Why is Radico Khaitan Ltd. falling/rising?

Recent Price Movement and Market Context

Radico Khaitan’s stock has been under pressure for the past three consecutive days, cumulatively losing 8.18% in returns during this period. The intraday low on 02-Jan touched ₹3,088.25, representing a 5.1% decline from previous levels. This underperformance is particularly stark when compared to the broader market, with the Sensex gaining 0.85% over the past week while Radico Khaitan’s shares fell by 6.21%. Year-to-date, the stock has declined by 6.10%, contrasting with the Sensex’s modest 0.64% gain.

Trading volumes also reflect waning investor enthusiasm. Delivery volumes on 01 Jan stood at 91,350 shares, marking a sharp 52.71% drop against the five-day average delivery volume. This decline in investor participation suggests reduced conviction among buyers, which has likely contributed to the downward price momentum. Additionally, the weighted average price indicates that a larger volume of shares traded closer to the day’s low, reinforcing the bearish sentiment.

Technically, the stock is positioned above its 100-day and 200-day moving averages, signalling underlying long-term strength. However, it remains below its short-term moving averages (5-day, 20-day, and 50-day), which often act as resistance levels during periods of correction. This technical setup aligns with the current short-term weakness despite a solid foundation.

Fundamental Strengths Supporting the Stock

Despite the recent price weakness, Radico Khaitan’s fundamentals remain robust. The company has demonstrated strong long-term growth, with net sales increasing at an annualised rate of 19.76% and operating profit growing at 16.83%. Over the latest six-month period, net sales surged by 33.16% to ₹2,999.97 crores, while quarterly operating profit before depreciation, interest, and taxes (PBDIT) reached a record ₹237.63 crores.

Moreover, the company’s ability to service debt is commendable, with a low Debt to EBITDA ratio of 1.04 times, indicating manageable leverage. The operating profit to interest coverage ratio stands at a healthy 14.60 times, underscoring strong financial stability. Institutional investors hold a significant 43.47% stake in the company, reflecting confidence from sophisticated market participants who typically conduct thorough fundamental analysis.

Radico Khaitan has also delivered positive results for five consecutive quarters, reinforcing its consistent operational performance. Over the past year, the stock has generated a 19.71% return, comfortably outperforming the Sensex’s 7.28% gain. Its three-year and five-year returns are even more impressive, at 201.74% and 577.78% respectively, far exceeding benchmark indices.

Valuation and Risks Tempering Investor Sentiment

Nonetheless, valuation concerns appear to be weighing on the stock’s near-term performance. The company’s return on capital employed (ROCE) is a strong 19.3%, but it is accompanied by a relatively high enterprise value to capital employed ratio of 11.8, suggesting the stock is expensive compared to its capital base. Although it trades at a discount relative to its peers’ historical valuations, the price-earnings-to-growth (PEG) ratio of 1.4 indicates that the market may be pricing in some moderation in future profit growth.

Profit growth over the past year has been substantial at 62.4%, outpacing the stock’s price appreciation, which could imply that the current correction is a market adjustment to valuation expectations. This dynamic, combined with reduced investor participation and short-term technical resistance, has contributed to the recent decline in share price despite the company’s solid fundamentals.

Conclusion

In summary, Radico Khaitan Ltd.’s recent share price decline on 02-Jan reflects short-term selling pressure and technical resistance rather than fundamental weakness. The company’s strong sales growth, consistent profitability, and solid debt metrics underpin its long-term investment appeal. However, valuation concerns and reduced investor participation have contributed to the current correction. Investors should weigh these factors carefully, considering both the company’s impressive track record and the market’s cautious stance in the near term.

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