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Deccan Herald » Economy & Business » Detailed Story
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A radically different approach
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Radico Khaitan, a medium-size spirits company, boasts of earning highest profits in the industry, Dilip Maitra finds out what makes it different from the rest.
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MAKE him wear a dhoti and a white kurta, he will very much look like a traditional Indian businessman who normally operates from the “Gaddis” in the mandis (market place). But looks can be deceptive. When it comes to business, Mr Lalit Khaitan, the 63-year old Chairman and Managing Director of Radico Khaitan, can teach a thing or two to topnotch executives coming from the best business schools.
Mr Khaitan runs the most profitable IMFL (Indian Made Foreign Liquor) business in the country as his flagship company Radico Khaitan boasts of highest profit margins in the organised sector spirit industry.
In the nine months ending December 2004, for example, Radico’s net profit was Rs 26.62 crore on net sales (net of excise) of about Rs 400 crore, indicating a net margin of 7 per cent. In an industry where 60 per cent of the revenues from sales goes to pay taxes and where the prices are artificially controlled in most States, Radico's profitability is an enviable benchmark for its competitors whose profitability ranges between 1 and 3 per cent. Also remarkable is Radico's growth: in the first 9 months of 2004-05 its gross sales grew to Rs 723 crore a 32 per cent jump over the same period last year. The average growth rate in the IMFL industry is just about 9 per cent. In 2004-05 Radico’s estimated volume sales was 9.5 million cases almost three times the size three years ago.
Ask Mr Khaitan about his magic formula for success, his explanation is simple: “We work very very hard to keep the costs low and at the same time drive our growth through the creation of strong brands.” Radico has several spirit brands spanning the whisky, brandy, rum, gin segments and the largest among them are: 8PM Whisky, Old Admiral Brandy and Contessa Rum.
Branding success
Radico Khaitan, formerly known as Rampur Distilleries, is actually a 62-year-old company which was established in 1943. It was initially engaged in the manufacturing of ENA (Extra Neutralised Alcohol) and was contract manufacturer for other liquor companies.
Radico’s journey to prominence started about six years ago when it launched its own brands of spirits. Its best known whisky brand “8PM” in the regular category was an instant hit when it was launched in 1999. Said Lalit Khaitan, chairman and managing director, “8PM is the first brand in the liquor industry to have entered the Limca Book of Records by crossing the one million cases mark in the first year of operation.” The star brand has recently crossed the three million cases mark and is the second largest in the regular segment. Radico’s other two millionaire brands in its 17 brands portfolio are Old Admiral Brandy and Contessa Rum. Its revenues have grown fast aided by aggressive expansion through contract bottling arrangements, brand acquisitions and marketing tie-ups for international brands.
Radico company has recently entered further into the white spirits segment with the launch of 8 PM Bermuda White Rum and has received an overwhelming response. The 8 PM Excellency Brandy has also been launched being the first in its segment that is blended with Cognac. The launch of these brands aim to broad base the company’s offering as well as increase its market share.
One of the major reasons behind the rapid growth of Radico’s brands is that the company decided to stick mainly to the belly of the industry, that is the regular (cheaper) and deluxe (semi premium) segments of whisky, brandy, rum, gin etc, where the consumption of IMFL is the highest in the industry in terms of volume.
Spreading out
By arriving at the perfect blend of right product for the right customers at right price, the company quickly gained volumes and market share. Along with this it spent a lot of time and money in designing attractive packaging and promotions at the point of purchases. Mr Khaitan claimed that the company has been successful in creating a wide distribution network that covers 80 per cent of retail points, clubs and bars in the country. Since the taxation in liquor industry is a State subject and imports and exports in and from the State are taxed heavily, all large players get their product manufactured locally for the local market. Naturally, Radico also had to do the same: the company now has 24 bottling units (four are owned and rest on contract) spread over 21 States.
Results are remarkable as Radico’s volume sales grew 51 per cent in 2004-05 to 9.5 million cases from 6.3 million cases in the previous year. “We are now actively looking at buying more distilleries in the States of Maharashtra or Karnataka or Tamil Nadu and setting up seven more bottling units,” said Mr Khaitan.
Curbing costs
Since there are great deal of controls on pricing and distribution, the only way to make money in the spirits industry in India is by driving down cost in every possible way. Radico has achieved this in two ways: attain highest possible economy of scale and lower debt and working capital requirement to keep finance costs low.
Through continuous process of expansion and modernisation, Radico has increased the production capacity of its mother distillery at Rampur (Uttar Pradesh) to 60,000 kilo litres (KL) now from 46,000 KL two years ago. It has built a new molasses (the basic raw material for potable spirit) storage tank of 125,000 quintal capacity which helped the company tide over the pressure on molasses supply last year when the prices shot up due to shortages. Said Mr Khaitan “If you can buy and store molasses in large quantities at favourable prices, you can control rest of the cost in the value chain effectively. This is why we keep investing in creating capacities.”
Managing money
With rapid growth, Radico’s need for funds have grown dramatically from Rs 100 crore 2002-03 to Rs 136 crore in 2003-04. But despite a 35 per cent growth in debt, the finance cost of Radico has decreased by a whopping 56 per cent last year to Rs 4.5 crore from Rs 10.27 crore. This was possible through very active treasury operations in interest derivative swap contracts. During the year the company was also able to bring down its average interest cost on working capital and term loans to around 2.5 per cent (after considering profits from treasury) leading to substantial savings in interest.
In the financial year 2004-05 Radico is expected to have greater savings in costs and larger contribution to profits. While the customers of Radico merrily gulp down more and more drinks, the shareholders of the company happily watch the share price rising high.
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Monday, May 9, 2005
