MOFSL initiates coverage on Radico Khaitan with 'Buy' rating and target price of Rs 3,000

Motilal Oswal Financial Services Ltd (MOFSL) has initiated coverage on Radico Khaitan, recommending a 'buy' with a target price of INR 3,000. The stock, currently trading at INR 2,453, is projected to see a 22% upside. The forecast is based on Radico's robust growth strategies and market expansions, particularly in the premium and luxury segments. MOFSL highlights Radico's capability to sustain double-digit volume growth in its Prestige & Above (P&A) portfolio, supported by strategic brand enhancements and broader distribution networks.

The recent India-UK free trade agreement (FTA), finalised in May 2025, introduces a phased reduction in customs duties on whisky and gin from 150% to 75%, with further cuts to 40% over the next decade. This development is expected to significantly benefit Radico Khaitan, reducing input costs for its premium brands such as Sangam, After Dark, and Ranthambore. The duty reduction is anticipated to save INR 750 million for Radico by FY26, enhancing profitability in its premium segment.

Radico Khaitan has demonstrated significant operational improvements in recent years. The company has reduced its gross debt from Rs 82 crpre in FY16 to Rs 190 crore in FY22, although it saw a temporary increase during a new capital expenditure cycle in FY23. With the benefits of its expanded capacities expected to materialise over the next few years, debt levels are projected to decline, supported by steady free cash flow (FCF) generation.

Financially, Radico has shown resilience with a 15% revenue growth from FY19-25, driven by a 12% compound annual growth rate (CAGR) in Indian Made Foreign Liquor (IMFL) and a 23% CAGR in non-IMFL segments. The P&A portfolio, which contributes 70% of IMFL revenue, recorded a 20% revenue CAGR. Looking ahead, MOFSL anticipates a revenue CAGR of 16% over FY25-28, with an EBITDA margin improvement to 16.2% by FY28.

Radico's brand expansion and market penetration strategies have played a crucial role in its success. The company has significantly increased its retail and on-premise presence, now covering over 100,000 retail outlets and 10,000 on-premise locations across India. This expansion has been instrumental in Radico's ability to navigate the complex regulatory landscape and establish a strong brand presence nationwide.

In terms of market strategy, Radico is leveraging its successful premiumisation efforts, accelerating launches in luxury segments to tap into high-demand markets. The company's P&A portfolio has grown from 4 million to approximately 1.5 crore cases, with vodka accounting for 50% of this segment. Radico holds an 85% share in the P&A vodka industry, and the company is poised to expand further in the premium whisky category.

Despite challenges such as inflation in glass and Extra Neutral Alcohol (ENA), which impacted margins, Radico is optimistic about a recovery. The easing of raw material prices and operational efficiencies are expected to support margin improvements. MOFSL projects gross margin expansion and a significant EBITDA margin increase during FY25-28, driven by a richer product mix and supply chain investments.

Radico's strategic direction underlines its commitment to sustaining growth and enhancing shareholder value. While the company faces potential risks from competitive pressures and state-level excise duty changes, MOFSL's positive outlook reflects confidence in Radico's growth trajectory and market positioning. With the India-UK FTA boosting input cost efficiencies, Radico is well-positioned to capitalise on emerging opportunities in the premium spirits market.