Event update: Radico Khaitan (Outperformer) - CPCB notification: No material impact on base business

Event

Central Pollution Control Board (CPCB), New Delhi, vide their letter dated 18th February 2019, has made certain observation on Zero liquid Discharge system for one of the plant of the company to improve the environmental conditions and pending fulfilment of requirements, it has directed for closure of operations at Rampur plant of Radico Khaitan.

Key details of the same are:

• The above closure will be maximum for the period of 15 days. The issues are not significant and company has already initiated the steps to rectify and comply with the additional requirements indicated by the CPCB.
• Company operates in three segments, country liquor, Bulk alcohol, and IMFL in this unit. Of this, IMFL, Grain/Malt plant will remain operational, only molasses production and Country Liquor sales will get impacted for period of 10-15 days.
• While the country liquor business will get impacted due to closure, the key business of branded IMFL will not get impacted as the company has sufficient inventory pipeline for the same. Further bottling unit which is non-polluting will also see no impact of the plant closure.
• We believe the closure would lead to revenue loss of Rs150-200m (~1% of FY19E revenues) and EBITDA loss (including all the related expenses to rectify the same) of Rs80-100m (~2.5% of FY19E EBITDA).

Our view

We believe the issues are more operational in nature and not material in terms of business impact given that the key branded IMFL business will not see any kind of disruption on account of this closure. We remain positive and believe continued traction in P&A portfolio, benefit of price hikes as well as on track reduction in debt will help sustaining the overall earnings trajectory (18% CAGR over FY19-21E). Valuations at 12/11x FY20/21E EBITDA remain attractive. Maintain Outperformer rating on the stock