Radico Khaitan's Q3FY18 results (Outperformer) - Strong volume growth drives earnings beat

Q3FY18 result highlights

• Radico Khaitan's net sales increased by 16.8% yoy at Rs4.8bn (est: Rs4.4bn); EBITDA increased 47% yoy at Rs755m (est:Rs678m) and PAT increased by 78% yoy at Rs350m (est:Rs245m). 
• Overal IMFL volumes increased by 17.7% yoy. Prestige & Above segment volumes increased by 11.2% yoy while Regular & other segment volumes increased by 20.1% yoy for the quarter.
• Reported gross margins increased by 220bps led improved state mix and benefit of price hikes.
• Staff expenses increased by 16% yoy, selling & distribution increased by 21% yoy while other expenses were up 5% for the quarter. Resultant EBITDA increased by 47% yoy with margin expansion of 330bps yoy to 15.7%. 
• Other income increased by 4% yoy while interest expense declined by 13% yoy. Tax rate was up 790bps resulting in PAT growth of 78% yoy.

Key positives: Strong IMFL volume growth

Key negative:  Higher tax rate

Impact on financials: Factoring strong performance, we increase our FY18/19/20E earnings by 4%/2%/2% respectively.

Valuations and View

Radico reported its best ever quarterly performance led by double digit IMFL volume growth which coupled with improving margins and lower interest cost resulted in PAT growth being sharply ahead of estimates. We expect volume growth to remain healthy aided by market share gains in the regular segment and innovation led growth in the prestige and above segment. Moreover, the sharp fall in molasses prices and price hikes in southern states as well as on track reduction in debt, will continue to drive overall earnings growth. The stock has witnessed a sharp re-rate in the last 3 months on the back of consistently improving earnings delivery and growth outlook; We believe RKL’s strong 27% earnings trajectory over FY17-20E will narrow the company’s valuation discount to market leader, United Spirits, on EV/EBITDA basis. Maintain Outperformer with a revised target price of Rs441.