Radico Khaitan Ltd

NSE:RADICO

Earnings Call Analysis

Radico Khaitan Achieves Robust Growth Amid Market Challenges

In Q2 FY '25, Radico Khaitan reported a noteworthy 12.6% growth in its Prestige & Above category, with overall IMFL sales at 6.78 million cases, reflecting a slight 2.5% dip year-on-year. The company saw an 18% increase in value terms for this category. Gross margins settled at 43.6%, slightly lower than the previous year, while EBITDA margins expanded 150 basis points. Innovations include the launch of Rampur Indian Single Malt in new markets, enhancing its luxury portfolio. With easing input costs and a strategic focus on premiumization, Radico remains poised for stable growth ahead, guided by its commitment to improving profitability and cash flow.

A Resilient Turnaround

In the second quarter of FY '25, Radico Khaitan showcased a significant improvement in its performance, achieving a 12.6% growth in the Prestige & Above (P&A) segment. The company's ability to withstand the hurdles posed by inflation and fluctuating commodity prices reflects the robustness of its business model. The management emphasized innovation as a key driver of this growth, particularly through the successful introduction of high-end products like Rampur Indian Single Malt and the ongoing expansion of their luxury portfolio.

Exciting Product Innovations

Radico Khaitan's innovative approach was further demonstrated with the launch of various premium products. Notable additions include the Rampur Indian Single Malt 'Barrel Blush', aimed at distinguishing itself in the luxury spirits market, set to launch internationally in the U.S., U.K., and Europe, before a domestic debut next year. This aligns with their strategy to elevate the brand's status and capture a larger slice of the growing luxury market. Coupled with a new campaign for Royal Ranthambore whiskey featuring a prominent celebrity, the company is committed to redefining luxury in the Indian alcobev market.

Strategic Focus on Margins

Management outlined a clear focus on EBITDA margins, expecting to see annual improvements of approximately 150 basis points. They indicated aspirations to reach late teen margins within three years through continued premiumization and operational efficiencies. Currently, gross margins improved by 258 basis points quarter-over-quarter, showcasing the effectiveness of their transitioning toward higher-margin products. This trend, along with an anticipated stabilization of input costs, suggests a promising path ahead for margin enhancements.

Navigating Challenges in Key Markets

Despite the impressive performance in the luxury segment, some challenges persist in the Regular & Below categories, primarily due to increased state-specific excise duties, such as in Karnataka, which saw volume reductions exceeding 40%. However, management is optimistic about a mid-single-digit growth trajectory in these sectors as market conditions improve. They are also keenly observing developments in Andhra Pradesh, where new government policies are anticipated to foster better cash flow dynamics, thus positioning the company for future growth in this region.

Driving Forward in a Competitive Landscape

Radico Khaitan is aware of the intensifying competition within the alcobev sector. To maintain its market leadership, the company is focusing heavily on its innovative product launches and marketing efforts to resonate with a wider audience, particularly among younger consumers. The recent uptick in the consumption of white spirits, which currently stands at only 4% of the market compared to a global average of 28%, signifies a substantial opportunity for growth and market capture.

Positive Outlook for Future Growth

Looking ahead, management anticipates a steady revenue growth of over 15% in the P&A category over the next couple of quarters, alongside a commitment to drive growth across its entire portfolio. They expect to leverage festive seasons effectively, which traditionally boosts sales in the spirits industry. Given these strategic directions and the encouraging market dynamics, Radico Khaitan appears well-positioned to enhance shareholder value in the coming years.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Radico Khaitan Q2 FY '25 Earnings Conference Call hosted by Dolat Capital. [Operator Instructions]

Please note that this conference is being recorded. I now hand the conference over to Mr. Himanshu Shah from Dolat Capital. Thank you, and over to you, sir.

[Himanshu Shah, analyst]

Thank you, Rutuja. Good afternoon, everyone. At this moment, we would like to thank the Radico Khaitan management for providing Dolat Capital with the opportunity to host the Q2 FY '25 earnings call.

We have with us the senior leadership team from Radico Khaitan, Mr. Abhishek Khaitan, MD and CEO; Mr. Amar Sinha, Chief Operating Officer; Mr. Dilip Banthiya, Chief Financial Officer; and Mr. Sanjeev Banga, President, International Business.

I will now hand over the call to Mr. Abhishek Khaitan, MD and CEO, for his opening remarks. Over to you, sir.

[Abhishek Khaitan, executive]

Good afternoon, ladies and gentlemen. Thank you for joining us on our Q2 FY '25 results conference call. Q2 FY '25 marked a significant turnaround in our operational performance, highlighting the strength of a resilient business model. While the consumer sector faced challenges due to a general slowdown, inflation concerns and volatile commodity prices, we are pleased with our robust performance.

We achieved a 12.6% growth in the P&A, the Prestige & Above category, along with a sequential improvement in EBITDA margins. Innovation remains a cornerstone of Radico's strategy. To further expand our luxury portfolio, we introduced Rampur Indian Single Malt, Barrel Blush. This new expression initially matured in American Bourbon barrels and finished in Australian Shiraz wine casks is a testament to tradition and expert craftmanship.

It will be a core expression along with Rampur Deluxe cask and Asava. With an international launch in the U.S., U.K. and Europe this year, we have plans to bring it to India next year.

Further extending the Rampur brand, we introduced Rampur Jugalbandi #5 and Jugalbandi #6, two new single malts in the Jugalbandi series. At the Whiskey Show in London, retailing at GBP 400 per bottle. These limited additions are crafted using high-quality Madera and Tokai casks, retained the classic Rampur Single Malt whiskey profile at their core.

We launched a new campaign for Royal Ranthambore whiskey featuring Saif Ali Khan earlier this month. His signature style and charisma perfectly aligned with the nobility and glamor that this Royal Ranthambore represents. This campaign marks a significant moment in our journey to redefine luxury in the Indian spirits market through what we proudly call Indi-Lux.

Taking our packaging innovation further with consumer choice and preference at the core, we have recently introduced our trendy and convenient pocket pack in 180 ml SKU for Magic Moments. We expect this to support the strong brand growth momentum.

This packaging is not only 100% recyclable, but also more cost effective. Regarding the recent development in the state of Andhra Pradesh, I would like to state that it is a very progressive government and as expected, the new policy is aimed at promoting stability and predictability in the regulatory environment.

Over the last 3 years, we have faced inflationary challenges that impacted our margins. However, by focusing on innovation and strengthening our premium brands, we have managed to navigate these tough times. With input cost pressure easing, we are poised to deliver steady profitable growth moving forward.

I remain optimistic about the growth prospects in the Indian alcobev sector. We are progressing well on our strategic road map and are confident in delivering results in line with our goals.

I would now like to hand over the call to our CFO for a detailed operational and financial review. Thank you, and over to you, Dilip.

[Dilip Banthiya, executive]

Thank you, Abhishek. Thank you, everyone, for joining us on this call today. During quarter 2 of FY '25, we reported a total IMFL volume of 6.78 million cases, representing a degrowth of 2.5% on a year-on-year basis.

Prestige & Above category volume grew by 12.6%. In value terms, Prestige & Above category registered 18% growth. IMFL realization increased by 9.7% on a year-on-year basis. Prestige & Above category account for 53.2% of the IMFL volume compared to 47.1% in quarter 2 of last year. The percentage of P&A is higher due to the significant degrowth in regular category.

Improvement in IMFL realization is due to a combination of price increases and continued premiumization. Regular category volume were impacted due to certain state specific industry-related issues and ongoing strategic rationalization of our portfolio.

Gross margin during the quarter was 43.6% compared to 44.1% in quarter 2 of FY '24 and 41% in quarter 1 of current year. Gross margin was impacted on a year-on-year basis due to the significant foodgrain inflation offset by premiumization in the IMFL business. EBITDA margin expanded on Y-o-Y basis by 150 basis points due to economies of scale.

Gross margin improved 258 basis points on a quarter-on-quarter basis due to the ongoing premiumization, stable raw material and packaging material scenario. We cautiously monitor the trend of grain and ENA, where volatility persists and expect the trend to improve from quarter 3 of current year.

Increasing net debt over March '24 is primarily due to the cyclical buildup of the inventory and higher receivables in certain states. Going forward, our focus will be on improving the profitability along with cash flow generation and a more efficient working capital management resulting into debt reduction.

With this, we now open the line for Q&A. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Harit Kapoor from Investec.

[Harit Kapoor, analyst]

I just had a few questions. First one is on the Royalty Brands. We've seen a little bit of dip on the volumes in the Royalty Brands. Just wanted to know whether it's because the Andhra policy is just coming in pace and there would have been some lower brandies on account of that or anything else to kind of read into that?

[Abhishek Khaitan, executive]

Yes. So it's primarily because of that and nothing beyond that.

[Harit Kapoor, analyst]

Got it. And given that -- as you mentioned, it's an extremely progressive policy. I just wanted to get your thought process on how you kind of plan to kind of take advantage of it. It's also fairly material in the popular market as well. So is the mode of being in the state going to be similar to what it has been over the last few years or is there a thought process on kind of rethinking that?

[Unknown Executive]

So as far as AP is concerned, we have always maintained that the new government is very progressive in its outlook to this alcobev space. The biggest advantage that comes to us is that, now our cash flows will improve because earlier, we were getting our payments only when tertiaries, which means sales from retail used to happen.

Now it will -- we will receive payments as soon as the government depots invoice to the retail outlets. So that's one, faster cash flow turnaround.

Second. I think because it is private is -- retail is private, there will be free choice available to consumer for premium brands. And UP is seeing a lot of traction in that area now, because of surrounding states. Plus they are rationalizing the prices also in the times ahead, because they've set up a pricing committee. So I think, in overall, if you see, UP is going to be -- sorry, Andhra is going to be the sunshine market for this space in the times ahead.

[Harit Kapoor, analyst]

Got it. And your mode of operating there, is there a thought process there yet or is this kind of wait and watch on that?

[Unknown Executive]

So, our -- basically, see, as far as AP is concerned, right now, we are operating through bottlers. It's...

[Abhishek Khaitan, executive]

See, right now, in Andhra Pradesh, we have been operating on Royalty. And we are assessing the situation. So starting from Q4 we might get into our own -- get away from Royalty and get into our own brands.

[Harit Kapoor, analyst]

Got it. The second part was on the profitability. So we've seen a very strong improvement in the gross margin sequentially. I just wanted to get your sense on the market -- the cost environment currently. I mean, mix continues to improve materially. Your non-IMFL business kind of is in the base now from Q3 onwards as well.

And cost inflation is manageable in my understanding. So is this likely to be an expanding kind of gross margin trajectory going forward? Do we continue to see gradual sequential improvement on the GM? Is that something we should expect?

[Dilip Banthiya, executive]

So Harit, you are absolutely right that quarter-on-quarter, we have improved on our gross margin by 250 basis points and the reason is that, one, the premiumization is ongoing for us and the premium brands and semi-luxury brands and all that are taking spread across pan-India. The product mix has improved. The Luxury segment and Semi-Luxury segment is doing very well. It is more than double digit now on top line side.

This quarter and also the export has done well on the Luxury segment of the market. And being the raw material and packing material scenario being benign, so we have improved because of various factors, so that has reflected in the gross margin. And I think yes, the margin improvement trajectory will continue.

[Operator]

The next question is from the line of Vishal Gutka from HDFC Securities.

[Vishal Gutka, analyst]

Congrats on excellent set of numbers. Before I question, I would like to extend seasons greetings. Wishing you all Happy Diwali in advance.

Two, three questions from my side. Sir, how do you view Karnataka market post your recent changes in the excise duty slab? Because one of your competitor highlighted that despite reduction in the excise duty, still, the taxes are much higher than the neighboring state.

Second question is on the brand specifically, you launched, I think, five, six brands over a period of last 18, 24 months. Just wanted to check with you, how would you ensure that you put equal focus on each brand? Do we have a setup similar to an FMCG company where a brand manager is appointed and equal focus is given out over there?

And the third question is on Luxury and Semi-luxury, although you highlighted that you are seeing a substantial uptick. Given the mall facilities are coming online now and festive season is approaching, then 3Q, 4Q, we should see a very, very sharp jump in the revenue segment for the subsegments?

[Unknown Executive]

Okay. So to answer your first question, first. I think, in our scheme of things, we see Karnataka totally different. You see, for many years, the taxes in Karnataka have been high and the consumer price, which is the MRP has been the highest over the country. Now our beginning has been made with comfort being given on the premium end of the prices. And we have, as a company, started seeing results. Our volume and margins are showing an increase, overall collection. So that's one. As far as Karnataka is concerned, we are banking on it in the times ahead for premium brands.

Secondly, your question was -- now, let me tell you, it is true that Radico has been championing the launch of Premium brands in this country, because our moto is very simple, to make India proud. And I think today, we are in that position that we can take on any international brand, which we have shown from our track record.

Now with a vast portfolio that we have made, every brand has an exclusive committed brand resource marketing manager. So as we are giving due attention to each of these brands, separate strategies are being made, separate review forums have been created. And that is why you will see an uptick on the Premium & Above brand sales, both in terms of volume and value.

As far as your third question is concerned. As far as the festivities are concerned, I think, starting October to March end, I think it's a great time for Premium brands, because there's a lot of traction. People are moving up. And that's why you see sales of Premium brands going up as well. So we see that these brands are going to bring us a lot more joy, because we started the game and the future looks bright for us.

[Vishal Gutka, analyst]

Got it. Sir, last question on Telangana market. So I think the dues were pending from the state government. So how are things moving now? If you can broadly highlight on Telangana market, what is happening out over there?

[Unknown Executive]

So Telangana government, see, the point is that it's still not as good as other states. But yes, Radico has been receiving payments for the last 2 months. And I think, the situation will improve further. Because they have also realized that they need to compete with Andhra. And if they -- they will be able to do so, only if they get stocks and push them. So I think it's more of a state pressure, and they will fall in line.

[Operator]

The next question is from the line of Darshika Khemka from AV Fincorp.

[Darshika Khemka, analyst]

Congratulations. I have a couple of questions. Firstly, in the opening remarks, you mentioned, that in the Regular & Below category, the volumes were affected due to certain specific states. Can you give us more details on this?

[Dilip Banthiya, executive]

Yes. So I'll say that a couple of states like the Karnataka increased the price of the Regular category, which has led to more than 40% reduction in the volume in that and we also suffered there. One or two more states has increased the prices like Uttarakhand and all that. UP, there has been a quotas and all that. So in this quarter, the quota remained a little lower and because of that, the volumes suffered because of that.

At the same time, the Andhra Pradesh, which was in election mode and all that now because of the pipeline getting, inventory getting cleared and all that, because of that, the sales were low. But now onwards, you will see in Regular category also, we will see that continued demand, and we will have a mid-single-digit kind of growth from here onwards.

[Unknown Executive]

So as far as regular segment is concerned, just to add to what Dilip said, we have rationalized volumes even in Kerala. As a company objective -- goal that we have, we moderate our policies of sales depending upon the contribution in the prevailing time, depending upon raw material and packaging material costs. So right now, wherever we are selling regular brands, it's only there where we make little money. Otherwise, we don't.

[Darshika Khemka, analyst]

Got it. All right. That was really helpful, sir. Secondly, could you give us some details on the kind of volumes that you're currently doing in the Luxury and Semi-luxury category of products? And what is the average realization like for the company? So the reason why I ask this question is that, as far as -- correct me, if I'm wrong, sir.

We don't make significant volumes in this category right now. But as the volumes increase, our EBITDA margins could also increase. So what I'm trying to say is, once you're making substantial volumes, our market could -- our margins could substantially increase, right? So from considering this scenario, what could be our target EBITDA margin?

[Dilip Banthiya, executive]

So on the Luxury side and Semi-luxury side, we're seeing a very strong traction. And in the past half itself, it is more than 25% to 28% on the top line side. At the same time, the premium -- yes, so the premiumization is happening, and we will continue to grow our P&A category volume by 15%-plus in next 2 quarters also and in 1 to 2 years further. So we are very confident about it, and that will reflect into the EBITDA margins, et cetera. And as we said, that we will continue to improve our EBITDA margin quarter-after-quarter.

[Darshika Khemka, analyst]

Do we have any targets? Could you quantify a target for us?

[Dilip Banthiya, executive]

As we have been guiding in earlier calls also that we will improve our margin every year by 150 basis points or so. So over the last year, we will be doing much better than that in this year. And thereafter, also for next 3 years, we will continue to improve our margin by 100 to 125 basis and that's basically how we will reach to the late teens margin in 3 years' time.

[Operator]

The next question is from the line of Amansingh from ProfitGate Capital.

[Amansingh Sahajsinghani, analyst]

Congrats on good set of numbers. So the growth in P&A segment has been good for the company. So can you break down the growth maybe which states are experiencing good growth and which brands are experiencing better traction in the segment?

[Abhishek Khaitan, executive]

We think, out of all our brands, like in the P&A category, we are seeing good growth in our Vodka segment, that is Magic Moments Vodka. Then we are seeing a lot of growth in Royal Ranthambore which is in the Semi-luxury space.

We're seeing a lot of traction in After Dark Premium Whiskey. And basically, the Luxury segment is also growing. So overall, all the brands are doing well in the P&A category. And it is doing well across states like in UP, it is doing well, in West, it is doing well. So all across...

[Unknown Executive]

Actually, the growth in P&A is broad-based.

[Abhishek Khaitan, executive]

Across.

[Unknown Executive]

Across. Yes.

[Amansingh Sahajsinghani, analyst]

So there is no specific geographies, which is doing well for the P&A segment?

[Dilip Banthiya, executive]

So across North, West, South, everywhere. Yes.

[Abhishek Khaitan, executive]

And also what we are seeing the White Spirit category is growing extremely fast, since it is only 4% of the market and globally, it is 28%. Earlier the vodka was 3%, which has come up to 4%. So there, we are seeing a huge traction.

[Amansingh Sahajsinghani, analyst]

Right. Understood. Also, is there any competitive intensity increase in the industry, maybe in P&A segment from the local players also and from the international players also which are being brought in by the domestic players with partnerships or distribution network? So is there any increase in competitive intensity?

[Abhishek Khaitan, executive]

I think, the competition intensity all year and last 5, 7 years has been quite high. So I think, it's the same.

[Operator]

[Operator Instructions] The next question is from the line of Harit Kapoor from Investec.

[Harit Kapoor, analyst]

Yes. Just a couple of follow-ups. One is, there is significant pipeline we've already launched as one of the other few participants...

[Abhishek Khaitan, executive]

Sorry, Harit, your voice is not clear. I think you'll have to speak in the phone, like your voice is not that...

[Harit Kapoor, analyst]

Okay. So the last 6 months, again, a lot of super premium launches, a lot of variant launches in Magic also have been done in the last 12 months. Obviously, you're investing again behind Royal Ranthambore as well rightfully so. Just wanted to know, in the run-up to the festive, which is there now, is that broadly what the launch pipeline should look like for the balance part of the year? I mean, have you seen most of it given that we are almost into the festive or second half should also have something in store as well?

[Abhishek Khaitan, executive]

See, there is one brand which is in store, but we are working on it. So, which is in the premium segment. So hopefully, very soon, we should see the -- maybe this fiscal year, you should see it or maybe beginning of next fiscal year, for sure.

[Harit Kapoor, analyst]

Got it. And just a clarification, I think, Dilip ji mentioned that the popular business, I think, should start to see some level of growth from now. Is that largely on account of the fact that some of the state-led disruptions is even one of your -- one of the larger player was talking about, is now largely done with and maybe apart from maybe one state here and there, your state level disruptions are not there?

[Abhishek Khaitan, executive]

Absolutely, you're right.

[Operator]

[Operator Instructions] The next question is from the line of Vishal Gutka from HDFC Securities.

[Vishal Gutka, analyst]

I just wanted to check on ENA. So commodity, one of the investors highlighted that, they expect ENA inflation to be around 11%, 12%, given that the government's mandate of blending ethanol has been increasing. Although we understand you have a backward integrated facility. And commodity costs, there's basically a rice cost is expected to come out with excess production. So how are you viewing, because the competitor has highlighted that they expect the inflation sustained. I just wanted your views on ENA and followed by glass, because we are seeing some deflationary trend. So that should hold on at the current level or should further accelerate from here onwards?

[Dilip Banthiya, executive]

So as far as the commodity is concerned, I think we don't actually see this 10%, 11% kind of inflation from here onward. One, there is a good monsoon and good crop yields are very good and all that. However, there has been an aggressive bidding on the ethanol side. So the prices have already moved up and in the non-season period.

As the season is starting from November onwards, we should see some softening of the prices of grain, maize, rice, et cetera. At the same time, government has built up a lot of buffer stocks. Even the buffer stock, they don't have space to keep, store and all that.

And the new rice miller processing is starting. So if there is -- we can't say, but if there is any support to the ethanol producer from some allocation on the SCI side and all that, that will further improve on that. So this is our take that we see a benign kind of environment on the ENA as well as the grain price.

As far as the glass is concerned, we have seen the worst. One correction has taken place, which is 4% to 5%. And I think, looking into the current scenario of the commodity and fuel prices, et cetera, and all that, we don't see that there is a room for further increase in glass prices even.

[Unknown Executive]

Yes. It looks like it will remain stable.

[Vishal Gutka, analyst]

Got it. One more question on the Magic Moments Vodka front. I think, in 1Q '25, we had seen 25%-plus volume growth in Magic Moments Vodka, if I recollect the numbers right. How is the performance for the current quarter? Is it similar to those lines or if you can broadly highlight for the specific brand?

[Dilip Banthiya, executive]

The Magic has been going very well. As a Magic family, we are growing in every segment, like in Magic, the flavors, the work flavors, et cetera. And Magic we see as -- Abhishek has said in his opening remarks that still nascent, it's still below 4% as the volume of the total industry.

And the consuming class is the youngsters and the women. So I think we -- and we are the leader with 60% market share across all price category. So I think we see a great growth, and we continue to see strong double-digit growth in years to come.

[Operator]

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to the management for closing comments.

[Abhishek Khaitan, executive]

So thank you for joining us on this call. We will continue to deliver a strong Prestige & Above volume growth driven by our diverse brand portfolio. Secondly, we will further develop our Luxury brand portfolio, which will see a major contributor to our profitability. Furthermore, we are focused on ensuring that our investment co-operates on efficient basis. This will enable us to generate cash, we pay debt and return cash to the shareholders. We look forward to interacting with you on our next earnings call. In the meanwhile, if you have any query, please feel free to write you us. Thank you.

[Operator]

Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.