RADICO KHAITAN: SHAKEN OR STIRRED?

RADICO KHAITAN

India's fourth largest & third most profitable spirits company, Radico Khaitan was among the companies added in the ASM list since June 1, 2018. While the BSE Statement on ASM does state, ”the shortlisting of securities under ASM Framework is purely on account of market surveillance and it should not be construed as an adverse action against the concerned company/entity”, the street was fairly nervous about the stock’s inclusion in this list. As a result of which, the share price of Radico Khaitan fell -15% since June 1, 2018 and has corrected about -21% from record high of `495 on May 30, 2018. Remember, it has been a big wealth creator before being enlisted the SEBI Watchlist, the market cap of Radico Khaitan almost quadrupled b/w June 2017 & June 2018

RADICO KHAITAN

In ASM List since Jun 1, 2018

Down 15% since Jun 1, 2018

Down 21% since Record High of 495 May 30th  2018

RADICO KHAITAN

B/w Jun 1, 2017 and Jun 1 2018: Stock Up 285%

Radico Khaitan has transformed from bulk & country liquor manufacturer to IMFL seller. The market knows this company via brands such as 8 PM Whiskey, Magic Moments Vodka, Morpheus Brandy and it’s latest entry in the super premium Single Malt offering Rampur. Analysts & market watchers stand positively surprised when the company claims it commands 50% share of India's entire Vodka market.

RADICO KHAITAN

IMFL Brands: 8 PM Whiskey, Magic Moments Vodka, Morpheus Brandy, Rampur Single Malt

The Company’s financials have shown a decent improvement in the last 5 Yrs. The liquor maker’s topline has compounded at a rate of ~5% between FY15 to FY18. Radico’s Ebitda margin improvement from 11.5% to 15% has ensured 16% growth in profitability over last half-decade. The company’s deleveraging efforts have further boosted Radico’s EPS. For the Future, Radico’s Management aims to make the company Debt Free by FY21 and targets 150 bps margin rise with 10% volume growth in FY19.

RADICO KHAITAN

REVENUE

FY15       1488 Cr

FY16       1543 Cr

FY17       1680 Cr

FY18       1823 Cr

EBITDA MARGINS

FY15       11.4%

FY16       12.6%

FY17       12.6%

FY18       14.8%

NET PROFIT
FY15       68 Cr

FY16       77 Cr

FY17       80 Cr

  FY18       123 Cr

RADICO KHAITAN

DELEVERAGING

                 Finance Expense      Total Debt

FY15                90 Cr                    738 Cr

FY16                85 Cr                    708 Cr

FY17                80 Cr                   654 Cr

 FY18                68 Cr                    522 Cr

Triggers for the company in future include better margins due to improving product mix, higher volumes in Uttar Pradesh. UP is one of the company’s strongest markets and with the Govt ending distribution monopoly last year, the case for higher volumes in UP strengthens.

MGMNT GUIDANCE

FY19: 10% volume growth in premium and 4% in regular segment

FY19: Margin Expansion of 150 Bps

Co to become debt free by FY20-21

However, a high working capital/receivables cycle would feature as the key concern for the future. It takes an average of 4 months for the company to receive cash for sales it has made. It would be important to see this process hasten. Another hanging sword on the industry is applicability of GST on ENA (key input for liquor companies). If indeed, it happens, as suggested by the Attorney Solicitor General, analysts peg a risk of 10-15% to industry EBITDA.

CONCERNS:

Year        Receivable days

FY15       117

FY16       135

FY17       135

FY18       126

Also, FY19 is a year full of state elections leading up to the big General Elections. Liquor is a politically sensitive subject and any adverse announcement from political leadership on the same may hinder the industry’s growth expectations.

CONCERNS:

Lower than expected pick-up in volumes

If GST is applied on ENA

Regulatory Risk

Having said that, the foreign institutional investors have been upping stake in Co and analysts peg (pun intended) Radico’s FY20 EPS to be higher by 45% than what it was in FY18. Despite a 4X move, Radico still trades at a discount to industry leader United Spirits. So is this decline of 20% from record high a time to enter or is the valuation glass overflowing already, only time will tell.

RADICO KHAITAN:

EPS TRAJECTORY

FY17 -       6

FY18 -       9.3

FY19e -     11

FY20e -     13.5

RADICO KHAITAN:

FY20e VALUATIONS

USL                              48X

RADICO KHAITAN          30X

Hindustan Unilever Q4FY18 Results: Dho Daala!

Hindustan Unilever Q4FY18 Results: Dho Daala!

If you’re an ad-buff like me, chances are, you’ll remember the old Surf Excel Tagline – Dho Daala! I’ve decided to pull this out from the archives to describe its parent Hindustan Unilever’s Q4FY18 Results. The company has managed to wash away all analyst expectations aside and report a stellar beat on all parameters this quarter.

For starters, it’s the Domestic Volume Growth of 11% that has surprised the street the most. Yes, Hindustan Unilever posted comparable domestic revenue growth of 16% in Q4, led by 11% underlying volume growth.  Across all the analyst-reports I referred to for consensus expectations, 6-8% was the general estimate. 11% Volume Growth in Q4 marks the company’s second straight quarter of double digit volume growth and this time, it’s without a favourable base. Remember, Q3FY18 saw 11% volume growth after 5 Yrs and that too because Q3FY17 witnessed 4% decline in Domestic Volumes owing to disruptions caused by demonetization.

HUL Q4FY18 YOY

Total Income +10.8% at 9097 Cr vs 8213 Cr

Comparable Domestic Sales +16% YoY

HUL Volume Growth 

Q3FY17    -4%

Q4FY17   +4%

Q1FY18     0%

Q2FY18   +4%  

Q3FY18   +11%

Q4FY18   +11%

It’s heartening to see that the company has posted double digit domestic volume growth without hampering margins.  In fact, a very strong operational performance will go down as the key highlight of HUL’s Q4 results. The company’s EBITDA margins expanded by 240 basis points on a reported basis and 160 basis points on a comparable basis, as per their Press Release. Cost Savings have come by on account of the company’s strong focus on cutting down non value adding expenses. Other Expenses have remained under control, while we also saw 150 Bps Improvement in Gross Margins.

However, the company’s focus on innovation and activation continues. For the second straight quarter we saw Ad Expenditure increase in excess of 25%. The street would view this positively.

HUL Q4FY18 YOY

EBITDA +24% at 2048 Cr vs 1651 Cr

EBITDA Margins at 22.5% vs 20.1%

Gross Margins at 52.6% vs 51%

Ad Expenses +25% at 1070 Cr vs 853 Cr

Net Profit +14.2% at 1351 Cr vs 1183 Cr

Exceptional Loss of `64 Cr

Hindustan Unilever’s reported Net Profit in Q4 clocked in gains of 14.2%, but there was a 64 Cr exceptional loss. If one was to adjust for the one-time expense, the FMCG Major’s comparable profits grew 26% YoY, that’s comfortably above even the highest estimates made by the analyst community.

So, what led to the growth? HUL’s management says, there was broad based volume growth across all segments of the company. All Verticals, Home Care, Personal Care, Foods & Refreshments witnessed double digit growth and margin expansion. The Natural’s portfolio and Innovative launches made by HUL grew 2.5X the average growth at HUL.

HUL Q4FY18 Segments:

Home Care:  Double-digit volume growth

Personal Care: Double-digit growth across Personal Products and Personal Wash

Foods: Good growth in Kissan and Knorr

Refreshment: Robust growth across Tea, Coffee & Ice-creams

I was listening in to the company’s earnings call, wherein the Top Mgmnt sounded rather confident about resumption of normalcy in all trade channels, an improving demand environment and the company’s focus to succeed consistently and profitably despite increasing competitive Pressure. Mgmnt commentary was particularly positive on the company’s brands Ayush and Indulekha in the Naturals Portfolio. While we kept hearing cautious calls from the top brass regarding an increasing input cost environment throughout the earnings call, the management sounded reasonably assured of their ability to tackle it, just as they have done so in the past.

HUL Q4FY18: Concall Takeaways

Trade Channels have Returned to Normalcy

Naturals Portfolio - Indulekha & Ayush doing well 

Premium Segment of Portfolio did better; popular range saw muted Growth

Indulekha is growing much faster than anticipated

Innovations and Naturals growing 2.5x avg

Expect Demand to Continue to Improve

Will continue to focus on operational efficiencies

Will manage inflationary headwinds as we have in the past

So, all said and done, the big question arises  - What Next? Remember, Hindustan Unilever is trading at Record High. The Stock has added 80% to its humongous market cap in the last 18 months and it’s trading at a record high P/E multiple of nearly 49X FY20e earnings. Ahead of results the consensus FY20e EPS on the street was 31 vs 24 in FY18. It will be very interesting to see if and to what extend to brokerages tweak these expectations upward given High Base, Increased Input Cost Environment and Record Valuations. Can there be a re-rating, will HUL cross ITC’s market cap tomorrow or will the fate of the HUL stock be similar to that of Titan, Dabur, Emami and Jubilant Foodworks which saw profit booking despite good showing in the current quarterly results, only time will tell. So let’s end it with a take on another Unilever tagline, Results Achhe Hain!

HUL Stock up 80% Since 2017; Trades at 49X FY20e

 Will Valuations be a speed-breaker? 

How Much More Can Analysts Tweak Expectations By?

EPS

FY18                 24

FY20e               31

Epilogue - 

Parsing All Through Brokerage Commentary This Morning - 

Headline Comments buy Brokerages

CLSA – Just Wow!
DB – How Good is Good?
Edelweiss - Bellwether rules unperturbed
Nirmal Bang - Rewards of Consistency
Morgan Stanley - Priced in                    
Nomura - Growth Recovery Already Built In

Upgrades 

Consensus FY20e EPS

Earlier      `31

Revised     `34 

Consensus Target Multiple 

 Earlier           49X 

Revised         50X

Target Price Revisions

             Old         New

DB         1700      1800

NB         1700       1750

CLSA     1575       1650

Phillip    1585       1670

CS           1530       1675

Nomura 1324      1430

MS         1120      1260

#FMCGDiaries - What moved ITC today?

ITC was the highest Nifty gainer in today’s session after a long period of under-performance. A large part of the street believes, things for ITC are coming together and some pieces of this massive jigsaw are falling in place. Let’s try and take a look at a few of those pieces

1) The Good News 

An important piece of news that showered gains on the entire FMCG sector was IMD’s announcement of normal monsoons in 2018. If both IMD & Skymet’s predictions do come true, it would make for a hat-trick of normal monsoons and hopefully spur rural demand. It’s because of this belief that most FMCG Stocks, like, HUL, Godrej Consumer, Pidilite, Britannia and Nestle hit record highs despite trading at record high valuations too.

2) The Valuation Argument

ITC’s underperformance v/s HUL can be summarized in the following charts. While the latter narrowed it’s gap with ITC’s market cap, the valuation gap between the two only widened. Usually, it has been seen that ITC trades at a 40% discount to HUL’s valuation during an unfavorable tax regime, which narrows to 25% during stable times. But as of yesterday’s close, ITC traded at a 50% discount to HUL’s valuations, a discount which is arguably the widest ever, at a time when the optimism over Co’s Non-Tobacco Business is the highest ever. Something, somewhere, had to give.

HUL vs ITC

Market Cap Gap Narrowing

At Start of 2017

                                            Market Cap

HUL                                         1.78 Lk Cr

ITC                                           2.92 Lk Cr

Yesterday

                                            Market Cap

HUL                                         3.13 Lk Cr

ITC                                           3.23 Lk Cr

HUL vs ITC

Valuation Gap Widening   FY19e PE

HUL                                         52X

ITC                                           26X

#As On April 17, 2018

3) Hotels Check In 

This is where it gets all the more interesting. A part of ITC that we often overlook, their hotel business. ITC runs one of the largest and fastest‐growing hospitality chains in the country. Hotel Stocks have been on a tear this week owing to favorable demand-supply situation, optimism towards the industry’s pricing power & occupancy and premium valuations of the latest listing, Lemon Tree Hotels. Stocks like Taj GVK, Royal Orchid & EIH Associated Hotels gaining anywhere between 26-30% in the last two sessions. Earlier, analysts on the street would ascribe a valuation of 15X EV/EBITDA (`5/share) to ITC’s hotel business. But with the current lot trading above 30, 40 & even 50X EV/EBITDA, the case for a re-rating of ITC’s hotel biz only strengthens. 

Hotel Stock Valuations

EIH Ltd                   63X

Lemon Tree Hotels 51X 

Indian Hotels          34X

Royal Orchid          32X

EIH Assoc              30X

FY18e EV/EBITDA

Valuing ITC's Hotel Biz 

At Various Multiples Hotel Biz Value Per share –

18X  Rs. 6/sh

20X  Rs. 7/sh

24X  Rs. 8/sh

28X  Rs. 9/sh

30X   Rs. 10/sh

FY18e EV/EBITDA

4) The Big Question – Value or Value Trap?

After today’s move, ITC now trades at 48% discount to HUL, the highest in the last 10 years. However, The company’s earnings growth over FY15-18 has been ~5%, the lowest in the last 20yrs. Irrespective of the optimism around ITC’s Non-Tobacco business, the truth is, Cigarettes still account for nearly all of ITC’s operating profits and free cash flow. Only an annual tax-hike of less than 10% in 2018 to lead to a substantial growth in cigarette volumes and earnings. Earnings growth is the one ball needs to be kept a watchful eye on and that depends solely, on how the Tax Regime on Tobacco pans out in the very near future.

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.

#FMCGDiaries - TITAN TURNS THOUSAND

TITAN TURNS THOUSAND

Titan hit the 4-Digit mark on auspicious Akshaya Tritiya. At 1000 Rupees, the market cap of Titan crosses 88000 Cr, placing the company at the 33rd spot in the list of Indian companies with the highest Market Capitalization

REMEMBER THE TITAN

A trip down memory lane and one can see the massive power of compounding this company has displayed. From a Watch Co to a Jewellery Co, the Stock price of Titan has surged from Rs. 56/sh 10 years ago to 1000 now. If you stretch the time beyond 10 yrs, 15 yrs ago the adjusted price of Titan was Rs. 2.5/sh. A gold mine, for those who discovered it then and held on.

BIG BULL’s BIG BET

A notable name which associates itself with Titan is Big Bull Rakesh Jhunjhunwala. RJ and Family as of March 2018 hold 7.5 Cr shares in Co, that’s now worth 7500 Cr (just over a billion dollars). Again reinforces the old adage, “if you find a good co, back your truck, tank up and hold on.”

TITAN V/S GOLD

Talking about old adages, Gold is pretty dear to us Indians and we’ve heard about the wealth creating properties of the Yellow Metal. A quick look at the data suggests the same, but it also suggests that in the last 15 yrs, Titan has returned more bling for the buck as compared to Gold. 10 Yrs Ago, Gold was available at 12500/10 gms and the same was available at 5600/10 gms 15 Yrs ago. Today the price of gold quotes around `32000/10 gms. So if you look at the Compounded Annual Returns over the last 10 or 15 Yrs, Titan has outshone Gold by a fair margin. This is not to suggest that this outperformance may continue. But, if the company continues to post strong earnings growth and gain market share, it may very well do.

TITAN Stock Returns

                             CAGR

10 yr                       33%

15 Yr                       49%

GOLD Returns

                             CAGR

10 yr                       6%

15 Yr                       19%

TOO MUCH PRICE FOR GOLD? OR DIAMOND FOR THE PRICE OF GOLD?

At 1000 Rupees a piece, one may argue that the valuations are stretched. Titan Trades at 55X FY19e & 40X FY20e. Morgan Stanley this morning has actually downgraded their outlook on the stock. They find themselves “reluctant to push multiples beyond current levels.” However, they add “the company remains one of our favorite plays on urban discretionary consumption growth in India, with huge untapped growth potential.” While, multiples cannot be pushed beyond a certain limit, one must keep a close eye on the earnings of Titan.

Much Love.

M

PS:Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.

FRIDAY THE THIRTEENTH

TRISKAIDEKAPHOBIA & PARASKEVIDEKATRIAPHOBIA

You read that right. I know you’re squinting at the multi-syllabic Greek words and wondering what they mean. Triskaidekaphobia means Fear of the number 13 while Paraskevidekatriaphobia takes it a step further and suggests Fear of Friday the 13^th

We have a great set up for trade today, 6 days of gains, FIIs buying in Index Futures and World Markets looking good, thanks to Donald Trump’s tweets. The superstitious argue it’s Friday, the Thirteenth. So let’s turn the calendar and see what previous 13 “Friday the Thirteenths” have meant for our market.

NIFTY ON FRIDAY THE 13TH

Date                       Move

13-Oct-2017        +0.7%    

13-Jan-2017        -0.1%

13-May-2016       -1.1%

13-Nov-2015        -0.8%   

13-March-2015    -1.5%

13-Feb -2015       +1.1%

13- June-14          -1.4%

13-Dec-2013        -1.1%

13-Sep-13             0.0%

13-Jul-12               -0.2%

13-Apr-12              -1.3%

13-Jan-12             +0.7%

13-May-11             +1.1%

In the last 13 Such Fridays:

The Nifty has ended lower on 8 occasions, higher on 4 occasions and unchanged on one

The Average Move over last 13 sessions has been -0.3%

-0.94% has been the average loss on a down day, while a good day added 0.9%

The last time 13^th April fell on a Friday was way back in 2012, that day the Nifty ended lower by 1.5%

Again, this data ain’t to suggest what may happen today, but it’s perfect fodder for geeks just like the words Triskaidekaphobia & Paraskevidekatriaphobia.

FMCG Q4FY18e: The Hope Of Sustained Recovery

FMCG Q4FY18: Sector Expectations 
The Hope Of Sustained Recovery 

It’s that time of the year again, analysts making calls to companies, distribution agents, sharpening pencils, updating excels and tweaking estimates to prepare for the quarterly earnings. For companies in the FMCG Sector, the task a little more difficult than the others because comparison of performance with prior quarters would be iffy due to the various distortions in the base variable.

FMCG sector earnings were most impacted by Demonetization & GST Related hiccups last year. Demonetization took place in Q3FY17 & the GST Impact was felt in the latter half of Q4FY17 & all of Q1FY18. 

If that isn’t enough, GST rates for a large swathe of daily consumption items were revised lower in Nov 2017, so Q4FY18 will have the first full qtr impact of lowered prices and expectedly higher offtake. 

Q3FY18 was the quarter where things started to look up. Almost every consumer company reported better than expected results; coming off a very favorable DeMo base. Margins improved due to benign raw material costs, rationalized spends and the GST related dip in H1FY18 saw some sequential respite. 

Most importantly, there was a heightened sense of optimism in the Management commentary post earnings. For instance, Hindustan Unilever, in their Q3 earnings statement said “Expect Gradual Recovery in Demand to Continue” vs “In a challenging business environment, we delivered strong overall performance” just a quarter ago. Hence, the key expectation from the FMCG sector this qtr is sustained recovery and positive management commentary. 

Volume Growth Trend & Expectations

As for the numbers, the sector, as a whole, is likely to see mid-single digit volume growth in Q4FY18. Additional GST rate cuts in Nov-17 led to price cuts across products may further increase offtake and aid volume growth. The business environment looks favorable now than ever before. Post DeMo and GST drubbing, the distribution channels seem to have recovered, especially Wholesale & Army Canteen Stores. 

The industry seems to have sized up the scale & limitations of its fiercest competitor in recent times, Patanjali. That’s visible in HUL, GCPL & Dabur’s improvement performance in the areas they were most affected, viz, Soaps, Honey & Toothpastes.

Q4FY18 Expected Growth

Keep an eye on the margins for the FMCG sector this quarter. There may be come divergence b/w food and Home and Personal Care companies. While prices of Crude, TiO2, VAM and Copra have seen a sharp increase while that of Flour, Sugar, Maida and Milk have seen flat/negative inflation. The Paint & Bldg Pdt Cos have taken price hikes of 5.5-6% to account for the increase in Crude to protect margins. 

For companies like Dabur, Emami, Marico and Britannia who do have small exposure to the MENA region, the street expects some improvement in reported results from the international business given a favorable base. 

FMCG Sector Valuations

However, the big question that begets answering is, what price are investors paying for this increased optimism? At 45X FY19e; the sector does trade at elevated valuations, but if these companies meet the street’s expectations with a hope for some more in the future, there’s no reason for investors to worry about the top dollar they’re paying for growth, opportunity and quality of management.  

A WEEK WHEN MILK SPILLED

The recent scams in the gems & jewellery and the banking world did quash a few popular sayings that stood for credibility, earlier. Out went “Safe as Banks,” “Gem of a Person,” and “Gold Standard” after Nirav Modi & Co took with them the terms Safe, Gem & Standard along with the many billions of Rupees.

Just the way stock market money seeks safe haven in the FMCG space during uncertainty, all the Honest-To-God patrons too, sought safety in the pristine dairy term - Doodh ka dhula (washed pure, with milk).  However, last week saw some events that put this term to risk too. The happenings in the Milky-Way suggest that some of the dairy doyens themselves may not be “dhula hua” with “doodh” after-all. Two instances caused some churn in our glass of milk.

First, the share price of Kwality Ltd (not to be confused with Kwality Walls Ice Cream that’s owned by Hindustan Unilever) tumbled 28% last week, extending its 2018 loss to 48%. 2 consecutive lower circuit hits on the stock caught the shareholders in, yet another tizzy.

Kwality Ltd promptly joined us on CNBC-TV18 and stated:

-          Appears Negative forces At Play Impacting the Stock Price

-          Nothing Fundamentally Wrong With the Company

-          Investigating the activity of these negative forces

-          None of the pledged shares are being sold in the market

For those familiar/invested in this stock, it was painfully reminiscent of what took place last September. In the first four days of September 2017, Kwality Ltd lost a quarter of its market capitalization in quick succession. Similar statements were made by the company then as well with no further disclosures.

However, this time, the company did go ahead and inform the exchanges. Kwality Ltd, in a notice to the BSE & NSE said they’ve received communication from Mr. Sidhant Gupta (an investor) who alleges that his broker, F6 Finserve Private Limited, has fraudulently sold some of his shares in the company and is now absconding. Mr Gupta has initiated legal & police action against the aforementioned too.

While, this disclosure is an attempt to explain the sudden decline in the company’s stock price, there is definitely more that needs some answering. Between December 2016 and December 2017, Kwality’s promoter stake has reduced from 64.24% to 63.94% and the pledge on promoters’ stake has increased from 44.07% to 61.91%. The current decline in stock price increases the risk of these pledged shares being sold in the open market. What also needs to be known is what proportion of Mr. Gupta’s holding was sold in the market by the said broker. This may give an indication of how much more remains. For the record, Mr. Gupta held 1.35% stake in Kwality as of December 2017, down from 2.18% in June 2017.

             

I will be watching what happens next very closely to test the quality of Kwality’s performance. If the share price is any indication of the street’s verdict on the company’s commentary and actions, Kwality Ltd has lost 61% since start of September 2017 till date.

The second big event was, for the lack of a better term, utterly-butterly surprising. A scam of Rs. 450 Cr discovered in our most beloved brand Amul. Turns out, the company had allegedly purchased cheese at higher price from a dairy in Kerala.  Amul has immediately swung into action and the board has called for an emergency meeting and heads have rolled as MD K Rathnam resigns. However, this does come as a shock to everyone because Amul was considered “Shuddh” (pure). Amul was definitely last bastion of Trust, Purity and All Things Good. Turns out, may be, this is, “The Real Taste of India”

No matter what the outcomes of these stray incidents are (and I do sincerely hope they’re just stray incidents), the prospects for Indian Dairy are very promising. We have a burgeoning nutrition-seeking vegetarian population, increasing shift from unorganized produce to branded milk and an insatiable appetite for value added products like Butter, Cheese, Lassi, Flavored & Fortified Milk etc. Let’s hope all the companies continue to focus on the best interest of the consumer and prevent their bright prospects from curdling before the glass is even half-full.

PS – I’ll be watching Amul’s next few ads very closely. Let’s see if they can use their famous wit to win back the love of customers.

Much Love.

M

PPS:

Don't treat any of these as investment ideas; I personally Don't Invest/Trade.

Keep The feedback Coming.