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In high spirits

Radico Khaitan

Initiating Coverage | 31 October 2012

Sector: Consumer

Investors are advised to refer through disclosures made at the end of the Research Report.

Gautam Duggad ([email protected]); +9122 3982 5404

Sreekanth P V S ([email protected]); +9122 3029 5120

Radico Khaitan

231 October 2012

Radico Khaitan: In high spirits

Page No.

Summary ............................................................................................................ 3

Premiumization to help expand margins ..................................................... 4-6

Pricing environment turning favorable ....................................................... 7-9

Well positioned to capitalize on rising IMFL consumption ..................... 10-14

Financials: Premiumization led 23% EPS CAGR ........................................ 15-18

Radico NV Distilleries JV: Receives Mega project status ................................ 19

Valuations attractive, given strong earnings growth ahead ................... 20-21

Annexure .................................................................................................... 22-26

Financials and valuation ........................................................................... 27-28

Radico KhaitanCMP: INR117 TP: INR152 BuyBSE SENSEX S&P CNX

18,431 5,598

Bloomberg RDCK IN

Equity Shares (m) 132.6

52-Week Range (INR) 135/92

1,6,12 Rel. Perf. (%) 0/-16/-10

M.Cap. (INR b) 15.5

M.Cap. (USD b) 0.3

Initiating Coverage |31 October 2012

Sector: Consumer

3

Stock performance (1 year)

Financial summary (INR b)

Y/E March 2012 2013E 2014E

Sa les 11.4 13.0 15.0

EBITDA 1.7 2.1 2.6

NP 0.8 0.9 1.2

EPS (INR) 6.0 6.9 8.9

EPS Gr. (%) 10.9 14.6 29.2

BV/Sh. (INR) 52.4 58.3 65.7

P/E (x) 19.4 16.9 13.1

P/BV (x) 2.2 2.0 1.8

EV/EBITDA (x) 12.6 10.6 8.8

EV/Sales (x) 1.9 1.8 1.5

RoE (%) 11.9 12.5 14.4

RoCE (%) 10.0 11.0 12.6

In high spiritsPremiumization to help expand margins, pricing environment improving

Focus on premiumization to help expand operating margins by 250bp over FY12-15

Incrementally better pricing environment - has received price hikes in several states

in 1HFY13

Supportive valuations, 23% EPS CAGR to drive stock performance - expect 30% upside

Premiumization to help expand marginsWe estimate 10.3% volume CAGR over FY12-15, backed by 20% volume growth

in Magic Moments. Earlier a mass/economy segment participant, RDCK identified

premiumization as its key strategy post FY06. In the last three years, RDCK has

launched Morpheus brandy, After Dark whisky and recently Florence brandy in

the premium segment. Increased thrust on the brandy segment would improve

positioning in the key South India market and also help arrest the decline in

brandy market share. The success of RDCK's premiumization strategy is reflected

in the improving salience of premium brands in overall volumes. We expect

premium brands to contribute 20% of overall volumes by FY15 against 15% in

FY12 and 8% in FY09, enabling 170bp gross margin expansion over FY12-15. Radico

has recently received a 10% cut in Glass prices which should support near term

margins, we believe.

Pricing environment turning favorableOur discussions with industry players suggest better pricing environment for

IMFL, especially in South India. The time lag between demand and approval of

price hike has come down. RDCK has received price hikes in Karnataka, Kerala,

Bihar, Madhya Pradesh, Chattisgarh in 1QFY13. Price increase in Andhra Pradesh

is likely to happen in October 2012. Karnataka is expected to grant price hikes in

November 2012. Also, we believe that the focus of the industry leader has

shifted from volumes to realizations and profits, thus improving the pricing

environment for the industry. In our view, this is a key enabler for structural

margin improvement.

Supportive valuations plus margin expansion = potential upside of 30%RDCK's leverage has improved significantly post FY09. In FY12, it redeemed FCCBs

by refinancing them through low cost (3.5%) 7-year ECBs with a two-year

moratorium. Given the expected margin improvement, sustained double digit

volume growth and 23% EPS CAGR over FY12-15, we believe there is a case for a

re-rating. However, we value RDCK at 17x FY14E P/E, in line with historical

averages. We initiate coverage with a Buy rating and a target price of INR152 -

30% upside. A spike in input costs and lower than expected margin expansion

are the key risks to our investment thesis.

Shareholding pattern %

As on Jun-12 Mar-12 Jun-11

Promoter 40.4 40.4 40.0

Dom. Inst 10.1 10.6 14.7

Foreign 26.4 26.2 27.5

Others 23.1 22.8 17.8

31 October 2012

Radico Khaitan

431 October 2012

Premiumization to help expand marginsExpect operating margins to expand by 250bp over FY12-15

Premium IMFL segment outperforming regular and economy segments

RDCK's new launches in the last three years in the premium to super premium segments

Increasing focus on brandy to augment market share, improve competitive positioning in

South

Salience of premium brands to increase from 15% currently to 20% of volumes by FY15

Premiumization is THE mantraRDCK has identified premiumization as a key strategy. Favorable demographics, rising

disposable income and changing social attitude towards drinking are the key factors

driving demand for premium liquor. Besides, state governments have consistently

been increasing excise duties on liquor, making it imperative for IMFL companies to

focus on premium brands to drive profitability.

Excise duties as a percentage of gross sales have increased considerably

Source: Company, MOSL

Before 2006, RDCK was a regular/economy segment player, participating in the sub-

INR300/unit pyramid. In 2006, it launched Magic Moments, positioned in the premium

segment. This was its first attempt at moving up the value chain. Gross profit/case in

semi-premium brands is 5x the regular brands. Similarly, gross profit/case in the

premium segment is 1.5x the semi-premium segment.

Magic Moments: Volumes up 3.8x since FY06 Radico continues to gain market share in Vodka (%)


Radico Khaitan

531 October 2012

After 40% CAGR in volumes since FY07, and having experienced the benefits of its

premiumization strategy, RDCK launched three more brands in the premium to super-

premium segments in the last three years. It launched Morpheus brandy in the super-

premium segment in 2009 and After Dark whisky in the premium segment in June

2010. Buoyed by the success of Morpheus brandy (volumes up 4.5x since FY10), in

1QFY13, RDCK launched Florence brandy in the super-premium segment in Tamil Nadu.

Florence is at a higher price point than Morpheus premium brandy and further augments

RDCK's premium portfolio. Going forward, RDCK intends to roll out a premium version

of Magic Moments vodka.

Morpheus After Dark Florence Morphues Verve -latest launch

RDCK sold 0.36m cases of Morpheus brandy in FY12 and we model 35% CAGR over

FY12-15. We expect premium brands to account for ~20% of volumes by FY15, up from

15% in FY12.

Salience of premium brands increasing


Focusing on brandy segment to augment market shareRDCK's recent thrust in the brandy segment is dictated by the need to improve its

market positioning in South India, a key brandy market, in our view. It acquired Yezdi

Group's Royal Lancer and Elkays whisky brands in FY12 and also took on lease their

entire bottling capacity. Both these brands are selling over 0.5m cases per annum,

primarily in Karnataka and Andhra Pradesh. We believe these brands would be further

strengthened in RDCK's distribution fold. This is a strategic acquisition and should

reinforce RDCK's presence in Karnataka, Andhra Pradesh and other South Indian states.

Radico Khaitan

631 October 2012

To leverage its strong pan India distribution network, RDCK is tying up with global

players to market their premium and super-premium products in India. It has a tie-up

with Earnest & Julio Gallo of California, one of the largest wineries in the world, to

distribute its wines in India. It has also tied up with Suntory (Japanese major with

annual revenue of USD20b) to market Yamazaki single malt and Hibiki blended whiskies

in India.

South India accounts for 90% of brandyBrandy market share has been declining consumption Geography-wise revenue distribution

Regionwise IMFL split of Radico(%)

Radico Khaitan

731 October 2012

Pricing environment turning favorableAugurs well for sector-wide gross margins

70% of the industry is government controlled, and hence, pricing is government

determined

The pricing regime is incrementally turning favorable for the industry - the quantum and

frequency of price increases has improved

Also, sector leader has shifted focus from volumes to profits

IMFL pricing environment turning favorable at the marginOur discussions with industry players suggest improvement in the pricing environment

for the IMFL industry. There has been modest increase in the quantum of price hikes

received by the industry, especially from South Indian states. Secondly, the time lag

between demand and approval of price hike has come down. RDCK has received price

hikes from (1) Kerala in 1QFY13, (2) Madhya Pradesh, Jharkhand, Bihar, Orissa, and

CSD in 1HFY13. Andhra Pradesh price hike is likely to happen in October 2012, which is

the single largest contributor for RDCK (16%). Karnataka is expected to grant price

hikes in November 2012.

Has received price hikes in several states in 1HFY13

SL. State Brand-Name % Effetive

No. Name Increase Date

1 Karnataka 8PM-Whisky 6.0 1st-April,2012-Onwards

Old-Admiral Brandy 6.0 1st-April,2012-Onwards

Crown Whisky 7.0 1st-April,2012-Onwards

Radico-Gold-Whisky 6.0 1st-April,2012-Onwards

Royal-Lancer-Whisky 6.0 1st-April,2012-Onwards

After-Dark-Whisky 1st-April,2012-Onwards

Magic-Moments-Vodka 11.0 1st-April,2012-Onwards

Magic-Moments-Flavours-Vodka 33.0 1st-April,2012-Onwards

Morpheus-Xo-Brandy 19.0 1st-April,2012-Onwards

2 Bihar 8PM-Whisky 19.0 1st-April,2012-Onwards


3 Jharkhand 8PM-Whisky 20.0 1st-April,2012-Onwards


4 Madhya 8PM-Whisky 13.0 1st-April,2012-Onwards

Pradesh Magic-Moments-Vodka 12.0 1st-April,2012-Onwards


5 Chattisgarh 8PM-Whisky 12.0 1st-April,2012-Onwards



6 Orissa 8PM-Whisky 14.0 1st-September,2012-Onwards

Magic-Moments-Vodka 9.0 1st-September,2012-Onwards

Black Cat Rum 16.0 1st-September,2012-Onwards

8 Kerala 8PM-Whisky 6.0 1st-August,2012-Onwards

Contessa-Rum 6.0 1st-August,2012-Onwards

8 Bermuda rum 6.0 1st-August,2012-Onwards

m2 6.0 1st-August,2012-Onwards

OAB 6.0 1st-August,2012-Onwards

MXO 6.0 1st-August,2012-Onwards

EXCELLENCY 6.0 1st-August,2012-Onwards

CWR 6.0 1st-August,2012-Onwards

BGB 6.0 1st-August,2012-Onwards


Radico Khaitan

831 October 2012

Top 6 states contribute 50% of Radico's IMFL revenues


Our discussions with industry sources also indicate that the focus of industry leader,

United Spirits (UNSP) has shifted from volumes to profitability post the change in

management. Rising state-level excise duties, volatility in raw material prices and

challenging leverage position (net debt of INR80b) could be some of the reasons for

the change in strategy. This augurs well for RDCK as well as other players as far as

pricing and realizations are concerned. In the last two years, Pernod Ricard, the second

largest player in IMFL, has driven the premiumization theme to the hilt. Its operating

profits have doubled during the said period.

Pernod Ricard has outperformed the industry led by superior performance in premium segments

Source: Penod Ricard,MOSL

Radico Khaitan

931 October 2012

Transformational deal involving industry leader could provide window ofopportunity to RadicoUNSP and Diageo have announced recently that they are in dialogue with respect to

possible transactions for Diageo plc to acquire an interest in United Spirits Limited.

However there is no certainty that these discussions will lead to a transaction.

Various media reports have been speculating about the potential deal. We try to

assess the impact of possible transaction from sector's viewpoint.

As discussed in the previous sections, IMFL market is seeing stronger growth in the

premium segments led by favorable demographic factors like rising disposable

incomes and aspiration levels of consumers. Consequently, the focus of most of

the IMFL participants in India has shifted towards driving Premiumisation as a

strategy in the medium to long term. Pernod Ricard has been clearly at the forefront

of this trend having doubled its sales and operating profits in two years. Despite

being 1/6th in market share compared to industry leader UNSP, it has achieved

similar levels of profit before taxes, thus underscoring the inherent benefits of

Premiumisation strategy.

If Diageo acquires strategic stake in UNSP we expect a further shift in focus of

industry players towards premium IMFL segments. Diageo's India portfolio is geared

to capitalize on the unfolding premium IMFL consumption story in India. Post the

acquisition, it will be able to drive its premium-super premium brands through a

wider distribution footprint. Given the lackluster growth in mature markets and its

underperformance vs. Pernod in India, we expect disproportionate focus from

Diageo to enhance its market footprint in India.

Combination of improving pricing environment as indeed the shift in the focus of

industry leader towards realizations/profitability could help drive the sector

profitability and margins in our view. This, in turn, can act as a potential re-rating

trigger for Radico, we believe.

From Radico's viewpoint, the UNSP-Diageo deal could give RDCK a window of

opportunity to explore market share improvement in the regular/semi-premium/

premium segments. If Diageo gets management control, there would be a transition

period (at least two quarters in our view), which RDCK could exploit to its advantage.

Such transition usually consumes significant management bandwidth and diverts

the top management's focus disproportionately towards deal completion,

integration of operations, financial deal closing, employee integration, etc.

Availability of stock in trade suffers, giving competitors a small window of

opportunity to enhance their trade presence.

Radico Khaitan

1031 October 2012

Well positioned to capitalize on rising IMFL consumptionContribution of IMFL increasing; volumes to grow in double digits

Third largest IMFL player, with strong CSD positioning

Contribution of branded IMFL to revenues increasing; top-4 brands constitute 70% of

volumes

8PM and Magic Moments - crucial volume drivers

Expect 10.3% volume CAGR over FY12-15

Play on the attractive IMFL opportunity in IndiaRadico Khaitan (RDCK) is a play on the growth opportunity in the Indian made foreign

liquor (IMFL) space, which is expected to witness 10% volume CAGR over FY12-15,

aided by a confluence of favorable demographics and rising disposable income. It has

a presence across segments and a distribution network of more than 486 wholesalers

and 36,000 retailers. RDCK has integrated operations, with 150m liters of distillation

capacity (including JV, Radico NV Distilleries), five owned bottling units and 28 contract

bottling units. It has a strong presence in CSD (Canteen Stores Department), with 18

registered brands. Hitherto a regular segment player, RDCK has shifted its focus to

premiumization and has launched four new brands in the premium to super-premium

segments in the last three years.

Third largest player in volume termsIn terms of cases sold, RDCK is the third largest player in the IMFL space, with sales of

17.7m cases in FY12.Having entered the branded IMFL space in the late-90s, it has

created four new millionaire brands (8PM, Magic Moments, Old Admiral and Contessa)

across product segments like whisky, vodka, brandy and rum. RDCK was earlier focused

on the value for money segment, with price points of less than INR300/750ml. It has

four pillar brands and a host of mid-size and regional brands. It entered the semi-

premium segment with the launch of Magic Moments vodka in 2006, followed by

Morpheus brandy in 2009, After Dark whisky in 2010 and Florence brandy, recently.

Radico's IMFL market share has stabilized at 8% Industry market share (FY11)


Radico Khaitan

1131 October 2012

Market share of industry leader in various IMFL segments

Category UNSP Market Share (%)

BII Scotch

Premium Scotch 44

Regular Scotch 6

Whiskey

Premium 60

Prestige 61

Regular 55

Vodka

Prestige 7

Regular 83

Regular Rum 56

Regular Brandy 67

Regular Gin 79


8PM and Magic Moments crucial volume drivers8PM whisky is RDCK's first success in the branded IMFL space. However, it

underperformed in FY07-09, with 23% volume decline. This was due to change in

formulation and spike in input cost. Subsequently, RDCK reverted to grain-based

formulation and re-launched 8PM with new packaging, supported by heavy

investments. Since its re-launch, 8PM has registered 10.3% volume CAGR over FY09-

12. We build in 10% volume CAGR for FY12-15.

Radico Khaitan: Brand architecture

Price Range/

750ml

Whisky

Rum

Brandy

Vodka

Gin

Economy

<INR150

Big Hit, Windies,

Radico Choice,

Gold Supereme,

Special

Appointment

Big Hit, Windies,

Black Cat, Rampur

No1, Tropicana

White

Whitefield, Big

Hit

Regular

INR150-200

8PM, Old

Admiral

Contessa,

Bermuda, Load

Nelson, Old

Admiral

Brihans Grape,

Whitefield

Special

Appointment,

Red Russian

Contessa, Blue

Bird, Goa Dry

Gin

Deluxe

INR201-300

Whytehall

Bermuda White,

Contessa White

Old Admiral, 8PM

Semi Prem

INR301-450

Brihan's Gold,

Napolean

Magic Moments

Premium

INR451-550

After Dark

Super Prem

>INR550

Morpheus

Radico Khaitan

1231 October 2012

Magic Moments vodka has achieved strong market positioning, with volume CAGR of

40% over FY07-12. Affordable price point (INR350-400/750ml), attractive packaging

and launch of various flavors and variants have enabled the brand to maintain strong

momentum. It has cornered ~30% share in the vodka market and 90% share in the

semi-premium segment. We expect vodka as a category to continue gaining share

and maintain 20% volume CAGR on account of the following reasons:

Increasingly, the youth is preferring white spirits to brown spirits, which are

conceived as drinks for the older generation.

India's current demographic profile suggests that 50% of the population is below

25 years and 65% is in the 25-35 year age group. The drink favored by the youth

population (with rising purchasing power) will grow at a faster pace than the

market.

Vodka can be mixed with water, juice, soda and cold drinks, which increases the

taste options for the drinker.

Vodka gives smoother taste, less 'kick' and no bad breath.

Heavy investments in the category through celebrity endorsements.

Magic Moments to continue growing at ~20% CAGR - Vodka

M cases Sales Gr. % Magic Moments Gr. % Key Brand Sh. %

FY06 0.1 0.1 100.0

FY07 0.5 400 0.4 300 80.0

FY08 0.8 60 0.7 75 87.5

FY09 1.1 37.5 1.0 42.9 90.9

FY10 1.5 36.4 1.4 40.0 93.3

FY11 2.0 34.2 1.89 35.0 93.9

FY12 2.4 17.4 2.2 17.6 94.0

FY13E 2.8 16.9 2.6 17.0 94.1

FY14E 3.3 19.6 3.1 20.0 94.4

FY15E 4.0 21.5 3.8 22.0 94.8


We expect consolidated volume CAGR of 10.3% over FY12-15, aided by double-digit

volume growth in Magic Moments, 8PM and Old Admiral.

8PM to continue growing at ~10% CAGR - Whisky

M cases Sales Gr. % 8PM Gr. % Key Brand Sh. %

FY06 5.7 4.2 73.7 73.7

FY07 6.1 7.0 4.4 4.8 72.1

FY08 5.5 -9.8 3.5 -20.5 63.6

FY09 4.6 -16.4 3.4 -2.9 73.9

FY10 5.1 10.9 3.6 5.9 70.6

FY11 5.6 10.6 4.0 11.9 71.4

FY12 6.3 11.9 4.6 13.4 72.4

FY13E 6.9 9.6 5.0 10.0 72.6

FY14E 7.6 9.5 5.5 10.0 73.0

FY15E 8.3 9.5 6.1 10.0 73.4


Radico Khaitan

1331 October 2012

Radico's volumes to grow at 10.3% CAGR over FY12-15… …driven by the vodka, whisky and brandy segments (% growth)


Branded IMFL ~74% of sales; contribution of country liquor, bulk spiritsdecliningBranded IMFL contributes ~70% of RDCK's revenue, with country liquor (5%), bulk

spirits (16%, molasses and grain based) and others (9%) accounting for the rest. The

contribution of IMFL to overall revenue has increased by 500bp since FY09. We expect

it to move up further by 300bp over the next three years owing to lower growth in

country liquor and bulk spirits. RDCK's strategy of driving premium IMFL brands should

also augment overall salience of IMFL, in our view.

The sale of country liquor is restricted to the state where the distillery is situated and

as such this segment is growing at a CAGR of just 5%. Also, country liquor sales are

strongly correlated with the election cycle in India. Country liquor sales were up 9%

in FY10, when the general elections were held. Spirit sales are a function of surplus

production over in-house requirements. As the branded IMFL and country liquor sales

increase, the availability of spirits for bulk sale declines.

Expect IMFL contribution to rise further Segment-wise sales growth trends (%)


Radico Khaitan

1431 October 2012

Top four brands account for ~70% of volumes


Share of Magic Moments to increase; top four brands to account for 71% of sales by FY15


Radico Khaitan

1531 October 2012

Financials: Premiumization led 23% EPS CAGRExpect 10.3% volume CAGR, 250bp margin expansion over FY12-15

Volumes to post 10.3% CAGR, driven by 20% CAGR in premium brands

Operating margins to expand 250bp over FY12-15, leading to EPS CAGR of 23%

Leverage has improved significantly since FY09; material change unlikely

Expect sales CAGR of 14.5% over FY12-15We expect RDCK's sales to grow at a CAGR of 14.5% over FY12-15, driven by:

Robust 22% volume CAGR in premium brands. We expect the premium segment

to grow ahead of the market, as consumers trade up, driven by favorable

macroeconomic factors.

16% sales CAGR in IMFL, 8% CAGR in country liquor and 13% CAGR in bulk spirits.

Sales and EBITDA growth trends


Gross margin to expand by 170bp, EBITDA margin by 250bp over FY12-15RDCK reported gross margin of 49.8% and EBITDA margin of 15.1% for FY12, a decline

of 260bp and 70bp, respectively. We believe there is significant scope of margin

expansion in the coming years, led by improving pricing environment in the IMFL

industry, better product mix (led by 22% volume CAGR in premium brands) and benign

input costs. We expect gross margin to expand 170bp over FY12-15. EBITDA margin

should expand 140bp in FY13 followed by 60bp expansion in FY14. Upside risks to our

margin estimates include higher than expected price increases (we build in annual

price increase of 5-6% on weighted average basis for the next two years). Downside

risks include higher than expected increase in input costs (we build in 8% increase

over FY12-15).

Radico Khaitan

1631 October 2012

Gross and EBIDTA margin


Expect input costs to increase 6-8%Molasses: Molasses prices increased 19% in FY12 after correcting by 32% in FY11 due

to bumper sugarcane output. Sugar production for sugar year 2012 (SY12; year ended

September 2012) is estimated at 26m tons. The industry expects molasses prices to

remain stable in FY13. Announcement of higher ethanol prices (INR27.5/liter) by the

government would prevent significant softening in prices of molasses. We expect

molasses prices to be INR417/quintal in FY13 and INR450/quintal in FY14.

Grain/ENA: Grain prices should gradually increase in line with the increase in support

prices by the government. ENA prices are currently ruling at INR33-34/liter.

Packaging/Glass: The cost of RDCK's packing material/case is directly correlated with

glass prices, which are in turn directly correlated with crude prices. Glass bottle prices

were increased 8% in February 2012 to pass on input cost inflation but HNG has cut

Glass prices by 10% recently w.e.f 15th September. We are building in a modest 5%

increase in packaging cost per case over FY12-15.

Molasses and grain price trends Trend in packaging cost/case (INR)


Radico Khaitan

1731 October 2012

Molasses and grain price trends


New launches, premiumization focus will keep ad spends high (% of sales)


Adjusted PAT to grow at a CAGR of 23% over FY12-15RDCK has posted sales CAGR of 16.2% and adjusted PAT CAGR of 19.6% over FY07-12.

Over FY12-15, we expect the company to post sales CAGR of 14% and EBITDA CAGR of

22%, led by 200bp margin expansion. In FY13, we expect interest cost to increase 50%

owing to higher working capital debt. Given the working capital intensive nature of

the IMFL industry, we do not expect material change in RDCK's working capital position

in the medium term. Assuming effective tax rate of 27% for the next three years, we

estimate 23% CAGR in adjusted PAT over FY12-15.

Adjusted PAT growth and interest as a percentage of sales


Radico Khaitan

1831 October 2012

Significant decline in leverage unlikelyRDCK raised INR3.42b through QIP in March 2010, which was utilized to retire debt. It

redeemed FCCBs in July 2011 by refinancing the entire USD44m through low cost

(3.5%) 7-year ECBs with a two-year moratorium. Repayments will begin in FY14.

Consequently, leverage declined from 3x in FY09 to 0.9x in FY12. Given the nature of

the industry, we do not expect significant decline in leverage hereon.

Higher debtor days from government controlled markets drive high working capital

intentisy for the sector. IMFL players are required to pay duties upfront at the time of

sale while they receive payments after three-four months in case of government

controlled states. Controlling debtors and advances is critical to long term cash flows

and return ratios.

Capital return ratios to improve by 300-400bp over the next three yearsRDCK's RoCE and RoE are in low double digits. Increase in EBITDA margin in FY13 and

lower interest burden post FY14 should help improve capital ratios by 300-400bp over

the next three years. However, the ratios are unlikely to show material improvement,

given controlled pricing and high proportion of sales to auction contractors and

government-controlled wholesale agencies.

Expect modest improvement in capital ratios led by operating margin expansion

Net working capital high as government controls 70% of theLeverage has come down significantly after FY09 (x) market (Nos' of days)



Radico Khaitan

1931 October 2012

Radico NV Distilleries JV: Receives Mega project statusProvides strategic option value to Radico

Radico Khaitan owns 36% in a Joint Venture with NV Distilleries, Radico NV Distilleries.

The distillery is located in the Aurangabad district of Maharashtra for the manufacture

of rectified spirit, ENA, IMFL and related products.

Recently, Government of Maharashtra has conferred the status of "Mega Project" to

the new manufacturing facilities of Radico NV Distilleries.

This project is entitled to receive certain subsidies and duty exemptions for a period

of seven years from the date of commencement of commercial production.

The benefits include:

Subsidy to the extent of 100% of eligible investment with a period of seven year

by way of set off /credit for Tax liability under Maharashtra Value Added Tax Act

2002 and Central Sales Tax Act 1956;

Electricity duty exemption for the period of seven years; and

100% exemption from payment of stamp duty.

The subsidy benefits should start accruing in FY13e. This JV, we believe, offer an

option value for Radico Khaitan in future, which it may monetise.

As per the FY12 balance sheet, Radico has invested INR 480m in the JV; INR 280m

through equity route and balance through preference shares (10% Cumulative non-

convertible preference shares).

It has also given a guarantee of INR 564m for loans taken by Radico NV Distilleries.

Radico NV Distilleries Maharashtra Ltd.

INR Million

FY12 FY11

% Ownership Interest (%) 36 36

Assets 1,023 936

Liabi l i t ies 721 713

Income 715 622

Expenses 677 628

Contingent Liabilities 56 8.8

Capital Commitments 0.1 8.8

Radico Khaitan

2031 October 2012

Valuations attractive, given strong earnings growth aheadExpect 30% upside; Buy

Valuations are supportive, given the expected 23% earnings CAGR over the next three

years

We value RDCK at P/E of 17x FY14 EPS and arrive at a target price of INR152.

Valuation multiples are in line with historical averages.

Supportive valuations plus 23% earnings CAGR = 30% upsideRDCK is an attractive play on the growing IMFL opportunity, underpinned by favorable

demographic factors like rising disposable income, growing youth population, and

changing social attitudes towards drinking. It has 33 bottling units spread across India,

through which it covers 90% of the retail outlets. Its premiumization strategy is working

and we expect the contribution of premium brands to increase from 15% of total

volumes to 20% by FY15. This would be the key driver for a robust 22% and 23% CAGR

in EBITDA and PAT over FY12-15,respectively, in our view.

The stock has traded at an average EV/EBITDA of 12.8x and P/E of 20.7x since FY10. We

believe there is a case for re-rating on account of:

RDCK's decisive focus on premiumization.

Improved pricing environment in the IMFL industry, boosting operating margins.

Any potential deal involving sector leader can have a positive rub-off effect on

peer valuations, including RDCK's, in our view.

We value RDCK at a P/E of 17x FY14 EPS and initiate coverage with a Buy rating and a 12

month forward target price of INR152 - 30% upside. At our target price, RDCK will

trade at 10.6x FY14E EV/EBITDA, modest discount to recent averages.Global liquor

companies trade at average 12-13x EV/EBITDA. Given the superior long-term growth

prospects of Indian liquor companies, we believe Indian players should trade at a

premium to their global counterparts. Any valuation re-rating owing to potential

UNSP-Diageo deal will provide upside to our target price.

Risks to our investment thesis Lower than expected price hikes will restrict margin expansion. Regulated pricing

for two-third of industry sales is a structural hangover on capital efficiency ratios.

Higher than expected input costs will restrict margin expansion.

Frequent changes in distribution increase debtor days.

Steady increase in excise duties by states adds to working capital cycle.

Radico Khaitan

2131 October 2012

Global Alocholic Beverage Cos

EPS Growth (%) P/E (x) P/B (x) EV/EBITDA (x)

FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

Diageo PLC 32.1 11.8 17.2 15.4 6.3 5.2 13.5 12.2

Heineken NV 20.9 18.8 26.0 21.9 1.3 1.2 - -

Carlsberg A/S 0.3 12.7 16.3 14.5 3.8 3.3 12.2 11.0

Anheuser-Busch InBev NV 18.2 28.7 13.5 10.5 5.7 4.2 9.0 6.5

SABMiller PLC 27.0 36.8 18.8 13.8 7.2 5.1 12.4 8.8

Takara Holdings Inc 12.1 15.0 20.6 17.9 2.5 2.3 12.7 11.1

Thai Beverage PCL 48.8 18.0 24.2 20.5 3.9 3.5 16.6 13.8

Luzhou Laojiao Co Ltd 5.8 11.3 24.9 22.4 6.0 5.2 15.2 13.8

Pernod-Ricard SA 19.8 14.9 16.9 14.7 2.1 2.0 12.6 11.2


Radico P/E band chart P/B band chart

Valuation comparison to FMCG - table

Annual Performance EPS (INR) PE (x) EV/EBIDTA (x) RoE (%)

CMP Reco FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E

Asian Paints 3,884 Neutral 103.1 121.5 142.9 37.7 32.0 27.2 24.1 20.2 16.6 36.0 34.7 33.8

Britannia 484 Se l l 15.6 18.4 23.7 31.0 26.3 20.4 22.3 17.1 12.3 34.9 35.1 37.9

Colgate 1,285 Neutral 32.8 40.0 46.5 39.1 32.1 27.6 29.4 23.6 19.9 109.4 114.7 108.7

Dabur 125 Neutral 3.7 4.4 5.5 33.4 28.7 22.8 26.0 21.2 17.1 37.9 34.7 35.8

Godrej Consumer 726 Neutral 16.3 21.6 26.3 44.6 33.5 27.6 31.3 23.6 19.3 25.2 23.1 24.3

GSK Consumer 2,997 Neutral 84.5 101.7 113.5 35.5 29.5 26.4 22.2 19.1 16.7 31.0 31.4 29.8

Hind. Unilever 550 Neutral 11.9 15.5 18.0 46.2 35.5 30.5 35.0 27.5 23.6 74.6 72.1 63.4

ITC 284 Buy 7.9 9.5 11.3 36.0 30.0 25.1 23.8 19.5 16.0 32.8 33.2 33.4

Marico 205 Buy 5.2 6.8 8.5 39.5 30.3 24.3 28.5 21.1 16.8 28.0 21.6 21.8

Nestle 4,673 Neutral 105.7 117.1 138.5 44.2 39.9 33.8 29.4 24.2 20.0 95.7 73.6 63.5

Pidilite Inds. 193 Buy 7.0 8.4 10.1 27.6 22.9 19.1 19.1 14.4 11.6 26.3 24.6 24.8

United Spirits 1,144 Neutral 19.5 19.3 35.1 58.6 59.3 32.6 17.8 15.8 14.2 4.9 4.7 7.9

Radico Khaitan 117 Buy 6.0 6.9 8.9 19.4 16.9 13.1 12.6 10.6 8.8 11.9 12.5 14.4

Radico Khaitan

2231 October 2012

Annexure

Indian IMFL Industry

520m cases Spirits market

is growing at 8-9% CAGR.

IMFL is growing at 10-11%

CAGR and Country Liquor

is growing at 5-6% CAGR.

Share of IMFL in spirits

has increased from 38%

to 44% in past six years

Spirit market CY2005 (%) Spirits market CY2011 (%)

Indian IMFL Industry


Whisky is the single largest segment and accounts for 69%

of IMFL value sales. Vodka and Gin account for just 5% of

IMFL sales. Vodka is growing at 25% CAGR while Gin is

growing at low single digits.

Spirit Market (Value) CY2011 South and west India accounts for 65% of IMFL sales


South and west India accounts for 65% of IMFL sales;

North India accounts for 25% while East India accounts

for only 10%


Radico Khaitan

2331 October 2012

IMFL Market Share


United Spirits acquired

Herbertsons, Triumph

dist, Carew and Shaw

Wallace increasing its

market share to 54%

India has favorable economic and demographic conditions for the growth of IMFL industry


Per capita consumption (ltrs)


Indian market offers

huge growth potential

due to young population,

rising income levels and

affordability, greater

social acceptability and

low per capita

consumption. Expect

IMFL volumes to grow at

11-12% CAGR in the

medium term

Radico Khaitan

2431 October 2012

Distribution system

Wholesaler

Retai lers

Retailer Margin

Sellers bargaining

power

Methodology

Key States

Government controlled

State through its entity

State operated or

private

12-15%

Low to average

Annual tender from

manufacturers

Karnataka, Kerala,

Uttaranchal

Tamilnadu,

Andhra Pradesh

Orissa, Bihar,

Rajasthan

Uttaranchal

Auction Market

State auctions

distribution rights to

private parties for

selected areas and time

Private vendors

20%+

Very low

Private parties negotiate

with liquor companies

Punjab, Haryana,

Chandigarh

Uttar Pradesh,

Madhya Pradesh

Himachal Pradesh

Free Market

Manufacturers sell

to wholesalers/

retailers

Private parties

obtain license for

nominal fee

8-10%

High

Private wholesalers

directly procure from

manufacturers

Goa, Maharashtra,

Assam

Delhi, West Bengal,

Tripura, Pondicherry

Chandigarh,

Jharkhand

Multiple distribution

systems across states

make India a tough

market to operate. Govt

controlled system

provides low pricing

flexibility while free

market works best for

the industry. Monopoly

distributor and auction

markets impact industry

profitability

Key markets with changes in distribution/pricing system

State Market in 2007 Market in 2010 Industry Pricing Power

Puduchery Govt. controlled Free Market Significantly Improved

Jharkhand Auction Free Market Significantly Improved

Bihar Auction Govt Controlled Improved

Rajasthan Auction Govt Controlled Improved

UP Free Market Auction Deteriorated

Punjab Free Market Auction Deteriorated

Haryana Free Market Auction Deteriorated

Madhya Pradesh Free Market Auction Deteriorated


Liquor industry reforms

have suffered a setback

as north India has moved

back to auction system;

Bihar, Rajasthan,

Jharkhand and

Puducherry have seen

improvements

Advertising for liquor is not allowed in India, industry is forced to undertake

surrogate advertising; ban on advertising is a key entry barrier

Liquor industry falls in the state subject by the GOI. Consequently it is subjected to

very strict distribution controls by the state governments. Currently three types of

distribution systems are prevalent in India i.e. Government controlled, Auction market

and free market. Each distribution system has its own characteristics, some of which

have been impeding the growth of the liquor industry in India.

Government Controlled; Under the Government controlled system, state government

either own its own or through an agency purchases liquor from various entities through

negotiated prices and sells at certain markup to the consumer through its own shops.

This system currently exists in southern India. It indirectly imposes limits on the

availability of the product.

Radico Khaitan

2531 October 2012

Auction Market; Under the auction market state government auctions the right to sell

liquor to various parties by auction of a certain fixed fee annually. The winners of

these contracts then negotiate prices with the liquor companies and sell to the

consumers through their own distribution network. This creates distribution

monopolies in small regions, which results in high consumer prices and fat margins

for the retailers.

Free Market; Open market system is most favorable to the trade and industry. It

improves the availability of the products and ensures fairness to both the consumer

and retailer. Under this system interested parties can open the liquor shops by taking

licenses from the state for a certain fee. Manufacturers sell the liquor directly to the

retailers at negotiated prices. This ensures fair play for the manufacturer as no one

retailer can force it to reduce the prices.

High entry barriers to work in favor of existing playersStrong entry barriers characterize liquor industry. These have resulted in very few

new players having successfully entered and established new brands in the market.

The industry is dominated by few players like United Spirits, Pernod Ricard, Radico

Khaitan, Jagatjit, Mohan Maekin and Seagram.

Media advertising of liquor is banned in India. Manufacturers undertake surrogate

advertising and sponsorships of various sports events to create brand awareness.

Surrogate advertising is generally done for Soda, bottled water and sports

equipment. This makes it difficult for any player to launch a new brand and make

it a success. This has thwarted the attempts of many global majors to make a

strong foot hold in the Indian liquor industry.

Taxes and duties constitute nearly 40-45% of the final consumer price. In addition

to excise taxes, there are high taxes on interstate movement of liquor. There are

more than 100 different types of taxes on liquor in India, which raises the entry

barriers for any new player.

Liquor is subject to 100% import duty and 150% countervailing duty, which raises

the prices of imported liquor to very high levels. This results in very high prices

for imported liquor, thus limiting their consumer reach.

High taxes on interstate movement of liquor results in manufacturers having small

bottling units in various states, thus creating inefficiencies in manufacturing. Thus

operating in India is akin to operating in 30 countries.

Reforms in liquor industry have received a setbackLiquor industry reforms have received a setback in the past few years. This is on

account of 1) steady increase in excise duty by various states 2) shift from free market

to auction system of distribution in entire north India. Although we note that some of

the states have moved from auction system and Govt controlled one, broad pace of

reforms have been back and forth. Switchover to auction system is a big negative in

North India as it entails higher credit period to wholesale trade. Higher credit period

coupled with increase in excise results in increase in credit period and working capital

requirements. Debtor's days for Radico have increased from 23 to 41 in past five

years; consequently net working capital has increased from 63 days of sales to 92 days

of sales. Steady increase in working capital is a drag as it impacts the cash flows.

Radico Khaitan

2631 October 2012

Recent changes in distribution of Alcoholic Beverages

State Market in 2007 Market in 2010 Industry Pricing Power

Puduchery Govt. controlled Free Market Significantly Improved

Jharkhand Auction Free Market Significantly Improved

Bihar Auction Govt Controlled Improved

Rajasthan Auction Govt Controlled Improved

UP Free Market Auction Deteriorated

Punjab Free Market Auction Deteriorated

Haryana Free Market Auction Deteriorated

Madhya Pradesh Free Market Auction Deteriorated


Radico Khaitan

2731 October 2012

Financials and Valuation

Income Statement (INR Million)

Y/E March 2011 2012 2013E 2014E 2015E

Net Sales 9,469 11,445 12,986 14,977 17,191

Change (%) 12.9 20.9 13.5 15.3 14.8

Total Expenditure 7,975 9,714 10,842 12,409 14,162

EBITDA 1,494 1,731 2,143 2,568 3,029

Change (%) 9.3 15.9 23.8 19.8 17.9

Margin (%) 15.8 15.1 16.5 17.1 17.6

Depreciation 271 328 376 423 454

Int. and Fin. Charges 293 375 515 526 537

Financial Other Income 47 1 2 3 3

PBT 977 1,028 1,255 1,621 2,041

Change (%) 94.7 5.3 22.0 29.2 25.9

Margin (%) 10.3 9.0 9.7 10.8 11.9

Tax 257 229 339 438 551

Tax Rate (%) 26.3 22.3 27.0 27.0 27.0

PAT 720 799 916 1,183 1,490

Change (%) 72.4 11.0 14.6 29.2 25.9

Margin (%) 7.6 7.0 7.1 7.9 8.7

Extraordinary Income 8 -163 0 0 0

Reported PAT 728 637 916 1,183 1,490

Balance Sheet (INR Million)

Y/E March 2011 2012 2013E 2014E 2015E

Share Capital 265 265 265 265 265

Reserves 6,249 6,687 7,476 8,452 9,680

Net Worth 6,514 6,953 7,742 8,717 9,946

Loans 4,935 6,547 7,568 7,518 7,158

Deferred Tax 498 563 689 851 1,055

Capital Employed 11,947 14,063 15,999 17,086 18,159

Gross Block 5,728 6,870 7,670 8,470 9,270

Less: Accum. Depn. 1,539 1,847 2,223 2,647 3,101

Net Fixed Assets 4,189 5,022 5,446 5,823 6,169

Capital WIP 219 48 300 200 200

Investments 1,207 1,113 1,134 1,134 984

Curr. Assets, L&A 8,059 10,139 11,620 12,917 14,312

Inventory 1,269 1,774 1,920 2,218 2,370

Account Receivables 3,191 3,478 4,216 4,634 5,329

Cash and Bank Balance 94 218 283 282 251

Others 3,506 4,669 5,201 5,783 6,361

Curr. Liab. and Prov. 1,728 2,528 2,770 3,256 3,774

Account Payables 840 1,187 1,212 1,443 1,669

Other Liabilities 295 1,148 1,320 1,518 1,746

Provisions 593 193 238 295 359

Net Current Assets 6,332 7,611 8,850 9,661 10,538

Miscelleneous Exp./Others 0 268 268 268 268

Application of Funds 11,947 14,063 15,999 17,086 18,159

E: MOSL Estimates

Radico Khaitan

2831 October 2012

Financials and Valuation

Ratios

Y/E March 2011 2012 2013E 2014E 2015E

Basic (INR)EPS 5.4 6.0 6.9 8.9 11.2

Cash EPS 7.5 8.5 9.7 12.1 14.6

BV/Share 49.1 52.4 58.3 65.7 74.9

DPS 1.0 1.3 1.7 0.0 0.0

Payout % 15.0 15.4 17.6 17.6 17.6

Valuation (x)

P/E 19.4 16.9 13.1 10.4

Cash P/E 13.7 12.0 9.6 8.0

EV/Sales 1.9 1.8 1.5 1.3

EV/EBITDA 12.6 10.6 8.8 7.4

P/BV 2.2 2.0 1.8 1.6

Dividend Yield (%) 1.1 1.4 0.0 0.0

Profitability Ratios (%)

RoE 11.6 11.9 12.5 14.4 16.0

RoCE 10.2 10.0 11.0 12.6 14.2

Turnover Ratios

Debtor (Days) 47 42 45 43 43

Asset Turnover (x) 0.8 0.8 0.8 0.9 0.9

Leverage Ratio

Debt/Equity (x) 0.8 0.9 1.0 0.9 0.7

Cash Flow Statement (INR Million)

Y/E March 2011 2012 2013E 2014E 2015E

OP before Tax 930 1,028 1,253 1,619 2,038

Int./Div. Received 47 1 2 3 3

Depreciation and Amort. 271 328 376 423 454

Interest Paid 293 375 515 526 537

Direct Taxes Paid 210 163 213 276 347

Incr in WC 1,256 1,155 1,174 812 908

CF from Operations 75 413 758 1,483 1,777

Extraordinary Income 8 -163 0 0 0

Incr in FA -88 971 1,052 700 800

Other Assets 13 268 0 0 0

Pur of Investments 314 -94 20 0 -150

CF from Invest. -217 -1,040 -1,072 -700 -650

Issue of Shares -7 -70 0 0 0

Interest Paid 293 375 515 526 537

Incr in Debt 474 1,612 1,021 -50 -360

Dividend Paid 92 108 123 161 208

Others Inflows -178 -308 -4 -47 -54

CF from Fin. Activity -96 751 379 -784 -1,159

Incr/Decr of Cash -238 124 66 -1 -31

Add: Opening Balance 332 94 218 283 282

Closing Balance 94 218 283 282 251

E: MOSL Estimates

Radico Khaitan

2931 October 2012

N O T E S

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employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliatesor employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitnessfor a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision

based on this report or for any necessary explanation of its contents.

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of InterestStatement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Radico Khaitan1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No

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