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Pick of the week: Radico Khaitan

HDFC Sec | 11 Sep, 2017  | Follow Author | Add to my Favourites 
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The  imposition  of  highway  liquor  sales  ban  by  Supreme Court,  demonetization  and implementation  of  GST  disrupted  the  volume growth over the last few quarters but are now events of the past. Relaxation given by SupremeCourt and Kerala  government are positives for volume growth. RKL is also expecting price increases to be effected soon as input costs had  risen significantly in the past due to low sugar production in SS 2016-17. RKL has undertaken significant capital expenditure  in the past for up-gradation and maintenance of plant & machinery and has sufficient capacity to meet its organic growth for  the next 5 years.

It is utilizing the recurring cash flow to pare down debt and aims to repay its entire long-term debt by FY19 which should  reduce interest  expenses and result in PAT margin expansion in the coming years. Shift towards premium products should  provide a cushion in case of raw material price increase and could otherwise lead to margin expansion. RKL could come out of flat Sales/PAT scenario (witnessed over FY13-FY17) due to a combination of macro and micro factors listed below.

We feel investors could buy the stock at the CMP and add on dips to Rs.152-158 band (~18x FY19E EPS) for sequential  targets of Rs 207 (24x FY19E EPS) and Rs 224 (26x FY19E EPS)  over the next 3-4 quarters. At the CMP of Rs.176 the stock  trades at 20.5x FY19E EPS.

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389.70 +25.05
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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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