Saturday, July 05, 2014

Radico Khaitan Ltd: A Low P/E Scrip
CMP: Rs.12.15
The domestic liquor industry is dominated by two large groups, the Vijay Mallya -controlled UB group and the Shaw Wallace group, which is controlled by the late Manu Chhabria’s family. The two enjoy a combined market share of about 55% in IMFL and about 70% in beer.  

The Indian Constitution says that, “The state shall endeavor to bring about prohibition of the consumption of intoxicating drinks”. But the liquor industry is one of the largest contributors to state revenues; the loss of which can severely affect their cash flows. Also, it is difficult to enforce prohibition given the nature of the demand for liquor.

Radico Khaitan Ltd (the 3rd or 4th largest player in the alcoholic beverage market) has a P/E of ONLY 20.92, against Industry P/E of 80.18. Even United Breweries Ltd is trading at a P/E of 83.59, while United Spirits Ltd is trading at a P/E of 106.95 and Empee Distilleries Ltd is having a P/E of whooping 165.94. Also, one of its nearest competitors, Jagatjit Industries Ltd is running into losses worth more than Rs.26 crores.

Therefore, a decent P/E re-rating can take the stock above Rs.200 or at least near Rs.165-170. The ace investors, Rakesh Jhunjhunwala bought the share in January, 2014 at Rs.167.75 per share. 

Conclusion: Government regulations at every level have affected the Indian liquor industry, introducing structural rigidities. Apart from the high level of taxes and levies (that account for up to 65% of the consumer price), regulations pertaining to licensing, creation or expansion of brewing/distilling and bottling capacities, manufacturing processes (grain-based or molasses-based), distribution and advertising impinge on the industry. Further, liquor being a state subject, every state has different regulations (including those on distribution) and tax rates for the industry apart from restrictions as well as levies on the inter-state movement of liquor.

These regulations have impacted the industry on all fronts. The high level of taxes and levies and the fact that companies have little control over distribution systems mean limited pricing flexibility. Consequently, players have low margin levels. Then, as a result of the restrictions on capacity expansions and inter-state movement of liquor, large players have either acquired or entered into contract manufacturing and bottling agreements with local players in various states. 

Therefore, the taxes and duties in the Alcoholic Beverage Sector has to be RATIONALIZED to provide it, a level playing field to compete in the international market. If the government is allowing the sale of liquor in the Indian Union, then it cannot go on showing step-motherly attitude towards the sector, for years. It is high time that the government of India takes note of the above facts and act accordingly, while preparing the Budget: 2014-15.

A strong buy is recommended in the counter with a short term Target of Rs.128-129.

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