Shares of liquor maker Radico Khaitan rallied nearly 6 percent intraday on June 26 after Emkay feels the stock is undervalued and has potential to return 79 percent.
The stock has rallied 15 percent in the last five trading sessions. It was quoting at Rs 309, up Rs 13.90, or 4.71 percent on the BSE at 1053 hours IST.
"We find the stock deeply undervalued as it trades at 14x FY21E EPS – a 23 percent discount to its five-year average P/E of 18.2x. We maintain buy with an unchanged target price of Rs 529 (25x
FY21E EPS)," the brokerage said.
Emkay is confident about the company's resilient business model, which enables the company to protect its EBITA margins for FY20. "Any price hikes will further boost EBITDA margins. Our investment thesis is supported by FY19-21E EPS CAGR of 23 percent," it said.
The brokerage believes that the broader midcap sell-off, concerns about rising raw material costs and fears about liquor ban in Andhra have overshadowed positive developments such as market share gains backed by product launches and continued debt reduction.
Radico Khaitan is protected from the recent jump in Extra Neutral Alcohol (ENA) prices as it is backward-integrated with 100 million Litre of ENA capacity, Emkay said.
ENA prices have risen around 12 percent and glass prices have increased 6 percent YoY in Q1FY20, impacting the profitability of liquor companies. States such as Uttaranchal, Himachal Pradesh, Chhattisgarh and Madhya Pradesh have hiked prices. Emkay expects other Indian states also to announce price hikes.
Management expects gross margin to remain in the range of 48-50 percent for FY20 and also expects 7-8 percent growth for the industry in Q1 despite the general elections, which happened in seven phases, resulting in several dry days and other restrictions.
"This suggests that demand growth for the premium segment should be in double digits," Emkay said.
Radico Khaitan has guided for 13-15 percent growth in its premium portfolio that currently contributes 50 percent to its revenue. The company expects it to rise to 60 percent in the next three years on a ramp-up in new products such as 8PM Black Whiskey, Verve Vodka, 1965 Rum, Electra RTD, Morpheus Blue Brandy, Rampur Single Malt and Jaisalmer Gin.
The company continues to focus on debt reduction and free cash flow generation, and expects to be a net-cash company in the next 18 months, the brokerage said, adding key risks include a further increase in raw material costs, absence of any price hikes and a steep rise in liquor duties.
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