RPG Lifesciences Continues Strong Turnaround

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Howdy Toasters!

In today’s issue of the Morning Toast, we discuss:

RPG Life Sciences continues strong turnaround story
Radico Khaitan continues debt reduction theme
An education concept to keep you chugging along

RPG Life Sciences continues strong turnaround story 🐱‍🏍

Legacy brands – Aldactone in Cardiovascular, Lomotil and Lomofen+ in Gastrointestinal, Naprosyn in Pain Management, Serenace in Neurology and Azoran in Nephrology.

The company reported another record setting quarter, with revenues growing 16% YoY to INR 1.1 Bn, with strong contribution by domestic formulations business (66%)
RPG has continued to deliver on margin turnaround story, with EBITDA % improving by ~8.5% over FY17-21; current quarter performance continued previous trends, with a 3.2% YoY improvement to ~23%
The company derives majority revenue contribution from domestic formulations business (focus on therapies including anti-diabetics, cardiology and immunosuppressants), followed by International Formulations (Non-US Markets) & API (Local & Global)
Margin turnaround has been a constant theme for the company, with each revenue segment posting EBITDA % growth, while gross margins also improved sequentially on the back of enhanced manufacturing efficiencies

Interesting! Tell me more? Future growth plans etc? 🤔

The management indicated continuation of present activities are likely to ensure growth during the second half of the year, with a changing therapeutic mix to positively impact margins – 66/34% split of speciality/chronic will move to 55/45%, (including anti-diabetic, cardiology etc)
In terms of sales staff, the company plans to increase head-count drastically, improving feet on street, from 500 to 700 in the near term;
The company suffered in between FY17-20, with the stock taking a beating (-50%); financial performance, with lack of direction from the management were key factors weighing on the stock
The last 15 months are classified as a turnaround, with the company consistently posting healthy margins & strong topline growth; the stock is up ~50% in the last 6 months, and greater on YTD basis

Does the stock have legs to carry on? Final thoughts? 🧐

The turnaround story is intact, with the company moving towards a therapeutic segment that is highly margin accretive (think: chronic)
The stock currently trades at 12x FY23 EPS, which when compared to other peers with similar business lines (India branded formulations), is highly under-valued, more so when you take into consideration growth profile across Revenue / PAT

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Radico Khaitan records cumulative net debt reduction of INR 828 crores since FY16; What’s up and what do you need to know? 😮🙄

Branded portfolio includes (with multiple iterations) – Magic Moments Vodka, 8PM Whiskey, Contessa Rum, Rampur Single Malt, Jaisalmer Gin

The company dropped its Q2 performance, recording healthy topline growth (~12.5% YoY), touching INR 7.1 Bn in revenues; on a half-yearly basis, when compared to H1FY21, revenues are up ~27% (Covid-19 seems behind us)
Prestige & Above (high value product portfolio, greater margin accretive) saw volume growth of ~18%, with revenue growth of 22% (vs Q2FY21); particular segment now contributes ~31% (up from sub 25%) to total IMFL volumes
Supply chain bottlenecks affected the company (much like everyone else), with gross margins contracting by ~3% on a YoY basis; the management highlighted significant increases in packaging material cost in Non IMFL business
Gross margins for core IMFL Business (~80% contribution to topline) remained stable, with Prestige & Above category assisting in maintaining margins, in lieu of commodity inflation highlighted in other business divisions

Nice! Tell me more? New Products launched, future growth prospects? 🧐

Management indicated its stance to continue to build-out the Prestige & Above category, plugging product portfolio gaps (Semi Luxury segment, INR 1000-2000) through launches across Whiskey, Brandy & Vodka
Radico launched a blended Malt, Royal Ranthambore and a premium version of Magic Moments, to take advantage of changing consumer preferences (through premium launches)
Branded portfolio (P&A & more) is well positioned across types & price points (see image below)

Interesting! Final thoughts? 👀🤓

The company has reduced debt to the tune of INR 828 crores since FY16, significantly improving cash generation (reducing interest expense), with management reiterating its plans to be net debt 0 in the coming years (huge!!)
Radico is poised to grow, with a management that has experience of launching, scaling and stabilising products across price segments
The stock currently trades at 37x FY23 EPS, which is a significant discount to peers including UBBL / UNSP (40+ EPS)

Keep a track?

What else caught our eye? 👀

Tata beats Maruti for the first time in a decade

Tata Motors’ operating profit per car rose to ₹45,810 in the second quarter (which is nearly double that of Maruti)
Tata can thank its strong demand momentum and flexibility and agile production and supply chain management for this win
Maruti’s volumes also contracted as a result of shortage of parts, while that at Tata increased by 53%

Oil on a roll

Oil prices hit a seven-year high in October and demand is now back above 100 million barrels a day.
The OPEC countries will meet later this week to set output policy – they are under increased pressure from developed nations to increase supply
The Fed might remove the covid stimulus which has led to nervousness in the market and risk-aversion among investors and a strong dollar

India doesn’t want to celebrate Diwali at home

Travel platforms, homestay brands, hotels and resorts saw a considerable spike in demand this week owing to the festival season
Instead of spending on traditional items like gold, many are investing in their love for travelling now that they are also fully vaccinated