TEXT-Fitch affirms India's Radico Khaitan's CP rtg at 'F1(ind)'

(The following statement was released by the rating agency)

June 13 - Fitch Ratings has today affirmed India-based Radico
Khaitan Limited's (RKL) National Short-term rating on its INR500
million commercial paper program at F1(ind). The program is
carved out of fund-based working capital banking lines of the
company.

The rating reflects RKL's large portfolio of spirits brands,
its established position in the otherwise fragmented Indian
spirits industry and its wide distribution network. The rating
also takes into account RKL's ability to successfully launch new
brands which has supported revenue and volume growth; the latest
launch was that of Magic Moments vodka, which is positioned in
the relatively small but fast growing vodka segment in India.
Besides new brand launches, RKL has attempted to increase its
market coverage through brand acquisitions and initiatives like
its JV with Diageo.

The rating also reflects the growing market for spirits in
India supported by favourable demographics, i.e., a relatively
young population with increasing disposable income. RKL has taken
initiatives like starting its grain distillery in order to
upgrade quality of its products. The spirits industry continues
to face significant barriers to entry due to the regulatory
framework, the need for a strong distribution network and the
effort required in creating new brands, especially given the
control on explicit advertising.

The rating is constrained by the working capital
intensive-nature of the industry which has contributed to RKL's
high financial leverage record; and the company's moderate
profitability for a brand-driven spirits business. Given the
developing and dynamic nature of the Indian spirits industry and
changing customer tastes, all players including RKL will have to
constantly invest in the invigoration of existing brands and
launch of new brands, which is expected to keep profitability
under pressure. However, the relatively low cyclicality of demand
in the spirits business provides some support to the company's
credit profile. Main issues facing the industry include
price-volatility in key raw materials, molasses and grain,
increasing regulation to discourage liquor consumption, varying
regulatory framework across states in India and price
administration by government agencies to some extent.

Positive rating drivers include a sustained reduction in
financial leverage and a significant improvement in profitability
with continued revenue growth. Negative rating drivers include
RKL's inability to reduce leverage from FY07 levels, debt-led
expansion or acquisitions stretching financial leverage further
and growth slowdown due to regulatory issues or brand weakening.

RKL's revenues grew from INR3.1 billion in FY03 to INR8.5bn
in FY07. Volumes increased from 4.72m cases to 13.5m cases of
Indian made foreign liquor (IMFL) in this period. Operating
EBITDA was 10.8% in FY07, from 12.4% in FY06 due to higher brand
building expenses. RKL has arrangements with bottling units,
called tie-up units, for production and distribution of its own
IMFL brands; currently RKL has 32 such units across the country.
The company finances the inventories, debtors and other current
assets of these units which increase its working capital
requirements. RKL's working capital requirements are expected to
remain high in line with industry norms; however, this forms part
of the assessed working capital limits. RKL has a high financial
leverage record: Total Debt/EBITDA was 6.86x at FYE07 and 4.01x
at FYE06; Debt/Equity was 2.7x and 2.6x, respectively. Financial
leverage is expected to remain high in the short-medium term as
key brands face volume pressure and brand building expenditure
remains high.

RKL's distillery started operations in 1943; it made its
first major brand launch in 1999. In FY07, RKL decided to expand
its product offering by launching the Magic Moments vodka.
Following a series of brand launches and acquisitions, RKL now
owns 34 brands against seven in 1999. RKL's distillery is based
at Rampur in the state of Uttar Pradesh.