Radico Khaitan Limited (RADICO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Radico Khaitan Q3 FY '25 Earnings Conference Call hosted by Dolat Capital Markets Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Himanshu Shah from Dolat Capital Markets Private Limited. Thank you, and over to you, sir.

Thank you, Lizan. Good afternoon, everyone. At this moment, we would like to thank Radico Khaitan management for providing Dolat Capital with the opportunity to host the Q3 FY '25 earnings call. We have with us the senior leadership from Radico Khaitan, represented by Mr. Abhishek Khaitan, MD and CEO; Mr. Amar Sinha, Chief Operating Officer; Mr. Dilip Banthiya, Chief Financial Officer; and Mr. Sanjeev Banga, President, International Business. I will now hand over the call to Mr. Abhishek Khaitan, MD and CEO, for his remarks. Over to you, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us on our Q3 FY '25 results conference call. Building on the strong momentum from the first half, Radico Khaitan achieved industry-leading IMFL volume growth of 15.3% year-on-year in Q3 FY '25. We anticipate this strong growth momentum to continue in the near term. The Prestige & Above category volume saw a 17.7% increase. Our Luxury portfolio, including Rampur Indian Single Malt whisky, Sangam World Malt and Jaisalmer Indian Craft Gin continues to deliver strong growth as we focus on increasing distribution, both off trade and on trade. After the launch of Rampur Indian Single Malt Asava, Sangam World Malt and Jaisalmer Gold Gin earlier this year, will continue to expand the rollout in most states. Asava is now available in 10 states, Sangam in 8 states, and Jaisalmer Gold in 6 states. We have seen Luxury & Semi-Luxury brands cross net sales value of INR 100 crores in Q3 FY '25 and INR 250 crores in the 9 months FY '25. Given the exceptional demand in the domestic as well as international market, we expect this to cross INR 500 crores net sales mark in FY '26. Royal Ranthambore whisky recorded a strong 55% growth during Q3. We recently launched our celebrity campaign with Bollywood star, Saif Ali Khan, which resonated well with the brand [indiscernible] and connected with the consumers. Royal Ranthambore has seen unprecedented success in civil markets and the volume run rate is increasing month-on-month across geography. We are very happy to report that in Q4 FY '25, it will be introduced to the CSD channel, which is a very large market. We believe it will drive further growth. All other core brands continue to report strong momentum, such as Magic Moments vodka, After Dark Blue whisky and 1965 Spirit of Victory Premium rum. Magic Moments vodka recorded 1.8 million cases sales during the quarter. We launched a limited edition celebration pack for Magic Moments vodka blending premium quality with [ texted ] vibrance. During the 9 months of FY '25, vodka industry has grown more than 15%, where we have a strong 60% market share. With that continued innovation, we remain confident of driving the industry growth. During quarter 3, After Dark whisky became the eighth brand to join the Millionaires' Club. Launched in 2011, this brand story took an exciting turn in 2022 with the launch of After Dark Blue whisky, designed to cultivate the younger generation. In the first 9 months of FY '25, After Dark achieved 1.34 million cases sales volume, representing over 100% growth compared to 9 months FY '24. It is positioned very strongly in the largest segment of the premium whisky industry. Going forward, I remain optimistic about the growth prospects in the Indian alcoholic beverage sector. We are progressing well on our strategic road map and are confident in delivering results in line with our goals. Our new product announcement pipeline remains robust and we are committed to delivering superior performance across our portfolio. Our strategic priorities remain focused on brand building, sustained profitable growth and long-term value creation for our stakeholders. I would now like to hand over the call to our CFO for a detailed operational and financial review. Thank you, and over to Dilip.

Thank you, Abhishek. Thank you, everyone, for joining us on this call today. During quarter 3 of FY '25, we reported a total IMFL volume of 8.4 million cases, representing a growth of 15.3% on a year-on-year basis. The Prestige & Above category volume grew by 18%. In value terms, the Prestige & Above category reached a 24.7% growth. IMFL realization increased by 5.5% on a year-on-year basis. Prestige & Above category accounts for 51% of the IMFL volume compared to 50% in quarter 3 of last year. Traveler category volume, which were impacted due to certain state specific industry-related issues and ongoing strategic rationalization of portfolio, have now returned to the sharp growth trajectory. This was due to the lower base coupled with the normalization of state-specific industry issues. Change in the route-to-market in Andhra Pradesh contributed 800 basis points to our overall volume growth. As regards the P&A segment, excluding Andhra Pradesh, the growth has been higher. The recent RTM change in Andhra Pradesh has progressed well, promising stability, predictability and regulatory environment. As a result, we have seen strong growth traction for our brand portfolio and gained market share from 10% in the first half to over 15% in quarter 3. We quickly adapted to the changing environment and created capacities to capitalize on industry opportunity. Gross margin during the quarter was 43% as compared to 41.8% in quarter 3 of FY '24, and 43.6% in sequential quarter 2. Gross margin impacted on a year-on-year basis due to the ongoing premiumization in the IMFL business, coupled with a relatively stable raw material scenario. Gross margin declined by 60 basis points on quarter-on-quarter due to foodgrain inflation. While we are optimistic about the inflationary scenario for ENA and grain to improve going forward, we continue to cautiously monitor the trends. Employee benefit expenditure were higher sequentially due to the annual appraisal and some incentive payment during the quarter. Interest costs increased sequentially due to higher working capital utilization during the quarter, primarily led by cyclical building of the grain inventory and higher receivable in certain states. This is temporary phenomena, and inventory will be liquidated by the year-end. Going forwards, our focus will be driving profitable growth along with cash flow generation and more efficient working capital management, resulting into debt reduction. With this, we now open the line for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama.

My first question is the Andhra market. So you have done well and you have gained market share. Even the nationals there has gained market share. So if you could tell us are the local players now all largely out of the market? And second is in the previous cycle, when similar regime, similar government was there, then what was your market share and as a percentage of pan-India, when do you see full normalization and what will be that number in terms of Andhra contribution to your sales?

So as far as the Andhra market is concerned, it's a 30 lakh cases market right now. It's a growing market. As the regulatory environment stabilizes and the policies become more stable, the market is continuing to show buoyancy. We have a 15% to 17% market share as Radico in that state. We are very buoyant about the future. Most of our brands that we have introduced are showing traction. The route-to-market changed in October -- on 16th of October 2024. Since then, there is a balance between secondary and tertiary sales. So as far as Radico is concerned, the movement for all our brands introduced in Andhra is sound and showing good signs. As far as the local players are concerned, they still exist, and they are largely operating in the lower-price segments, which I think will continue for some time. Still, the national brands gain attraction. This has also started to happen. Most national companies are now getting good volumes, and it will benefit of the nice players like us.

So my second and last question is on the demand side. You also sounded positive and pan-India and national side is also positive. So my question is in terms of the [indiscernible] demand, how much is the benefit coming from there? And ex of Andhra, what will be your expectation of growth because Andhra clearly is helping? And would you see Q4 Andhra contribution being a bit lower? Because first quarter, generally, the inventory pileup is there, which helps in a larger number. So would you say that Q4, the contribution to sales from Andhra, that could be a bit lower and then it starts going up again?

I think as I told you, there is a balance between certainty and [ tertiary ] sales for all our brands. So as far as we are concerned, we see that the momentum will continue and we will continue to perform extremely well in quarter 4 and year after.

And in terms of the pan-India demand, what is driving the optimism? Because almost every other form of consumption, they're clearly saying there's a slowdown in urban. I do understand some of the base is a bit favorable for the industry, may not be for you but [ Maharash's ] demand clearly is there for the next 2 quarters also. So would you say [ Maharsh's ] demand is what is helping in terms of optimism versus say, other forms of the FMCG consumption or, say, any other discretionary consumption also QSR? Everything is weak. In terms of apparel also, it is weak. So what is different for the liquor industry versus other forms of consumption in the urban currently?

So are there any [ ailments ] to you. I think what's happening...

Sorry to interrupt, sir. Your audio is really not...

[indiscernible]

Sorry to interrupt. Hello, sir. Are you able to hear me?

Yes.

Sir, your audio is not coming across clear.

So let me say first that as you see in Q3, the growth has been across significant categories. The regular segment has also recovered and the Premium & Other segments have also shown great traction, strong double-digit growth. Radico, as far as it goes, we have seen traction across our brands. And that's why you'll see this number of [ D&A ] growing by 17% in volume. And as far as overall volume is concerned, it stretches across premium and regular brands, and that's how you get 15%. [indiscernible] is visible particularly in the liquor industry and it is not purely because of weddings and festivities. The industry itself is buoyant. And that's why we see that -- we feel that the next quarter and thereafter, demand will be encouraging. One more point that we want to stress here is that 3 years back, the market segments for brands above the [ inter ] segment was only 25% of the IMFL industry. Today, it has at least a whopping 42%, which means is the brands in the premium segment are getting traction and Radico is driving this growth as well as part of an industry player. That's why you see [ traction ] from all the brands that we have worked because they have market leadership positions in gin, rum, brandy and vodka. And now we are growing steadily in the whisky segments as well. All brands that we have launched in the past 2 years have done exceedingly well and are sitting pretty well in all the markets across geographies.

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

Sir, I just had two questions. One was on -- you mentioned that you expect that your Luxury & Semi-Luxury portfolio to cross INR 500 crores. If you could just give us a sense of what will drive growth next year? Do you think it's more getting into markets where you weren't present? Or it's just gain or just throughput growth that you're seeing? And within this, if you could just give even a qualitative flavor of what's growing faster and et cetera? I know the portfolio, but if you could just give a sense of what's going faster, what's driving this growth? So just a little bit more comments on this portfolio, which will be INR 500 crore business for you next year.

The first, let me say, as Mr. Abhishek had also mentioned in his opening remarks, that our Luxury & Semi-Luxury sales was approximately INR 100 crores and [indiscernible] in value terms of 45%. As far as volume is concerned, we have shown equally strong volume by growing at 54%. As far as ratio sales of Luxury & Semi-Luxury brands are concerned, we have grown to a level of [ 12% ] in Q3 as against 9% in the previous year. Now having said that, I must tell you that all the brands that we have launched today have shown great attraction and acceptance at the consumer level. And that what has always pioneered the price positioning of all brands in different categories and segments. Our prices are well accepted and people see by virtue of a higher price position that we not only offer its stature, but we are also giving an equal quality commensurate to the price that we offer. Now today, these brands, despite the attraction and sales growth, we feel are still at a latent stage and there is a good way to go in terms of creating market shares. And that's the reason we feel that the coming years will show a much better result. Not only that, we will also expand across geography. See, Radico has a national business. We are one of the strongest distribution companies in the country India. We are the largest player in the [indiscernible] segment from India. And we are in the process of expanding our distribution of Luxury & Semi-Luxury products, and that will also give us expansion in volumes and profitability growth.

Got it. Very, very clear, sir. So just on this, what -- how large would -- I mean, would this be -- would a significant portion of this, say INR 500 crores next year or whatever the -- of the INR 250 crores for the 9 months, be export? Or maybe it could be -- what would that ratio look like?

Today, exports is about -- in the volume term, export is only about --

Yes, the exports are in the volume terms approximately 5.5%. In the domestic market, we have [indiscernible] growth rate is much better than export.

And it will continue to be so at least for the next 3 years because the market is huge. It is growing very fast. So we need to exploit that solution. And also, if you see the single malt industry in the domestic market has overtaken the international malts also. So I think the investments to what we done in our malt capacity about 4, 5 years back, for the next 3 years, we expect [indiscernible] because right now, that [indiscernible] is more than what we can [indiscernible] next year, weekly, and our malt will increase from double in the next year. So that will [indiscernible] has entered into the [ harm ] process, which is one of the largest markets. So I think, overall, the entire space is quite buoyant.

Got it. Got it, sir. Very clear. The second part was on the cost side. So you've seen on one side, you have the possibility of some increase likely in it and all at some point in terms of government pricing. But on the other side, you also have the grain prices, which seem to now be coming into a more favorable trajectory over the next 1 or 2 quarters and going forward. So if you could just help us understand how do we see this kind of confluence of factors playing out in ENA pricing over the next, say, 3, 6, 9 months, if one had to hazard a guess? Yes, that's my question.

Actually, we see the -- I feel like the kind of [indiscernible] take is the grain prices from 17,000 touched about 28,000. The primary reason was the ethanol supply and the stoppage of the NCII which happened about 1.5 years back. And only now the government for the first time which we were expecting long back because it is a huge pile of about 60 lakh tonnes of green [indiscernible] lying in the empty [indiscernible], they have just announced their ethanol can be produced from [ NCI ]. So that is at [ 20 to 50 ]. So I think it all depends on the government policy, but it will continue. Surely there will be easing of the wrong reason.

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

Congratulations for the good set of numbers. So my question is first on demand where one of the company said that there is a slowdown in the premium and luxury end of the segment, whereas you have been saying that your growth has been very much far superior. What gave you confidence that this kind of mid-teens kind of a volume growth can be continued in P&A segment? And also the regular segment, after, let's say, 12 to 13 quarters afterwards, we are seeing positive volume growth in regular segment. And what can we expect in terms of volume growth in regular segment going ahead?

So let me answer the regular segment first. See, it's true that it is quite some time -- some later that the market has started responding as far as the regular segment is concerned. There are a couple of reasons for it. But we have, in our earlier conferences, also stated that we have normally rationalized our regular volume because of escalation loss, raw material pressures and contribution loss. So wherever we thought it was economical, where it's -- and profitable, we used to sell regular and there it was not used to rationalize the volumes. Having said that, as far as the current growth rate in the regular segment that we have seen of 13.4% and a value growth of 13%, that's primarily because of 2 reasons. One, Andhra has offered an opportunity to set brands below the P&A segment at a lucrative price and the contributions are healthy. That's what we are doing. And going forward, we also feel this trend footprint because [ Kerala ], which is a huge market of more than 20 lakh cases a month, has given a 6% to 7% price increase. And therefore, we see that this will also benefit the industry, including Radico. So we are optimistic about the regular segment recovery in the months ahead.

Yes. So just on regular segment...

[indiscernible] will also continue in the mid-single-digit rate.

Okay. But if I want to strip out Andhra Pradesh from the regular segment, what would have been growth excluding Andhra Pradesh then in this quarter?

In my opening remark at Andhra, our overall growth is 7%, 7.5% as of the day and it would be even almost higher or better than the [indiscernible] average. So the point is that excluding Andhra, as [indiscernible] said, that there are certain improvement in the state regulatory environment [ with defense ] and given the guidance it is large scale [indiscernible] which has backed the volume. The export also, there is some improvement in the volumes of the other segment. And Andhra is one of that also. So I -- in fact, as I already said, that mid-single-digit rationalization from impact for next year, we can believe us achieving that.

Got it. And sir, your comments on P&A segment volume growth?

As far as P&A segment is concerned, I mentioned a little going back. I see brands above the regular segment today are 129 million cases approximately out of the [ 3 and 4 ] million cases which has [ reached ] the market in Q3, which is roughly [ 32% ]. Now this is a different market and growing at double digit across categories and segments. So as far as we don't want to comment on what others feel about the slowdown or the fast pace, but as far as Radico is concerned, all our brands are buoyant. They are responding very well. We have great plans, marketing plans ahead and other growth momentum of getting a P&A growth of 15% plus in the times ahead will continue.

Got it. Got it. And sir, second question is related to our debt. There, after our CapEx, we have not seen any decline -- or let's say, reduction in debt. Part of this is also attributed to Telangana government not paying the dues. Where are we standing in terms of due from Telangana government and when we can expect -- or, let's say, by what year we can become a debt-free company?

Sir, we have said then -- have you said that couple of months issue which will get sorted out soon, the direction the industry is on. Secondly, we build grain incent rate in our late season. That will also be partly liquidated by the year-end. And from Q4 onwards, you will see a declining trend in our debt scenario and as we guided, by '26, '27, middle or so, our debt will be barely visible. Those kind of [ answers ] will be coming from internal approval. We are really confident of achieving the debt-free kind of situation by '26, '27.

I want to add one very important point, that unlike other players, Radico's all overdues in Telangana are not as high. And subsequently now, Radico is being paid with other companies in 45 days for the policy. So that's not so much of a [ debtor in ]. But yes, that is news. Whatever our overdue will get cleared in Q4.

Got it. Got it. And sir, lastly, on margin front. You clearly highlighted that Luxury segment has been growing very fast. So sir, can you comment a bit on in terms of profitability of Luxury segment versus other P&A segment versus regular segment for us?

So we talk about our margin. And actually, in the last several quarters, we've been writing about, that we've improved on our margin by less 150 basis points year-on-year. This year over the last year, we have improved the finance [ 40 ] basis points to 9 months and we'll continue to do that. With the kind of government [indiscernible] and portfolio and we are growing much faster, we expect our margins to grow 100, 125 basis points every year for next 3 years, thereby going on the 15% kind of margin in next year. So we expect that the business model will actually make [indiscernible].

The next question is from the line of [ Rohit Kumar ] from [ Nuvayshey ].

Am I audible?

Yes, sir.

So my question is from micro sense or the...

Speak loudly, please.

Hello?

Sir, can you speak a bit louder?

Yes. Is my voice audible?

Sir, can you speak a bit louder?

Is my voice audible now?

Yes, sir. Please proceed.

Sir, how much margin do you make in -- per ml packs? So for example, from 90 ml pack to 750 ml pack, how much margin do you make? In EBITDA-wise, in terms of EBITDA-wise?

Again, can you repeat your question?

How much margin do you make from 90 ml pack to 750 ml pack? Is the margin similar in terms of EBITDA-wise?

The question, it is the margin pack terms of the price point. And basically, whether it is 90 ml or 180 ml or 250 ml, depending on the kind of the effect and the margin EBITDA across the [indiscernible].

So each segment has different margin side. So can you give us the margins on the blended wise? How much blended margin do you make in the 90 ml pack or 180 ml pack or 750 ml pack?

As I said, [ Rohit ], it is actually not 90, 180 ml the sale. These are SKUs. When we launch any products or we market any product, the price segment, where we are offering a segment 180, 750, 275, this is a composite basket of margin we're seeing on the constitution side. So we can't distinguish which is 90 ml margin versus 750 ml margin.

The next question is from the line of Pankaj Kumar from Kotak Securities.

Most of the questions are answered. I just wanted to have one clarification that ex AP and the P&A category, what was the growth in this quarter?

In P&A category?

Ex Andhra Pradesh.

See our P&A category has grown by 17.7% in the quarter. And the AP volumes contribute about 700 basis points. And as far as P&A category goes, excluding Andhra also has been [ presently ] higher than 17.7. Note, it's on the broad base, across geographies.

And sir, you have guided for INR 500 crores from Semi-Luxury & Luxury segment. So what kind of margins that this category can generate in the [ Luxury ] segment?

We do not quantify what margin is in segments, but recently, in the Luxury and Semi-Luxury segment, in fact, it's all the [indiscernible] and above, the margin is much, much higher than the P&A category.

So [indiscernible] like you're saying 100 to 125 bps, the margin improvement that you are looking at every year. So what portion would be driven by your mix changes versus your raw material advantage?

See, normally [indiscernible] one time the grain prices have gone up. In October, December quarter, I think it was the highest. So roughly, if you wanted to be [indiscernible] volume is contributed because of the product mix and optimization.

And sir, CapEx, what kind of CapEx that we are looking at this year and the next year?

We have done with all our business CapExes and our CapEx run rate INR 100 crores to INR 125 crores every year for next 2 to 3 years. This is after our both large projects are over. Some payment of those large projects are made in this year, but the new CapEx is run every business.

[Operator Instructions] The next question is from the line of Rohan Patel from Turtle Capital.

Am I audible?

Yes. Yes.

I have questions regarding our country liquor business and non-IMFL business. Seeing your financials for FY '24, we did somewhere around INR 1,300 crores in non-IMFL segment. And roughly 50% of that comes from country liquor. But when we look at our margins in non-IMFL segment, we are near to midterm single digit, mid-single digit. And when we see some of our peers in country liquor in UP market, they're currently doing a healthy double-digit margin of 14% to 17%. So can you explain the difference in this? Like why are margins low? And in '23, we were negative EBITDA.

So the question is that our country liquor business is only in 1 state. It is in [indiscernible] might be going into 3 more states. But we are talking about only UP where the margin in the country liquor are in the mid-single digits. And as you say, rest of the non-IMFL business is the alcohol sales, where also the margin has been squeezed because of the high inflation in grain prices. There also, the margin has squeezed through a mid-single-digit kind of numbers. So seeing what we've seen that SCI has opened up and all that, it's all a question of how the market behaves and it will [indiscernible] then we can see some improvement in that segment also.

Seeing your close competitor who operates country liquor in 1 state and they're doing, say, UP who is having a market share of say, 25% to 27% and has 200 million-liter in country liquor in UP. So they have fairly healthy EBITDA compared to us, mostly twice than us. So is it due to geographies that you cater to in -- within a state district-wise?

I think they're talking about Uttar Pradesh and somebody doing it [indiscernible] they have a mix of the grain-based country liquor as well as this this country liquor. I'm going to give you the mid-single-digit margin mix [indiscernible] so the mix of the book are country liquor being sold.

So if you can look...

Let me explain this to you. There are 2 large players in UP, including us. The margins for country liquor remain more or less the same. There is no difference because the SKUs that both the company sell are the same. The strategy that the other [indiscernible] is also the same. So the margins cannot be -- the EBITDA targets cannot be different unless you do some other businesses in that.

Okay. Okay. And what we have seen is that there are -- this is towards the IMFL business and in P&A segment. What we have observed is that your competition is coming in, a lot of brands are coming in. But we are seeing that Millionaires' portfolio companies that are doing over 1 million cases have been coming from well-established legacy brands like Radico, USL or [ LED ]. So what advantage does a company like Radico has over a new entrant or as a new brand that are coming up, celebrated brands, which are coming available?

Actually, they invest in [indiscernible] there is a company that account of the branding position not being shown and this and that, so definitely [indiscernible] brand carries that better, let's say, [indiscernible]. I'm not ready to speak about...

Let me explain this, right? National peers like Radico have had the benefit of distribution and marketing strength. And with this scale of operation, there is a definite advantage for new brands produced by national companies as against smaller players. It's very difficult for new entrants to sustain today because the cost of entry and the cost of sustainment is very, very high.

Thank you. [Operator Instructions] As there are no further questions, I now hand the conference over to the management for the closing comments.

Yes. So moving forward, we will continue to deliver a strong sustainable volume growth driven by our diverse brand portfolio. Definitely, we'll further develop our brand -- country brand portfolio. You'll see a major contributor to our profitability. Furthermore, we are focused on ensuring that our investment always efficiently as possible. This will enable us to generate cash to pay debt and return cash to the shareholders. We look forward to interacting with you in all our next earnings call. In the meanwhile, if you have any query, please feel free to write to us. Thanks a lot.

Thank you, members of the management team. Ladies and gentlemen, on behalf of Dolat Capital Markets Private Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.