Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Sula Vineyards Ltd (SVL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Positive’ and short term rating has been reaffirmed at ‘CRISIL A1’.

 

The upgrade in the ratings factors in improvement in SVL’s profitability as well as financial risk profile. In fiscal 2023, SVL’s retained its leading market position in wines segment with revenue growth of 22% mainly driven by growth in own wines. Healthy ramp-up in hospitality segment also supported the growth. Operating margins improved to 30.7% in fiscal 2023 as against 26.8% in fiscal 2022 on account of scaling down of trading segment and focus on premium brands. Going forward, revenue growth is expected to remain healthy while maintaining operating margins above 28% as the company focus on scaling up its operations in premium wines segment.

 

The financial risk profile improved driven by higher cash accruals and equity infusion by the promoters in fiscal 2023. Capital structure improved with TOL/TNW reducing to 0.7 times in fiscal 2023 from 0.9 times in fiscal 2022. Debt to EBITDA also improved to 1.2 times as on March 2023 from over 2 times as on March 2022. Going forward, the capitalisation ratios are expected to remain comfortable and improve gradually supported by higher accruals, despite planned debt funded capex.

 

CRISIL Ratings notes that SVL has received excise duty demand of Rs 115.89 crore on July 31, 2023, which is currently set aside by the high court. The company has contested that the demand notice is not valid under law. Based on a legal opinion, the management believes that the demand notice is not tenable by law and does not expect any liability to arise future. Any large obligations arising from this demand will remain a key monitorable.

 

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, modest but improving liquidity 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 65% 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 8-9 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 to 30.7% in fiscal 2023 as compared to 26.8% in fiscal 2022 and 16.7% in fiscal 2021. The operating margins improved over the last two fiscals as the company reduced the share of low margin trading business (import of international brands). 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. Increased contribution from high margin hospitality business also aided better overall margins. EBITDA margins are expected to remain healthy above 28% this fiscal 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 51 crore fiscal 2023. Subsequently the leverage (TOL/TNW) has improved to 0.66 times as on March 31, 2023 compared to 0.9 times as on March 31, 2022. Debt protection metrics also witnessed significant improvement as indicated by interest coverage ratio and net cash accruals to total debt ratio of 7.6 times and 0.3 times as on March 31, 2023 as against 5.0 times and 0.2 times respectively in previous fiscal. The improvement in financial risk profile is expected to sustain on expectation of healthy operating performance to continue and it remains a key monitorable.

 

Weaknesses:

• Working capital Intensive operations: The operations are working capital intensive as reflected in Gross Current Asset (GCA) days of over 290 days. Large inventory is due to lead time of around 6 month for manufacturing wine leading to 180-190 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 80-120 days 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

CRISIL Rating expects cash accruals of over Rs 80 crore in fiscal 2024 as against term debt obligations of around Rs 47 crore. SVL also has access to fund based limits of Rs 180 crore, which were utilized 51% for the 12 months ended July 2023. SVL has a planned capex of Rs 65 crore in fiscal 2024 to be funded through 70% debt. However, with higher profitability, the liquidity is expected to remain comfortable over the medium term

Outlook: Stable

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:

• Substantial increase in scale of operations and demonstration of maintaining the same over a period, with operating profitability margins sustaining above 28%.
• Improvement in financial risk profile supported by higher cash surplus

 

Downward factors:

• Weakening in capital structure or debt protection metrics, on back of higher than anticipated capex or further stretch in working capital leading increase in Debt to EBITDA to more than 2 times on a sustainable basis.
• Lower than anticipated operational performance due to adverse regulatory policies or increasing competition impacting the business profile
• Any demand notice from Excise Department impacting 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 India's Wine Capital with almost 35 other wineries following suit in the region 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 2500 acres (including contract) across Nashik and the state of Karnataka. Sula currently has a production capacity of over 13.8 million litres, of which 12.08 million is housed in the state of Maharashtra and 1.76 million in Karnataka. Its Karnataka capacity increased after it acquired Heritage Winery, which has a capacity of 1 million litres, earlier this year.

 

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

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	70.2	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Oct-24	36.8	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sep-27	51.5	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	May-27	37.5	NA	CRISIL A+/Stable
NA	Working Capital Demand Loan&	NA	NA	NA	20	NA	CRISIL A1
NA	Working Capital Demand Loan^	NA	NA	NA	55	NA	CRISIL A1
NA	Working Capital Demand Loan%	NA	NA	NA	45	NA	CRISIL A1
NA	Working Capital Demand Loan$	NA	NA	NA	60	NA	CRISIL A1

& 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

^ LC/ Bank guarantee limit of Rs 1 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

$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.