Why Radico Khaitan Expects Margins To Grow

Magic Moments vodka maker Radico Khaitan Ltd. expects that operating margins will continue to improve in the next two to three years as product prices increase and input costs fall.

“We see this to continue in financial year 2018-19 as well on softer raw material prices,” Chief Financial Officer Dilip Banthiya told BloombergQuint. “Higher prices and product mix will also help in certain areas.”

Gross margin of the country's fourth-largest liquor maker by volume expanded by 400 basis points to 48 percent in the last financial year. Operating margins, which grew 200 basis points during the period, too will continue to improve in the next three years, he said.

Over the last year, the industry had faced several challenges, including a ban on the sale of liquor on highways and the implementation of Goods and Services Tax. These visibly faded in the fourth quarter, Banthiya said. India's per capita consumption of alcohol at 4.6 litres a year is lower than the global average of 6.3 litres and nearly half of countries like the U.S. and Brazil, according to the World Bank data. Rising gross domestic product and per capita income will increase discretionary spending on liquor, he said.

The company's March-quarter net profit more than doubled to Rs 34 crore as excise duty was discontinued on some of its products after the implementation of GST.

The top line will continue to grow in double digits in the current financial year, Banthiya said, which will help it become debt free by 2021. Radico Khaitan has already paid off Rs 215 crore in the last financial year. Total debt now stands at Rs 570 crore.

The stock has rallied 33.4 percent so far this year compared with a 2.9 percent rise in the S&P BSE Sensex.

The UP Boost

Banthiya expects large liquor manufacturers to benefit from a shift in excise policy in Uttar Pradesh from April 1. The market in the state will grow by at least 15-20 percent in the coming years and Radico Khaitan is best placed to gain from that, he said.