Radico Khaitan and Som Distilleries – In high spirits

The performance in the second half of the financial year was significantly better compared to the first half mostly due to the highway liquor ban. The company ended the year with a topline and bottomline of Rs 1,823 crores and 124 crores, representing yearly growth of 9 percent and 54 percent, respectively.

The growth in topline was driven by a combination of price hikes and increase in sales volumes. RAK witnessed an overall volume growth of 12.5 percent for the year. The margins improved due to a significant decline in prices of key raw material - molasses. The price of molasses, which forms around 18-20 percent of the raw material basket and nearly 8 percent of net sales, dropped by as much as 80-90 percent during the second half of the financial year.

The balance sheet continues to strengthen as the strong cash flow from operations helped in the repayment of debt of around 380 crores in the last two years. RAK has a current debt-to-equity ratio of 0.4x (times) and it aims to be a zero-debt company by 2021.

RAK has a 6 percent share in IMFL segment by volume. Its ‘Magic Moments’ Vodka brand is highly popular in the mid-market segment and commands a market share of 50 percent. The recent changes in Uttar Pradesh excise policy, aimed at curbing rampant illegal liquor trade and smuggling, is seen as a major positive for dominant players like RAK. The company continues to strengthen its distribution channel to gain sales volumes across regions.

Som Distilleries & Breweries (SDBL)

SDBL Q4FY18 revenue grew 44 percent year-on-year (YoY) to Rs 118 crores. This was led by robust volume growth in the beer segment. Both the gross and EBITDA margin expanded substantially due to softer raw material prices and operating leverage. EBITDA for the quarter more than doubled to Rs 16.8 crores.

SDBL has diversified product portfolio consisting of Beer, Rum, Brandy, Vodka, and Whisky. Beer is the flagship product of the group and its 'Hunter', 'Black Forest' and 'Black Fort' beer have gained significant popularity in a short span of time. Overall, it has 2 percent of market share in Beer segment on pan India basis. Madhya Pradesh is the core market of SDBL and it has a 38 percent share in the beer segment and 15 percent share in the IMFL segment within the state.

The company has recently commenced commercial production at its subsidiary Woodpecker Distilleries and Breweries located in Hassan, Karnataka. Last year, the ‘Woodpecker’ beer brand was granted sales license in the Canteen Store Department (CSD). In addition to this, four of its brands have been granted pan India sales approval by CSD. The expansion along with an excise approval for supply to Maharashtra will aid volume and revenue growth in the coming months. The company expects to garner Rs 500 crore revenue in FY19.

The recent addition of Nilojit Guha, previously Sales Director at SAB Miller India, to the management team will strengthen the sales and marketing channel of SDBL. The company is focusing on fortifying its sales and distribution network in southern markets (Karnataka, Andhra Pradesh, Telangana and Tamil Nadu) where the per capita consumption of liquor is relatively higher than other parts of India. To market its products, the company uses multiple channels to market its brands across different regions. It’s focusing on marketing through digital channels in Karnataka while using a complete marketing strategy for entry into Maharashtra.

Besides expanding presence in the domestic market, SDBL is also planning an entry into the US market this year. The initial trial run of its products in four states has been completed. Going forward, the management plans to be present in around 40 states in the US by the end of FY19.

Outlook and recommendation

Consumption stories are multi-year themes as consumers generally tend to have sticky preferences in terms of taste and brands. In this context, liquor consumption presents an attractive opportunity as India has a large young population and remains an underpenetrated market in the alcoholic-beverage segment.

We have a very positive outlook on the liquor consumption space as the per capita consumption in India is far lower compared to western countries and provides huge opportunities for growth. In our view, both Som Distilleries and Radico Khaitan remain well positioned to capitalise on the market opportunities on account of high brand recall and strong distribution network.

The growth momentum gained in FY18 by liquor companies will continue ahead as 2019 is an election year. However, these stocks are trading near lifetime highs and appear expensive on a price-earnings (P/E) multiple basis. Radico Khaitan (CMP: 403.50) is trading at a trailing P/E multiple of 43.6x while Som Distilleries & Breweries (CMP: 302.40) is trading at trailing P/E multiple of 33.0x. Considering the huge opportunity size and scope of penetration, we would advise investors to buy these stocks on correction with a long-term view.