Radico Khaitan Limited (RADICO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Radico Khaitan, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ashit Desai from Emkay Global Financial Services. Thank you, and over to you, sir.

Yes. Thanks, Stephen. Hi, everyone. It's a pleasure to host Radico for their Q3 results call. From the management, we have Mr. Abhishek Khaitan, Managing Director; Mr. Dilip Banthiya, Chief Financial Officer; Mr. Amar Sinha, Chief Operating Officer; and Mr. Sanjeev Banga, President, International Business. I'll now hand over the call to Abhishek for his opening remarks, and then post that we can start with the Q&A session. Over to you, Abhishek.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on our Third Quarter FY '22 Results Conference Call. I hope you are all doing well and keeping safe. For most part of the Q3 FY '22, market conditions remained normal as the previous rate of pandemic subsided. We are very pleased with our volume growth, particularly in the Prestige & Above brands, which grew by 18% over Q3 FY '21. We have continued to outperform the industry with the total volumes of 6.98 million cases, which is a 7.4% year-on-year growth versus industry growth of 2%. The growth was broad-based across the portfolio and across states. After a strong start with the launch in UP and Maharashtra, Royal Ranthambore whiskey and Magic Moments Dazzle Vodka has now been rolled out in 3 more states. Both these brands have received extremely positive response. In the month of December 2021, 8PM Premium Black Whiskey crossed a monthly run rate of 2 lakh cases and 8PM Family crossed 11 lakh cases. This truly reflects the strong consumer franchise that our brands enjoy. In January 2022, we have dispatched the first order to CSD for Rampur Indian Single Malt and Jaisalmer Indian Craft Gin. These brands will go on to create a strong positioning for themselves in the CSD market in the coming period. With the investment in Rampur Indian Single malt capacity expansion a few years back, we will see substantial quantities of the single malt becoming available for domestic as well as export market. During the quarter, exports have been impacted due to global freight scenario and nonavailability of containers. However, the order pipeline remains strong. Over the last few quarters, we have seen an inflationary trend across industries, and our sector is no exception. We have seen a sharp increase in some of the key import materials, which have impacted our profitability margins particularly in the non-IMFL segment. In the near term, the operating environment is expected to remain challenging. In the medium to long term, we are confident of achieving the high teens margin that we had guided earlier, given the portfolio premiumization and backward integration. I'm very excited to share that after consolidating the business over the years, we have embarked upon a judicious CapEx plan. We have been evaluating return accretive capital allocation opportunities. Today, we have a very strong balance sheet and free cash flow generation. Since FY 2016, we have reduced our net debt from the peak of INR 950 crores to INR 135 crores currently, all through internal accruals. During this period, our IMFL volumes have expanded from 18.2 million in FY '16 to around 26 million cases. Our current capacity in Rampur is fully utilized which necessitates a need for expansion. This will be funded 50% through internal accruals and rest from borrowings. All the CapEx will be completed by Q1 FY '24 and cash flow will start accruing. We will see our debt levels peak out in FY '23, and then start to reduce again in FY '24 onwards, with the strong cash flow generation from the existing business as well as these new projects. We expect to be debt-free again by FY 2025. Both these projects will be accretive to EPS and cash flows from the inception. The business growth opportunities of the Indian Alcobev industry is very compelling, and UP is going to be one of the key growth engines. Given the current raw material scenario due to the ethanol blending program of the central government, molasses availability will be restrained in the future. The premium IMFL industry is growing at a faster pace than the overall IMFL industry, which uses grain-based alcohol. Therefore, the demand for grain ENA is going to increase further. One of the key reasons that we have been able to create brands like Magic Moments, Morpheus, 8PM Premium Black, Jaisalmer, and Rampur Indian Single Malt is because we had quality alcohol from our own plants. The recent change in Uttar Pradesh State excise policy of mandating grain alcohol 42.8 degree category, which comprises 25% of the industry is an important step towards moving consumer to higher-quality alcohol. With own ENA from Rampur dual feed, which will become operational by Q4 FY '23, profitability of the country liquor segment will also improve. These projects will enable us to expand our in-house capabilities to drive future growth of the branded business and capitalize on the industry growth opportunities along with securing raw material supplies. In Sitapur, we are also putting up malt maturation facilities, keeping in view the future growth potential of Rampur Indian Single Malt. We are also setting up a craft gin plant to support the growth of Jaisalmer Indian craft Gin. Both these projects will be return accretive with the average ROCE in the range of 20% to 23% and payback period of 3.5 to 4 years. It will create value for all stakeholders. We have 28 contract bottling units, and we are currently buying 50 lakh liters of ENA monthly. So this CapEx will secure the large captive requirement. Rampur Dual feed project will be operational by Q4 FY '23. All major plants and equipments have been ordered. We have acquired over 107 acres of land in Sitapur, and the development work will start shortly for the greenfield. For the purpose of acquiring land, we have formed 7 step-down subsidiaries as there is ceiling limit on the acquisition of the land in UP. The Sitapur plant will be operational by Q1 of FY '24. We are very happy with these developments as these capacities will pave the way for us to capitalize on the future growth opportunities presented by the Indian IMFL industry and in particular, in the state of Uttar Pradesh. I would now like to hand over the call to our CFO for a detailed operational and financial review. Thank you, everyone, and over to you, Dilip.

Thank you, Abhishek. Thank you, everyone, for joining us on this call today. During the third quarter, we have reported IMFL sales volume of 6.98 million cases, representing an increase of 7.4% on Y-o-Y basis. This was led by Prestige & Above category volume growth of 18.2%. In volume -- in value terms, Prestige & Above category registered 21.5% growth. Prestige & Above category account for 33.8% of total IMFL volume compared to 30.7% in Q3 of FY '21. Net revenue from operation during Q3 of FY '22 was INR 766 crores, representing an increase of 12% compared to Q3 of FY '21. During this period, IMFL sales value increased by 12.5% as a percentage of total revenue. IMFL sales account for 82.1% of net revenue compared to 81.7% in Q3 of FY -- last year. Gross margin during the quarter was 46.2%. This was impacted due to the ongoing commodity inflation, particularly in non-IMFL business. Over the last few quarters, we have seen prices of PAT resin and other packaging materials go up significantly. However, on Q-on-Q basis, gross margin has remained stable. Despite significant increase in raw material prices, gross margins for the IMFL business was impacted only moderately owing to a favorable product mix. ENA prices have increased marginally in line with expectation given the recent changes in ethanol prices. Raw material inflationary trend is expected to continue, although the rate of increase is expected to moderate in Q4. The company is taking all efforts to optimize cost and to mitigate any margin headwinds. Over the long term, we expect to continue our margin expansion and trajectory, given our portfolio premiumization. Finance costs decreased by 48% on Y-o-Y basis from INR 5.39 crores to INR 3.12 crores during Q3 of FY '22. Company's cost of borrowing is one of the lowest in the industry due to the lower interest environment, stable profitability, strong capital structure and improved liquidity position. We have been an efficient working capital management and a very strong credit controls. During the first 9 months of the year, we reduced our net debt by INR 62 crores after the CapEx of INR 24 crores for new projects. The recently initiated CapEx plan will enable us to be future-ready and capitalize on the industry growth opportunities. We have a very strong financial position, comfortable liquidity. During this time, we are taking all necessary steps to sustain our financial strength, maintain robust business model and grow consistently, competitively and profitably. With this, we will now open the line for Q&A. Thank you.

[Operator Instructions] First question is from the line of Abneesh Roy from Edelweiss.

My first question is on P&A volume. That's up 310 bps as a percentage of IMFL for you. So what will be your long-term 3 years, 5 years target here? Is there a conscious strategy? Or is it that both segments will have their own growth rates. So P&A will keep increasing. But do you have a conscious target in mind?

See, currently, P&A is at the level of 33.8% of the total sales -- but as you would have seen, our thrust in the last 3 years, particularly, has been very aggressively on the P&A segment. We have been promoting all our premium brands. Magic has been growing, Morpheus super premium Brandy has been growing. 1965 Rum has achieved 10% market share in defense and has garnered equal traction in the civil market. And now we have launched our most favorite segment premium brand called Royal Ranthambore, which has just hit 5 states. We were seeing excellent traction on these products. We have upgraded Magic Moments Vodka to the next level, which is close to some of the premium international brands, this has also received very good response. Verve in Magic Moments has achieved a 20% market share amongst all premium brands, including Indian and International. Now what we see here from is that these brands have just hit the market like Royal Ranthambore and Magic Dazzle. They will become stronger and stronger. The next 3 years are going to be quite eventful because any premium brand requires at least 3 years of right market dosage, marketing dosage to -- for the brand to bloom. Coupled with that, our focus on premiumization will continue, like we had mentioned in the last like we had mentioned in the last earnings call, we had 2 whiskeys in the pipeline. One has been delivered. The another premium whiskey will be delivered over the course of the year. So let me say that we are well online with strengthening the premiumization and the P&A segment stronger and stronger. The next 3 years are going to be quite eventful for Radico.

My second question is on the raw material and GM. So we are seeing general inflation everywhere. So ENA, glass bottles, corrugated box, diesel for logistics. Everything has been inflationary. So how you have managed Q-o-Q stable GM? Is it because of mix? And second, in Q4, do you expect things to be even more challenging versus Q3 in terms of these raw materials?

So you are right, Abneesh, that we have seen the inflationary pressure in this current year in last 9 months. And ENA, we have seen that 2.5% Y-o-Y as well as Q-on-Q price increases. We see that the trend now should moderate because the impact of the supply side constraints, which has been there is now being addressed slowly. And I think next year onward, we should not see that, rather some of the prices in the paper box and all that or PAT, et cetera. But we will be happy with these prices even because we are trying to upgrade our portfolio, improve the product mix. And in IMFL segment, as I said in my remarks, that the impact of the inflationary have been very, very moderate because of the product premiumization. Simultaneously, this will -- next year, we passed on by taking some price increases in a couple of large states, which the industry is already in touch and deliberating with the state government's representation has been given so as and when it happens, that will also be known to the industry. So I think next year onwards, the price pressure, which we have seen in this current quarter, and particularly on gross margin, should be done away with, and I think we will be on a better trajectory on gross margin and EBITDA margin.

Sir, one last follow-up...

Mr. Roy, sir, sorry to interrupt, but for any follow-up, may we request you to rejoin the queue please. [Operator Instructions] The next question is from the line of Jignesh Kamani from GMO & Company.

I just want to know what is the current requirement for ENA. And since we are doubling our capacity from 101 million-liter to close to around 207 liters it will suffice to what percentage of the requirement after 2 years down the line? And second thing on the CapEx trend like in Rampur, we are spending INR 185 crores just to convert the kind of single feed into kind of double feed it will be only incrementally just 7 percentage more new where we are spending INR 555 crores. So I just want to say, what is the ROC and payback on the you can say dual feed conversion where you are spending INR 185 crores?

So as far as the ENA capacity is concerned, we have around 10 crores, 11 crores, 10.5 crores liter in Rampur. However, this is for our brand business as well as for country liquor, both together, which is now utilized 95% and as we are doing around 26 million cases of the IMFL so that is also another 10 crores, 11 crores liter, and there is a country liquor portfolio also in state of UP. So put together, these will be utilized as the industry is growing double digit and particularly in Uttar Pradesh, the industry growth it continues to be in double digit. We expect in the next 3 to 5 years, the industry will have current year itself without an increase in the prices, the state is talking about INR 40,000 crores of revenue from Alcobev industry. So we see a great growth. And in due course of time, this capacity expansion, which is being done will be utilized fully for our branded business. So keeping in view the horizon of 3 to 5 years and as the government ethanol blending program, the molasses is being diverted more and more into the ethanol, and we have seen yesterday, again, the government data that the molasses -- the alcohol -- the ethanol blending has gone from 8% to 11% keeping the raw material security into account this is our plan for 3 to 5 years to make this happen. And as we are moving towards premiumizing and almost all the products uses the grain-based alcohol for the premium product so this will be value utilized. Second point is regarding what was -- yes, right. So on dual feed, I will say that our molasses brand, which is a capacity of 140 KLPD right now and to convert in it dual feed, it is a balancing of equipment also and putting all the equipment which are required necessary for looking at the future from efficiency productivity point of view. We are also adding 1 dryer for the DDGS. So all put together, this will be there and this is having a payback period, yes, of 4.5 years. So that is also justified looking into the business requirements.

See, why we are converting the dual facility is one simple reason, we foresee that in the near future, all the molasses products will convert into grain which means that the entire portfolio, even of the non-IMFL business is going to get premiumized into economy brands like what is in the southern states where your recoveries are much higher. So converting into the dual mode will help us to increase our margins, which you will see from Q1 of '23 coming into play. And going forward, once the entire non-IMFL business is converted into grain, the recoveries and the margins will increase substantially.

But our -- like in terms of volume, volume will increase by the 7 percentage when we convert in dual feed. Will our cost of manufacturing of ENA reduce drastically from molasses to converting to grain?

No, the selling price will increase because like in the 25%, what the Uttar Pradesh government has given, the grain product's selling price is much higher.

I'm talking more from the manufacturing goal because ENA via grain based is also available in future, right? Because there will be enough capacity available for the both molasses and grain based because of the current expansion happening in the industry. So I'm saying, when we are spending INR 185 crores just to convert from molasses to grain, and it is not reducing any you can say our manufacturing core. So from the ROC point of view, we are not giving much. I understood on the realized part but this will be more from the selling point of view, not from the manufacturing point of view.

No, I'll just explain you the scenario. In Uttar Pradesh, where we are into the non-IMFL business, what is happening the molasses is given by the government at a reserved price. So now with this ethanol blending that reserve price will eventually go and everything will get converted into grain, where the pricing of the product will become higher. So that is what is going to happen in the next 2 to 3 years. So we have already prepared ourselves because the whole segment of country liquor, which is close to 80 million cases will get into economy alcohol.

And how is the availability of grain? Because if you take as per the government plan for the ethanol blending alone, they are expecting to have a close to INR 4 crore worth of you can say ethanol from the grain alone. If this is the case then there is also issue on the grain availability?

See, in the end, the water [Technical Difficulty] is its own balance and what we feel is because molasses will go more into ethanol, the pricing of the grain products will go up. So eventually, in the end, your brands will go because the higher you sell, the domestic brands, the national brands will sell much more. So there, we have a huge advantage.

Plus the UP state government has defined the policy very clearly that all IMFL henceforth will only be grain. So this dual feed conversion is going to benefit us in a very, very big way.

Next question is from the line of Aaron Armstrong from Ashmore Group.

For the new CapEx projects, could you talk about how much of that relates to business that you currently outsource and that you're now looking to bring housing in-source versus how much is the support new growth without the change in kind of in-sourcing and outsourcing mix? And then perhaps if you could share any details or some examples of where you're currently outsourcing and the new capacity allows you to bring that in-house and the kind of margin savings, cost savings that you'll see from that?

So the presently, we have actually been outsourcing around 50 lakh liter of the ENA for our IMFL business. So in -- across India at this month -- per month, right? So this is INR 6 crores of the alcohol ENA being bought by the company. And as far as your question regarding that, how much does it save towards the backward integration actually saves a lot that is why we are talking about that this project will give a ROCE of 20% to 23% and a payback period of just 3.5 years. So the payback is quite huge, and it will start generating the EPS and free cash flow from the first full year of operation, which is in '23, '24. That is the reason we're very, very conscious about our capital allocation. And the reason for allocating for a captive ENA unit is our own requirement will be there. In 3 to 5 years, we will be -- we will have to have the facilities and as the ethanol vending program is generating the grain-based alcohol as well as the molasses-based alcohol for the alcohol industry for us will be a challenge. So we are having our own quality alcohol and which will support our branded business.

Can I add.

Yes, yes, please.

So just to add, you see the growth of the Indian alcohol business is taking place in double digit in the Prestige & Upward segment. We are currently sourcing 6 million liters per month out of the additional 100 million liters that the new plant will give, which means 60 million liters is required in any case going forward. So we will have this control on our destiny because we are basically premiumizing and all our premium brands require grain, which is of good quality. That's what we are planning to do.

That's great. And then perhaps if I could ask on Page 12 of the presentation. You mentioned malt escalation capacity, which should start to bear fruit in 2024. Can you talk about how significant this could be? Any indications on volumes that we could expect?

You see we expanded our malt capacity a couple of years ago. Our malt distillery is based in Rampur itself. And we've been aging and maturing malt for Rampur Indian single malt all this while. So we are setting up additional maturation facility in the new plant, which will give us rich dividends in the years to come when all this malt is available to us. We do expect a much larger -- because currently, Rampur is still on allocation, whether it is in the international market or we've launched it only in very few markets in India. So it's still on allocation and will remain on allocation for next 12 months, but we expect substantial quantity of malt to be available for bottling from next year onwards, that's basically '23, '24 onwards. So that should give us a huge boost to our luxury portfolio as well as our revenues.

Would you be able to share any numbers around that, please?

Well, we don't share brand-wise numbers, but going by the response and the awards that our brands have been winning world over, in fact, Rampur Asava was ranked the #7 amongst the top 20 whiskeys of the year 2021 they have been consistently winning gold medals and ratings of 94, 95 points with all the whiskey experts. So there is -- we've just touched the tip -- as they say tip of the iceberg because it still remains in allocation, we -- our brands are in about 85 countries, but Rampur is only available in about 35 countries. So we have a long way and we are constrained by the availability of malt. Hopefully, that will be over in the next 12 months. So you can see huge growth coming from this portfolio.

One final question, if I may, please. So GP margin was around 50% a year ago, we're slightly off that. Is that something you think we could recover in the coming quarters? Or do you think that it takes slightly longer to get back to?

Yes. So this is sales where we are seeing this inflationary pressure. And I think as we have already guided, we expect the margin, again, gross profit margin to again come back on 48% or 50% levels after when this inflationary pressure is over price increases happen, at the same time, product premiumization is happening. So all these are towards that. So we are expecting this in coming 2 to 3 years, we should be back in our gross margin at 50% level and on operating margin as we guided on high teens level.

The next question is from the line of Amarjeet Maurya from Angel One.

Sir, can you provide me 9 months industry volume numbers? And what's your expectation in the full year industry expectation growth now?

So 9 months, we have actually shown a growth of 18.6%. And the best thing is that the Prestige & Above brands have grown by 23% against an industry growth of prestige of only about 18%, regular brands have grown by 17%. Overall, we have seen an 18.6% growth. The growth, therefore, in volume terms is very, very healthy, and we are -- the industry growth is 14%. Overall, we have overall grown at 18.6%, and we have over outsmarted the industry growth as usual for the fifth year.

So sir, what's your expectations for the full year? If we are considering the fourth quarter for the industry?

See, for the full year, I think we should like 18.6% is our growth. So we should be in the late teens only for the full year.

Yes, and sir what about the industry?

Industry would be the same, like industry has grown in the 9 months by 14%. So I think industry would be in the range of about 12% to 15%. .

That's right. .

And Radico's growth will be much ahead of the industry.

So we can see the 4% to 5% outperformance against the industry?

Right.

In terms of volume, okay, okay, sir.

The next question is from the line of Vishal Chopda from UTI Mutual Fund.

Just going back to this CapEx, we are planning. I mean bearing with you, I understood the problem you are anticipating is that with this blending increasing, there could be an issue in sourcing of ENA. So we are trying to do more in-house manufacturing. But as I understand, this will be more of an industry-specific issue not just for us. And obviously, we are a small player in the IMFL industry. We have much bigger players like United Spirits and Pernod and we don't see them putting their own ENA capacity. So I'm just trying to understand what is different that they will be able to manage with outsourcing and do you have to do own manufacturing? Can we would -- can we also would not have continued outsourcing and obviously keep our balance sheet more light instead of taking doing this high CapEx. So I just want to understand what am I missing here?

Yes, that's an interesting question. Like if you see the history of Radico, Radico would be the only company to create close to about 10 to 15 premium brands in the last 1.5 decades. And this has been possible because of our quality, what we produce and the spirit. We started as a distillation company and producing the right quality spirit has been our forte. Like even if you see Rampur Indian Single Malt retailing at INR 8,500 a bottle much higher than any 18-year-old whiskey and still being given on an allocation shows the quality we produce. So now foreseen, we are seeing that it is the kind of premium portfolio like even our 8PM premium black, which has touched 2 lakh cases a month. Going forward, with our Royal Ranthambore, Rampur, Jaisalmer, the in-house capacity of producing our own spirit is going to fuel my growth for the future. So -- and even Magic Moment Vodka having a market share of 56% is itself it speaks the quality of the liquor we produce. So I think by having this dual thing and the Sitapur, Radico has taken its plan set for the next 5 to 7 years. Secondly, if you see, we had waited for 5 years, my debt level from INR 950 crore is down to INR 130 crore. Today, we are going to get long term, we are going to borrow only INR 370 crores long-term debt in the range of 6% to 6.5%, whereas these projects is going to yield me 20% to 23%. So I think it is the right time Radico is doing now while it has consolidated to position itself for the premium play for the next 5 to 7 years.

Okay. Understood. I mean, just 1 point, sir, I want to make here is that -- and what we have done in the last 4 or 5 years very phenomenal in terms of growth and improving our balance -- health of the balance sheet, which is also reflected in the stock price and valuations. It's just that we have transitioned from a bulk alcohol manufacturer to a IMFL players now, but we are again focusing back on bulk alcohol manufacturing instead of continuing to outsource like the bigger brands. So it's just that and again, you are taking that. So that's what was a concern here. I mean if I was of the view that the bigger players can continue to outsource why can't we do that? And just focus on brand building, premiumization, I think that would have been better. That would have in my view? I mean I take your point. And secondly, sir, on the ROC calculation, I just wanted to clarify is that -- obviously there will be some assumption of the grain-based ENA price there and the raw material, I'm assuming, is mainly rice here. So what happens -- I mean, I just want to clarify here what is -- is there a linkage between the ENA price? And how is the linkage I just want to understand, suppose rice prices, hypothetically, rice prices go up, does that significantly change our ROC calculation because our raw material price will go up and the grain-based ENA price -- is it linked to that? Because I think molasses-based ENA price is more governed by the government, the government tells what prices to sell at. So maybe the grain-based price is also linked to that? And what happens if rice prices move? So how does it impact our ROCE calculation?

See, we have done an ROC calculation on a very conservative basis in this project, because it is not only the alcohol. It will help me to sell the branded products, where we have not even considered the margins. So there is enough headroom for the projects to the payback, I think even after the pricing going up or down, would not affect it.

Okay. So you are saying the rice -- volatility in rice price -- input price should not impact your payback to this?

Yes, it should not impact much.

The next question is from the line of Avi Mehta from Macquarie.

Sir, I just wanted to kind of continue with the last question a bit. And more from a conceptual basis, what I hear is that you would like to do this capacity because it helps us grow in the premium segment. And hence, would it be right to assume that you would -- as this growth continues, you would want to maintain that back-end support and hence, want to have that capacity and you may need to kind of add to this capacity, say, 5 years down the line or 3 years down the line. Is that the right way to understand that, sir?

See, that as of now, to answer this question would be a little difficult because if you see we have planned for the next 5 to 7 years, like when we started Rampur Indian Single Malt or Jaisalmer being priced at INR 8,500 and INR 3,700 for Jaisalmer, the most expensive gin in the country. We did not expect the response to be so overwhelming. So depending on this now with the capacities what we had invested 4 years back, will start coming in '23, '24 of the malt. So depending on the demand, we will take our call during that time. But as of now, I think next 5 to 7 years, we are quite self-sufficient. And this is going to greatly help in our premium portfolio.

And sir, if -- and as I hear you correctly, this is not a decision which has been based on the pricing of the ENA. You are not expecting ENA prices to rise further. It's just...

No, no, it is for the grain because number one, there are 2 points. We feel the molasses is going to get extinct. Second, the raw material, we get the grain of the best quality. We expand our Gin distillery, we expand our maturation of malt for Rampur Indian Single Malt where the volumes after 4 years can go much multifold like what we did in our Rampur plant, which we'll see the volumes coming on '23, '24. So overall, I think from a premium point and today, when the debt is so low at 6.5% and the projects can give us a ROCE of 20% to 23% and help my premium portfolio. I think it's a -- I think it will add a lot of -- it will create a lot of value for all the stakeholders.

Okay, sir. And sir, the second question is what you -- just on the grain versus molasses are you also arguing in a way that our regular portfolio at some point of time will also start using grain? Is that also the thought process behind us saying that the grain molasses will die and everything has to move to grain is that what we should...

Yes, see, absolutely, you're right. As it is today, 90% of our brands are using grain and in the coming future, which is down the line, I think, another 1 or 2 years, everything will be grain.

Sir no, not for us, I mean for the industry. I'm sorry, I was not clear on that. I mean are you urging it for the industry, which is why you see capacity has been an issue? Is that what you were...

See, industry also, if you see gradually has moved towards the grain. Industry also, I think 70% to 80% will be grain now. So -- but in the near future with this ethanol blending, I think next 2 to 3 years, everything is in grain.

See, what's happening is, as I had mentioned earlier, the growth in the alcohol branded business is only coming from the prestige and upward segments. That is the premium range. This segment is going to expand multifold in the next 5 years. And we will require that much more grain. Molasses will be out extinct. And therefore, we are basically setting up this plant to make sure that we control our own grain spirit of quality, which has so far been a major factor in the success of Radico's portfolio.

Okay, sir. Okay. No, I mean, exactly. So I just wanted to clarify that the reason for this is quality and not a concern on availability or price? That is what I wanted to just clarify.

See, quality is definitely the prime focus, but obviously, it will help us in price as well.

The next question is from the line of Harit Kapoor from Investec.

So I just had a few questions. One was on UP. So this whole -- the change in the UP policy has that been the core reason for the dual feed? Or were you already thinking about this dual feed kind of a CapEx? And just in addition to that, is there any incentives that the government is providing on this CapEx that you're doing on the Sitapur side that adds to your ROC calculation?

See, if you see -- if we have ordered the plant, we've been foreseeing this coming in the last 1 year. And now it has come sooner than later, which is very, very good for the industry of getting the non-IMFL business also into grain because your recoveries increase, you are not dependent on any sugar mill and your brands command that price. So I think that has been a very important and a good change which has come.

Right, right. And any incentives that the government is providing?

No, there is no incentive by the government.

Got it. The other question was on the only 11 crore liters that come in, in fiscal year '24. The -- so firstly, the 6 million that this -- sorry, the 60 crore -- 6 crore liters that you are outsourcing from outside, I'm assuming that all of it can't go in-house, right, because you're buying from different states and the freight costs, et cetera. So how much of that can we now manufacture in-house for your own purpose out of the 6 crore liters?

See the INR 6 crore liter is also increasing rapidly now because what we are seeing with the volume ramping up and everything. So I think about 70%, 80% can be used for internal. That's the growth.

That's the growth and -- yes, and at the same time, this 42.8%, which has been converted, will also take a large chunk of that, which is again grain based completely, which is 25% of the industry. So in the beginning, it will be a mix of the -- our own for IMFL as well as non-IMFL, but at a later 2 to 3 years' time, our own growth of IMFL business and the non-IMFL business will take away. So that capacity utilization, we will ensure will be full by partly selling ENA outside as well as for our own consumption.

So there will be 11 crore liters in FY '24 that you are expecting to fully utilize. How much of that in your current calculation would be, say, out -- for you selling outside? And how much of it would be in-house because of the country liquor being higher and also your own requirements on IMFL and the fact that you're not outsourcing anymore? And just sir, in addition to that, is -- are you already now over next year going to kind of figure out the tie-ups with the brands for that 11 -- for the selling ENA outside, how will that work?

So in the beginning, a couple of years, it will -- the capacity will also be utilized partly for supplying grain-based ethanol, where also there is a good pricing. So this is an interim for a couple of years. But eventually for IMFL and non-IMFL, it will -- as the volumes are growing, it will make good it will make good complete this thing and we have our plans where we have -- a model where we've seen that for a couple of years only, it will be supplied. And there also the realization and all that justifies this investment. And after that, with the grain, as we said, and that 25% has come into the non-IMFL. Eventually, 36% and 25% will also get converted as the molasses availability is constrained towards ethanol blending. So keeping in view that in mind, this is the first step and the next steps, the government which the government has started taking will again be taking and creating a huge demand for grain-based alcohol.

And just the last thing on this was what is -- so out of the INR 50-odd crores that you are doing on the greenfield. How much is the land cost involved in this roughly?

It is roughly 8% of the total project cost.

8% of the total project.

Next question is from the line of Jaydeep Walia (sic) [ Jasdeep Walia ] from New Mark Capital.

Sir, I wanted to find out if you would be manufacturing a different grade of quality of ENA in your new plant versus what is available in the market? My impression was that ENA is ENA it's like commodity, so there's not much value proposition of creating your own distillery. So I wanted to know your opinion on that?

See, quality of ENA differ on the quality of plant and being -- we being expert and running this plant from ages like so the quality of plant -- the quality of alcohol being produced by our plant is much superior. And that is the reason we have -- actually, we have been using all the alcohol of our own stores in the Magic flavors, Morpheus and all that. So to say that quality is for a commodity same is not right at the same time even we were exporting to the multinational, see our quality of alcohol, which was not accepted from any other manufacturer. So to be actually control over our own quality in the branded business, it is a desired and necessary -- compelling reason that we should have our own capacity expansion so that we can produce those kind of branded products, which we are actually launching and in pipeline.

Just to add what Dilip has mentioned, when we used to export our ENA to global players, Radico ENA commanded a premium of 7% to 10% over all the other manufacturers, which is a testimony of the quality that we produce and we intend to do the same thing in Sitapur plant as well.

Got it, sir. Sir, the ROC number that you are projecting of upwards of 20% kind of ROC on these new investments so if I remember rightly, just 5, 6 years back on distillery plants, mid-single digit ROC was there. So the ROC might look good as of now because of -- obviously, there's a shortage of ENA because of the government blending program. But are you sure this kind of return on capital employed will remain after 3 years in all the capacity which is being created by the industry right now on the online? So it is possible that after 3 years once all the capacity comes online, the return on capital employed might fall to low to mid-single digits?

See the ROC what we have calculated, we have not taken into account the [Technical Difficulty] we are going to get because we are going to be able to produce more of our premium brands. So I think the ROC is also on quite a conservative basis. So I don't foresee going beyond -- going to a single digit at all. There's quite headroom for that.

Got it, sir. And sir, you could have looked at other kind of arrangements as well, right, like co-locating your bottling plant with another distillery CapEx for which would have been put up by some other party rather than Radico itself funding the CapEx. So have you explored those kind of arrangements? And what made you reject those kind of arrangements?

See, we would not like to risk our heart, which is our Rampur, Jaisalmer, all our premium products in anyone's else had. This I am investing for the next 5 to 7 years, and especially where in next -- by FY '25 we will be debt free. So this is the investment for my premium portfolio and the growth of premium brands of Radico, which we would not like to risk it at any other people's this thing.

Got it, sir. Isn't malt capacity expansion independent of distillery capacity expansion?

Yes. So we are also putting a malt maturation hall which we had put it in Rampur about 3.5, 4 years back, where our products will now start coming in '23, '24, where the Rampur volumes will significantly go -- so we -- but -- and even the gin because the gin has taken off very well in the markets. And it is a craft gin. So a new craft gin distillery also will be put there.

Got it. No what I was trying to say is that you could have expanded malt capacity independent of this distillery investment, right?

Yes, we could have. But again, going back to the same thing, we need to be 100% sure of the quality of the liquid of the alcohol that goes into our premium brands. And we will not take any chances on that. And when the returns are good, we are a debt-free company why not create more wealth and generate more revenue and more profits in years to come.

So to support it further, this is a business case. Business case to support the brand at the premium level. At the same time, it is a financial compelling reason as well. When we can raise the money at 6% to 6.25% for a 5-year period and can generate a ROCE of 20% to 25%, then it makes sense to be having a secured raw material supplies, quality supply, generating revenue, generating the ROCE, which is much better than what your cost of capital is. So this is creating in longer -- medium to longer term, the shareholders', stakeholders' value.

Next question is from the line of Kaustubh Pawaskar from Sharekhan.

So this backward integration, what we are planning. With this, would it be fair that our margin trajectory, what you're targeting of around high teens should improve?

See, especially with the backward integration on the premium brand, we want to give a guidance on a conservative basis where in a couple of years, we will be in the high teens. Then it all depends on your Rampurs and Jaisalmers, where it can go further up and Royal Ranthambore. But to give an estimate right now, we'd like to say high teens easily.

Okay. And sir, in your initial comment, you mentioned that exports is something where there is some bit of disruption because of the less availability of container and what kind of impact on the overall volumes was there in this quarter because of this lower exports?

You see our export order book remains very healthy. Yes, there has been a global shortage of containers and the freight rates have been going very, very high. But the silver lining is that they've now kind of stabilized and they're not increasing earlier, every fortnight, the freight rates were going up and availability was an issue. So we do expect them to stabilize and hopefully, in the coming months, may come down, moderate a little bit and the order which are all in pipeline will start moving out. Still, the -- in terms of export, we grew by about 85% last year. And we are trying to maintain the same level of exports this year also despite all the challenges. I think it will be a good way to consolidate our export business.

And this quarter, even the regular, we have seen the volume growth a little bit on the lower side at around 2% to 3%. And last 2 quarters, we have been seeing at around 2% to 3% any specific reason for it? Or should we expect it to remain at this level or that should be further improvement?

See, what we see that the volumes are very buoyant for us in most states, in multiple states, our volumes are showing a double-digit growth. And that speaks a lot about the acceptance consumer franchise for the brands that we've cultivated over the last 5 years. So yes, we are very hopeful we are optimistic, and we hope the trends to continue.

And we have guided earlier also that on the Prestige & Above category, we will be growing in double digit, more than double digit like -- and in the regular category where we are doing only in selected states not our pan-India, depending on the contribution it generates. So right there, we have always been talking about a single digit or 5% to 6%. So I think industry as well is also showing the trend that Prestige & Above category is growing better than the regular, popular category.

We take the last question due to paucity of time from the line of Deepak Lalwani from Unifi Capital.

I just have a couple of questions. See, first, what is your current ENA requirement in UP market alone and how much is being met internally?

Currently, we are buying on an average about 20 lakh liters per month for the UP market ENA.

Okay. So the point is I understand that ENA is something which can't be transported from one state to another state easily right given the taxation and all so how are you planning to sell that the extra ENA that you will generate from this CapEx?

One is the ENA, what we are buying for the domestic market is about 50 lakh liters per month. And for the non-IMFL business, we are buying about 20 lakh liters per month. So the 20 straight away gets utilized, plus the growth which will come plus the growth of the premium brands plus our shortage of -- even for the premium brand, the 50 lakh what we are buying a part of it will get converted into this thing, our own usage.

And a couple of years, we will sell ethanol also.

So by which year will you be in a position to use the complete new CapEx for your internal requirements?

I think in fact fourth year.

About 3 to 4 years.

So the first 3 years, we will be selling it to the other alcohol players. Is that right?

We will supply the grain ethanol in the meantime.

But do we have demand? I mean, I assume that there will already be enough supply in the UP market, right?

There's enough demand. I think the demand supply gap, the demand supply gap that the government itself is having a very remunerative prices government is giving and for that government is also giving the policies like buying the grain from FCI and all that. That's to support the supplies, last year, the supplies overall was 8.1%. This year, it has jumped by 300 basis points. I think the government stocking about by 25%, 20% is a big target and I think that will have the -- if our own supply is there, there is enough demand because 20% from 11% is a lot of gap.

Just one final question from my side. So the CapEx that you are doing for greenfield, which is coming to almost INR 1.6 crores per KLPD. Is it the industry average number? Or is it slightly on a higher side because I'm looking at some of the competitors, who are doing at INR 1 crore, INR 1.1 crores per KLPD. So just trying to understand why is it on a higher side?

See, this CapEx of Sitapur includes your malt maturation hall, it includes the gin distillery, it also includes bottling halls of 10 million cases of IMFL and 10 million cases of non-IMFL, so it's a mixture of everything. It's not just only the plant itself. It is -- we are going to beef it up with all our things for the premium brand. So it's a combination of a lot of other plants which we are putting in.

Yes, yes, integrated facility.

It will be a total integrated facility.

Ladies and gentlemen, I now hand the conference over to the management for their closing comments.

Yes. Thank you, Ashit, and we have continued to deliver upon our premiumization strategy, which is reflected in our strong P&A volume growth during this quarter as well as in the past 5 years, the 2 new luxury brands are doing very well, continue to receive positive consumer and trade feedback in the new markets they are being rolled out. Next year, we will roll it out in the Pan-India basis. There has been short-term margin pressure due to competitive inflation, but we are confident of maintaining our long-term margin expansion given the premiumization of our portfolio and backward integration. We look forward of interacting with you on our next earnings call. In the meanwhile, if you have any query or follow-up, please do feel free to write to us. Stay safe and healthy. Thank you.

Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.