Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term facilities of Sula Vineyards Limited (SVL; Formerly known as Sula Vineyards Private Limited) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’. The short term rating has been reaffirmed at ‘CRISIL A1’.

 

The outlook revision reflects improvement in SVL’s financial risk profile as reflected in expansion in profitability, improved liquidity and healthy capitalisation and coverage indicators. CRISIL ratings expects that the healthy financial risk profile will sustain over the medium term driven by improvement in operating performance and strengthening of liquidity.

 

In fiscal 2022, SVL’s operating performance witnessed significant improvement as indicated by earnings before interest tax depreciation and amortisation (EBITDA) margins of 26.8% as against 16.7% in previous fiscal driven by changes in product mix, calibrated price hikes and various cost optimisation measures. Recovery in hospitality business also contributed to improvement in EBITDA. The operating margins are expected to sustain at healthy levels over the medium term and the same remains a key monitorable.

 

The financial risk profile improved significantly driven by higher than estimated cash accruals and equity infusion by the promoters in fiscal 2022 and 2023. Capital structure improved with TOL/TNW reducing to 0.9 times in fiscal 2022 from 1.5 times in fiscal 2021 and expected gradually improve further over the medium term. Debt to EBITDA improved to 2.0 times as on March 2022 and is expected to remain around these levels supported by higher accruals, despite planned debt funded capex.

 

CRISIL Ratings has noted SVL filing draft red herring prospectus for equity listing, however since the entire issue is offer for sale; no cash flow is expected into SVL owing to proposed equity listing.

 

The rating continues to reflect the market leadership position of SVL in the wine industry in India and established brand name. These strengths are partially offset by working capital intensive operations and vulnerability to changing regulatory environment.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated the business and financial risk profile of SVL and its Artisan Spirits Private Limited due to the similar nature of operation 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: SVL has more than 50% market share in the Indian wine industry. The share of wines in the alcobev industry is small at less than 1% in India and the market is concentrated with over 90% revenues being contributed by Maharashtra, Karnataka, New Delhi, and Goa. SVL plants are located in key markets of Maharashtra and Karnataka.

 

Established brand name: SVL benefits from strong brand awareness. SVL is also able to utilise its established sales network to market and promote its trading business. The company has a revenue of more than 5 times the next competitor. It has been adopting new age marketing and branding techniques in order to appeal newer generations and has been fairly successful. The company is able to leverage its brand name to market its hospitality business and it plans to expand the business further to reap the benefits. Established brand and focus on premium segment wines are expected to improve margins going forward.

 

Improving operating margins: SVL’s EBITDA margins increased by 1000 bps to 26.8% in fiscal 2022 from 16.7% in fiscal 2021 and 11.4% in fiscal 2020. During fiscal 2022, the company reduced the share of low margin trading business (import of international brands) which has improved the margins. Additionally, the company is carrying out structural changes over the years including increasing share of elite and premium brands, calibrated price hike, re-negotiating contract with suppliers, reducing marketing cost by moving from traditional media to social media, rationalisation of manpower, among others. Additionally increased contribution from high margin hospitality business also aided better overall margins. EBITDA margins are expected to remain healthy as benefits of structural improvement to continue over the medium term.

 

Improving financial risk profile: The financial risk profile has witnessed significant improvement on account of increased cash accruals and equity infusion by promoters, who infused Rs 57 crore (includes Rs 22 crore share warrants conversion) in fiscal 2022 and further around Rs 50 crore in fiscal 2023. Subsequently the leverage (TOL/TNW) has improved to 0.9 times as on March 31, 2022 compared to 1.5 times as on March 31, 2021. Debt protection metrics also witnessed significant improved as indicated by interest coverage ratio and net cash accruals to total debt ratio of 5.1 times and 0.2 times as on March 31, 2022 as against 2 times and 0.11 times respectively for FY21. The improvement in financial risk profile is expected to sustain on expectation of healthy operating performance to continue and it remains a key monitorable.

 

Weakness:

Working capital Intensive operations: The operations are working capital intensive as reflected in Gross Current Asset (GCA) days of over 300 days. Large inventory is due to lead time of around 6 month for manufacturing wine leading to 130-140 days inventory. Grapes are procured from December to March for the entire year which leads to high raw material inventory during the year end. Debtors have remained around 90-120 in the last three years. Debtors are high as most of the sales in southern states are through corporation model resulting in debtor days of more than 4 months.

 

Vulnerability to changing regulatory environment: Alcobev industry in India is highly regulated with regulatory power in hands of individual states. This has tendered the industry to be vulnerable to vagaries of frequent changes in regulations. For instance, fiscal 2017 was a disruptive year for the industry on account of Bihar prohibition, demonetisation and ban on liquor vendors within proximity to highways which led to destocking by the vendors.

Liquidity: Adequate

SVL’s liquidity is strong based on expected cash accruals of Rs 70-80 crore in fiscal 2023 as against term debt obligations of around Rs 35 crore in fiscal 2023. SVL also has access to fund based limits of Rs 180 crore, which were utilized 84% for the 12 months ended June 2022 when compared with drawing power. Utilization levels in 6 months ended June 2022 has been lower at 60-80% as compared to corresponding period in the previous year on account of higher cash accruals, equity infusion by the promoters and efficient working capital management. SVL has a planned capex of Rs 78 crore in fiscal 2023 to be funded through 60% debt. However, with higher profitability and incremental equity infusion, the liquidity is expected to remain comfortable over the medium term. Sustenance of liquidity will be a key monitorable over the medium term.

Outlook: Positive

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

Rating Sensitivity Factors

Upward Factors

• Sustenance of healthy operating margins driven by cost efficiencies achieved and healthy growth in operating income
• Improving financial risk profile with interest cover sustaining above 4 times as well as further improvement in liquidity profile

 

Downward Factors

• Weakening in capital structure or debt protection metrics, on back of higher than anticipated capex or further stretch in working capital leading to decrease in interest cover to below 2.5 times on a sustainable basis.
• Lower than anticipated operational performance resulting material weakening of profitability
• Adverse regulatory policies or increasing competition impacting the business profile

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 India's Wine Capital with almost 35 other wineries following suit in the region over the next decadeAfter the launch of its first wines in 2000, Sula expanded from its original 30 acre family estate in Nashik to approximately 2600 acres (including contract) across Nashik and the state of Karnataka. Sula currently has a production capacity of over 14.5 million litres, of which 12.7 million is housed in the state of Maharashtra and 1.80 million in Karnataka. Its popular brands include flagship brand Sula, RASA, Dindori, The Source, Satori, Madera & Dia.

.

The company also owns two wine resorts, Beyond Sula and The Source at Sula, both situated in its manufacturing facility at Nashik.

Key Financial Indicators# (Consolidated)

As on/for the period ended March 31		2022	2021
Revenue	Rs.Crore	421	388
Profit After Tax (PAT)	Rs.Crore	52	3
PAT Margin	%	12.4	0.7
Adjusted debt/Adjusted networth	Times	0.6	1.0
Interest coverage	Times	5.1	2.0

#CRISIL Ratings adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Working Capital Demand Loan!	NA	NA	NA	60.00	NA	CRISIL A1
NA	Working Capital Demand Loan@	NA	NA	NA	55.00	NA	CRISIL A1
NA	Working Capital Demand Loan^	NA	NA	NA	20.00	NA	CRISIL A1
NA	Working Capital Demand Loan*	NA	NA	NA	45.0	NA	CRISIL A1
NA	Term Loan	NA	NA	July-2024	59.5	NA	CRISIL A/Positive
NA	Term Loan	NA	NA	Aug-2023	105.0	NA	CRISIL A/Positive
NA	Term Loan	NA	NA	Dec-2023	17.5	NA	CRISIL A/Positive
NA	Term Loan	NA	NA	Mar-2024	5.0	NA	CRISIL A/Positive
NA	Bank Guarantee	NA	NA	NA	5.0	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	4.0	NA	CRISIL A/Positive

!SBLC for Trade credit Rs 15 crore as a sub-limit, Bank guarantee limit of Rs 15 crore as a sub-limit ,EPC/ PCFC EBRD/PSFC Rs 25 crore as a sub-limit, LER on forward contracts Rs 50 crore as a sub-limit.

@LC/ Bank guarantee limit of Rs 1 crore as a sub-limit

^Fungible with LC/BG up to Rs 3 crore as a sub-limit, SBLC  for Trade credit Rs 3 crore as a sub-limit, EPC/ PCFC EBRD/PSFC Rs 15 crore as a sub-limit

*Bank guarantee limit of Rs 10 crore as a sub-limit, LC Rs 0.2 crore as a sub-limit, EPC/ PCFC EBRD/PSFC Rs 15 crore as a sub-limit