Radico Khaitan's Q3FY20 results (Outperformer) - Strong volume growth continues…

Q3FY20 result highlights

• Radico Khaitan's net sales grew by 17.2% yoy to Rs6.5bn (est: Rs6.1bn); EBITDA grew by 7% yoy to Rs1,025mn (est: Rs995m) and PAT grew by 7% yoy to Rs557m (est: Rs553m). 
• Overall IMFL volumes grew by 13.9% yoy (est: 8.7%). IMFL revenues increased by 20.8% yoy further aided by improved price/mix. Prestige & Above segment volumes grew by strong 21.3% yoy while Regular & other segment volumes increased by 11.1% yoy for the quarter. Non-IMFL revenues increased by 2.7% yoy.
• Gross margins decreased by 100bps yoy, (but were up 130bp qoq) to 49.7% impacted by higher input costs (ENA/glass), partially offset by improved mix. ENA prices were up ~22% yoy & 2% qoq.
• Staff expenses were up 15% yoy, selling & distribution increased by 3.5% yoy. Advertising & sales promotion expenses were up 14.6% yoy to Rs324m. Other expenses were up 40% yoy (due to cow cess in UP & increase in other general expenses). Resultant EBITDA margins contracted by 150bps yoy to 15.8%. 
• Gross debt stood at Rs4.1bn (Rs3.8bn in Sep 19). Increase in debt is largely on account of higher working capital requirement due to delayed payment in corporation based markets.

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

Key negatives: Higher other expenses, increase in net-debt.

Impact on financials: Factoring higher overhead costs, we have cut FY20E EBITDA by 3%. Introduce FY22E.

Valuations & view

Despite challenging industry scenario, Radico Khaitan reported yet another strong quarter with robust volume growth in P&A as well as regular segment. Management remains positive about further traction in its premium launches. Moreover, input costs have peaked out and company expects prices to remain stable to moderate which coupled with continued mix improvement & likely price hikes in south markets should aid overall earnings growth. Current valuations of 15x/12x FY20/21E EBITDA are at a significant discount to United Spirits & remain attractive. Given the strong execution on volumes, we maintain our Outperformer, rating on the stock.