Radico Khaitan Limited (RADICO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Radico Khaitan Q3 FY '24 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. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. On behalf of Dolat Capital, we welcome you all to Q3 FY '24 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. I will now 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 Q3 FY '24 results conference call. Driven by the strength of our premium brand portfolio and focused marketing strategies, Radico Khaitan delivered another quarter of resilient performance with Prestige & Above category brands growing by 20% year-on-year. All core brands continue to report strong momentum such as Magic Moments Vodka, which recorded 1.6 million cases sales during the quarter, Morpheus Super Premium Brandy, Royal Ranthambore, After Dark Blue Whiskey, 1965 Spirit of Victory Premium Rum, et cetera. Our commitment to delivering value to our consumers, execution excellence, increasing investment in brands and driving premiumization remains a cornerstone of our success. Our luxury portfolio continues to attract consumers and connoisseurs across the globe. Rampur Double Cask was recently featured in the Luxury Lifestyle Award as the Top 100 Premium Wine and Spirits Brand of the World. Rampur Asava won the Double Gold at Barleycorn Awards 2023 and was named as the Best World Single Malt. We plan to launch Asava in the domestic market in the next financial year FY '25. Furthermore, we continue to expand the distribution of Rampur and Jaisalmer in India. Rampur is now available in 14 states, and Jaisalmer is available in 20 states. We have further expanded our luxury offerings with the launch of Spirit of Victory 1999 Pure Malt whiskey. The launch not only reiterates our premiumization strategy, but is also a testament to our innovation and brand creation capabilities. Priced at INR 5,000, this brand is targeted at a mid-priced luxury segment. Our Master Blender has traveled over the world to evaluate various single malts and has blended them meticulously together with our Indian single malt to craft this exceptional pure malt. We are confident that 1999 Pure Malt will go on to create a mark of its own as many of our previous luxury brands. While we have seen prices of certain commodities stabilizing, the scenario remains volatile for grain, glass and ENA. We continue to cautiously monitor the industry trends. Given the steep inflation in the grain prices over the last 2 quarters, we have seen our margins getting impacted. Despite this, we have been able to sustain gross margins on a year-on-year basis due to the ongoing premiumization and the price increases in the IMFL business. Current grain scenario is volatile and it is an industry issue. Government and industry are working together and have taken certain steps such as the use of alternate feedstock in the manufacture of ethanol, which should be -- also alleviate the pressure on broken rice prices. It is heartening to note that due to our focus on financial discipline, we have been able to reduce our net debt by over INR 100 crores on a sequential basis. We remain committed to our integrated growth strategy of a focused premium product portfolio, brand innovation and agile organization and delivering value to our consumers and stakeholders. We will continue to deliver our value-led growth, manage business with agility, harness the strength of our extensive distribution network and manufacturing platform while consistently improving our profit margins. I would now like to hand over the call to our CFO for the 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 quarter 3 of FY '24, we reported a total IMFL volume of 7.25 million case, which is a growth of 3.7% on a year-on-year basis. Prestige & Above category volume grew by 20.2%. In value terms, the Prestige & Above category registered 29.1% growth. Prestige & Above category now accounts for 49.9% of the IMFL volume compared to 42.4% in quarter 3 of FY '23. The percentage of P&A is slightly higher due to the significant degrowth in revenue category. Improvement in IMFL realization is due to a combination of price increase and continued premiumization. We have received price increases in Regular category in Defence division, which supported the volume in Regular segment. On a year-on-year basis, there was 185 basis point overall impact due to price increase on our IMFL sales value. Gross margins were impacted both on a year-on-year basis and quarter-on-quarter basis due to the significant foodgrain inflation. Grain price inflation had a negative impact of 500 bps on year-on-year and 370 basis points on quarter-on-quarter basis on gross margins. Despite the commodity inflation in ENA and grain prices, we have been able to sustain gross margins on a year-on-year basis due to the ongoing premiumization and price increase in the IMFL business. Although prices of certain packing materials have softened recently, we cautiously monitor the trends of grain, ENA, glass bottles, which still remain volatile. Due to strong financial discipline and working capital management, the company has been able to reduce the net debt on quarter-on-quarter basis. Overall, we have a strong financial position and comfortable liquidity. During these times, we are managing and taking all necessary steps to sustain our financial strength, maintain a robust business model, grow consistently, competitively and profitably. With this, now we open the house for Q&A. Thank you.

[Operator Instructions] We have our first question from the line of Abneesh Roy from Nuvama.

Congrats on a very good set of numbers. I wanted to understand the P&A volume growth. So the market leader has been sounding out a slowdown the past 2 quarters. And in fact, this quarter, they saw less than mid-single-digit volume growth in P&A, which used to be much higher earlier. Your performance both in Q3 and 9 months has been pretty strong at 20%, 22%. So I wanted to understand, do you see also the industry slowing down? I understand your performance is good. So if you could tell, from last 3 to 5 years, the new products which you have launched, what is the contribution in the P&A? Is that the reason why you are able to grow much faster?

Thank you, Abneesh. First of all, our P&A category is growing across the geographies and across the brands. In P&A, the Magic Moment Vodka, which is our flagship brand, is growing by 22%, 23%. Morpheus Super Premium Brandy is growing in double digits. After Dark Blue whiskey, which has been there now rolled out to around 9, 10 states, is also growing in strong double digits. 8PM Premium Black is also growing in strong double digits. Then Royal Ranthambore has seen a big jump because started in 2 years back, it's seeing -- now it's available in 19 states, and we are seeing a good traction in that brand. So luxury brand is growing very fast. It's growing also on top line. And the Luxury portfolio, Rampur Indian Single Malt [indiscernible] in India, it is available in 14 states now. Jaisalmer Indian Craft Gin is available in 19 states. So we are doing well. We are growing the portfolio across. Our existing flagship brands are growing faster, also aided by the new launches which are being rolled out. And the [ width ] of distribution and all that is also taking place, we are doing well on those brands also. Do you want to add, Amar?

So it's like this that if you really see the last 2 years -- in fact, just last year, Magic Moment completed its 5 million cases. Morpheus did 1 million cases. 1965 Premium Rum did 1 million cases. 8PM Premium Black completed 3 million cases. Now all this put together has given Radico great strength across the retail and on-trade business over the last 2 years. And we are getting the benefit of this on the luxury portfolio also that we have launched. And that's the reason why Royal Ranthambore, Jaisalmer, all of them continue to do well, and we see a similar trend moving forward.

So sir, one follow-up. So in terms of the last 3 years or 5 years, whatever number you are comfortable to give, so out of the INR 519 crores, what would be the contribution of new products launched in either 3 years or 5 years out of this?

To summarize, for 3 years or 5 years at this point in time, we were, in our volume terms, around, 3 years back, around 35%. Now today, we stand 50% almost in volume. So it's a consistent growth in our existing flagship brands and the new brands. But new brands are still very, very nascent, like these have been launched 2, 3 years back only. And there is a lot of things to do maturing these brands in many states. So I think both put together, it's a combination of our existing flagship brand as well as the new launches.

Sir, last follow-up question. So you said mostly the flagship brands are also growing very strongly. So any particular states where these are the stronger performance? Because why I'm asking this is, one, when I see Pernod and UNSP, both growth rates are much slower in terms of their P&A volume growth. Second, of course, is there is a general consumption slowdown across almost every FMCG, [ UTC ], QSR, apparel, paint, FMCG. So generally, everything is slow only. So against that context, your flagship brand growing so strongly is a very good performance. So if you could give more color to it in terms of, state-wise, anything there or why the market share gains are happening? Because clearly, it seems market share gains rather than the industry growth rate are being there.

So I'll say that, in general, we are finding that P&A category and premium brands, we are not seeing that slowdown, particularly in our brand portfolio. However, the regular mark brands because -- and strategic call also, there is some pressure which we have seen also in the last 3 quarters. I think coming quarter also, there will be some single-digit decline in that versus Y-o-Y basis last year. From next year onwards, when correction course is done and we get new price increases also in certain states in the popular categories, then we will be in the range -- growing in that also in the range of 3% to 5%. So I say that it is not one particular state or some of the states where this is present; it's across India. And the P&A category, we are seeing the growth happening everywhere.

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

So Dilip, if you look at the 9 months in P&A, you have a 10% growth in realization, 9.5%, 10%. I just wanted to understand how much of this would be price and how much of this would be mix in your estimate?

So in P&A, our delta between this is around 11%, 11.5%, out of which 190 basis points is out of the price increase and rest is because of the product mix and premiumization.

So this high single-digit kind of a mix like...

It is a normalized state of affairs because in these quarters, you see that there is a decline in the popular category, and there is a jump of 18%, 20% in the P&A category. In a normalized state of affairs, I think 6% to 8% is comfortable. It should be the delta because of the product premiumization.

Yes. So I was just asking, within P&A, it's like a 10% growth. And if I assume 2% is pricing, that's about 700, 800 basis points. Do you think the 700, 800 basis points delivery is a sustainable one given that the last 2, 3 years, actually all the product launches that we are doing are dramatically higher on a realization per case as compared to our average? Is that the correct way to think about it?

Yes, it's correct to think about it because now, with most of the products which are launched in the range of 2,000 plus, so we see the traction then the delta is improving, realization per case is improving.

Got it. Got it. Great. And on the popular side, just one question, do you expect the bases to start to normalize more so from the second half of next year? Or you'll start to see some of that flattening out of growth coming in from the early part of F '25 as well?

The Regular category, some of that is an industry issue and some of that is inflation-related issue. So where the margins are just squeezed out, there are also, consciously, as a strategic decision, we also do away with certain sales. But we see that some price increases have happened, like Defence has given some price increase in the popular category. Some of the markets will further consider it. And I think in a normalized state, 3% to 5% kind of growth in popular category from next year onwards, we can take it.

And last thing was on the Royalty brand. This Royalty portfolio now should be fairly consistent, right? Because you've seen it now in terms of a Y-o-Y basis, the volumes are fairly similar to what they were in base quarters. So these are the expected numbers going forward? Or I assume that unless we have a major deflation where you want to take back some of these, until then, this should be a fairly consistent number to go with that?

Yes, of course, the Royalty brands will continue to be in this range of 0.8 million to 1 million cases per quarter. And since it is a fixed remuneration we get, so the mix of that, premium brands are around 50%, 55% and regular popular category brands are 40%, 45%. So this will continue to be the range.

[Operator Instructions] The next question is from the line of Parv Jain from Niveshaay Investment Advisory.

Congratulations on the good set of numbers. Sir, the first question would be on the raw material inflation side. Sir, so on a year-on-year basis as well as sequential basis, can you help me with some figures to understand how the inflation has been impacting us?

Yes, so inflation has been mainly on account of the broken rice, which is our key raw material for making alcohol. And the prices before the FCI discontinued the supply for ethanol used to be in the range of INR 21,000 to INR 21,500. So slowly and gradually, it has ramped from there to around INR 27,000 to INR 27,500. However, governments have been taking proactive steps to contain these prices. A couple of weeks back, there was a maize which has been allowed with the increased testing for the ethanol. So some of the production capacities are going to be shifted from the broken rice to the grain -- maize-based facility. And another thing, government has come out again to distribute the rice to the consumers by Bharat Rice scheme. So I think there will be -- and export has also been contained. I see that the market forces will play and the grain -- broken rice prices should correct from here. So we could see those kind of correction by March end, but those actions definitely should bring something for softening the prices.

So I think we should see the prices topping out around the quarter 1 of FY '25. Is that a fair assumption?

Topping out in Q4, I think.

Q4 this financial year?

Yes. Because actually speaking, I was also having these things that RBI in its report has also said that for last 3 months consecutively, the rice is giving a double-digit inflation in their CPI also. So these are cause of concern for government also.

Right, right, right. Okay, sir. I think that helps. Sir, my second question would be on the industry's broader outlook. Like we see the regular segment kind of facing a slowdown. I mean, how do you view that going forward? And how is that going to play out? I mean will this luxury segment -- the Prestige & Above segment will continue to give higher growth while the Regular segment will start to kind of get matured and slow down? And how -- what is your broader outlook on the industry?

So first of all, for us, you see, in the last 15, 16 years, whatever, we have actually launched the product -- almost all the products have been launched in the P&A and above category. So our focus is that. Secondly, looking into the inflation and other things, we, as a national player, have a lot of choices to serve the consumer. But there are regional players, there are players which are regionally placed in 1, 2 states. They are also -- because they don't have the P&A and above category, so they are focused there. And when we will have the price increases, we'll again come back on only those states when there is a comfortable margin. So for us, I think this is not -- the capital allocation and all that is based also on the amount we make. Otherwise, we see certain rural and other where we also hear from other FMCG industries that there are some pressures. In the mass brands, every industry, every FMCG industry is taking that. But for us, the main model, business model is P&A and above.

The next question is from the line of Dhiraj Mistry from Antique Stockbroking Limited.

Congrats on a very good set of numbers. So my question is on non-IMFL business that we have seen significant jump. What kind of annual or quarterly run rate we can expect from this business? And also, you can throw some light on what kind of gross margin and EBITDA margin you will be making on non-IMFL business?

So our non-IMFL business, because we have this facility of Sitapur which is up and running, and from this quarter, like Q3, it has been running almost at full capacity. Because of that, we had the -- and alcohol sale has been there. Also, our country liquor volume has increased by 31% in this quarter on Y-o-Y basis. So a combination of the alcohol sales as well as the country liquor increase, this has made a non-IMFL increase. And a couple of distilled byproducts which we sell out of the distillery, that is also forming part of that. But to the run rate, it will remain in the range of INR 430 crores to INR 450 crores quarterly basis. But in due course of time, as we have our branded business growth and 15% to 20% in P&A and others also growing in single digits, we will continue to consume the grain spirit captively. As we said earlier also that we will have in 3, 4 years' time, the consumption of the grain ENA captively. So until that time, it is a filler that we sell or export the ENA or the alcohol in the domestic market.

And sir, on margin profile, can you comment what kind of margin you will get?

Actually, margin has squeezed because earlier, when this was in INR 9 to INR 10 per liter, but because of the grain prices going up, the margins squeezed to INR 3.5 to INR 4 a liter. In percentage terms, the gross margin is in the range of 7.5% to 8%, and EBITDA margin is around 5.5% on a blended basis on the non-IMFL business.

Okay. And second, I'm assuming when there would be like from the price hike which we had seen last year for the overall portfolio, when it would be anniversarized in coming quarters?

The price increases are a natural course and a continuous phenomena in our IMFL business. We continue to present -- represent all the states with the cost push we have seen. And I think the new policies which are coming from Feb-March, we are also optimistic and hopefully some price increase will materialize in some of the states.

Okay. Okay. And sir, last question, when do you expect that the company would become a debt-free company? Like in this quarter, we already paid INR 100 crores of debt. What's your internal target to become a debt-free company?

So we are managing our working capital and the CapEx very well. Almost most of the big CapEx has been done now. And I think in 2 years' time, we will be almost on negligible debt with the kind of [ free cash flowing through ].

The next question is from the line of Karan Taurani from Elara Capital.

Congrats on a good quarter. The question was around the regular segment. You mentioned that from next year onwards, you will see growth come back in certain markets because of the potential price hike. But as of now, we haven't seen any markets specifically giving any kind of price hike. So what is the confidence behind this comeback in the regular volume growth?

So it's like this, that if you look at the way prices have gone up, in the last 1 year, you've almost got 12 to 13 states which have been very receptive on price increase. And we also find that the states today are more receptive on the inflation that has happened in this business over the last few years. So I think we see that our efforts on getting a price increase will pay back, like it has been in the last 1 year, in the near future as well. And the next 1 year should see softening of most prices, and regular should come out better in terms of margins.

Secondly, Karan, the base effect has already played out in this year. So base effect is also because of every quarter, there has been some negative decline in this thing, so next year, with the price increase and the base is now coming on the rational level; secondly, Defence has given price increase, we started supplying there, so we will see that 3% to 5% kind of growth is achievable.

And how much of regular volumes would come from UP state? Any broader numbers there?

Let me look. State to state, I think -- you are talking only about regular in UP?

Yes, only regular...

Out in UP, I can give you a broad understanding of what's the UP market for us. We have around 28% market share across the industry, right? So we are present everywhere. We are present in regular. We are present in premium. Our Magic Moments Vodka is the largest-selling vodka in UP. The Verve vodka and the flavors are gaining momentum, so -- and 1965, which is also a very strong brand in UP. I'd say that Royal Ranthambore Jaisalmer, I think it's a mix of that. But to have a 28% market share itself is that we are present everywhere and growing.

Right. And as a focus or a vision statement, from the company standpoint, do you believe that you can potentially reach towards 2/3 volume contribution as far as P&A is concerned, given the kind of growth difference we are seeing in terms of P&A versus regular? And is that a focus area right now? Or you believe that regular, also, there is still a lot of demand and in the future, there could be a comeback? Or do you believe that P&A will continue to outperform and probably it would be more than 60% of volume contribution going ahead?

See, P&A volume growth actually is systematically and consistently growing. This period, we have seen an increase because of the skew that popular is degrowing and P&A is growing 20%. However, in a normalized state, if we see the 15% to 20% growth in our P&A and 4% to -- 3% to 5% growth in our regular category, we consistently on a base -- on this current basis, we can see that we will be -- we are -- I think 50% is skewed, but 50%, 55% should be this thing; and 3 to 5 years, it can be 60% even in volume terms. But the point is I can't comment 3 to 5 years like that because how the regular category with this, again, grain prices, ENA prices and all that, correct, and we get price increases, we can also have the strong single-digit growth in that. But still 55% to 60% you can assume and are -- in 3 to 5 years' time, we will be achieving from the P&A category.

And in that case, possibly 80% of your revenues would come from P&A, given the high realization in that segment. Is that a fair assumption?

The value growth will be much higher because basically, the brands which are coming and growing faster, including the new launches, are in much higher categories.

Just one last thing on the whiskey category, again, right? So again, there's this big gap between 8PM Black and Rampur that you have. Obviously, Royal Ranthambore is there. But any plan to launch something in that mid- and upper-Prestige segment, which would probably compete with the Blenders Pride or Royal Stag category?

So let me say that Royal Ranthambore has really done well. This year, we will do 3x the volume we did last year. We've just launched 1999 Spirit of Victory whiskey, which is at a INR 5,000 a bottle price. Above that, we have Rampur Single Malt. All of them put together are doing extremely well, and we hope the same response coming for Spirits of Victory 1999. However, to specifically to answer to your question, we are looking at filling all the available opportunities in different segments of premium whiskeys in the times ahead. And so obviously, that answers the question, yes.

[Operator Instructions] The next question is from the line of Himanshu Shah from Dolat Capital.

Just a couple of questions. Sir, can you provide some color on what would be our current margin range on popular segment versus the P&A segment, some ballpark color within the IMFL space?

Himanshu, actually, our margin profile, basically on the P&A, which includes luxury also, is a very different term listing because it has a very wide range. So I can say the blended margin in IMFL business is between 15.5% to 16%.

Okay, sir. So the wide range would be 800 to 1,000 basis point difference? Or it would be...

It is 50 to 100x.

Okay. Sorry?

Luxury segment is much higher. Yes, so -- because a lot of things are common in nature. So the point is allocation of these expenditures can't be done on popular category and this thing. The manpower and so many administrative costs are common in nature, so we can't allocate that. But as I said that we have a fairly good margin in our IMFL business, which are [ negative ].

And secondly, sir, can you update? A few of the states have come up with the policy. So what kind of price increases those states have given, if any? And what kind of tax increases we have seen in some of the states? A few of the major states that have come out with the policy, if you can help us.

Yes. So the states which have given the price increases are, weighted average basis, in the range of 180 basis points to 185 basis points. The states include Telangana, Haryana, Assam, Maharashtra, Rajasthan, Delhi, Karnataka, Uttar Pradesh, all these big states.

This 185 basis point price increase, this is for the next financial year, that is FY '25?

No, this is for this financial year. The impact on a weighted average basis on my IMFL business is 185 to 190.

Okay. And sir, policies for next financial year, I believe UP, Rajasthan, those are the states that have come up with their policies. So what kind of price increases we have got on those states, if any?

So the excise policies are in the process of being decided and published. Right now, Rajasthan has given a very nominal increase. But as we mentioned earlier, the association is in discussion with the state governments considering the inflation that exists. And the government are taking a very pragmatic and receptive view of the same. They have done it in the last 1 year, and we hope that the new year, new fiscal year, will also be fruitful as far as our efforts on price increase is concerned.

That was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

So thanks for joining us. 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 will help us further in that. We look forward to interacting with you on our next earnings call. In the meanwhile, if you have any query or follow-up questions, please feel free to write to us. Thanks a lot.

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