By any yardstick, the alcohol industry is one of the toughest places to be in. There is the maze of government regulations to navigate, large players who dominate the distribution channel to contend with and fire hoops to jump through for advertising. A new entrant is really up against a formidable challenge. Therefore, credit is due to Radico Khaitan for transforming itself from a bulk producer to brand creator. What is more, the company chose to compete in the hard-to-crack premium category, and they have aced it. Over the past five years, FY16-20, their revenue has grown from Rs.16.52 billion to Rs.24.27 billion at 10.09% CAGR, and net profit from Rs.734.5 million to Rs.2.28 billion at 32.74% CAGR.
The company did several things right. One of them was push hard on innovation, with their flavoured variants in Magic Moments vodka and ready-to-drink formats, launched in FY20. Naveen Trivedi, AVP at HDFC Securities, believes Radico Khaitan has got their portfolio expansion right. “The company has premium offerings across products and a strong presence at every price point,” he says. Radico Khaitan’s premium play is what really excites Himanshu Shah, analyst, Dolat Capital. Of the 24.3 million cases it sold last year, the premium brands formed seven million, out of which vodka and brandy were 5.5 million. “The premium whisky (~100 million cases market) is a sizeable market opportunity. Radico sold only 1.5 million cases last year and this can be a significant incremental growth driver,” he says.
The pandemic lockdown hit the industry out of nowhere. The shutting down of pubs and restaurants, and the damage it did to demand for premium brands has not gone unnoticed. In this interview, the company’s managing director Abhishek Khaitan says the toughest has been COVID-19 taxes, which can go up to 70% in some states. Otherwise, the company had managed by keeping their facilities running, by quickly assembling capacities to manufacture sanitizers and by cutting variable costs. Demand has begun to recover in Q1FY21 and the debt overhang, once a bane for Radico, is no longer there.
How has COVID-19 impacted your business?
Without a doubt COVID was a shocker. Thankfully, our efforts over the last three years stood us in good stead. For example, take debt, which is negligible compared to five years ago when we were highly leveraged. On a gross turnover of Rs.100 billion, it stands at just Rs.2.50 billion. Otherwise, the lockdown affected the industry as a whole, which lost revenue. India was one of the few countries across the world where liquor was not allowed to be sold. If you remember, there had been no production for 45 days. Elsewhere in the world, liquor is an essential good. At Radico Khaitan, we kept our distillation plants going by manufacturing sanitizers on a small scale.
While restrictions have now been lifted, sales numbers have not recovered though. People assumed that long queues outside liquor stores were an indication that the industry was in good shape, but the numbers clearly present a different story. It was just pent-up demand. Now, the big challenge is the decision of some states to bring in COVID-19 tax of 50-70% for the liquor industry. So, a bottle that cost Rs.1,000 began to cost Rs.1,700. The impact was felt most in states such as Andhra Pradesh, Delhi, West Bengal and Chhattisgarh. Some of them have started to roll it back but time has been lost. June quarter was difficult, no doubt, but we did better than the industry. During this period, the industry’s growth fell over 50% while our fall was 43%.
How did you manage that?
We were constantly in touch with the trade. We did not cut salaries at any level, and this kept motivation high even when there was
bad news all around. By June, all our 32 plants were operational.
Of course, manufacturing sanitizers kept our plants running but the bottling part of the business was completely shut. Therefore, nothing was sold. On lower volume, our Ebitda dropped 25%. We managed this by smartly calibrating variable costs. While we kept salaries untouched, we did not spare any chance to cut back on everything else. This included office rentals and also interest paid on debt, which is only 6.5% per annum compared to about 9% earlier. Though there was a lockdown, we managed to repay Rs.1.30 billion of our debt from our free cash flow. Effectively, we used the pandemic as a way to cut back on costs.
The good news is that, for the September quarter, our volume is back to pre-COVID level in states where the COVID tax hike was only 5-10%. In states with higher tax, volume dropped by 20-70%. In Andhra Pradesh, it is down 50%, and in West Bengal 40% and Odisha an exceptionally high 70%. In contrast, Uttar Pradesh, where taxes were low, volume is up by 5-10%. At the company level, our largest markets are Uttar Pradesh, Karnataka, Telangana, Andhra Pradesh, Rajasthan and Delhi. Luckily for us, most of these states have low COVID tax or have rolled back taxes.
Will digital delivery of liquor pick up?
It is great as another channel of distribution. We believe a lot of women may opt for it, because the experience of going to a store is not always good. With our strong presence in vodka, we could gain from this. That said, it is too early to predict its impact because sales through this channel are a miniscule share of total sales. Only a few states have allowed it.
How do you expect demand to shape up for the rest of the year? Which segments are growing?
Demand is returning to normal level except at the top end of the market, such as for Scotch, which is hit. Things should be fine by the third quarter, and we are certain we will outperform the industry as we did in the first quarter. Perhaps, the only real concern is that the top end (Rs.1,500-2,000 per bottle) won’t take off. That accounts for 1-2% of our volume. Barring the super premium segment, it has been a growth story across the board. Two years ago, we launched 8PM Premium Black whisky and it is all set to go past the one million cases mark during the current fiscal.
There is concern about the COVID tax, but every state will have to roll it back soon and that will mean more consumption.
What is your outlook for extra neutral alcohol (ENA) prices?
Our industry has only seen high raw material prices, but now, the scenario looks benign. In fact, the prices of ENA have declined. There is little to suggest that it may take off sharply from this point.
Any shifts you have seen in terms of consumption across price points? How do you expect operating margins to move?
Our observation is that consumers are consuming what they did earlier. There is no downtrading. What is peculiar about the liquor industry is that once a person is used to a certain kind of whisky or vodka, there is a high reluctance to change. People in India, we think, will not cut back on experience but hold back on luxury. Whatever downtrading is happening is only in states with high COVID tax. Operating margin for us has always been super healthy (18% last year). It will remain in the late teens for the next three years.
Our sales largely happen through retail. Institutional sales is only 3-4%. We don’t see this changing dramatically. In India, you pay 5-6x more while drinking out and, from the consumer’s point of view, that money can be used to drink more affordably.
You have transformed the company from a bulk producer to one that is that focused on the premium end. What do you think you did right?
In the liquor industry, mass products give you volume, but value comes from premium brands. When I joined the business we were only a bulk spirits manufacturer. So, we looked at ways to compete with the multinationals and the answer was to have world-class brands in the premium segment. Though whisky was and is the largest part of the spirits market, it has always been the most competitive. Our strategy was to offer quality spirits across price points. Over time, we have brought in a host of premium and super premium brands like Morpheus, 1965, Spirit of Victory and 8PM Premium Black.
Your growth story has been largely organic, even when there were acquisition opportunities. Why?
We did do a couple of very small buyouts about 15 years ago. When I joined, debt was Rs.400 million with loss of Rs.100 million. At one point, post expansion of production facilities, our debt crossed Rs.10 billion in 2015. We turned our attention to cutting down debt and, over the past three years, I have repaid close to Rs.7 billion. Our priority has been to have a few strong brands, which would keep the business going. After all, we had the plants and the overhead costs were already paid for. Once your brands start generating cash, you are in good shape. You can call us conservative but we like to do things slowly. Even in the case of 8PM Black, we started off initially in three states before moving to seven. We have mastered the art of creating brands by not spending too much. If we know how to build brands inexpensively, how does an acquisition make sense?
Radico Khaitan is one of the largest suppliers of IMFL to the canteen stores department (CSD), a segment known to have entry barriers. Do you still see it as a big opportunity?
We are by far the largest suppliers to the CSD. This business was something that I chose to focus on when I joined. A lot of effort went into marketing as well. Today, around 10-11% of our total business comes from there. There is no distribution challenge here, there was an opportunity to build an Indian brand and this worked with our portfolio across spirits. However, this has not given us any big growth over the past five years. For one, it is a limited market and our approach is to maintain status quo. We see bigger opportunities outside to build our brands. For instance, exports have taken off with us reaching over 70 countries. Today, 7% of our business comes from exports. For our premium brands, the US is the largest market apart from Africa and Middle East. Now, we are expanding in South East Asia. We have a good presence at premium outlets, for example our Rampur Single Malt sells for $1,400, and there is also an opportunity to create brands only for the export market.
Being a premium player will be difficult in this economic environment. What is your plan to retain volume?
For anyone to build a pan-India brand from scratch today is almost impossible. I don’t think even we can create Radico all over again today. The challenges are many — you can’t use the word whisky, distribution has become far more complex, more approvals have become necessary and, of course, a lot of money has to be spent on media to stand out in the clutter. If someone needs to take advantage of the IPL, media spend of Rs.500 million to Rs. 1 billion is needed for minimal visibility.
How have you positioned yourself in a whisky market in which Diageo and Pernod Ricard are formidable players?
When we started off, competition was actually tougher with more companies. Most of them shut shop and we managed to survive. Today, it is down to just two multinational companies and we have done things right. We are not a cheap brand and have never dropped prices. At the core was investments made in the blend and a focus on quality. Besides, being an Indian company gives us a better understanding of culture, festivals and emotions. That allows us to do a lot of activities at a regional level.
Do regional players pose a threat to pan India players?
In many ways, the entry of new players is good news for the industry. It opens up the category and brings in more customers. Over time, there will be no more than three to four strong brands. We have always believed in having a large portfolio and are now more encouraged by the entry of new players.