Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil A+/Stable/Crisil A1’ ratings on the bank loan facilities of Sula Vineyards Ltd (SVL).

 

The ratings continue to factor in the market leadership position of SVL in the Indian wine industry, its extensive grape procurement network, healthy operating profitability and strong financial risk profile. These strengths are partially offset by working capital intensive operations and vulnerability to the changing regulatory environment.

 

Revenue grew 11% to Rs 568 crore in fiscal 2024, from Rs 512 crore in fiscal 2023 supported by healthy growth across own brands and the wine tourism segment. Operating margin was healthy at 30.7% in fiscal 2024, as against 30.7% in fiscal 2023, supported by continued focus on premium brands. Revenue growth moderated in the first half of fiscal 2025, having grown 5% year-on-year to Rs 253 crore, from Rs 242 crore in the previous fiscal, amidst a slight slowdown in demand owing to inflationary pressures. Operating margin moderated to 26.7% in the first half of fiscal 2025, compared to 30.8% in the corresponding period previous fiscal, due to higher selling expenses, as the company focused on increasing its presence in states such as Telangana and Madhya Pradesh. Going forward, revenue growth should remain healthy, while operating margin is expected to sustain at over 28%, supported by better operating leverage with higher sales expected in second half which is seasonally stronger.

 

Financial risk remains strong, marked by a robust margin and healthy capital structure. Debt rose to Rs 300 crore in fiscal 2024, from Rs 192 crore in fiscal 2023, due to higher working capital requirement and delay in receipt of subsidy of Rs 87 crore under the Wine Industrial Promotion Scheme. Subsequently, gearing and total outside liabilities to tangible networth ratio (TOL/TNW) increased to 0.55 time and 0.88 time, respectively, as on March 31, 2024, from 0.37 time and 0.66 time, respectively, a year ago. Going forward, capitalisation ratios should also be comfortable and will improve gradually, supported by modest capex of Rs 60-65 per annum and healthy profitability.

 

Crisil Ratings notes that Sula Vineyards has a disputed excise duty demand of Rs 115.89 crore, which has been set aside by the High Court on March 7, 2024, and the matter now stands disposed off, in favour of the company.

Analytical Approach

To arrive at the ratings, Crisil Ratings has consolidated the business and financial risk profiles of SVL and Artisan Spirits pvt Ltd, given the similar nature of operations of these entities.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Market leadership position in the wine industry in India: Sula has a dominant position in the Indian wine industry with market share of over 50%. It has an established brand presence supported by the vast portfolio of 68 brands across different price points and extensive distribution network with 50 distributors. Sula has also established strong direct-to-customers sales channel through its vineyards, through which it has sold ~3.5 lac bottles in fiscal 2024. Sula has five manufacturing plants in Maharashtra and Karnataka and has access to over 2,800 acres of vineyards. Over 75% of revenue comes from Maharashtra, Karnataka, Telangana, New Delhi, and Goa.

 

• Healthy operating margin: Operating margin rose to 30.7% in fiscal 2024, as compared to 26.8% in fiscal 2022 and 16.7% in fiscal 2021. The margin has improved over the last three fiscals as the company reduced the share of the low-margin trading business (import of international brands). Additionally, it has made structural changes over the years, including increase in share of elite and premium brands, calibrated price hikes and re-negotiation of contracts with suppliers among others. Increased contribution from the high-margin hospitality business also led to improvement in margins overall. The operating margins moderated in first half of fiscal 2025 to 26.7%, compared to 30.8% in the corresponding period previous fiscal, on account of increased selling expenses, as the company focussed on increasing its presence in states such as Telangana and Madhya Pradesh. Margins are expected to sustain at healthy levels of above 28% in fiscal 2025, supported by better operating leverage as sales are expected to pick up in the second half of fiscal 2025 with quarter three being seasonally the strongest quarter.

 

• Strong financial risk profile: Financial risk remains strong marked by a robust operating margin and a healthy capital structure. Gearing and TOL/TNW ratios increased to 0.55 time and 0.88 time, respectively, as on March 31, 2024, from 0.37 time and 0.66 time, respectively, in the previous year, due to higher working capital requirement. Going forward, gearing is expected to remain at 0.47-0.50 time, supported by modest yearly capex of Rs 60-65 crore and healthy profitability. Operating performance should remain healthy and is a key monitorable.

 

Weaknesses:

• Working capital intensive operations: The operations are working capital intensive as reflected in Gross current asset (GCA) days of over 318 days as on March 31, 2024. Lead time of around six months for manufacturing wine, leads to a large inventory of 180-190 days. Grapes are procured between December and March for the entire year, and raw material inventory is higher during the year end. Receivables were high at 135 days as on September 30, 2024 (111 days as on March 31, 2024), following a slowdown in payouts by the Telangana corporation market, which typically entails a higher receivable cycle. As most of the sales in southern states are through the corporation model, receivables tend to stretch beyond four months.

 

• Vulnerability to the changing regulatory environment: The domestic alcobev industry is highly regulated with power in the hands of individual states. This exposes the industry to frequent changes in regulations. For instance, fiscal 2017 was a disruptive year on account of prohibition in Bihar, demonetisation and ban on liquor vendors within proximity to highways, which led to destocking by the vendors.

Liquidity: Adequate

Liquidity is supported by cash accrual of Rs 55-60 crore in fiscal 2024, as against term debt obligations of Rs 30-33 crore. Fund-based limit of Rs 220 crore was utilised at 80% on an average for the 14 months ended September 30, 2024. Driven by healthy profitability and modest capex plans of Rs 60-65 crore per annum, liquidity is expected to remain comfortable over the medium term

Outlook: Stable

Crisil Ratings believes the credit risk profile of SVL will improve over the medium term, driven by sustenance of healthy operating performance, improvement in liquidity and strong market share in the Indian wine industry.

Rating sensitivity factors

Upward factors:

• Substantial and sustained growth in scale of operations and operating margin sustaining above 28%
• Improvement in financial risk profile, supported by cash surplus.

 

Downward factors:

• Weakening in capital structure or debt protection metrics, due to higher-than-anticipated capex or further stretch in working capital, leading to increase in debt to Ebitda ratio to more than 2 times, on a consistent basis
• Weaker-than-anticipated operational performance, due to adverse regulatory policies or increasing competition, impacting the business risk profile
• Any demand notice from the Excise Department, impacting the financial risk profile of the company

About the Company

SVL is a winery and vineyard located in the Nashik region of western India, 180 km northeast of Mumbai. Established in 1999, by Rajeev Samant, SVL was Nashik's first winery and paved the way for the city to become the Wine Capital of India, with almost 35 other wineries following suit over the next decade. After the launch of its first wines in 2000, Sula expanded from its original 30-acre family estate in Nashik to approximately 2,800 acres (including contract) across Nashik and the state of Karnataka. Sula currently has a production capacity of over 15.9 million litres, of which 14.85 million is housed in Maharashtra and 1.14 million in Karnataka.

 

The company also owns two wine resorts, Beyond Sula and the Source at Sula, both situated in its manufacturing facility at Nashik. In fiscal 2024, Sula opened its first wine tasting room outside its Wineries at Nashik.

Any other information: Not Applicable