HDFC Alcohol Beverages (Sector Report Init Cov) Jul 2018

SECTOR REPORT 12 JUL 2018
Alcohol Beverages
Top down heady, bottom up insipid

India’s liquor industry looks attractive on a top down aggregate industry profits are derived from the
CMP TP basis, presenting a strong case for long term investors. deluxe, semi-premium and premium segments. In 3Q
Rating
(Rs) (Rs) High barriers to entry, inelastic demand (?), increasing FY18, Allied Blenders (ABD) launched new brands
United Spirits 620 SELL 570 social acceptance and premiumisation provide most of (Sterling Reserve B7 and B10) in the semi-premium
Radico 387 BUY 473 the rationale for this view. A closer look, however, and premium segments. Pernod Ricard and UNSP
reveals structural pain that dampens both volume and have a strong presence here.
value growth. The industry remains at the mercy of a  Meanwhile, ABD has also cut prices in the deluxe
quagmire of state-specific regulations, ever increasing segment (Officer’s Choice Blue) in Maharashtra. OC
taxes, price control, distribution model changes and Blue competes with McDowell’s No 1. We see these
political interference. Reiterate SELL on United Spirits moves as negative and expect margins to remain
under pressure.
(UNSP) and initiate coverage on Radico Khaitan (RDCK)
with a BUY, driven by more visible improvement in  UNSP is a SELL. We have factored optimistic
business trajectory and relatively affordable valuations. assumptions, despite near term competitive and
regulatory challenges in Karanataka and Maharashtra
 Good business, but for whom? The liquor business (~40% of volumes, revenue and EBITDA). The
does look good on gross revenue basis, but we are potential excise increase in Maharashtra to offset LBT
not sure who it is good for. A consistent rise in loss of FY18 is unlikely to be passed on to consumers.
tax/unit leads to (1) Govt’s revenue share rising, with Rich valuations (60x/46x FY19/20E EPS) further
most states posting double-digit tax growth, (2) Low bolster our SELL case, with a TP of Rs 570 (40x Jun-
volume growth, and (3) Downtrading, that offsets 20E EPS).
premiumisation gains achieved with much effort (and  Radico a BUY: Radico has well-positioned itself by
spend) by liquor cos. focusing on (1) The fast growing and niche vodka
 Competition heating up as dark clouds recede. Over segment (Magic Moments has ~50% market share)
FY17-18, the industry ran into highway sales bans, and super premium brandy (Morpheus). High margin
demonetisation, GST, route-to-market changes in UP, P&A brands are 26/43% of IMFL volumes/revenues.
West Bengal and Chhattisgarh. But, it also benefited UNSP is at 47/63%, suggesting significant relative
from tailwinds like stable/declining raw material headroom for Radico to premiumise. (2) Govt
prices, a decrease in taxes in Maharashtra, and price supplies (CSD is 17% of IMFL revenue vs. ~6-8% for
hikes (a normally difficult ask) in 14-15 states. UNSP) with high entry barriers, and (3) Non-IMFL
Himanshu Shah  This is leading to rising competitive activity with business (25/15% of revenue/EBITDA). RDCK trades
himanshu.shah@hdfcsec.com existing players entering new segments, undertaking much cheaper (32/27x FY19/20E EPS). BUY with TP of
+91-22-6171-7315 selective price cuts to gain market share. Most of the Rs 473 (32x Jun-20E EPS).
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
ALCOHOL BEVERAGES : SECTOR REPORT
IMFL: Soft growth, dull outlook

 India’s IMFL industry’s volume growth has been a regulatory and political uncertainties associated with
modest 2% over CY13-18E. This is despite under the industry.
Indian IMFL industry has
penetration, rising aspirations and social acceptance,
witnessed soft growth,  This is in contrast to most management’s optimism of
increasing income levels etc
outlook too remian modest high single-low double digit volume growth and mid-
 Notably the growth outlook as per research agencies high teen’s value growth.
remains lull over CY18-22E owing to high taxations,
Whisky (brown spirit) Volume Mix of Spirits (Mn Cases) Volume Mix of Spirits (%)
constitute 60% of the market Whisky Brandy Rum White Spirits Whisky Brandy Rum White Spirits
volume followed by Brandy, 350 Mn cases 100.0 3.4 3.8 4.0
14 14.1 13.1
Rum and White spirits (mainly 15.6
300 12 44
80.0
Vodka) 250
9 43
21.8 21.1 21.0
44 71
65 60.0
200 61
Vodka has been the fastest 150 40.0

59.2 61.0 61.9
growing category, Rum the 100
165 187 210
20.0
slowest 50
- -
CY13 CY18E CY22E CY13 CY18E CY22E
Globally Vodka is the largest Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research
category in IMFL segment
Value Mix of Spirits (Rs Bn) Value Mix of Spirits (%)
Whisky Brandy Rum White Spirits Whisky Brandy Rum White Spirits
3,000 Rs bn 100.0 %
6.1 6.3 7.2
210 9.5
11.1 9.4
2,500 274
80.0 11.7 10.7 9.6
147 280
2,000 222
111 250 60.0
204
1,500 215
40.0 73.8
2,155 71.1 73.5
1,000
1,714
1,304 20.0
500
- -
CY13 CY18E CY22E CY13 CY18E CY22E
Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research Source : Euromonitor, Radico Khaitan, HDFC sec Inst Research
Page | 2
South drives quantity, North+West profitability

 Southern states with annual volumes of ~185-190mn Southern India IMFL Volumes
Southern states account for a cases account for ~60% of overall IMFL market. With FY14 FY15 FY16 FY17 FY18
significant portion of the high penetration of liquor (~7-8 litres per head) 60.0 Mn cases
volume growth in Southern states has been muted,
industry volumes primarily in 50.0
thus pulling down the overall industry growth.
regular category
 Within South, Tamilnadu and Kerala contribute ~75- 40.0
77mn cases (~40%). Both this markets are highly 30.0
regulated by the government with strong presence of
Growth in Southern markets local players. National branded players have thus
20.0
espeically Karnataka and franchiseed their brands (mostly on fixed fee). This 10.0
premiumisation are inevitable markets offer inconsequential growth opportunity. -
for healthy industry growth  Karnataka, Telangana and AP are important markets Andhara Telangana Tamilnadu Karnataka Kerala
from volume perspective. However since this are Pradesh
large low-priced Popular segment market and due to Source : State government/s, HDFC sec Inst Research
Volumes in Karnataka has limited price increases (once in two to three years);
been flat over FY15-18 at their share of profitability is lower than volumes.
~55mn cases Norther and western states take precende over here.
 Surprisingly post seperation from Andhra Pradesh, Southern India IMFL Volume growth YoY
Telangana has been witnessing healthy double digit
FY15 FY16 FY17 FY18
In FY19, Karnataka govt took growth in volumes over FY16-18. One of the reasons
18.2
we believe is liquor factories were located in
a steep increase in excise duty 20.0 %
13.8
13.1
Telangana region and thus it was getting exported to
per unit/liquor by~ 12% ~(8% 15.0
Andhra Pradesh.
in excise policy and recently
 10.0
6.4
6.1
UNSP has a significantly higher dependence on
5.4
4% owing to farm loan Karnataka. UNSP enjoys a ~50% market share in 55-
1.8
1.6
1.5
5.0
1.2
0.4
0.1
-8.3
waiver). This may further
-8.5
56mn cases market. Karnataka alone accounts for -
impact the volume ~33% of UNSP’s overall volumes. Telangana and
-5.0
-1.5
growth.Taxation on Beer has
-2.0
Andhra Pradesh contributes additional ~10% and 8%
been flat since FY16. to UNSP volumes. -10.0
Andhara Telangana Tamilnadu Karnataka Kerala
 Radico Khaitan (RDCK) derives ~31% of its IMFL Pradesh
revenues from Souther market. Source : State government/s, HDFC sec Inst Research
With exception of Telangana,
all other major states has
been struggling to grow
Page | 3
Indian Whisky Market : Key players, brand and competitive positioning

Gross UNSP Pernod ABD Radico John Distillery
Profits / Total
Category
Case Brand Volume Brand Volume Brand Volume Brand Volume Brand Volume Volume
(Rs)
UNSP‘s dervies a significant Cheap / Local
30.0
or Unbranded -
portion of its profit from
McDowell’s No 1 category vs. Hayward's
Officer's Origin
8.9 Choice 25.5 8 PM 7.0 al 10.3 51.7
fair distribution for Pernod Fine
(OC) Choice
Ricard from the three leading X
Regular Old Tavern 7.4 7.4
brands across categories
Bagpiper 6.0 6.0
Director's
4.2 4.2
Special
Prestige and Above
ABD has launched new brands McDowell’s Imperial
Deluxe ~1.5-2X 26.6 19.0 OC Blue 6.5 52.1
Sterling Reserve B7 and B10 in No. 1 Blue
Semi Premium and Premium Semi-
~3-4X
Royal
4.5
Royal
18.7
Sterling
- 23.2
Premium Challenge Stag Reserve B7
categories
Sterling
Signature Blenders
Premium ~6-7X 1.8 6.4 Reserve - 8.2
Antiquity Pride
B10
Super Black & White,
1.0
Premium VAT69 etc
Scotch Johnnie Walker Chivas Regal -
Total 59.4 44.1 32.0 7.0 10.3 183.8
Source : Industry, HDFC sec Inst Research
Page | 4
Company, brand and Category-wise volume sales

Category Company Brand CY13 CY14 CY15 CY16 CY17
Hayward's Fine 8.3 9.6 7.4 8.2 8.9
Old Tavern 8.7 8.6 9.4 8.8 7.4
UNSP Bagpiper 9.5 7.9 7.2 7.0 6.0
UNSP has shown a healthy Director's Special 4.3 4.4 4.6 4.7 4.2
growth in Royal Challenge Sub total 30.8 30.5 28.6 28.7 26.5
Regular
while its Regular category ABD OC 23.8 28.4 32.9 32.9 32.0
brands continues to struggle John Distilleries Original Choice 10.0 10.5 10.7 10.1 10.3
Bangalore Malt Whisky 0.1 0.8 1.1 2.1 3.5
Pernod has shown growth Radico 8 PM 4.8 4.3 4.1 5.7 7.0
across its categiories/brands Total 69.4 73.7 76.3 77.4 75.8
UNSP McDowell's No 1 24.9 25.8 25.9 26.7 26.6
and so is Radico in 8 PM
Deluxe Pernod Imperial Blue 10.9 14.1 17.5 18.0 19.0
Total 35.8 39.9 43.4 44.7 45.6
UNSP Royal Challenge 1.8 2.5 3.6 4.7 4.5
Semi Premium Pernod Royal Stag 14.8 16.1 17.3 18.0 18.7
Total 16.6 18.6 20.9 22.7 23.2
Both Pernod and ABD UNSP Signature 1.6 1.6 1.5 1.6 1.8
witnessed major growth in Premium Pernod Blender's Pride 4.2 4.8 5.6 6.2 6.4
CY11-13 viz. time frame Total 5.8 6.4 7.1 7.8 8.2
Total 127.8 139.8 150.0 156.1 157.9
during which UNSP’s faced
internal disturbances
Company-wise whisky sales (only key brands as stated above)
Company CY13 CY14 CY15 CY16 CY17
Allied Blenders (ABD) 23.8 28.4 32.9 32.9 32.0
UNSP 59.1 60.4 59.6 61.7 59.4
Pernod 29.9 35.0 40.4 42.2 44.1
John Distilleries 10.1 11.3 11.8 12.2 13.8
Radico 4.8 4.3 4.1 5.7 7.0
Alco Brew 0.1 0.4 1.2 1.4 1.6
Total 127.8 139.8 150.0 156.1 157.9
Page | 5
Brandy, Rum and Vodka

Brandy, Rum and Vodka are  Brandy is second largest category after Whisky in  After relatively flat volumes over CY11-13, UNSP’s Mc
other categories of IMFL IMFL industry with ~65mn cases. However nearly 50- Dowell’s No 1 Rum has seen a sharp decline in
60% of this volume is in unbranded/cheap category. volumes over CY15-17. Similar has been the case with
segment ~120mn cases
 Tamilnadu and Kerala account for ~70% of the brandy Radico.
market
market. Both this markets are difficult to penetrate  Vodka: Vodka (white spirit) is a smaller segment with
due to stringent distribution control by the ~9-10mn cases. This is in contrast to global trend
government of both wholesale and retail. Local player where consumption of Vodka leads in IMFL category.
grab a lion’s share in these states. Whisky (brown spirit) with ~185mn cases leads in
Brandy and Rum are large
 As can be seen from the table below, both UNSP and India with ~55-60% of the global share.
segment but consistently
declining for branded liquor Radico has been struggling to sustain volumes of their  However, Vodka has been the fastest growing IMFL
leading brands in the category. segment. More importantly 68% of the share in
players
 Rum with ~45mn cases is third largest category after Vodka is constituted by Premium and Super premium
Whisky and Brandy. However Rum has been segment (up from ~50% in CY12).
struggling to grow its foothold.  Radico Khaitan is a prominent player in this niche
Vodka though fastest growing category with ~50% market share in Super
Premium/Premium segment.
is just ~9-10mn cases market.
68% of the Vodka market in Top selling brands in categories of Brandy, Rum, Vodka, Gin etc
premium and super premium. Company Brand CY13 CY14 CY15 CY16 CY17
UNSP McDowell's No 1 (Brandy) 2.4 2.4 2.7 2.2 1.7
Radico has strong footprint in UNSP McDowell's No 1 (Rum) 16.2 16.6 16.2 14.9 12.5
Vodka category. Radico Magic Moments (Vodka ) 2.9 3.2 3.5 3.6 3.7
Radico Old Admiral (Brandy) 3.9 3.5 3.3 3.5 3.1
Radico Contessa (Rum) 2.6 2.7 2.7 2.0 1.8
Bacardi Bombay Sapphire (Gin) 2.8 3.0 3.3 3.8 4.0
Total 30.8 31.4 31.7 30.0 26.8
Page | 6
Whisky: Competitive intensity on rise

Profit Mix: Is UNSP at risk?  ABD's market share in Maharashtra is modest with
OC volumes of 1.5mn cases and OC Blue at 0.6mn
 Deluxe, Premium and Super-Premium category
cases (i.e. ~10%).
account for bulk of the industry profitability in the
Whisky segment.  UNSP is also likely to cut it prices (a) to ensure price
 McDowell’s No 1 contributes a large proportion to war doesn't spread to other brands/segments and
the profits of UNSP. also in other states and (b) to defend market share
which is more important as recovery of lost share is
 This is in contrast to equitable distribution of profits throbbing.
from three different segments for Pernod Ricard.
 Increase in competition in Deluxe segment
 UNSP had plans to reduce prices in Maharashtra in
2Q/3Q FY18 posts LBT withdrawal and plough back
(McDowells No 1) may impact the profitability of
the windfall gains but then had pulled back.
UNSP.
Maharashtra is amongst one
of the more profitable states Competition raising its ugly head as industry  Assuming UNSP also reduces its price for McD No 1
recovers: by Rs 80/bottle and bring it at par with Imperial Blue
for UNSP with significantly
and OC Blue at Rs 560/bottle; UNSP's
higher market share  Liquor industry has been coming out of regulatory revenue/EBITDA could get impacted by ~Rs 1bn.
challenges of highway ban, demonetization, GST,
route to market changes etc
UNSP: EBITDA impact of price cut in Maharashtra
Increased competitive No of IMFL cases sold in Maharashtra ~20
 Industry also saw tailwinds on raw material prices, UNSP share ~50%
intensity in Maharashtra to decrease in duty in Maharashtra, price increases (a
impact UNSP profitability McD No 1 contribution ~40%
daunting task) in 14-15 states.
No of McD No1 cases sold 4
 This is leading to increased competitive activity with Bottles/case 12
existing players entering into new segments, Price cut/bottle Rs 80
undertaking price cuts for market share gains etc Revenue impact/bottle ~25%
ABD cuts prices of OC Blue in Maharashtra Revenue impact/bottle (Rs) 20
Impact on revenue/GP/EBITDA (Rs Mn) 960
 Maharashtra is ~20mn cases IMFL market. UNSP is a Source : Industry, HDFC sec Inst Research
leader with ~45-50% share. Mc Dowells No 1
contributes ~40% of UNSP's volumes (4mn cases). UNSP reduced price of Royal Challenge in West
Bengal
 McD no 1 sells for MRP of Rs 640/bottle and
competes with Imperial Blue of Pernod Ricard (Rs  Our channel check also reveals UNSP has reduced
560/bottle) and Officer's Choice Blue (OC Blue) of price of its Royal Challenge brand in the West Bengal
Allied Blenders (ABD) at Rs 620/bottle. Our channel market from Rs 540/bottle (750ml) to Rs 500 in Feb-
check reveals, ABD has reduced price of OC Blue from 18 to bring it at par with Royal Stag. It has again
Rs 620 to Rs 560 from current month (Jun18). restored it back to Rs 540.
Page | 7
ABD ups its competitive ante in Premium removal of Local Body Taxes (LBT). UNSP gained ~Rs
segment 500mn/qtr or ~Rs 1.5bn for FY18 from 2Q-4Q.
 ABD had been a single brand company 'Officers  Maharashtra liquor policy is not yet announced and is
Choice' with variants OC Blue and OC Black that expected in couple of months. Govt is likely to
competes in deluxe segment. increase the excise rate to offset the LBT loss.
 In 3QFY18, ABD launched semi premium brand  Our channel check reveals that liquor players may not
Increased competitive ‘Sterling Reserve B7' that competes with Royal pass on the entire hike in excise to consumers as
intensity to keep margin Challenge of UNSP and Royal Stag of Pernod. It has volumes in Maharashtra are already struggling posts
under pressure owing to also launched premium brand ‘Sterling Reserve B10' the highway ban.
higher marketing and against Signature and Antiquity of UNSP and Blenders
promotional spends though in Pride of Pernod. Differentiated packaging of Sterling  This may pose a major setback for liquor players in
the medium term it could lead Reserve B7 is the key factor vs. the established Maharashtra especially UNSP.
to expansion of category brands.
 Recently Karnataka government increased the excise
 ABD is swiftly launching its new brands across duty by 4% (after raising it by 7-8% from Apr18) to
states. Increase in competition from ABD in core mobilize resources to meet the farm loan waiver of
profitable segments of UNSP and Pernod to hamper ~Rs 340bn.
growth for later.
 Even Maharashtra state government had announced
 Even if volumes don’t decline due to increased farm loan waiver of ~Rs 340bn last year.
competitive intensity, margins may remain under
pressure owing to higher advertising and promotions. Distribution expansion in Maharashtra
 Our channel check reveals the impact of ABD’s new  Maharashtra government is also considering allowing
brand launch is higher on Royal Stag of Pernod then hotel owners (bars etc) to allow selling liquor at MRP.
on Royal Challenge. Pernod has been a rationale It may amount to significantly large expansion to
player in terms of pricing and marketing spend (~6% number of existing outlets.
of revenues). However, price cuts by Pernod in Semi-  Government is thus considering imposing one-time
premium category or increased marketing spend license fee from owners who may seek to sell liquor
wouldn’t bode well for the overall industry. at MRP from bar. No new shop license has been
Pull back of LBT windfall gains in Maharashtra issued in Maharashtra since 1975.
 UNSP and all the other major liquor players had  UNSP being a market leader may see major gain in
windfall gain in Maharashtra in FY18 owing to volumes from the expansion in distribution outlets.
Page | 8
Growth opportunity: Liquor player or state governments?

Gross revenue growth outdo  The bull thesis on liquor rests primarily on the  Notably, a significant portion of the industry value
the net revenue growth of inelastic demand, high barriers to entry and thus the growth is captured by the state governments than
underlying growth opportunity. the liquor players.
companies by ~8% p.a.
 However our concern stems from ever increasing  For example, the net revenue for UNSP has come
taxation on liquor companies which either impacts down to 31% in FY18 from 58% in FY10.
volumes or may force consumers to downgrade.
Net / Gross Revenue: Consistently trending lower YoY growth: GR outperforms NR by ~8% p.a.
Gross Revenue Net Revenue Net / Gross Rev (%) Gross Revenue Net Revenue
30.0
270 Rs bn 60.0
25.0
225 20.0
50.0
180 15.0
135 40.0 10.0

5.0
90
30.0 -
45
-5.0
- 20.0 -10.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Page | 9
 Steep increase in taxation is also reflected in the

robust excise revenue growth of major state
governments. We highlight below of Karnataka and
Uttar Pradesh as a reference.
Karnataka and UP excise revenue (Rs Bn) Uttar Pradesh excise revenue growth YoY (%)
Most of the state witness a Karnataka Uttar Pradesh
25.0 %
180 Rs bn
excise revenue growth 21.2 20.2
21.3
(double digit) despite modest 150 20.0 17.7 19.0 19.0
16.1 16.9
volume growth 120 15.0 15.8
14.7
90
10.0 10.5 12.2
60 10.6
5.0 6.7
30 6.2 4.5
1.3
- -
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: State excise website, HDFC sec Inst Research Source: State excise website, HDFC sec Inst Research
Karnataka IMFL excise revenue growth YoY (%)

Excise rev growth YoY Vol growth YoY
75.0 %
65.0
55.0
45.0
35.0
25.0
15.0
5.0
-5.0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: State excise website, HDFC sec Inst Research
Page | 10
 Our discussion with industry reveals that majority of  Haryana is one of the most affordable states with tax
the states continues to increase per unit taxation on friendly policies. However as can be seen from table
IMFL every-year or two. This is one of the prime below over the last two years government has
reasons leading to consistent rise in gross revenue significantly raised the excise duty (a) by increasing
from liquor companies but little translating to net per unit taxation and (b) more importantly
Most of the states increase
revenues. introducing more slabs.
taxation on liquor every one
or two years, either by Haryana: Excise duty per unit increased
tinkering with the slabs or IMFL
Excise duty per Ex Distillery Price Excise duty as % of
(Brands with Ex Distillery Price
increasing the excise duty in Proof litre** (Rs) per PL (Rs) EDP per PL
upto on per case basis)
the existing slabs FY16 & FY18 & FY16 &
FY16 & FY17 FY18 & FY19 FY16 FY17 FY18 FY19 FY18 FY19
YF17 FY19 YF17
G= H= I = (C or
A* B C D E F J = E/H K = F/H
As can be seen from the table A/6.78 B/6.78 D)/G
aside for Haryana there is Rs 1,200 Rs 1,000 43.0 43.0 48.0 54.0 177.0 147.5 24.3% 32.5% 36.6%
sharp increase in excise duty Rs 1,200 - 3,000 Rs 1,001 - 1,500 53.0 53.0 64.0 70.0 442.5 221.2 12.0% 28.9% 31.6%
per proof litre. Rs 3,001 - 6,000 Rs 1,501 - 2,500 63.0 63.0 81.0 87.0 885.0 368.7 7.1% 22.0% 23.6%
Rs 6,001 and above Rs 2,501 - 3,500 73.0 73.0 103.0 110.0 516.2 20.0% 21.3%
For example a liquor case Rs 3,501 - 5,000 - - 113.0 120.0 737.5 15.3% 16.3%
with ex distillery price of Rs Rs 5,001 - 7,000 - - 153.0 165.0 1,032.4 14.8% 16.0%
3,000/case would have Rs 7,001 and above - - 203.0 215.0
required to pay in FY16/17
EDP is ex distillery price *Liquor companies mostly price the product at the upper end of the slab/range to maximize the realization and
excise of Rs 53/proof litre vs. minimize the impact of taxation ** One proof litre (LPL London proof litre) is equivalent to ~1.7litre
Rs 110 in FY19.
 Even Karnataka state increased per unit taxation on  Uttar Pradesh state too has substantially increased
liquor twice in FY19. Earlier it increased excise duty the tax/unit and brought down the ex-distillery price
across slabs by ~7-8% and recently by further 4% to of liquor companies. However our channel check
raise resources for farm loan waivers. It has been reveals it is unlikely to impact the net realization
consistently raising taxes either by tinkering slabs or owing to substantial reduction in trade spends. This is
by raising the per unit taxation. on account of abolition of monopolistic distribution in
the state.
Page | 11
Premiumisation: Inevitable!
 Premiumisation is inevitable for the liquor players to  Also in case of UP as can be seen from below table,
improve profitability. This is owing to (a) low industry Net realization as % of MRP increases from 13% to
volume growth (b) restriction on distribution which 30% as one moves up the value chain and (b) Gross
further hampers volume uptick (c) restriction on price Profit per bottle/case of semi-premium/premium
increases that curtails value growth. segment is equivalent to 3-6x of Popular brands due
 Besides above the most important reason for to lower taxes and higher net realization. Thus, liquor
Net realization increases, premiumisation we believe is owing to (a) lower net companies don’t mind losing volumes in the Popular
both on absolute and as % of to gross revenue realization on lower price products segment for more profitable value growth in the
across majority of the states. For example as premium segment.
gross revenue (or MRP) as
one moves up the ladder highlighted in table above of Haryana, excise duty  This is one of the reasons we believe, why UNSP has
decreases from 36% of ex distillery price to 16% as franchised its operations for regular segment brands
one moves up the value chain. across thirteen states with lower contribution to
overall profitability and focus on premium brands.
UP trade dynamics (MRP per 750ml bottle)
In Rs %
Brand Company Ex Ex
Trade Trade
Distillery Tax MRP Distillery Tax MRP
Margin Margin
Price Price
8PM Special Rare Blend of Scotch & Indian Whisky Radico 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0%
8PM Bermuda XXX Rare Caribbean Rum Radico 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0%
Officer's Choice Original Whisky ABD 54.2 289.6 76.2 420.0 12.9% 68.9% 18.1% 100.0%
Bagpiper Superior Whisky UNSP 54.3 289.5 76.2 420.0 12.9% 68.9% 18.2% 100.0%
Officer's Choice Blue Reserve Grain Whisky ABD 82.7 334.5 82.8 500.0 16.5% 66.9% 16.6% 100.0%
McDowell's No.1 Select Whisky UNSP 82.7 334.5 82.9 500.0 16.5% 66.9% 16.6% 100.0%
Imperial Blue Premier Grain Whisky Pernod 99.6 343.7 86.7 530.0 18.8% 64.9% 16.4% 100.0%
M2 Magic Moments Premium Vodka Radico 102.5 350.1 87.4 540.0 19.0% 64.8% 16.2% 100.0%
Regal Talons Premium Rare Generation Whisky Radico 102.5 350.1 87.4 540.0 19.0% 64.8% 16.2% 100.0%
Royal Stag Premier Whisky Pernod 121.7 366.6 91.7 580.0 21.0% 63.2% 15.8% 100.0%
8 PM Premium Black Rare Whisky Radico 122.5 365.6 91.9 580.0 21.1% 63.0% 15.9% 100.0%
Royal Challenge Classic Premium Whisky UNSP 122.6 365.5 91.9 580.0 21.1% 63.0% 15.9% 100.0%
Royal Stag Barrel Select Whisky Pernod 140.8 382.2 97.0 620.0 22.7% 61.6% 15.6% 100.0%
Pluton Bay Superior Exotic Rum Radico 141.4 381.5 97.1 620.0 22.8% 61.5% 15.7% 100.0%
M2 Magic Moments Verve Premium Vodka Radico 141.4 381.5 97.1 620.0 22.8% 61.5% 15.7% 100.0%
Morpheus XO Blended Reserve Brandy Radico 224.7 447.5 107.8 780.0 28.8% 57.4% 13.8% 100.0%
Blenders Pride Rare Premium Whisky Pernod 233.3 457.8 108.9 800.0 29.2% 57.2% 13.6% 100.0%
Signature Premier Grain Whisky UNSP 234.4 456.6 109.0 800.0 29.3% 57.1% 13.6% 100.0%
Antiquity Blue Ultra Premium Whisky UNSP 250.0 469.0 111.0 830.0 30.1% 56.5% 13.4% 100.0%
Blenders Pride Reserve Collection Whisky Pernod 278.3 506.8 114.8 900.0 30.9% 56.3% 12.8% 100.0%
Page | 12
 While we agree with the liquor player’s strategy of  We believe in the inelastic nature of liquor demand.
premiumisation, it is a difficult and slow process. The However, owing to consistently rising per unit
Indian alcohol market is a media-dark industry, where taxation and thus consumer prices (a) it brings down
advertising is restricted. Stringent state-wise the overall industry volumes even if temporary (and
regulations and restrictions on advertising pose may be sometime permanent). This is visible from the
challenges for new players to enter the market, and low volume growth trajectory of industry and (b)
create a loyal customer base for their products. These persistently rising prices may force consumer to
aspects act as a strong entry-barrier. But, Shifting down trade and partly offset the premiumisation
consumer preferences to premium brands in a ‘media effort.
dark’ industry is also counter-productive to
premiumisation strategy.
Price slab-wise % mix of cases sold in Karnataka in last five years
FY14 FY15 FY16 FY17 FY18 Remarks
No of cases sold (Mn) 51.8 54.9 55.2 54.3 55.0
Price Slabs (Rs)*
Volume mix (%) in each slabs
FY14, FY15 & FY16 FY17 & FY18
0-414 0-449 10.0 8.9 9.2 8.9 9.0
414-464 450-499 50.5 50.5 44.1 46.7 47.6
465-514 500-549 18.7 18.4 22.8 18.0 16.4
Karnataka state has seen 515-564 549-599 7.4 8.9 10.6 13.0 14.1
marginal uptrading, however 565-664 599-699 0.6 0.7 0.8 1.0 1.1
it has also been offset by 665-764 699-799 1.1 1.0 0.9 0.8 0.7
downtrading in higher slabs 765-864 799-899 3.0 3.3 3.6 3.5 3.3
865-964 899-999 0.6 0.5 0.5 0.5 0.5
965-1064 999-1099 2.9 3.1 3.3 3.5 3.4
1065-1164 1099-1199 0.9 0.9 1.4 1.5 1.6
1165-1264 1199-1299 1.0 0.9 0.2 0.2 0.2
1265-1364 1299-1399 1.3 1.1 0.8 0.6 0.5
1365-1764 1399-1799 0.6 0.5 0.5 0.4 0.3
1765-2164 1799-2199 0.3 0.2 0.2 0.2 0.1
2165-4889 2199-4924 0.9 0.8 0.8 0.8 0.7
4890-7615 4924-7650 0.3 0.3 0.3 0.4 0.4
7616 and above 7651- 15000 0.1 0.1 0.1 0.1 0.1
Total 100.0 100.0 100.0 100.0 100.0
Source: State website, HDFC sec Inst Research *In general the liquor companies price case at the upper end of the slab
Page | 13
 Industry dynamics are unlikely to improve in the near  We will closely watch-out for (a) stable taxation
term. Given that alcohol is now amongst the very few policies (b) volume or mix surprises despite rising
items for states from a tax revenue perspective post taxation (c) price increases from state or (d) liberal
GST, we see no reason why government may follow a distribution policies.
different path.  Awkward industry dynamics and rich valuations
Summary even with reasonable growth assumptions leaves
limited margin of safety for UNSP. Sell.
 Despite being media dark and rising taxation, we  Radico’s relatively cheap valuation, niche
remain cognizant of rising disposable incomes, positioning in fast growing Vodka and super
increasing social acceptance, high barriers to entry premium brandy segment and improving dynamics
and companies push for premiumisation and margin in state of UP (20% of volumes) are the key factors.
improvements. BUY.
Valuation summary
EPS
Mcap CMP* TP P/E (x) P/BV (x) ROE %
FMCG companies Rating CAGR (%)
(Rs bn) (Rs) (Rs)
FY18 FY19E FY20E FY18 FY19E FY20E FY17 FY18E FY19E (FY18-20E)
Britannia 763 6,358 NEU 6,307 76.0 61.6 48.0 22.5 17.9 14.1 33.0 32.4 32.8 25.8
Colgate 311 1,143 NEU 1,219 46.9 39.3 33.5 19.3 19.3 15.8 46.0 49.0 51.7 18.2
Dabur 667 379 BUY 423 48.7 40.3 33.4 11.6 11.0 9.2 25.9 28.0 30.1 20.7
Emami 242 534 BUY 627 47.1 38.1 32.1 12.0 11.1 10.4 27.3 30.4 33.4 21.1
Godrej Consumer 902 1,325 - 1,143 59.9 49.4 43.0 15.1 13.5 11.9 34.3 36.0 36.5 18.1
Hindustan Unilever 3,719 1,718 NEU 1,709 72.4 58.5 48.3 49.5 42.8 36.0 72.0 78.4 81.0 22.5
ITC 3,350 276 BUY 367 29.9 27.2 24.6 6.6 6.0 5.5 23.1 23.2 23.4 10.1
Marico 443 343 BUY 388 53.7 41.5 32.2 17.6 16.0 14.0 34.1 40.4 46.3 29.1
Radico Khaitan 51 387 BUY 473 41.7 31.8 27.3 4.5 4.0 3.5 11.4 13.3 13.7 23.7
United Spirits 450 620 SELL 570 64.7 60.3 46.3 18.9 14.4 11.0 33.4 27.0 26.8 18.2
Source: HDFC sec Inst Research * as on 11th July, 2018
Page | 14
COMPANY UPDATE 12 JUL 2018
United Spirits
SELL
INDUSTRY ALCO BEV Short term challenges
CMP (as on 11 Jul 2018) Rs 620 United Spirits’ (UNSP) management has pushed for Liquor companies may partly offset the excise
premiumisation, cost control, de-leveraging and has increase against the LBT windfall gains of last year.
Target Price Rs 570 This would further impact UNSP.
franchised out low-end brands. UNSP’s
Nifty 10,948
premiumisation drive and BS cleanup are enticing,  Premiumisation inevitable, but slow with hiccups:
Sensex 36,266 as they can drive up margins and return ratios. We Consistent rise in unit taxation impairs the ability of
KEY STOCK DATA think this transformation is mostly happening and liquor companies to capture the value share of
Bloomberg UNSP IN have more than built it into our assumptions. industry pie. It also leads to subdued industry volume
No. of Shares (mn) 727 growth as well as downtrading that offset the
UNSP’s faces higher competitive intensity, risk of premiumisation gains. Higher ad spends (~10% vs. 6%
MCap (Rs bn) / ($ mn) 450/6,546
further excise increases (especially in Maharashtra) for Pernod) doesn’t ensure sustained premiumisation
6m avg traded value (Rs mn) 1,491
which may not be passed on to the consumers. in event of pullback. Increased aggression from
STOCK PERFORMANCE (%) Even in Karnataka (33% of its volumes), both competition is a risk.
52 Week high / low Rs 801/468 volume growth and premiumisation has been weak.
3M 6M 12M UNSP’s rich valuations (46x FY20E EPS) and  Low bad debt provision-bright spot: UNSP made a
provision of ~Rs 1.4bn for bad debt owing to route to
Absolute (%) (10.4) (19.0) 17.4 reasonable assumptions leave limited upside
market changes in certain. In absence of any such
Relative (%) (17.3) (24.1) 3.2 potential. SELL with TP of Rs 570 (40x Jun-20E EPS). provision requirement in subsequent years, it could
SHAREHOLDING PATTERN (%) lead to ~150bps margin expansion.
 Competitive intensity on rise: UNSP is an undisputed
Promoters 58.5 leader in IMFL space. However, it face challenges of
FIs & Local MFs 4.3 rising competitive intensity from Allied Blenders entry
Consolidated Financial Summary
FPIs 23.3 into semi-premium and premium segment. ABD has
(Rs mn) FY17 FY18 FY19E FY20E FY21E
Public & Others 13.9 also cut price of OC Blue in Maharashtra which
competes with McDowell’s No 1. It could potentially Net Sales 88,635 85,906 92,512 101,704 112,550
Source : BSE
impact UNSP’s EBITDA by ~Rs0.8-1bn. UNSP too EBITDA 10,352 12,007 14,647 17,129 20,313
resorted to price cut in West Bengal for Royal APAT 5,071 6,964 7,466 9,722 12,290
Challenge before pulling it back. Diluted EPS (Rs) 7.0 9.6 10.3 13.4 16.9
P/E (x)
 Potential increase in excise duty in Maharashtra: 88.8 64.7 60.3 46.3 36.7
Himanshu Shah Maharashtra is likely to increase excise duty and it EV / EBITDA (x) 47.1 39.9 32.1 27.0 22.3
himanshu.shah@hdfcsec.com may not be fully passed on to the consumers due to RoE (%) 29.7 33.4 27.0 26.8 26.0
+91-22-6171-7315 already high prices and struggling volume growth. Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
UNITED SPIRITS : COMPANY UPDATE
Key Model Assumptions

CAGR
FY17E FY18E FY19E FY20E FY21E
FY18-20
Volumes (Mn Cases) 90.1 78.5 83.9 89.7 96.0 6.9
We estimate 9.8% revenue
- P&A 36.8 37.2 40.5 44.2 48.2 9.0
CAGR over FY18-20 led by
- Popular 53.3 41.3 43.4 45.5 47.8 5.0
volume growth and modest
price increase. Management
Realization/bottle 936 1,021 1,047 1,078 1,117 2.8
targets 12-13% revenue CAGR
- P&A 1,358 1,378 1,402 1,437 1,487 2.1
- Popular 644 698 716 730 744 2.2
Our assumptions seem fair
considering industry Standalone Revenue 85,936 81,701 89,568 98,555 109,180 9.8
challenges of increasing - P&A 49,960 51,280 56,838 63,502 71,640 11.3
competition, price cuts, - Popular 34,330 28,830 31,028 33,231 35,591 7.4
increase in taxation etc - Other operating income 1,646 1,591 1,702 1,822 1,949
Led by mix change, RM Contribution Margin 42.1% 46.5% 46.8% 47.1% 47.5%
tailwind and lower PDD we - P&A 46.5% 50.1% 50.3% 50.6% 50.8%
forecast a healthy 290bps - Popular 35.6% 40.0% 40.3% 40.5% 40.8%
EBITDA margin expansion in
FY19 and further 100bps in Contribution (Rs Mn) 37,092 38,809 42,803 47,406 52,874
FY20. - P&A 23,241 25,686 28,612 32,126 36,422
- Popular 12,204 11,532 12,489 13,459 14,503
FY18 includes incremental - Other operating income 1,646 1,591 1,702 1,822 1,949
PDD charge of Rs 1.5bn owing
to route to market changes in Advtg & Prom 6,668 7,882 8,513 9,279 10,114 8.5
UP, Chhattisgarh, Haryana % of revenue 7.8% 9.6% 9.5% 9.4% 9.3%
(pulled back subsequently) etc
Employee costs 6,674 6,601 6,469 6,922 7,406 2.4
% of revenue 7.8% 8.1% 7.2% 7.0% 6.8%
Other operating expenses 13,591 14,112 14,068 15,052 16,106 3.3

% of revenue 15.8% 17.3% 15.7% 15.3% 14.8%
Page | 16
Higher growth in subsidiaries

CAGR
owing to government grant to FY17E FY18E FY19E FY20E FY21E
FY18-20
Pioneer Distilleries from the Total operating expenses 26,934 28,595 29,049 31,253 33,626 4.5
State of Maharashtra for % of revenue 31.3% 35.0% 32.4% 31.7% 30.8%
setting up projects in notified
rural areas in two phases. EBITDA 10,158 10,214 13,754 16,153 19,248 25.8
These grants are receivable in % of revenue 11.8% 12.5% 15.4% 16.4% 17.6%
the form of VAT refunds
Subsidiaries Revenue 2,699 4,205 2,944 3,150 3,370 0.8
Higher other income owing to Operating costs 2,505 2,413 2,051 2,174 2,305
sale of properties Subsidiaries EBITDA 194 1,792 892 975 1,065 19.1
Consolidated
Revenue 88,635 85,906 92,512 101,704 112,550 9.5
EBITDA 10,352 12,006 14,647 17,129 20,313 25.3
Margin % 11.7% 14.0% 15.8% 16.8% 18.0%
Depreciation 1,886 1,923 2,159 2,281 2,403

Interest Costs 3,751 2,710 2,550 1,602 896
Other Income 1,053 2,189 1,206 1,266 1,329
PBT 5,768 9,562 11,143 14,511 18,343

Tax 697 2,599 3,677 4,789 6,053
APAT 5,071 6,963 7,466 9,722 12,290 43.9
O/s shares 727 727 727 727 727

EPS 7.0 9.6 10.3 13.4 16.9 43.9
Source: Company, HDFC Sec Inst Research
Page | 17
Valuation and view

Upbeat assumptions and rich  At CMP, UNSP is trading at 60x FY19E and 46x FY20E Sensitivity Of TP At Various EPS And Multiples
valuations leave limited room EPS. We foresee strong earnings CAGR of 18% over EPS
FY18-20, led by recovery in volumes, lower PDD and Multiple (x) FY19 FY20 FY21
for complacency
improvement in mix. 10.3 13.3 16.8
Sell with TP of Rs 570 30 308 399 505
 Optimistic assumptions, though plausible, are fraught
35 360 465 589
with risk. Rich valuations and persistent regulatory
40 411 532 673
adversity associated with the business leave limited
45 463 598 757
room for upsides hereon. We await a better entry-
50 514 664 841
point. SELL with a TP of Rs 570 @ 40x Jun-20E EPS.
Page | 18
Financials
Premiumisation to play out as Volume Break-up: Prestige Vs. Regular (%) Value Break-up: Prestige Vs. Regular (%)
contribution of the higher end Prestige & Above Regular Prestige & Above Regular
100% 100%
P&A segment to UNSP’s
volumes and revenue to 36% 35% 34% 33%
80% 80% 41%
increase 53% 52% 51% 50% 47%
63% 59%
60% 60%
40% 40%
64% 65% 66% 67%
53% 59%
47% 48% 49% 50% 20%
20% 37% 41%
P&A to contribute to 66% to
0%
UNSP’s revenue and 49% to 0%
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY16
FY17
FY18
FY19E
FY20E
FY21E
volumes by FY20E
Volumes of P&A to grow at

9% CAGR, while regular UNSP’s Regular And Premium Volumes (Mn Cases) Trend In EBITDA And Margins
EBITDA (in Rs Bn) EBITDA margin (%) - RHS
volumes at 5% Regular (mn cases) Prestige & above (mn cases)
21.0 20%
120
18%
18.0
100 16%
15.0 14%
80 12%
48 12.0
59 53 46 10%
60 43
41 9.0
EBITDA margins to improve 8%
on the back of acceleration of 40 6.0 6%
premiumisation and price 20 37 37 41 44 48
3.0
4%
34 2%
increases
0 0.0 0%
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 19
Company background
Vijay Mallya was appointed  UNSP was acquired by Vithal Mallya in 1951. Post his 0.04% through an open offer made to public
Chairman of the company in demise, Vijay Mallya was appointed Chairman in shareholders
1983 1983.
 Post this, in 2014, Diageo again made an open offer
 In 2013, Diageo Plc, the UK-based spirits company, to UNSP shareholders of Rs 3,030 per share.
acquired ~25% in UNSP for Rs 1,440 per share Moreover, Diageo acquired 3.76% by way of on-
through three routes viz (1) Acquiring 14.98% stake market purchases in 2013-14. Currently, Diageo is the
Diageo has made two open by entering into a share purchase agreement with promoter and holds ~55% stake in UNSP. The
offers to UNSP shareholders – five companies (UBHL, Kingfisher Finvest India Ltd., cumulative investment for this stake is ~USD 3bn.
the second in 2014 being SWEW Benefit Company, Palmer investment Group
more successful Ltd. and UB Sports Management Overseas Ltd., (2)  Currently, Anand Kripalu is the MD and CEO of UNSP,
10% by preferential allotment agreement and (3) and Sanjay Churiwala is the CFO.
United Spirits: The Story So Far..
Year Key Milestone
1951 Vithal Mallya acquired McDowell's
Currently, Diageo is UNSP’s 1968 McDowell's No.1 Whiskey launched.
promoter, with a ~55% stake 1973 Vijay Mallya inducted as Director in McDowell & Co.
1983 Company board unanimously appoints Vijay Mallya as the Chairman of McDowell’s, after the demise of Vithal Mallya
McDowell's completes acquisition of Shaw Wallace & Company - brands Royal Challenge, Antiquity, Director’s Special,
2005
White Mischief amongst others become part of the company portfolio.
United Spirits Ltd, is created through the merger of McDowell & Co Ltd, Herbertsons Ltd, Triumph Distillers and Vintners
2006 Private Ltd, Baramati Grape Industries India Ltd, Shaw Wallace Distilleries Ltd and four other companies.
UNSP acquires Bouvet Ladubay, subsidiary of France-based Taittinger.
Diageo has driven various
2007 UNSP acquires Whyte & Mackay, UK's scotch whiskey distiller, for GBP 595 mn
rationalisation initiatives in
2013-14 Diageo plc acquires ~55% shareholding in United Spirits. Currently, UNSP is a subsidiary of Diageo plc
UNSP, after assuming control
In September 2014, UNSP’s board of directors directed an enquiry into certain matters referred to in company’s financial
in 2013-14 2014 statements and auditor’s report for FY14. This enquiry was headed by the MD and CEO of UNSP and covered various
matters, including certain doubtful debts, receivables, advances, deposits etc.
Sale of Whyte & Mackay to Emperador, for a consideration of GBP 430 mn
2015 In April 2015, UNSP board discussed and considered the outcome of this inquiry. Subsequently, UNSP made provisions for
doubtful debtors, loan and advances to UBHL, etc., which were reflected in financials of FY14 and FY15
Renovation of key regular brands such as McDowell No.1 and Royal Challenge completed
2015-16 UNSP continued to implement rationalisation initiatives, such as sale of select non-core assets
USL entered into a settlement agreement with Vijay Mallya pursuant to which he resigned from his positions as a director
2016
and chairman of UNSP and of the boards of its subsidiaries
Source: Company, HDFC sec Inst Research
Page | 20
Income Statement (Consolidated) Balance Sheet (Consolidated)

Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E As at March (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Revenues 88,635 85,906 92,512 101,704 112,550 SOURCES OF FUNDS
Growth (%) 4.3 (3.1) 7.7 9.9 10.7 Share Capital - Equity 1,453 1,453 1,453 1,453 1,453
Material Expenses 49,297 43,406 46,765 51,149 56,306 Reserves 16,403 22,438 29,904 39,626 51,916
Power & Fuel expenses 348 364 392 431 477 Total Shareholders Funds 17,856 23,891 31,357 41,079 53,369
Employee Expenses 6,882 6,809 6,469 6,922 7,406 Minority Interest (25) 136 - - -
Other Operating Expenses 21,756 23,320 24,239 26,074 28,047 Secured loans 8,697 7,628 7,197 6,197 5,197
EBITDA 10,352 12,007 14,647 17,129 20,313 Unsecured loans 29,069 23,013 25,569 22,569 19,569
EBITDA Margin (%) 11.7 14.0 15.8 16.8 18.0 Total Debt 37,766 30,641 32,766 28,766 24,766
EBITDA Growth (%) 7.3 16.0 22.0 16.9 18.6 Net Deferred Taxes 1,536 2,863 2,200 2,531 2,365
Depreciation 1,886 1,923 2,159 2,281 2,403 Long Term Provisions & Others 442 526 600 600 600
EBIT 8,466 10,084 12,487 14,847 17,910 TOTAL SOURCES OF FUNDS 57,575 58,057 66,922 72,976 81,100
Other Income (Including EO Items) (3,088) 1,744 1,206 1,266 1,329 APPLICATION OF FUNDS
Interest 3,751 2,710 2,550 1,602 896 Net Block (excluding goodwill) 18,486 17,552 17,904 17,622 17,219
PBT 1,627 9,118 11,143 14,511 18,343 CWIP 1,993 1,018 2,080 2,287 2,531
Tax (Incl Deferred) 697 2,599 3,677 4,789 6,053 Goodwill 680 361 361 361 361
Minority Interest & Profit/loss Investments 1 1 5 5 5
- - - - -
from associates Other non-current assets 8,528 12,973 8,873 9,050 9,231
RPAT 930 6,519 7,466 9,722 12,290 Total Non-current Assets 29,688 31,905 29,222 29,325 29,347
EO (Loss) / Profit (Net Of Tax) (4,141) (445) - - - Inventories 19,276 19,197 22,103 24,845 26,484
APAT 5,071 6,964 7,466 9,722 12,290 Debtors 29,534 26,812 31,642 35,353 40,069
APAT Growth (%) 196.9 37.3 7.2 30.2 26.4 Loans and advances 7,808 7,075 7,864 8,645 9,567
Adjusted EPS (Rs) 7.0 9.6 10.3 13.4 16.9 Cash & Equivalents 872 2,560 12,962 16,807 21,480
EPS Growth (%) 196.9 37.3 7.2 30.2 26.4 Total Current Assets 57,490 55,644 74,569 85,650 97,600
Creditors 12,247 14,551 14,661 15,977 17,495
Other Current Liabilities & Provns 17,356 14,941 22,209 26,022 28,351
Total Current Liabilities 29,603 29,492 36,870 41,999 45,847
Net Current Assets 27,887 26,152 37,700 43,651 51,753
TOTAL APPLICATION OF FUNDS 57,575 58,057 66,922 72,976 81,100
Page | 21
Consolidated Cash Flow Key Ratios

Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E
Reported PBT 1,627 9,118 11,143 14,511 18,343 PROFITABILITY (%)
Interest expenses 3,751 2,710 2,550 1,602 896 GPM 44.4 49.5 49.4 49.7 50.0
Depreciation 1,886 1,923 2,159 2,281 2,403 EBITDA Margin 11.7 14.0 15.8 16.8 18.0
Working Capital Change (2,993) (411) 2,291 (1,952) (3,776) APAT Margin 5.7 8.1 8.1 9.6 10.9
Tax Paid (697) (2,599) (3,677) (4,789) (6,053) RoE 29.7 33.4 27.0 26.8 26.0
Others (1,353) (1,328) (1,206) (1,266) (1,329) RoIC (or Core RoCE) 11.8 10.8 15.3 17.1 20.0
OPERATING CASH FLOW ( a ) 2,221 9,413 13,260 10,388 10,484 RoCE 12.7 15.4 14.7 15.4 16.7
Capex (1,129) (525) (3,062) (2,207) (2,244) EFFICIENCY
Free cash flow (FCF) 1,092 8,888 10,198 8,182 8,240 Tax Rate (%) 42.8 28.5 33.0 33.0 33.0
Investments 8 - (4) - - Fixed Asset Turnover (x) 4.8 4.8 5.2 5.7 6.5
Non-operating Income 5,194 2,189 1,206 1,256 1,329 Inventory (days) 79.4 81.6 87.2 89.2 85.9
INVESTING CASH FLOW ( b ) 4,073 1,664 (1,861) (951) (915) Debtors (days) 121.6 113.9 124.8 126.9 129.9
Debt Issuance/(Repaid) 492 (7,125) 2,125 (4,000) (4,000) Other Current Assets (days) 32.2 30.1 31.0 31.0 31.0
Interest Expenses (3,751) (2,710) (2,550) (1,602) (896) Payables (days) 50.4 61.8 57.8 57.3 56.7
FCFE (2,167) (947) 9,773 2,579 3,344 Other Current Liab & Provns (days) 71.5 63.5 87.6 93.4 91.9
Share Capital Issuance - - - - - Cash Conversion Cycle (days) 111.2 100.2 97.6 96.3 98.2
Dividend - - - - - Debt/EBITDA (x) 3.6 2.6 2.2 1.7 1.2
Others (3,532) 446 (573) 10 - Net D/E (x) 2.1 1.2 0.6 0.3 0.1
FINANCING CASH FLOW ( c ) (6,791) (9,389) (998) (5,592) (4,896) Interest Coverage (x) 2.3 3.7 4.9 9.3 20.0
NET CASH FLOW (a+b+c) (497) 1,688 10,402 3,845 4,673 PER SHARE DATA (Rs)
Opening bal of Cash & Cash Equ 1,369 872 2,560 12,962 16,807 EPS 7.0 9.6 10.3 13.4 16.9
Closing Cash & Equivalents 872 2,560 12,962 16,807 21,480 CEPS 3.9 11.6 13.2 16.5 20.2
Source: Company, HDFC sec Inst Research Dividend - - - - -
Book Value 24.6 32.9 43.2 56.5 73.5
VALUATION
P/E (x) 88.8 64.7 60.3 46.3 36.7
P/BV (x) 25.2 18.9 14.4 11.0 8.4
EV/EBITDA (x) 47.1 39.9 32.1 27.0 22.3
EV/Revenues (x) 5.5 5.6 5.1 4.5 4.0
OCF/EV (%) 0.5 2.0 2.8 2.2 2.3
FCF/EV (%) 0.2 1.9 2.2 1.8 1.8
FCFE/Mkt Cap (%) (0.5) (0.2) 2.2 0.6 0.7
Dividend Yield (%) - - - - -
Page | 22
INITIATING COVERAGE 12 JUL 2018
Radico Khaitan
BUY
INDUSTRY ALCO BEV Spirited and soaring
CMP (as on 11 Jul 2018) Rs 387 RDCK is an attractive play in the IMFL space with  Niche positioning – strategic driver of growth:
~20mn cases sales (6.5-7% market share). Our RDCK’s strategic focus on vodka and premium brandy
Target Price Rs 473
optimism on RDCK is premised on (1) Its strong with low competitive intensity (10% volume CAGR
Nifty 10,948 over FY13-18), customer segment (CSD, exports) and
presence in fast growing and niche segment of
Sensex 36,266 Vodka (~50% share) and super premium Brandy. geography (UP) enables to drive growth.
KEY STOCK DATA Prestige and above constitutes ~20% of its total  RDCK enjoys 50% share in fast growing segment of
Bloomberg RDCK IN revenue but 50% of its EBITDA, leaving significant Vodka. CSD contribute ~17% of its revenue and it
No. of Shares (mn) 133 headroom for RDCK to premiumise, (2) CSD sales at enjoys a healthy ~23% volume share. Entry into CSD
segment is difficult with stringent process and
MCap (Rs bn) / ($ mn) 52/749 ~17% in the IMFL revenue, with high entry barriers,
compliance norms. UP is a major market for RDCK
6m avg traded value (Rs mn) 712 (3) Captive ENA manufacturing in largest sugar
(~20% of volumes). Abolition of monopolistic
STOCK PERFORMANCE (%) producing state of UP that provides raw material
distribution is driving strong growth in Popular
52 Week high / low Rs 496/125 tailwinds, and (4) Balance sheet deleveraging. Net category for RDCK in the state.
3M 6M 12M debt/EBITDA declined from 5x in FY15 to 2x in FY18.
 Deleveraging to further boost profitability: RDCK’s
Absolute (%) 4.0 21.6 191.0 Initiate with BUY and TP of Rs 473 at 32x Jun-20E net debt declined from peak of Rs 9.1bn in FY16 to Rs
Relative (%) (2.8) 16.5 176.8 EPS vs. 40x for United Spirits (UNSP). Our lower 5.4bn in FY18 led by healthy 20% EBITDA and 30%
SHAREHOLDING PATTERN (%) valuation multiple for RDCK vs. UNSP owes to the earnings CAGR, modest capex and better working
Promoters 40.4 latter’s leadership and bigger brands. capital management. We expect this trajectory to
continue. Management expects to be debt free by
FIs & Local MFs 5.1
Key highlights FY21 though we remain conservative.
FPIs 22.9
Public & Others 31.5  IMFL the growth lever led by premiumisation: Consolidated Financial Summary
RDCK’s business comprises of IMFL (branded liquor) (Rs mn) FY17 FY18 FY19E FY20E FY21E
Source : BSE
and Non-IMFL. IMFL contributes 76% of RDCK’s Net Sales 16,799 18,228 19,831 21,259 22,744
revenue and 85% of EBITDA (16-18% margin). EBITDA 2,121 2,698 3,155 3,501 3,874
APAT 809 1,235 1,617 1,889 2,203
 Within IMFL, high margin (22-24%) Prestige and Diluted EPS (Rs) 6.1 9.3 12.2 14.2 16.6
above segment though contribute 26% of volumes P/E (x) 63.7 41.7 31.8 27.3 23.4
Himanshu Shah and 43% of revenues but ~60% of EBITDA; rest by low EV / EBITDA (x) 27.8 21.0 17.8 15.6 13.7
himanshu.shah@hdfcsec.com margin (11-13%) Popular segment. UNSP’s 47% RoE (%) 8.1 11.4 13.3 13.7 14.0
+91-22-6171-7315 volumes, 63% revenues are from premium segment. Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
RADICO KHAITAN : INITIATING COVERAGE
Company Overview
 Radico Khaitan (RDCK) is one of the largest players in IMFL and Non-IMFL: Revenue and EBITDA mix (%)
the Indian Spirits industry. It was formerly known as IMFL Non IMFL
Rampur Distillery and Chemical Company. It was one 100%
of the largest and most efficiently run distilleries, 15%
24%
RDCK is one of the largest 80%
manufacturing high grade ENA (extra neutral alcohol)
providers of branded IMFL to from molasses and grain and as a bottler for other’s
CSD spirits before entering the branded liquor space in 60%
1999. 85%
40% 76%
 RDCK’s marquee brands include 8PM whisky (fastest 20%
selling 1mn cases in the year of launch itself),
IMFL business is the key Morpheus brandy, Contessa rum, Old Admiral 0%
brandy, Magic Moments Vodka, After Dark, Regal Revenue EBITDA
growth driver
Talons etc
Source : HDFC sec Inst Research (estimate)
 The company is one of the largest providers of
branded IMFL to the Canteen Stores Department IMFL and Non-IMFL: Revenue mix (%)
Revenue contribution of IMFL (CSD), which has significant entry barriers. IMFL Non IMFL
business has increased from 100%
70% in FY12 to 76% in FY18; Business Segment: IMFL and Non IMFL
21%
22%
23%
24%
26%
27%
28%
28%
30%
31%
80%
 Radico’s business segment comprises of IMFL (Indian
Made Foreign Liquor) and Non-IMFL segment. 60%
 IMFL business comprises of branded liquor sales and
79%
40%
78%
77%
76%
We expect the contribution of
74%
73%
72%
72%
70%
69%
is the key growth driver.
IMFL to overall revenue to 20%
increase to 79% by FY21E  Non-IMFL segment comprises of bulk alcohol sales, 0%
country liquor in UP state and PET / printed bottles.
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Source : Company, HDFC Sec Inst Research
Page | 24
IMFL: key growth driver

 RDCK is one of the few companies in India that has  Revenue contribution of IMFL has increased from
RDCK’s portfolio constitute of developed its entire brand portfolio of IMFL 70% in FY12 to 76% inFY18. With healthy 9% revenue
organically with four millionaire brands viz. 8 PM CAGR, we expect contribution of IMFL to increase to
four millionaire brands viz. 8
Whisky, Contessa Rum, Old Admiral Brandy and 79% by FY21.
PM Whisky, Contessa Rum,
Magic Moments Vodka.
Old Admiral Brandy and
Magic Moments Vodka
IMFL revenue trend and growth YoY (%) Non IMFL revenue trend and growth YoY (%)
IMFL revenue (Rs Mn) % change YoY (RHS) Non IMFL revenue (Rs Mn) % change YoY (RHS)
18,000 15 5,500 15
Despite healthy growth in 10 5,200 10

15,000
premium brands, RDCK’s IMFL 5 5
4,900
revenue declined in FY15 and 12,000 0 0
FY16 owing to curbing the 4,600
-5 -5
sales of low margin ‘Popular; 9,000
-10 4,300
brands. -10
6,000 -15 4,000 -15
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
This was on account of steep
increase in raw material Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
prices, taxation and lack of
price increases from
government
Page | 25
Focus on niche segment drives growth in IMFL

Product positioning
Consumer MRP (Rs) Whisky Rum Brandy Vodka Ready to Drink
RDCK’s product portfolio Rampur
offers broad choice for Luxury > Rs 4000 Jaisalmer
Single Malt
consumers across segments Super Premium > Rs 700 Morpheus
Magic Moments
with focus on premiumisation Verve
Semi Premium/Premium Rs After Dark
Pluton Bay Magic Moments
500-700 Whisky
Deluxe Rs 300-500 Regal Talon Contessa White
Contessa Rum, Bermuda Old Admiral
Regular Rs 225-300 8PM
Rum Brandy
Magic Moment
Ready to Drink Rs 80-125
Family
Source: Company, HDFC sec Inst Research All prices for 750 ML bottle except for ready to drink, which is for 275 ML bottle
RDCK’s product innovation and brand building history

Year Key Milestone Category Competing brands
Started the branded IMFL division and launched its first brand 8 Bagpiper, Haywards, Director Special,
1998 Regular
PM Whisky; Became a millionaire brand in first year of launch Officers Choice
Launched Old Admiral Brandy; Became one of the leading
2002 Regular Amrut’s Silver Cup Brandy
brands in CSD
After creating brands in high volume regular categories,
Oxygen Apple Vodka, White Mischief
RDCK launched six new 2006 launched the first product in the semi premium category, Magic Semi-Premium
Vodka Ultra
brands in last five years, all in Moments Vodka
Launched Morpheus Super Premium Brandy; Magic Moments Bajois Napoleon Brandy, Bols Brandy
premium segment 2009 Super Premium
became a millionaire brand X O Excellence
2011 Launched After Dark, a premium category whisky Semi-Premium Royal Stag and Royal Challenge
Launched Magic Moments Verve, a super premium vodka Seagram's Fuel Vodka, Eristoff- Red
2012 Super Premium
followed by flavors of Verve Vodka
Launched Morpheus Blue, an upgraded version of Morpheus
2013 Super Premium
super premium brandy
2014 Launched two new flavors of Magic Moments Verve Vodka Super Premium
2015 Launched ELECTRA, a premium ready to drink product Super Premium Breezer
Paul John Single Cask, Amrut Cask
2016 Launched Rampur Indian Single Malt luxury whisky Luxury (only exports)
Strength, Paul John Brilliance
2016 Launched Regal Talons Semi Deluxe whisky Imperial Blue, McDowells No 1
Launched Pluton Bay Premium Rum and 1965-The Spirit of McDowell’s No. 1 Celebration XXX
2017 Semi-Premium
Victory Premium Rum Rum, Revolution Premium XXX Rum
2018 Launched Jaisalmer, a luxury Indian craft gin Luxury (only exports)
Page | 26
IMFL: Volume, Revenue and EBITDA Mix (%) IMFL revenue trend
P&A Popular IMFL revenue (Rs Mn) % change YoY (RHS)
100%
18,000 15
P&A volume contribution
80% 10
though modest at 26%, it 41%
15,000
57%
accounts for ~60% of the 5
60% 74%
EBITDA in the IMFL segment
12,000 0
(50% of overall)
40% -5
59% 9,000
43% -10
20%
Higher volume growth in P&A 26%
to significantly improve the 6,000 -15
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
0%
profitability of RDCK
Volume Revenue EBITDA
Drop in P&A revenues in FY16 Revenue trend: P&A and Popular Volume trend: P&A and Popular
is owing to change in P&A Popular P&A Popular
18,000 Rs mn 24.00
accounting from IGAAP to
IndAS 15,000 20.00
12,000 16.00
9,000 12.00
6,000 8.00
3,000 4.00
- -
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 27
Revenue growth: P&A and Popular Volume growth: P&A and Popular
P&A has witnessed consistent % P&A Popular % P&A Popular
20.8
volume (10% CAGR over FY13- 25.0 21.0
18) and revenue growth 20.0 18.0
15.0 15.0
12.0 8.6 8.9 9.3 9.0 9.0
10.0 8.0
9.0 7.0
5.0 4.5 6.2 6.2
6.0 5.0 5.0
- 3.0
Decline in Popular segment (5.0) -
(10.0) (3.0)
volumes over FY15 and FY16 (6.0)
(2.0)
has been strategic owing to (15.0)
(9.0) (7.2)
steep increases in raw (20.0) (12.0) (10.7)
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
material prices and lack of
price increases by state
government leading to Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
curtailment of volumes of loss
making brands
Revenue mix: P&A and Popular Volume mix: P&A and Popular
P&A Popular P&A Popular
100% 100%
80% 80%
54%
55%
56%
56%
57%
59%
62%
67%
70%
72%
73%
74%
74%
74%
76%
79%
82%
60% 60%
84%
40% 40%
46%
45%
44%
44%
43%
41%
20%
38%
20%
33%
30%
28%
27%
26%
26%
26%
24%
21%
18%
16%
0% 0%
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 28
Volume mix: P&A brands Volume mix: Popular brands

Magic Moments Vodka Morpheus Brandy Others 8 PM Whisky Old Admiral Brandy Contessa Rum Others
% %
100
100
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
- -
FY14
FY15
FY16
FY17
FY18
FY14
FY15
FY16
FY17
FY18
8PM laid the growth 8PM Whisky: founding stone of success:  Though the whisky segment was and is the largest in
foundation for RDCK and the Indian spirits market (~60%) it is also the most
 With 8PM launch in 1999, not only RDCK successfully
continuos to be an important competitive. India also accounts for ~60% of the
entered the branded liquor sector but also managed
contributor world’s whisky consumption.
to achieve a million cases in sales within a year of its
launch.  With 8PM whisky, RDCK was jostling with the likes of
8PM grew by 29% in volumes UNSP and multinational Pernod Ricard who spends
 8PM whisky continues to be the flagship brand of the
in FY18 led by strong growth company and deliver healthy volume growth year- big bucks on their brands. This is when RDCK decided
in UP market, change in after-year. In FY18 alone the brand registered 29% to go where there was less chance of being pushed
packaging from PET bottles to growth led by strong sales in UP market. off the road.
tetra packs etc
 The phenomenally successful Old Admiral Brandy,  This is when RDCK decided to launch a brand but in a
launched in 2002 is another millionaire brand from segment that was untapped. However, globally
The brand has been
RDCK’s straddle. Vodka is the largest segment (bigger than whisky) and
consistently registering becoming even more popular. Trends in Indian
healthy growth (15% CAGR Magic Moment Vodka: Sweet spot demographics were similar. This is when
over FY14-18) management decided to capitalize on this
 Vodka is a smaller and niche segment that accounts
for a significantly large portion of the profit pool of opportunity.
RDCK.  In 2005, another millionaire brand Magic Moments
Vodka was launched. The brand became a huge
Page | 29
success. The packaging and direct printing has been a Morpheus brandy: Small but highly profitable
huge hit of Magic Moments vodka.
 Brandy is second largest volume contributor in IMFL
 Magic Moments crossed the million-case mark in industry after Whisky. Size of brandy market is
2010. Based on the success of Magic Moments, RDCK ~65mn cases. However a significant portion of this
has also launched Magic Moments Remix Vodka- an (~50-60%) is either in unbranded/cheap category or
extension of Magic Moments vodka into the low priced Popular segment.
flavoured category. Remix has 6 flavours – orange,
 More importantly Tamilnadu and Kerala account for
Magic moment has been the green apple, lemon, lemongrass & ginger, raspberry
~70% of the brandy market. Both this markets are
and chocolate. The variants have invoked an
eureka product for RDCK difficult to penetrate due to stringent distribution
extremely positive response. The experimental
control by the government of both wholesale and
attitude of consumers and their thirst for premium
retail.
variety was the key reason behind RDCK launching
Since its launch in 2005,  RDCK has thus uniquely positioned itself in low-
flavored Magic Moments Vodka.
hitting a million cases in 2010; quantity but highly profitable super-premium brandy
the brand has grown to
 Historically the growth rates of white spirits (Vodka,
segment. As per the management it enjoys ~50-60%
Gin etc) have been nearly double the growth of
almost 3.5-4mn cases p.a. share in this super-premium segment.
other segments (whisky, brandy, rum etc). Future
growth outlook is expected to be similar.  RDCK enjoys a healthy 22-24% margin in the Prestige
and above category of IMFL led by Magic Moments
 Super Premium and Premium Vodka remained one
Vodka and Morpheus Brandy.
of the fastest growing segments with CY12-17
volume growth of 16.7% and 9.4% respectively  These segments enjoy high margin, growth and low
(overall Vodka industry growth of 4.3% during same competitive intensity vs. whisky segment where the
period). likes of UNSP, Pernod and ABD push around.
 Recently company has launched premium variant  Increase in competition from branded liquor players
Magic Moments Black. In UP Magic Moments sells for is a risk. However it may also expand the size of this
Rs 100/180ml nip vs. Rs 180 for black. niche market. With its strong brand presence for
more than a decade, RDCK is well-positioned.
Page | 30
Geographic and customer segment split  RDCK has 18 products registered with CSD across
 RDCK customer and geographic concentration of categories and one of the largest providers of
revenue is fairly distributed. No single customer or branded IMFL to CSD.
state contributes more than 20% of its revenue in Uttar Pradesh market boost:
IMFL segment. This minimizes the risk of adverse
regulations in any specific segment or loss of  Uttar Pradesh (UP) is an important market for RDCK
customers. That said, UP is one of the largest RDCK’s enjoys a healthy 20-25% market share in UP.
RDCK enjoys a healthy 25% It accounts for ~15% of RDCK’s IMFL revenues. This is
contributing market including Non-IMFL business.
volume share in CSD segment, on upswing led by distribution model change from
similar to UNSP  With exception of South, all the other states Apr’18 vs. monopolistic distribution.
witnessed a healthy double digit growth.  This is positive for strong brands including RDCK’s
CSD has high entry barriers 8PM whisky and Magic Moment Vodka. Erstwhile
IMFL revenue mix private players used to push for their own brands.
North South CSD East West Export Adulteration of branded liquor was also an issue.
CSD contributes ~17% of
RDCK’s revenue vs. ~5-7% for 100.0% 4.3%
5.6%
5.7%  The robust growth in 8PM whisky sales (+29% YoY)
5.9%
UNSP as per our estimate 7.0% 8.8% in FY18 was significantly contributed by UP.
80.0%
17.3% 16.7%  Besides IMFL, RDCK also sells bulk alcohol and
60.0% country liquor only in the state of UP. Including bulk
33.8%
alcohol and country liquor, revenue contribution
30.5%
40.0% from state of UP would increase to ~30-35%.
Monopolistic distribution by a In-house distilleries ensure RM availability:
20.0%
single party earlier led to 32.0% 32.4%  RDCK has 5 distilleries strategically located in two of
push for their own brands 0.0% the largest sugarcane producing states - Maharashtra
FY17 FY18 and Uttar Pradesh. 3 distilleries are in Rampur, Uttar
Distribution model change in Pradesh and 2 in Aurangabad, Maharashtra. The
UP to provide boosts to sales strategic location of distilleries allows availability of
of branded liquor players CSD: High entry barriers molasses and unhindered operations in the distillery.
 As per the management, RDCK enjoys a 23% volume Availability of molasses is crucial to the liquor
industry being the key raw material.
UP excise collection in FY18 market share in CSD segment. This is lower than that
of UNSP. CSD contributes ~17% of RDCK’s revenues.
 The Rampur Distillery plant has an ENA (Extra Neutral
grew by 21% (2HFY18 by Alcohol) capacity of 102 mn litres per annum. It is one
For UNSP, we believe this to be ~6-8%.
32%), for Apr18 it was up of the largest distilleries in India and is operating at
84%)  A prior registration is required to sell brands through ~90-95% of its capacity. It also has an ENA storage
CSD outlets. The registration process is lengthy and capacity of 3 months thereby, safeguarding partly to
time consuming. It has stringent policies on quality, the price volatility of ENA.
supply chain and fee structure. This act as an entry  The company has 28 bottling units out of which 5 are
barrier. owned. The company has a bottling unit across all
states, thereby reducing the transport costs.
Page | 31
 RDCK has a strong distribution network; ~55,000 Cost of goods sold mix
retail outlets and ~5,000 on premise outlets. The Raw Materials Packaging goods
distribution is supported by regional marketing %
100.0
services.
80.0 34.8 37.0 36.0 42.3
Key Raw Materials: Consumption and price 44.9 49.0
Increase in proportion of
packaging goods in RM mix in trend 60.0
FY18 is owing to sale of 8PM  The Extra Neutral Alcohol or ENA is a high distillated 40.0
whisky in tetra packs which is alcohol without any impurities and is used for the 65.2 63.0 64.0
55.1 57.7 51.0
treated as part of packaging production of alcoholic beverages such as whisky, 20.0
vs. pet bottles which is part of vodka, gin etc
-
raw materials  Raw material prices have been relatively stable over
FY13
FY14
FY15
FY16
FY17
FY18
FY17-18 with downward bias. With all time high
sugarcane and sugar production for Sugar Season 19 Source: Company, HDFC sec Inst Research
(October18 to Sep19), prices of molasses based ENA
is expected to remain soft. Molasses is a byproduct
while manufacturing sugar.
ENA prices (Rs): Quarterly trend ENA prices (Rs): Annual trend
52.0 Rs 50.0 Rs
Steep increase in ENA prices 48.9
48.6
49.0 48.5
over FY13-15 and lack of price
48.0 48.0
increases from state
government forced RDCK to 47.0
curb sale of Popular brands 44.0
46.0
45.7 45.7
with low margin/profitability
45.0
40.0
44.0
43.0
43.0
36.0
42.0
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
FY13
FY14
FY15
FY16
FY17
FY18
Page | 32
Key raw materials and price trend

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

Adjusted EBITDA (Rs Mn) EBITDA margin % (RHS)
 RDCK’s margin after being flat for three years from
Volume growth, mix FY12-14, witnessed a decline in FY15 owing to lack of 4,000 18.0
improvement and stable raw price increases from state government and
3,500 16.0
material prices to lead to consistently adverse raw material movement.
healthy 14% EBITDA and 24% 3,000
 However, RDCK’s EBITDA margin has consistently 14.0
earnings CAGR improved (+500bps since FY15) led by (a) improving 2,500
product mix (b) price increases from state 12.0
government in FY18 and relatively stable raw 2,000
material prices. 1,500 10.0
 RDCK’s focus on (a) launching products in the 1,000 8.0

premium segment (b) raw material tailwinds and (c)
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
focus on costs optimization will lead to margin
expansion. We expect the EBITDA to grow at a CAGR
of 13% (FY18-21E) to Rs 3.9bn from Rs 2.7bn in FY18.
Page | 33
Debt repayment to boost profitability Source: Company, HDFC sec Inst Research
 RDCK has successfully reduced its net debt by Rs Key risks

3.7bn from peak of Rs 9bn in FY16 to Rs 5.3bn in  Increase in competitive activity: RDCK significant
Increase in competitive FY18. Reduction in net debt has been led by better portion of EBITDA and earnings is from niche
intensity especially in the working capital management especially recovery of segment of vodka and brandy which witnesses’
niche category of Vodka and inter-corporate deposits. Net debt/EBITDA declined limited competition from leading MNC players like
super premium brandy from 5x in FY15 to 2x in FY18. UNSP and Pernod Ricard. Any increase in competitive
 Management targets to become debt free by FY21 activity by this player remains a key risk.
end. Nevertheless, we remain conservative and
estimate the net debt to decline to Rs 1.5bn by FY21  Lack of price increases: In addition to
end from Rs 5.3bn in FY18. premiumisation, RDCK is dependent on state
government for price increases. Lack of price
 The reduction in debt will boost profitability along increases from state government or steep increase in
with expansion of net margins. Healthy revenue and taxation may hamper volume growth.
EBITDA growth led by better mix and raw material
tailwinds, reducing debt and the associated savings in  Increases in input costs: Raw material prices have
the interest costs will lead to PAT CAGR (FY18-20E) of been relatively stable over FY17-18 with downward
24%. bias. With all time high sugarcane and sugar
production for Sugar Season 19 (October18 to
Leverage ratio Sep19), prices of molasses based ENA is expected to
Net Debt (Rs Mn) Net Debt/EBITDA (x) (RHS) remain soft. Molasses is a byproduct while
10,000 6.00 manufacturing sugar. However abnormal increase in
ENA prices remains a risk.
8,000 5.00
4.00
6,000
3.00
4,000
2.00
2,000 1.00
- -
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Page | 34
Key Revenue Assumptions

FY13 FY14 FY15 FY16* FY17 FY18 FY19E FY20E FY21E
Volumes (Mn Cases)
Financials upto FY15 are basis
P&A 3.08 3.72 4.04 4.40 4.75 5.05 5.51 6.01 6.55
IGAAP and from FY16 Popular 15.93 16.64 15.44 13.79 13.51 14.45 15.34 16.11 16.92
onwards basis IndAS Total 19.01 20.36 19.48 18.19 18.26 19.50 20.86 22.12 23.47
Growth YoY (%) 2.49
Decline in realization in FY16 P&A - 20.8 8.6 8.9 8.0 6.2 9.3 9.0 9.0
Popular - 4.5 (7.2) (10.7) (2.0) 7.0 6.2 5.0 5.0
is owing to change in
Total - 7.1 (4.3) (6.6) 0.4 6.8 7.0 6.1 6.1
accounting from IGAAP to Mix (%)
IndAS P&A 16.2 18.3 20.7 24.2 26.0 25.9 26.4 27.2 27.9
Popular 83.8 81.7 79.3 75.8 74.0 74.1 73.6 72.8 72.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
RDCK’s Non-IMFL business Realization (Rs/Case)
P&A 1,187 1,220 1,255 1,111 1,120 1,174 1,204 1,227 1,245
comprises of (a) Bulk alcohol Popular 523 553 541 510 500 543 558 568 577
(b) Country liquor and (c) Total 631 675 689 656 661 706 729 747 763
bottles etc Growth YoY (%)
P&A - 2.8 2.8 (11.4) 0.8 4.8 2.6 1.9 1.5
RDCK’s earns a modest Popular - 5.7 (2.2) (5.7) (2.0) 8.6 2.6 1.9 1.5
Total - 7.0 2.1 (4.9) 0.9 6.8 3.1 2.5 2.2
margin of 8-10% on Non-IMFL
Revenue (Rs Mn)
business P&A 3,656 4,540 5,070 4,890 5,319 5,922 6,639 7,373 8,157
Popular 8,331 9,203 8,354 7,036 6,759 7,853 8,650 9,252 9,861
IMFL subtotal 11,987 13,743 13,424 11,926 12,077 13,775 15,289 16,625 18,018
Non IMFL 5,176 4,829 5,041 4,592 4,722 4,453 4,542 4,633 4,726
Total 17,163 18,572 18,465 16,518 16,799 18,228 19,831 21,259 22,744
Growth YoY (%)
P&A 15.4 24.2 11.7 (3.6) 8.8 11.3 12.1 11.1 10.6
Popular 12.1 10.5 (9.2) (15.8) (3.9) 16.2 9.0 7.0 6.6
IMFL 13.1 14.6 (2.3) (11.2) 1.3 14.1 10.3 8.7 8.4
Non IMFL 9.4 (6.7) 4.4 (8.9) 2.8 (5.7) 2.0 2.0 2.0
Total 11.9 8.2 (0.6) (10.5) 1.7 8.5 8.3 7.2 7.0
Mix (%)
P&A 21.3 24.4 27.5 29.6 31.7 32.5 33.6 34.8 36.0
Popular 48.5 49.6 45.2 42.6 40.2 43.1 43.4 43.3 43.1
IMFL 69.8 74.0 72.7 72.2 71.9 75.6 77.0 78.1 79.1
Non IMFL 30.2 26.0 27.3 27.8 28.1 24.4 23.0 21.9 20.9
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, HDFC sec Inst Research * FY16 onwards revenues are as per IndAS vs. IGAAP earlier ** FY13-15 reported revenues are
different from above as in financials revenues from third party were accounted on net basis. For comparison purpose they have are restated.
Page | 35
Key P&L assumptions

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

% of revenue FY16 FY17 FY18 FY19E FY20E FY21E
change and raw material COGS 54.1 54.8 52.2 51.1 50.6 50.1
tailwinds, we expect gross Gross Profit 45.9 45.2 47.8 48.9 49.4 49.9
margin to improve by Employee cost 7.8 8.4 8.5 8.8 8.7 8.7
~150bps over FY18-20 Other operating exps 26.8 24.2 24.5 24.2 24.1 24.2
Total Exps 34.5 32.5 33.0 33.0 32.9 32.8
EBITDA 11.4 12.6 14.8 15.9 16.5 17.0
PBT 6.0 6.5 10.3 12.4 13.5 14.7
PAT 4.3 4.7 6.7 8.2 8.9 9.7
Other operating expenses: Key items

Rs Mn % of revenue
Radico spends ~5% p.a. on FY16 FY17 FY18 FY16 FY17 FY18
advertising and promotions Consumption of stores and spares 284 280 211 1.7 1.7 1.2
Power and fuel 286 278 355 1.7 1.7 1.9
Repairs & Maintenance 168 181 206 1.0 1.1 1.1
Rates & taxes 457 445 457 2.8 2.6 2.5
Freight, Travelling & Conveyance 879 924 990 5.3 5.5 5.4
Advertising & Promotions 782 805 873 4.7 4.8 4.8
Rebate disc & supervision chgs 228 371 423 1.4 2.2 2.3
Provision for doubtful debts 334 (0) 89 2.0 (0.0) 0.5
Forex fluctuations (net) 198 (8) (33) 1.2 (0.1) (0.2)
Bottling charges 254 223 210 1.5 1.3 1.2
Other overheads 550 562 676 3.3 3.3 3.7
Total 4,419 4,060 4,458 26.8 24.2 24.5
Page | 36
Consolidated Income Statement Consolidated Balance Sheet

Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E As at March (Rs mn) FY17 FY18 FY19E FY20E FY21E
Net Sales 16,799 18,228 19,831 21,259 22,744 SOURCES OF FUNDS
Growth (%) 1.7 8.5 8.8 7.2 7.0 Share Capital 266 266 266 266 266
RM Costs 9,214 9,522 10,139 10,765 11,404 Reserves 10,036 11,155 12,643 14,403 16,478
Gross Profit 7,585 8,706 9,692 10,493 11,339 Total Shareholders Funds 10,302 11,421 12,909 14,670 16,744
Employee cost 1,403 1,549 1,738 1,859 1,973 Long Term Debt 1,033 344 172 86 43
S&D 1,979 2,159 2,322 2,485 2,659 Short Term Debt 6,994 5,628 5,178 4,039 2,625
Other Exps 2,082 2,300 2,476 2,649 2,835 Total Debt 8,027 5,972 5,350 4,125 2,668
Total Operating Cost 5,464 6,008 6,536 6,992 7,466 Other Non current liabilities 784 1,034 1,148 1,276 1,420
EBIDTA 2,121 2,698 3,155 3,501 3,874 TOTAL SOURCES OF FUNDS 19,114 18,427 19,407 20,071 20,832
EBIDTA (%) 12.6 14.8 15.9 16.5 17.0 APPLICATION OF FUNDS
EBIDTA Growth (%) 13.0 27.2 17.0 11.0 10.6 Net Block 7,060 7,057 6,976 6,839 6,771
Depreciation 417 409 429 461 493 Other Non current assets 3,505 2,865 2,865 2,865 2,865
EBIT 1,704 2,289 2,726 3,039 3,380 Non Current Assets 10,565 9,922 9,841 9,705 9,636
Interest 804 682 566 474 340 Inventories 2,930 3,109 3,377 3,651 3,886
Other Income 196 267 290 296 297 Trade Receivables 6,240 6,300 6,859 7,299 7,659
PBT 1,097 1,873 2,450 2,862 3,338 Other Current Assets 1,829 2,257 2,498 2,686 3,122
Tax 288 638 833 973 1,135 Current Assets 10,999 11,666 12,734 13,637 14,667
RPAT/APAT 809 1,235 1,617 1,889 2,203 Trade Payables 1,853 2,141 2,210 2,404 2,593
APAT Growth (%) 10.1 52.7 30.9 16.8 16.6 Other CL & Provisions 1,238 1,743 1,680 1,792 1,998
AEPS 6.1 9.3 12.2 14.2 16.6 Current Liabilities 3,091 3,885 3,890 4,196 4,591
EPS Growth (%) 10.1 52.7 30.9 16.8 16.6 Net current Assets 7,908 7,781 8,844 9,441 10,076
Source: Company, HDFC sec Inst Research Cash & Equivalents 641 724 722 925 1,120
TOTAL APPLICATION OF FUNDS 19,114 18,427 19,407 20,071 20,832
Page | 37
Consolidated Cash Flow Key Ratios

Year ending March (Rs mn) FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18E FY19E FY20E
PAT from Operations 809 1,235 1,617 1,889 2,203 PROFITABILITY (%)
Interest 804 682 566 474 340 GPM 45.2 47.8 48.9 49.4 49.9
Depreciation 417 409 429 461 493 EBITDA Margin 12.6 14.8 15.9 16.5 17.0
Working Capital Change 1,359 127 (1,063) (597) (635) APAT Margin 10.1 12.6 13.7 14.3 14.9
OPERATING CASH FLOW ( a ) 3,388 2,453 1,550 2,227 2,401 RoE 4.8 6.8 8.2 8.9 9.7
Capex (164) (406) (349) (325) (425) RoIC (or Core RoCE) 8.1 11.4 13.3 13.7 14.0
Free Cash Flow 3,224 2,048 1,201 1,902 1,975 RoCE 6.7 8.3 9.9 10.6 11.5
Investments & Others (663) 889 114 128 143 EFFICIENCY 6.4 8.0 9.5 10.2 10.9
INVESTING CASH FLOW ( b ) (827) 484 (234) (197) (282) Tax Rate (%)
Capital Issuance - - - - - Asset Turnover (x) 26.3 34.1 34.0 34.0 34.0
Debt Issuance (1,606) (2,055) (622) (1,225) (1,457) Debtors (days) 2.4 2.6 2.8 3.1 3.4
Interest (804) (682) (566) (474) (340) Payables (days) 136 126 126 125 123
Dividend (138) (116) (128) (128) (128) Cash Conversion Cycle (days) 40 43 41 41 42
FINANCING CASH FLOW ( c ) (2,548) (2,854) (1,317) (1,827) (1,925) Net Debt/EBITDA (x) 172 156 163 162 162
NET CASH FLOW (a+b+c) 14 83 (1) 203 194 Net D/E 3.5 1.9 1.5 0.9 0.4
Closing Cash 641 724 722 925 1,120 Interest Coverage 0.7 0.5 0.4 0.2 0.1
Source: Company, HDFC sec Inst Research PER SHARE DATA (Rs)
EPS 6.1 9.3 12.2 14.2 16.6
CEPS 9.2 12.4 15.4 17.7 20.3
Dividend 0.8 0.8 0.8 0.8 0.8
Book Value 77.4 85.8 97.0 110.3 125.9
VALUATION
P/E (x) 63.7 41.7 31.8 27.3 23.4
P/BV (x) 5.0 4.5 4.0 3.5 3.1
EV/EBITDA (x) 27.8 21.0 17.8 15.6 13.7
EV/Revenues (x) 5.8 4.3 2.8 4.1 4.5
OCF/EV (%) 5.5 3.6 2.1 3.5 3.7
FCF/EV (%) 4.7 2.7 1.2 2.8 3.2
FCFE/Mkt Cap (%) 3.5 3.1 2.8 2.6 2.3
Dividend Yield (%) 0.2 0.2 0.2 0.2 0.2
Page | 38
RECOMMENDATION HISTORY
United Spirits TP Radico TP

800 500
700 400
600
300
500
200
400
100
300
Dec-17
Oct-17
Aug-17
Apr-18
Nov-17
Jan-18
Sep-17
Feb-18
May-18
Jun-18
Jul-17
Jul-18
Mar-18
Sep-17
Feb-18
Nov-17
Jun-18
May-18
Dec-17
Mar-18
Oct-17
Aug-17
Apr-18
Jan-18
Jul-17
Jul-18
Date CMP Reco Target Date CMP Reco Target
4-Oct-17 490 SELL 412 12-Jul-18 387 BUY 473
28-Oct-17 605 SELL 488
12-Jan-18 766 SELL 510
24-Jan-18 698 SELL 508
11-Apr-18 671 SELL 538 Rating Definitions
28-May-18 650 SELL 570 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
9-Jul-18 636 SELL 570 NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
12-Jul-18 620 SELL 570 SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Page | 39
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SECTOR REPORT 12 JUL 2018

Top down heady, bottom up insipid

IMFL: Soft growth, dull outlook

Vodka has been the fastest 150 40.0

South drives quantity, North+West profitability

Indian Whisky Market : Key players, brand and competitive positioning

Company, brand and Category-wise volume sales

Brandy, Rum and Vodka

Whisky: Competitive intensity on rise

Growth opportunity: Liquor player or state governments?

135 40.0 10.0

 Steep increase in taxation is also reflected in the

Karnataka IMFL excise revenue growth YoY (%)

Source: State excise website, HDFC sec Inst Research

Key Model Assumptions

Other operating expenses 13,591 14,112 14,068 15,052 16,106 3.3

Higher growth in subsidiaries

Depreciation 1,886 1,923 2,159 2,281 2,403

PBT 5,768 9,562 11,143 14,511 18,343

O/s shares 727 727 727 727 727

Valuation and view

Volumes of P&A to grow at

Income Statement (Consolidated) Balance Sheet (Consolidated)

Consolidated Cash Flow Key Ratios

 IMFL business comprises of branded liquor sales and

IMFL: key growth driver

Despite healthy growth in 10 5,200 10

Focus on niche segment drives growth in IMFL

RDCK’s product innovation and brand building history

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

Key raw materials and price trend

EBITDA margin set to expand: EBITDA and margin trend

 RDCK’s focus on (a) launching products in the 1,000 8.0

 RDCK has successfully reduced its net debt by Rs Key risks

Key Revenue Assumptions

Key P&L assumptions

Led by revenue growth, mix

Other operating expenses: Key items

Consolidated Income Statement Consolidated Balance Sheet

Consolidated Cash Flow Key Ratios

United Spirits TP Radico TP

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