Radico Khaitan Ltd: On a High

I am writing this in a hurry but definitely not on a High for I don’t drink. But I don’t mind the intoxication of buying a great liquor stock like Radico Khaitan (I also have USL and United Breweries). I am advising it for last 2-3 years at our Blog. Links here and here. It is still hovering around the same price which I don’t mind at all as I have accumulated a good chunk of it during the period (My Avg is 90). As explained earlier also that I prefer investing in a particular stock over a period of time (2-3 years) absorbing all the positives and negatives as period of 2-3 years is sufficient for any company to have a start base. I don’t mind if the price of the stock remains stressed during this period like I wish for distressed prices for stocks like Narayana Healthcare and CARE Ltd as I want to invest big amount in these. I want to write a detailed post on Radico for past 2 months but only for time although time has come for it to not to remain cheap for too long.

I’ll post a detailed study on it within 2-3 days. I am writing this as I feel it can have a fast and unprecedented run from here on. It is a perfect stock based on domestic consumption based theme. It badly deserves a re-rating.

It is the cheapest liquor stock in India earning around 80 cr NP yearly but available at PE ratio of just 15 when players like USL are commanding a PE of 70-80. Radico is second largest liquor company in India after USL. Liquor business has strong entry barriers due to various state laws which are very difficult to command. Radico is focusing on premium liquor for past few years and its operating margins are rising in spite of dullness in the overall market. It has recently launched single malt whisky which is the third Indian made after Amrut and Paul John.

Radico has given great set of numbers this quarter again. For last 1-2 years as it is focusing big on premium products with high margins which is yielding results as its margins are increasing with every quarter. Earlier Indian liquor sector was a "Daaru Adda" as most of the liquor sold was of cheap quality. But as Indians are growing mature and rich they are learning the real art of drinking which is responsible drinking which is drink less but drink good premium quality products.

This June-16 quarter, Radico's operating profits are at 46 cr vs 36 cr YoY. Turnover is at 430 cr vs 417 cr...so a clear sign of rise in operating margins. I like this company, its management as they had the guts to venture into premium segment and they built some of the marquee Indian brands of last decade like 8 PM, After Dark, Morpheus Brandy, Contessa rum, Verve Vodka, Magic Moments vodka. Last day it was up at 9% to 101...but it is still a buy...still very cheap.

I am pasting below the verbatim of one of my earlier post on Radico Khaitan:

(Posted In Nov-2014-Radico Khaitan: Liquor…this is one sector which is going to witness huge activity going forward. First…we Indians don’t yet know what is really a whisky? What we drink in the name of whisky is nothing but neutral spirit extracted from molasses (By product of sugar) which is then blended with imported malt and grain scotch whiskies to get the flavor and colour of whisky. In india, they have given it a very funny name; Indian Made foreign Liquor (IMFL) which comprises Whisky, Beer, Vodka, Brandy, Rum etc. In foreign countries, Indian whisky gets the tag of rum as it is made from molasses and most of them find its taste terrible. Single malt or grain whiskies are like silk and these are enjoyed best neat without adding any soda/water/ice.

At present india has imposed huge import duties on imported scotch whiskies which inflated the cost of BIO (Bottled in Origin) whiskies by almost 3 to 4 times and BII (Bottled in india) by twice. This has protected the inefficient Indian liquor industry from high quality competitors. However there are some like Amrut distilleries from india whose single Malt whisky has been awarded as the world’s best twice which shocked the entire world. This prominently export oriented company has now started offering 1000 bottles in india also. Amrut is always in short supply globally. This shows with dedication and efforts Indian companies can give global brands a run for their money.

Scotch Whisky unions of Europe are eagerly waiting for india to sign the FTA agreement with European union which will force india to lower the high import duties on scotch whisky. Sooner or later india is going to sign the treaty. Whenever this will happen will prompt foreign companies to look for acquisitions in india to get hold of complex liquor distribution system of india where every state has its own set of rules with regard to wholesale and retail of liquor. Central and state level taxes are very high and these are stretched to the fullest by state governments to increase their revenues. Diageo has already done the same by acquiring USL. Secondly this will also make bulk imported whiskies cheaper for Indian companies for blending purpose which will raise their margins. It will also prompt them to focus on high quality grain based products in order to be competitive.

One more thing, in spite of global demand for whisky almost doubled in last 20 years or so, area under Barley (to make malt for scotch whisky) production has actually decreased during the period which is made up by rising production of barley per acre. Although barley produced in Scotland is best suited for scotch whisky but india can be a huge global supplier of Malt.

With this background, I feel it is worth risk taking to buy the Indian liquor stocks like Radico Khaitan/USL which are trading at multiyear lows. Radico CMP is around 88/-)

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)