run. The change in mix would result in better margins by

FY19E. We expect EBITDA margin to be at 13.8% by FY19E led by better mix resulting in margin improvement of 120 bps in FY17-19E. This will also have

positive impact on its returns ratios and which should likely to improve in the longer

run.

Sales & Sales Growth (%) PAT and PAT growth (%)


RoE and RoCE (%)


0

3

6

9

12

15

0

5,000

10,000

15,000

20,000

25,000


Net Sales (Rs mn, LHS)

Growth (%, RHS)

0

3

6

9

12


RoE RoCE

-15

0

15

30

45

(300)

0

300

600

900

1,200


PAT (Rs mn, LHS) Growth (%, RHS)



Aims to achieve zero long term debt by FY19E

RKL has Rs 8 bn debt including long term debt of Rs 2.4 bn with 8.7% as average

cost of long term debt. It intends to achieve zero long term debt by FY19E. It has repaid 1 bn of debt in FY17 and targets to repay another Rs 1 bn in FY18E. It has

USD 25 mn of ECB which will retire in next 2 years. The company does not expect

any major capex in next 5 years as it has enough capacity to meet its growth. The company has been generating operating cash flows and this is expected to

strengthen further on expected improvement in margins with increased share of

prestige and above segment.

D/E ratio (x)


0.0

0.3

0.6

0.9

1.2

1.5

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E



KEY RISK

Liquor is highly regulated business

RKL is present in highly regulated business where price is controlled by the

government in majority of states. Hence liquor players depend upon government

for passing on any impact of raw material price volatility. Raw material price also depends upon sugar output which is dependent upon weather conditions.

GST would negatively impact margins in near term

The implementation of GST has resulted in additional taxes on input materials and services, and will result in some impact on margins (to the extent of 0.5%). Liquor

companies are working with state governments to seek clarity on some of these

specific taxes and also approaching them for price increases.

Low promoter holding creates potential takeover risk

High entry barrier in business due to capital intensive nature and regulatory hurdles

along with low promoter holding (~40%) increases risk for RKL as a potential takeover target.



COMPANY BACKGROUND RKL is one of the largest players in the Indian spirits industry and owns brands like 8PM whisky, Magic Moments vodka, etc. The company was formerly known as

Rampur Distillery which was established in 1943. The promoter Mr. Lalit Khaitan

along with his father bought Rampur Distillery in 1972. The company was operating as bottler for other spirit companies till 1999, when it forayed into its

own brand. Now, RKL has evolved from a distillery player to a branded IMFL player

in India with presence across product categories and has 4 brands in 1mn cases annual sales category. It operates three distilleries and one JV with total capacity

of 157 million litres (30 mn cases of IMFL and 7 mn cases of country liquor) and

33 bottling units spread across the country. It has strong sales network through over 55,000 retail outlets across India. It is presently the market leader in premium

vodka category with its brand Magic Moments. The company is increasing focus

on premium/prestige segment (Price >Rs 300/750ml) which is contributing 26% of its volume and 44% in value terms while regular brands (Price <Rs300/750ml)

contributes 74% in volume and 56% in value terms.

RKL’s brand portfolio

Source: Company

RKL’s Brand Portfolio

Category Whisky Rum Brandy Vodka Gin Ready to Drink

Super Premium > Rs600 Rampur Indian Morpheus, Verve, Verve

Single Malt Morpheus Blue Flavoured

Semi-Premium/Premium After Dark Pluton Bay Bonjour Magic Moments,

> Rs400-600 Regal Talons Magic Moments

Remix

Deluxe Rs 300-400 Whytehall Contessa Excellency

White

Regular Rs 225-300 8 PM, Old Contessa Old Admiral, Contessa,

Admiral Bermuda, Brihans Grape, Goa Dry Gin

Lord Nelson Whitefield

Ready to Drink Rs 80-125 Electra

Source Company, Note: All prices for 750 ML bottle except ready to drink, which is 275 bottle



Top Management

Name Designation Background/Role

Dr. Lalit Khaitan CMD He has been at the helm of affairs of the Company for

more than 50 years. He is the Patron Member and

Chairman of U.P. Committee of PHD Chamber of

Commerce and Industry.

Abhishek Khaitan MD He joined the company in 1997 and has been

responsible for the robust growth of the company and

its brands. He has a Bachelors Degree in Engineering in

Industrial Production and qualifications in Managerial

Finance and Managerial Accounting from Harvard

University, U.S.A.

Krishan Pal Singh Whole Time Director He is President (Operations) and heads Distillery Unit at

Rampur. He has over 40 years of experience in the

liquor industry and has been associated with Radico

Khaitan Ltd. for over a decade.

Dilip K Banthiya CFO He is a CA and has 25 years of experience in corporate

finance, treasury, international finance and corporate

mergers and acquisitions activity in India.

Amar Sinha COO He holds an PG degree in Marketing and Sales

management, and Industrial Relations and Personnel

Management. He has vast experience in the industry

and worked with Shaw Wallace, White and Mackay

India, etc.

Source: Company



FINANCIAL PERFORMANCE In the past 5 years (FY12-17), RKL’s net sales, EBITDA and PAT grew by 8%, 6.1% and 4.8% respectively with EBITDA margins declining from 13.8% in FY12 to

12.6% in FY17. The sales growth also got affected by increase in duties, raw

material price volatility, various regulatory hurdles, issues related to prohibition, etc. Further, Q1FY18 sales got impacted by weak volume in the quarter due to ban

on liquor sales by SC on highways. The company witnessed 4% yoy decline in net

revenue led by 5.8% yoy decline in volume (7.3% decline in Regular and 1.7% decline in prestige and above). However, the EBITDA margins have improved by

180 bps to 15.1% on increased contribution from prestige and above segment.

As per the management, the impact of highway ban would sustain for two more quarters.

Quarterly performance

Year to March (INR Mn.) Q1FY18 Q1FY17 % Chg Q4FY17 % Chg

Gross Revenue 13,755 12,110 13.6 12,098 13.7

Excise 9,642 7,826 23.2 8,168 18.0

Net Revenues (Incl Other Op Income) 4,113 4,284 (4.0) 3,930 4.6

Raw Materials Cost 2,239 2,388 (6.2) 2,149 4.2

Gross Profit 1,874 1,897 (1.2) 1,781 5.3

Employee Expenses 340 364 (6.7) 349 (2.7)

Selling & Admin exp 410 421 (2.6) 488 (16.1)

Other Expenses 505 541 (6.6) 475 6.4

Operating Expenses 3,493 3,713 (5.9) 3,461 0.9

EBITDA 620 571 8.5 469 32.2

EBITDA margin (%) 15.1 13.3 11.9

Depreciation 102 105 (3.2) 102 (0.6)

Other income 53 39 36.9 54 (2.6)

Net finance expense 189 214 (11.8) 188 0.1

Profit before tax 382 291 31.5 232 64.5

Provision for taxes 126 71 77.8 66 90.2

Reported net profit 257 220 16.7 166 54.3

As % of net revenues

COGS 54.4 55.7 54.7

Employee cost 8.3 8.5 8.9

Selling & Admin exp 10.0 9.8 12.4

Other Expenses 12.3 12.6 12.1

Operating expenses 84.9 86.7 88.1

EBITDA 15.1 13.3 11.9

Reported net profit 6.2 5.1 4.2

Tax rate (% of PBT) 32.8 24.3 28.4

Source: Company



OUTLOOK & VALUATION We expect company’s revenue and PAT to grow at a CAGR of 5.3% and 18% respectively in FY17-19E, led by 1) 2.9% CAGR in IMFL volume 2) 2% CAGR in

IMFL realization led by product mix 3) 120 bps improvement in EBITDA margins on

increased contribution from prestige brands, 4) 12% average decline in interest expenses over FY17-19E. We expect 120 bps improvement in EBITDA margins in

FY17-19E. This will have positive impact on RoCE which is expected to be at 11.3%

by FY19E. The stock is presently trading at FY18E and FY19E PE of 23x and 17.3x, based on EPS of Rs 6.4 and Rs 8.4 respectively and is available at a steep discount

to its peers. It peer USL is trading at FY19E PE of 49.6x (Vs 17.3x of RKL), EV/EBITDA

of 28.5x (Vs 9.8x of RKL), P/BV of 10.7x (Vs 1.6x of RKL) and EV/Sales of 3.9x (Vs 1.4x of RKL). In FY17, USL reported EBITDA margins of 11.4% as compared to

12.6% of RKL. Currently, RKL is trading at 30% discount to its past averages on

EV/EBITDA, P/BV and EV to Sales basis. We recommend BUY rating on the stock with target price of Rs 200 which is based on average of all valuation parameters.

At our target price, the stock will be trading at FY19E PE of 23.8x.

Valuation

Parameter FY19E Multiple (x) Value/Rs per share

PE 8.4 23 50% discount to USL 194

P/BV 90 2 80% discount to USL 180

EV/EBITDA 2565 13 55% discount to USL 208

EV/Sales 18622 1.8 50% discount to USL 209

Average Target price 200

Source: Kotak Securities - Private Client Research

Forward P/E comparison to USL

Source: Bloomberg

Forward EV/EBITDA comparison to USL

Source: Bloomberg



Peer Comparison

Comparative Mcap EV FY17-19E FY17-19E FY19E FY19E FY19E FY19E FY17 FY17 Net

(Rs bn) (Rs bn) Sales PAT P/E (x) EV/EBITDA EV/Sales P/BV RoE RoCE D/E CAGR CAGR (x) (x) (x) (%) (%) (x)

RKL 19 27 5.3 18.0 17.3 9.8 1.4 1.6 8.3 9.2 0.7

USL 370 407 8.6 172.5 49.6 28.5 3.9 10.7 5.6 14.7 2.1

Source: Capitaline, Bloomberg



FINANCIALS

Profit and Loss Statement

(Rs mn) FY16 FY17 FY18E FY19E

Revenues 15431 16799 17165 18622

% change yoy 3.7 8.9 2.2 8.5

EBITDA 1950 2121 2243 2565

Depreciation 403 417 456 466

EBIT 1546 1704 1787 2099

Other Income 381 197 197 197

Interest 851 804 722 623

Profit Before Tax 1077 1097 1262 1672

% change yoy 23.6 1.9 15.0 32.5

Tax 308 291 416 548

as % of EBT 28.6 26.5 33.0 33.0

Shares outstanding (mn) 133 133 133 133

EPS (Rs) 5.8 6.1 6.4 8.4

DPS (Rs) 0.8 0.9 1.0 1.2

CEPS(Rs) 9 9 10 12

BVPS(Rs) 68 77 83 90

Source: Company, Kotak Securities - Private Client Research

Cash Flow Statement (Rs mn)


Pre-Tax Profit 1056 1097 1262 1672

Depreciation 403 417 456 466

Change in WC 47 685 3 (135)

Other operating activities (1063) 813 (416) (548)

Operating Cash Flow 443 3012 1304 1455

Capex (458) (1686) (250) (250)

Free Cash Flow (15) 1326 1054 1205

Change in Investments 0 (1073) 0 0

Investment cash flow (458) (2759) (250) (250)

Equity Raised 0 0 0 0

Debt Raised 22 (672) (1000) (1000)

Dividend & others 3 448 (131) (158)

CF from Financing 25 (224) (1131) (1158)

Change in Cash 10 28 (77) 47

Opening Cash 103 114 142 65

Closing Cash 114 142 65 113

Source: Company, Kotak Securities - Private Client Research, *on Net sales

Balance Sheet


Paid - Up Equity Capital 266 266 266 266

Reserves 8779 10033 10748 11713

Net worth 9045 10299 11014 11980

Borrowings 8514 7842 6842 5842

Net Deferred tax 744 693 693 693

Total Liabilities 18303 18834 18549 18514

Gross block 9127 10718 10968 11218

Depreciation 3356 3773 4229 4695

Net block 5771 6945 6739 6523

Capital work in progress 19 114 114 114

Total fixed assets 5790 7059 6853 6637

Inventories 2344 2930 2822 2959

Sundry debtors 5489 6240 6396 6632

Cash and equivalents 114 142 65 113

Loans and advances & Others 4492 2660 2714 2768

Total current assets 12439 11973 11996 12472

Sundry creditors and others 2605 2874 2937 3186

Provisions 481 402 442 487

Total CL & provisions 3086 3276 3379 3673

Net current assets 9354 8697 8617 8799

Other net assets 2179 1025 1025 1025

Total Assets 18303 18834 18549 18514


Ratio Analysis


Profitability Ratios

EBITDA margin (%) 12.6 12.6 13.1 13.8

EBIT margin (%) 10.0 10.1 10.4 11.3

Net profit margin (%) 5.0 4.8 4.9 6.0

Adjusted EPS growth (%) 13.7 4.9 4.9 32.9

Balance Sheet Ratios:

Receivables (days)* 130 136 136 130

Inventory (days) 55 64 60 58

Loans & Advances 106 58 58 54

Payable (days) 62 62 62 62

Cash Conversion Cycle* 230 195 191 180

Asset Turnover 0.8 0.9 0.9 1.0

Net Debt/ Equity 0.9 0.7 0.6 0.5

Return Ratios:

RoCE (%) 8.6 9.2 9.6 11.3

RoE (%) 8.9 8.3 7.9 9.8

Valuation Ratios:

P/E (x) 25.3 24.1 23.0 17.3

P/BV (x) 2.1 1.9 1.8 1.6

EV/EBITDA (x) 14.3 12.8 11.7 9.8

EV/Sales (x) 1.8 1.6 1.5 1.4




RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for

information purposes only.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there

is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing,

an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM

Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production

[email protected] [email protected] [email protected] [email protected] [email protected]

+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6427

Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy

[email protected] [email protected] [email protected] [email protected]

+91 22 6218 6432 +91 22 6218 6426 +91 22 6218 6440 +91 22 6218 5373

Arun Agarwal Sumit Pokharna Pankaj Kumar Ashini Shah Auto & Auto Ancillary Oil and Gas Midcap Midcap


+91 22 6218 6443 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5438

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale

[email protected] [email protected]

91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas


+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

mailto:[email protected]



















Disclosure/Disclaimer

Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.

Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like

mutual funds and fixed deposits, depository services and Portfolio Management.

Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities

Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However

SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on

KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.

We offer our research services to clients as well as our prospects.

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons

into whose possession this document may come are required to observe these restrictions.

This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities

Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.

We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed.

Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for

future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and

are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a

company's fundamentals and as such, may not match with a report on a company's fundamentals.

Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this

material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements

are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with

the recommendations expressed herein.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research

Group of Kotak Securities Limited.

We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in,

and buy or sell the securities thereof, of 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 subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company

(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report

or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as

interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio

Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG

research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any

manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice

before investing.

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or

their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.

Details of Associates are available on our website ie www.kotak.com

Research Analyst has served as an officer, director or employee of subject company(ies): No

We or our associates may have received compensation from the subject company(ies) in the past 12 months.

We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No

We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject

company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the

research report. Our associates may have financial interest in the subject company(ies).

Research Analyst or his/her relative's financial interest in the subject company(ies): No

Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report - No

Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication

of Research Report.

Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date

of publication of Research Report: No.

Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of

publication of Research Report: No

Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.

"A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."

Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22

43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya

Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered

as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to

risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully

before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative

contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected].

Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at [email protected]

or call us on: Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292

Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you

feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208.

Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal ) at

[email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-

(022) 4285 8301.

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