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Radico Khaitan Ltd
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Ladies and gentlemen, good day, and welcome to the Radico Khaitan Q4 FY '23 Results 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.
Thank you, Zico. Good afternoon, everyone. On behalf of Dolat Capital, we welcome you all to Q4 FY '23 Earnings Conference Call of Radico Khaitan. We would like to thank the management for giving us the opportunity to host the call. On the call, we have with us Mr. Abhishek Khaitan, Managing Director; Mr. Amar Sinha, Chief Operating Officer; Mr. Dilip Banthiya, Chief Financial Officer; and Mr. Sanjeev Banga, President, International Business.
Let me hand over the floor to Mr. Abhishek Khaitan for his opening remarks. Thanks, and over to you, sir.
Good afternoon, ladies and gentlemen. Thank you for joining us on our Q4 FY '23 results conference call. Our performance during the year was driven by a consistent focus on consumer centricity, sustained investment behind our core brands, coupled with premiumization, agile supply chain and robust distribution network. Our Prestige & Above category volumes remained robust, and we registered 17% year-on-year growth on a very high base. This was led by our core brands such as Magic Moments vodka, which crossed 5 million cases sale. Morpheus Premium brandy and 1965 Spirit of Victory Premium rum, both of which crossed a million case mark. Magic Moments is now the seventh largest vodka brand globally.
Driven by our premiumization focus, during the year, we have delivered a strong growth in the top end of the Prestige & Above brands. Prestige & Above brands have shown 150% growth compared to prepandemic levels. This has led to a sustainable improvement in the realization per case as we have highlighted in our presentation. To capitalize upon the traction of 8PM Premium Black whiskey during Q1 FY 2024, we have launched renovated edition of the brand into a more contemporary packaging to enhance upon its brand equity and make it more aspirational.
The new packaging is focused on differentiating the products by highlighting the 8 rare nodes. During Q4 FY '23, the company unveiled Sangam World Malt whiskey at ProWein 2023 in Düsseldorf. Sangam is a confluence of malt from the traditional European origins and the new world. It is being launched in the U.S.A., Europe, U.K., Australia, Singapore and Global Travel Retail with shipments starting from June 2023. While the raw material scenario still remain volatile, we are seeing early signs of deflation in certain commodities.
In the IMFL segment, we have recently received price increases in the state of Uttar Pradesh, Rajasthan, Telangana, Karnataka, et cetera. Overall, recent price increases will account for of 1.8% of IMFL sales value in FY '24. With these price increases coupled with a favorable product mix, we will be able to mitigate margin headwinds in the IMFL business to a large extent. The impact of the cost push has been much severe in the non IMFL business where we have received price increases in the state of Uttar Pradesh applicable from 1st April '23 onwards.
This will support the profitability expansion in FY 2024. During Quarter 4 FY '23, we had successfully commissioned the dual feed plant at Rampur and also started bottling operations at Sitapur. The distillery operations of Sitapur are expected to start commercial operations from the beginning of Q2 FY '24. As we continue to drive our premiumization journey, the availability of additional grain-based CMA will strengthen our value proposition.
The bottling plant at Sitapur positions us strongly to capitalize all the future growth opportunities in the branded business. Radico Khaitan is progressing firmly on the part of its exciting premium brand creation journey, which will be further tendered by the backward integrated manufacturing platform.
Going forward, we continue to focus on our long-term plant of premium IMFL portfolio expansion with new brand introduction in both white and brown spirits and leveraging the benefits of our capital investments.
Despite the near-term pressure, we are confident that we have all the levers in place for FY '24 and expect to build on the current momentum and deliver a broad volume-led growth along with improvement in profitability.
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.
Thank you, Abhishek. Thank you, everyone, for joining us on this call today. During Q4 of FY '23, we reported total IMFL volume of 7.24 million cases, which is relatively flat on Y-o-Y basis. Prestige & Above category volume grew by 17.4%, including the royalty brands. Our P&A volume growth is around 35%.
In value terms, the Prestige & Above category registered 18.2% growth. Our Prestige & Above category volume represents at double-digit CAGR compared to the pre-COVID level. We have rationalized volume of regular category brands. This is a conscious strategic decision to mitigate input cost pressures. Prestige & Above category now account for 40.2% of the total IMFL volume compared to 30.5% in Q4 of FY '22.
The percentage expansion has been higher due to the decline in regular volumes. In FY '24, we expect that our Prestige & Above category volume will continue the high double-digit growth. With recent received price increases in certain key states, regular volume shall also return to their mid-teens with mid-single-digit growth rate.
Our gross margin during the quarter has been under pressure due to the continued commodity inflation, particularly in non-IMFL business, where we have recently received price increases. Even a favorable product mix impact of the cost push on the gross margin of IMFL business was mitigated to a large extent.
We have experienced inflation in ENA and glass. Glass costs increased by around 12% from middle of Q3. The full impact of which is visible in Q4. However, certain other commodities such as [indiscernible] and paper have seen early sign of softening. In near term, we expect raw material pricing situation to remain volatile. We expect our margin to improve from current level as we have multiple levers of profitability improvement into FY '24.
Our Rampur dual feed plant has already become operational and Sitapur plant is expected to be operational from the beginning of Q2 of FY '24. The CL and UPML price increase, our non-IMFL margin will also improve. We expect strong P&A volume growth with already received price increases in IMFL segment. We will have a higher volume contribution from luxury brands, Rampur Indian Single Malt and Jaisalmer Indian Craft gin.
We have a strong financial position, comfortable liquidity. During these times -- we are taking all necessary steps to sustain our financial strength, maintain robust business model and grow consistently, competitively and profitably.
With this, we'll now open the line for Q&A. Thank you.
[Operator Instructions] Our first question is from the line of Vaibhav Gupta from Bowhead Investment Advisors.
Hello, sir. Good afternoon. Am I audible?
Yes, yes, very much.
Yes, sir. Sir, as you have mentioned that for P&A category, the growth, including royalty sales is 35%. So similarly, can you share the same number for full year and for regular segment also for the quarter and full year?
So royalty brands is included -- you're right that it is in the range of -- for full year also in the range of 35% to 37%.
Okay. Okay, sir. And what about the regular category, sir?
Granular category has seen -- for regular category, if we take out the royalty as a royalty brands, in the Q4, the decline would be about 16% against 23% that we have reported. And for the full year it's about 7% against the 13% that we have reported.
Got it. And sir, similarly, like growth in exports and CSD for the quarter and full year, like do you have the number in hand?
So as far as the growth in export as well as in defense is concerned, the P&A category is growing in double digits in export and as well as in defense and certain civil markets where the input cost pressures were high, we cut down on certain brand sales. And this is the reason that the regular category has degrown in this year. But given the price increases which we have received in certain states, as well as the international trade pricing coming down, we expect that the regular category to go in that mid-single digit.
Our next question is from the line of Harit Kapoor from Investec.
Just had a couple of questions. One was on the popular segment itself. So from a run rate perspective, do we expect a similar kind of run rate on volumes the way we can attract the quarterly numbers? Or do we see that there will be an acceleration given that we -- some of the volumes that we restricted because of inflation start to come back. I just wanted to understand what's the way to look at it for FY '24?
Your voice is very, very heavy. So can you repeat this on regular category please?
Yes, is this better?
Yes. It is bit clearer.
Okay. So my question was on popular. I just wanted to get a sense of -- this quarter, ex the royalty brands were at close to 4 million cases. I just wanted to understand, do we -- how do you look at FY '24 on this base, given that some inflation -- you're seeing the inflation in certain pockets cool off, you've got some price increases.
So do you start to increase wherever you've restricted the growth, do you start to increase -- pick up the volumes there? And do the royalty brand, which is about 1 billion case a quarter now, does any change happen to that portfolio? Do you take it back? Or are they 1- to 2-year contracts? So just wanted to get a sense of how that mix will work.
So as far as the '24 volume is concerned, we are on our course, continue to deliver, P&A category growth of high teens between 15% to 18%. The regular category becomes viable now in certain states. So we will be back in -- from Q1 onwards itself in a single digit, mid-single-digit kind -- 4% to 5% growth kind of thing. Overall growth, we expect to be in the range of around 10% for the whole year with a top line growth of 15% to 16% on IMFL business.
Okay. Got it. Got it. And on the -- I just had a question on the balance sheet. It seems to have been a increase on the inventory days -- just wanted to get a sense of what's happened there? Is it a kind of bunching up? Or could you give a sense of what's happening -- I think it's 80-plus days for the year?
So as we have already intimated and informed that our Sitapur bottling operation also got started. At the same time, in the season, we started procuring certain raw material and fuel there. So the inventory in that part has also gone up. As far as the inventory number of days of the IMFL business is concerned, we are monitoring it continuously. And in corporation and other markets, our number of inventory days are in line with what our business plans.
Got it. So this should normalize to some extent, right, because these are kind of...
For next year when the -- the top line grows, this thing will normalize.
[Operator Instructions] Our next question is from the line of Vikas Tulsyan from Vision Ahead Services Private Limited.
Sir, my question is, what is the response for this ready-to-drink vodka, which we have launched in the Indian market? And what response you foresee for your 3 international brands, Rampur, Jaisalmer and Ranthambore? And my third question is how that -- if U.K. free trade agreement comes into picture, how it will affect you positively or negatively?
So first of all, the trend of RTDs in India is just catching up and growing. Vodka cocktail launched by Radico is the first of its kind in the category. There is no vodka-based cocktail drink available other than Radico. This response in Karnataka where we have launched first, to start with is very encouraging. And that is pushing us to extend the launch now to a couple of more states in the next quarter which is Maharashtra, Daman and some states in the North. So the product has responded very well, and we hope to make it a national product in the course of the next 1 year.
In terms of our luxury portfolio, Rampur and Jaisalmer, the international response as well as domestic response continues to be extremely positive. As we've always said, Rampur still remains on allocation, but we increased our malt capacity a couple of years ago. So we will start having more malt available this year onwards.
And going forward, there will be substantially more malt that will be available, which will make us then facilitate expansion of our footprint, both in the global market as well as the Indian market. Jaisalmer again tripled our gin distillation capacity to cater to the increased demand both from international as well as domestic market. So we are very positive on our luxury portfolio.
And sir, Ranthambore?
So the Royal Ranthambore as a product has been launched in 13 states. And there are more states which are planned to be launched during the new fiscal year. The product has received unprecedented positive response. And the unique thing about Royal Ranthambore is that it has been pitched against some of the popular international brands higher in terms of price and it has been very well accepted. This goes to prove that the consumer is accepting good products now made from India against any other international brand. So we are very optimistic and the new year -- new fiscal year will delight us.
And sir, how this U.K. free trade agreement -- if it comes into picture, how it will affect us?
See, let me tell you what. When the Indian economy was largely based on products selling below the Prestige segment -- Prestige & Above segment, then it would have been a reason to worry. But now most of the products that we are selling in India, especially Radico, which has more than 40% of its sales in the Prestige & Above segment, we don't have any reason to worry.
Secondly, we have seen out of experience that the India, Australia FDA has gone up very positive, protecting the interest of the domestic players. And we hope that the Indian government is going to look the same way as far as the U.K. FDA is concerned. But in terms of price positioning, now India has breached the quality and drive standards of international brands. And therefore, we don't see a lot of issues around it.
Our next question is from the line of Chanchal from Birla.
Sir, if I look at the gross margin, now you are almost at 15 quarter low. The mix has improved. I mean your premium portfolio has been doing very well, if I look at 3-year CAGR. And the new plant is starting in Rampur, a plant is starting in Sitapur -- will start shortly. Now going forward, I mean we heard that the ENA prices and the bottling prices hurt you. What's the kind of gross margin the company can go to -- I mean, I'm sure you'll cross your peak gross margin given the mix we are improving on some -- and how will this happen quarter after quarter? Some guidance in the next 2 to 3 years, how this gross margin can look -- can be there?
So Chanchal, first of all, the inflation in the commodity has been high, very high in all the commodities which we will use as a raw material. So the impact of the commodity was around 850 basis points, all of which we have mitigated in the IMFL business to a large extent. We got the price increase last year, which is on a weighted average basis on IMFL business is 300 basis points.
The non-IMFL business continues to add back, which also we have received the prior effective from 1st April '23 onwards. So from a negative EBITDA, it will also turn into a positive single-digit EBITDA.
As far as the margin drag -- on gross margin drag out of 850 basis points, we have been able to mitigate roughly around 450 to 500 basis points. Why? Price increase as well as product mix. And you will see that our realization per case in P&A category has improved by INR 100 per case. So this is an improvement in the quality of product mix in the P&A category we are selling.
So in '23, '24, there are multiple levers, which will improve our margin consistently quarter after quarter and the dual feed -- Rampur dual feed and Sitapur green field project, backward integration will give us the additional leverage on that than the price increase which we got in certain states.
In coming year also in '23, '24 the impact of that is approximately 180 basis points or so. Increase in the P&A category, which we are confident to deliver 15% to 18% growth. And with the Rampur Indian single malt and Jaisalmer volume ramping up and in domestic as well as in international markets.
I think we are on course to deliver during this year that our margin will be in mid-teens. And that's how we will mitigate and thereafter with the kind of product portfolio and new launches coming in. We will be able to deliver better margin in coming 1, 2, 3 years later part.
So I think our journey is continuing. Our product profile is strengthening, and we have seen this headwind, which we have been able to mitigate roughly around INR 210 crores, INR 220 crores of cost, which we have handled in this year in spite of that, these are the margins.
So thank you, this is useful. So I think mid-teens margin will go this year. And going forward, margins will improve further because I'm seeing that the peak margin was...
I said that quarter-after-quarter, we will improve on our margin expansion trajectory here onwards. During the quarter, we will reach mid-teens and thereafter in coming years with the kind of product profile and with premiumization going on, the margin expansion in next 2 to 3 years will again be back on these kind of things.
The second question is on the balance sheet, if I may. So the debt level is almost INR 600 crore plus now. Is this the peak debt? Or do you think -- because now that plant has started, your debt should start coming down going forward?
So we will have a peak debt of approximately INR 800 crores in Q2 of FY '24. Thereafter, it will continue to decline by the free cash flow and by '25, '26 assets, as we guided, we will be, I think, positive on our cash flow.
Our next question is from the line of Darshan Shah from Multi-Act Equity Consultancy Private Limited.
I have just one question. So what is the share of defense CSD segment in overall revenues in FY '23? And what was it, let's say, 5 years back?
Defense segment, volume-wise, is around 9% to 10% of the overall volume of our unbranded business.
And what was it, let's say, 5 years back?
It remains actually between 10% to 11% because actually the growth in the civil market is much better on volume side, much faster and better. So -- it used to be between 11%, 12%, now it is 9% to 10%.
Our next question is from the line of Manish Poddar from Motilal Oswal AMC.
Just one question, sir, how much capitalized -- how much debt has the capital is?
Pardon, how much debt capitalized? In long-term debt, we have actually contracted for INR 500 crores, out of which we availed as on 31st March, INR 320 crores.
Because if I look at the quarterly run rate of interest outflow, it is roughly INR 9 crores. And I think you have INR 610 crores of debt on the balance sheet. I'm just trying to understand why the interest cost was low?
So the interest on the capital project, which is actually Sitapur green field project, which is a commercial production start, the intervening period interest is being capitalized.
So yes, that -- how much is that amount?
I think it is INR 6.5 crores.
INR 6.5 crores on a quarter basis?
Yes. No, not quarterly basis. I'm talking about in total. Capitalize is that much for the whole period until 31st March '23.
So our weighted average interest cost on working capital and some loan put together is in the range of 7.5% to 7.6%.
Okay. So -- and this number INR 600 crores, you said it will go to peak at INR 800 crores, right, by Q3 or Q2 end?
Can you come back again? Yes, yes.
So -- okay, okay. And just one more thing. When is this plant expected to commence because it is still showing in CW -- so I'm just trying to understand when will this commercialize?
Beginning Q2, we are expecting to have the trial run and commission production by July end or something.
Our next question is from the line of Harit Kapoor from Investec.
I just had a follow-up, this quarter, realization growth...
Mr. Harit, we request you to use your handset, please?
Sorry. So just to have a follow-up. In this quarter, the realization growths have been fairly muted on P&A and popular. I mean, popular, there might be some changes. But on P&A, they've been fairly muted. So would it be that the lower end of the Prestige segment this quarter has done probably better, 8PM Black, et cetera. Is that the way to look at it?
So Harit, you're right. If you compare Q3 versus Q4, the higher end of P&A was better in Q3 because of the festivities, et cetera. And in Q4, that's not the case. So that's the only reason because we haven't had any differential in terms of pricing as in Q4. So that's the only reason.
Okay. Understood. Understood. And the other thing was on -- this year, actually, in spite of increasing CapEx you've been fairly -- you've increased your payout ratio to about 20%, and this is a high CapEx here. Just wanted to get a sense that -- Abhishek is on call as well. Do we expect this ratio to continue to improve? I think maybe next year is a peak out debt here. But post that, -- is that the right way to look at it, that things should improve from here in terms of payout ratios?
Yes. Because the kind of cash the company will throw out after like because the debt will keep reducing. So our dividends will keep going up and the payout ratio will increase.
[Operator Instructions] Our next question is from the line of Satyaki.Bhattacharya, Individual Investor.
The line for Bhattacharya is unmuted. Please go ahead with your question. Satyaki.Bhattacharya, may we request to unmute your line from your side.
Our next question is from the line of Pankaj Kumar from Kotak Securities.
Sir, on the volume growth that we are guiding around 15% to 18% on the P&A side and mid-single digit in the regular category. So how do you see that -- this includes the royalty brand as well or...
Mr. Pankaj Kumar, may we request you to use your handset as the audio is not clear.
Yes. So my question was more on this volume growth that you are giving. So this volume growth guidance that includes our royalty brands as well or its like...
So the guidance which we have given about the P&A and other regular categories, including royalty, but the full year '23, this run rate of 800,000 boxes to 900,000 boxes will be actually equal in the next this thing. So in a like-to-like basis, which is a growth including royalty.
Including royalty. So net of royalty, how do you see that?
As I said that this year, we had a run rate of [indiscernible] boxes per quarter. So this continues with the same this thing. On this basis, the growth of P&A will be 15% to 18%, and regular will be in the mid-digit -- single-digit including royalty.
Okay. On the new brands that we talked about, we would be launching this white category as well as in the brown -- so what are the plans? Which category segment that we are looking at?
See the new brand, what we are looking at, one of the brands will be in the luxury segment and the other will be in -- it will be a mix luxury or a super premium.
Okay. Okay. And sir, on this non-IMFL business, now we've got the price hike. So decent volume growth on that side as well?
Yes, there will be a volume growth on the -- because how we see that in a couple of years, that might be converted into IMFL. So that is what the trend -- because that is why the grain plant has been put up and plus for the luxury segment and all our brands. So the volumes will increase.
Okay. And the margin in this non-IMFL category would be at what level?
So it is actually now 7% to 8% after the price increase.
Our next question is from the line of Naveen Trivedi from HDFC.
My question is again on the margin side. Can you just explain about what is the gross margin difference between the P&A and the regular portfolio for FY '23?
So overall margin in the IMFL business, EBITDA margin has been ranging between 15% or so. You're talking about gross margin. Gross margin on the P&A category will be about 55% to 60%.
And what about the regular portfolio?
Regular portfolio has been in the range of around 15% to 20%.
So that gross margin side you're expecting, this will become around 25%, 30% sort of a band next year? I'm saying the gross margin expansion in the regular portfolio will be close to 20% next year?
We are not actually looking at -- we have done this where the pricing period will come back. It's a matter [indiscernible] and everything. So I can't give you, but overall, as I said, that mix of P&A and regular category, we will have an improvement in margin in the gross side. Our margin on the gross side used to be in the range of around 48% to 49%, which has come down to 41%. So there has been a normal rate noted this point. So this will be mitigated by these -- all the levers of the profitability which we have talked about. And the margin on -- the gross margin will again go back on this -- but still volatility of raw material and other things are there. On the EBITDA side also, we are confident to achieve our margin on the mid-teen kind of thing during the course of this year.
Sure, sure. Just one thing I want to understand -- the plant benefit impact on the gross margin side. Apart from assuming there is no further volatility in the -- on the RM basket? How should we look at the benefit of the plant on the gross margin side?
We said earlier also that taking your own ENA versus buying out from outside gives a delta of around -- now around INR 10 to INR 11. So the ENA which we are going to use, whether for our UPML or for the IFML business, we are going to get that. Last for the time being, we will export or sell the domestic market, but in 3 years' time, all the ENA will be used for our captive consumption basis.
[Operator Instructions] Our next question is from the line of Rajendra R, who is an individual investor.
So I had one kind of broad organization level question here. So your competitor, the market leader has separated Prestige & Above brands and they have sold out or they're deprioritizing the popular brands. So I mean, in your own case, the trend is very clear. We had a 30% volume contribution from P&A, that has gone to 40% and probably this year, it will be 50% or above that. So do you have any thoughts on separating out the non-IMFL business or the popular brands that seems to bring a lot of volatility into the metrics?
No, we don't have any plans of separating out the business because it's all integrated. The plants are there. So there are a lot of GST application and everything. So there's no plans of separating it out. And what we see, UP is such a large state, 20% of the India's population is in Uttar Pradesh, and the way the industry is developing, we are the market leader, we control, we have a market share of close to 30% in the IMFL business. And if you see UP alone in the next 5 years, the way the growth is happening, the industry can go anywhere.
Our next question is from the line of Mr. Himanshu Shah from Dolat Capital.
Just one question. In lower Prestige category, which brand we are having? And is it available Pan India? Or what are the plans for that particular category -- low Prestige category?
You're talking about, Himanshu, the popular category, the regular category, low Prestige is all, we have the flagship brands like 8PM, Old Admiral brandy and Contessa rum, that's all launches in last 15 years has been done P&A and above only. So we are continuing -- wherever these brands are stronger, and we make some money after the price increases. And that from that only, we plan to have a mid-single-digit growth in the coming year.
And we have, in our presentation, also highlighted the growth for each segment and also the key brand within that segment.
I was talking about low Prestige as the category in McDowell's No.1 and Imperial Blue kind of category?
So see, we have so far have really been unrepresented in that category, primarily because margins were not good enough. But now with the positive response of various state governments on the price line, we have just introduced a brand called After Dark Blue and it has started responding very well. We've started it from Uttar Pradesh and some other states. And we hope to make it big in this segment as well. But we will be confined to those states where it is profitable and the margins are healthy.
Sure. And sir, just one more, if you can help. What would be the volume side of the industry in this category -- low Prestige category?
It will be about close to 50 million to 60 million cases.
Our next question is from the line of Priyam Khimawat from ASK Investment Managers.
Just wanted to understand post green field commercialization of Sitapur and Rampur dual feed, what will be our total E&A capacity in crore liters -- our grain base capacity?
Capacity will be in the range of around 21 crores liter.
So when we talk about the INR 10 to INR 11 delta per liter, can we expect a INR 200 crore improvement in FY '25 on the gross margin basis?
See, first of all, you must understand that Rampur dual feed plant had been converted because of the reason that, first of all, the industry is migrating from the molasses-based to grain-based alcohol. And the dual feed molasses availability in due course of time will continue to be declining and most of the molasses will be used for the ethanol blending. So to cater to the growing market of UP in UPML as well as in IMFL we converted it. It will give a delta of INR 1.5 crore liter per annum, and the impact of that will be around INR 10 per liter.
But on the additional capacity being created, that's right. Earlier, we were also utilizing on molasses data. But in order to safeguard ourselves, we converted on dual feed. Sitapur capacity will be addition. As it is, we are buying INR 7 crore liter of grain alcohol for our IMFL business sourcing from various systems. In due course of time, that will be used actively, and we were constrained to increase our volume on P&A category without these expansions.
Got it. Sir, and when we talk about the mid-teens kind of EBITDA margin, we are talking about exit run rate in Q4 FY '24, not entire year FY '24. Am I correct?
So it will be achieved during the course of the year. It will start improving from Q1 onwards. But during Q3 and Q4, you will see that.
That was the last question of our question-and-answer session. I now would like to hand the conference over to the management for closing comments.
So thanks for joining us today on this call. We are confident of maintaining our long-term margin expansion given the premiumization of our portfolio recently received price increases, both in IMFL and non-IMFL and backward integration. Further, the operating leverage will also start kicking in from FY '24. We look forward to interacting with you on our next earnings call. In the meanwhile, if you have any query for follow-up, please feel free to write to us. Thank you.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.