Goldman Sachs initiates coverage on Radico Khaitan with a target of Rs 1,144. Goldman Sachs in their first note on Radico have sounded a very positive tone as they like the market share momentum and cash flow generation of the company.
KEY HIGHLIGHTS
  • Goldman notes the market leadership of Radico in the vodka category and their emergence in the Whisky, Brandy, Rum and Gin category too
  • The company’s EBITDA margins have expanded substantially as they have increased the mix of the premium portfolio in their sales
  • Goldman also notes the attractive valuation that it trades at making the risk reward more favorable

 Mumbai: Goldman Sachs has initiated coverage on alco beverage maker Radico Khaitan, with a buy, target price of Rs. 1,144/share. They note 3 key reasons behind their positive coverage – continued market share momentum, expansion in EBITDA margins, attractive risk-reward ratio.

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Goldman says that Radico is already a market leader in Vodka with a 45% volume and value share – and an emerging competitor whiskey, brandy, rum, and gin.

It says that Radico has gained 120bp market share in the Prestige & Above category between FY21-24driven by new launches in vodka, whiskey, and gin. “We forecast P&A volume growth of 9% between FY20-25E despite a dip in FY21 due to the COVID-19 driven lock-downs”, says Goldman in the note.

The other trigger is the expansion in EBITDA margins. The P&A mix has improved and Goldman expects that segment to contribute 35% of sales in FY25 vs 29% in FY21. Its gross margins are seen expanding to 51.0% in FY25, compared with 50.3% in FY21, largely due to improving the mix.

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However, Goldman does not assume any reduction in advertising and promotions spend as Radico reinvests behind its brands, especially with a slew of new launches planned for the next 12 months.

Goldman says Radico has seen a steady improvement in cash generation and repaid most of its debt, leaving it well-placed to invest more behind its existing brands and premium innovation.

And finally, Goldman likes the valuation. With Radico trading at 28.5X FY23E P/E, a 21% discount to UNSP and 48% discount to our coverage, which we view as unwarranted, says Goldman.