Radico Khaitan's Q2FY19 results (Outperformer) - Earnings beat continues…

Q2FY19 result highlights

• Radico Khaitan's net sales increased by 15.5% yoy at Rs5.2bn (est: Rs5.1bn); EBITDA increased 39.5% yoy at Rs917m (est: Rs863m) and PAT increased by 73% yoy at Rs495m (est: Rs459m). 
• Overall IMFL volumes increased by 11.5% yoy. Prestige & Above segment volumes increased by 14.6% yoy while Regular & other segment volumes increased by 10.3% yoy for the quarter.
• Reported gross margins increased by 330bps yoy led by lower input cost and benefit of price hikes.
• Staff expenses increased by 19% yoy, selling & distribution increased by 25% yoy while other expenses were up 6% for the quarter. Resultant EBITDA increased by 39.5% yoy with margin expansion of 300bps yoy to 17.7%. 
• Other income decreased by 18% yoy while interest expense decreased by 48% yoy on account of debt reduction. Tax rate was up 130bps resulting in PAT growth of 73% yoy

Key positives: Double digit volume growth in IMFL, Margin expansion & reduction in debt

Key negatives: Higher selling & distribution expenses

Impact on financials: Factoring strong performance we have increased our FY19/20/21E earnings estimate by 13%/11%/11%.

Valuations & view

Radico delivered yet another strong performance with this being the 4th consecutive quarter of double digit IMFL volume growth and continued acceleration in gross margins. We are factoring a conservative 8% volume CAGR over FY19-21E led by market share gains and successful new launches. With input cost remaining benign coupled with continued traction in P&A portfolio, we expect margin trajectory to remain healthy. Further on track reduction in debt & interest cost reduction will continue to boost overall earnings growth. Given consistently strong execution and better earnings delivery, we believe RKL’s valuation discount to market leader United Spirits, on an EV/EBITDA basis, will narrow further. Maintain Outperformer with a target price of Rs488.