Radico Khaitan's Q2FY20 results (Outperformer) - Inline performance, healthy outlook

Q2FY20 result highlights

• Radico Khaitan's net sales increased by 10.1% yoy at Rs5.7bn (est: Rs5.8bn); EBITDA decreased 5.6% yoy at Rs866m (est: Rs852m) and PAT increased by 58.6% yoy at Rs786m (est: Rs579m). 
• Overall IMFL volumes grew by 10.9% yoy (est: 7%). IMFL revenues increased by 16.4% yoy further aided by improved pricing. Prestige & Above segment volumes grew by 11.3% yoy while Regular & other segment volumes increased by 10.7% yoy for the quarter.
• Non-IMFL revenues declined by 12% yoy as healthy growth in Country Liquor was offset by decline in PET & bulk alcohol sales.
• Gross margins decreased by 300bps yoy, (but were up 120bp qoq) to 48.4% impacted by higher input costs (ENA/glass) and purchase of alcohol for production of country liquor (adverse impact of Rs80m). Adj for the same, gross margin was 49.8%.
• Staff expenses were flat yoy, selling & distribution increased by 6% yoy. Advertising & sales promotion expenses were up 20% yoy to Rs394m. Other expenses were up 18% yoy (due to cow cess in UP) for the quarter. Resultant EBITDA decreased by 5.6% yoy with margin contraction of 250bps yoy to 15.2%. Adj EBITDA margin was 16.6%
• Other income decreased by 55% yoy. Depreciation was up 23% yoy while interest expense decreased by 16% yoy.

Key positives: Strong volume growth in P&A segment.

Key negatives: Moderation in gross margins.

Impact on financials: Cut FY20/21E earnings marginally by 1-2%

Valuations & view

Radico Khaitan’s earnings print was in line with estimate, with healthy volume growth partially offset by weaker margins on account of higher input costs. Overall execution remains healthy indicative from continued double-digit volume growth in P&A segment. Further management commentary in terms of industry outlook remains positive as it expects volume trajectory to improve in 2H. Further gross margin trajectory is likely to sustain as input cost prices have largely peaked out & likely to see some moderation, which should aid overall earnings growth. Current valuations of 12x/10x FY20/21E EBITDA are at a significant discount to United Spirits & remain attractive. Maintain Outperformer.