Rating Rationale
July 10, 2020 | Mumbai
Sula Vineyards Private Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.376 Crore
Long Term Rating CRISIL A/Negative 
Short Term Rating CRISIL A1
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities of Sula Vineyards Private Limited (SVPL) continues to reflects the market leadership position of SVPL in the wine industry in India, and established brand name. These strengths are partially offset by working capital intensive operations, moderate debt protection metrics and vulnerability to changing regulatory environment.
 
On June 01, 2020 CRISIL had revised its outlook on the long-term bank loan facilities of SVPL from 'Stable' to 'Negative' and reaffirmed the ratings at 'CRISIL A/CRISIL A1'.
 
The outlook revision reflects CRISIL's belief that the SVPL's credit risk profile may weaken over the medium term due to a sluggish domestic demand scenario leading to decline in the operating performance. For 9 months ending December 2019, SVPL reported moderate growth of 7% on-year in operating income due to lower demand. Operating margins, however, remained healthy at 13.5%.
 
Further, SVPL's business has been impacted in the current fiscal following measures taken by various state governments as well as central government towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along with severe restrictions on travel and movement of people. Since these measures are imposed at a broader level and across sectors, they have impacted the business profile of the company in terms of temporary closure of production facility and closure of establishments of dealer-distributors-retailers as well as points of consumption such as hotels, restaurants, bar etc. Accordingly, working capital is also expected to be elongated temporarily as a result of the lockdowns leading to higher inventory and slower realization of debtors. However, the same is expected to retract to normal levels once the economic activity resumes normalcy later in fiscal 2021. The ability of the business to revert back to operational stability and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.
 
The company has also sought moratorium from its domestic lenders in line with the relief measures announced by the Reserve Bank of India (RBI) on payment of interest and instalment of loans and accordingly has availed the relief in repayment of bank loan instalments and interest due during March ' May 2020. The company is likely to avail further extension of moratorium by three months up to August 31, 2020 as per the latest RBI guidelines released on May 21, 2020. The moratorium opted will support liquidity in the interim before the high season for wine sales kicks in. As per SEBI Circular dated March 30, 2020, CRISIL has factored the inclination of lenders/investors to refinance the debt rather than waiting for formal documents due to heightened operational challenges faced by the company in present time and also takes into account the moratorium on loan repayment instalments permitted by the Reserve Bank of India (RBI) before recognizing defaults. However, CRISIL will continue to monitor the development in this regard.
 
The financial risk profile remains adequate driven by healthy capital structure with TOL/TNW estimated at 1.56 times in fiscal 2020, however debt protection metrics are moderate due to higher working capital debt and lower operating performance.
 
The ratings continues to reflect the market leadership position of SVPL in the wine industry in India, and established brand name. These strengths are partially offset by working capital intensive operations, moderate debt protection metrics and vulnerability to changing regulatory environment.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated the business and financial risk profile of SVPL 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: SVPL has more than 65% market share in the Indian wine industry. Although the industry is small with around 3 million cases annually, the industry has grown at a healthy CAGR of 10% in the last 5 years. SVPL has recently acquired the Heritage Wines near Bangalore to shore up its position in the Karnataka market, which is the second largest market for wines in India. 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. SVPL plants are located in key markets of Maharashtra and Karnataka.
 
* Established brand name: SVPL benefits from strong brand awareness. The company is able to leverage its brand name to market its Hospitality business which has higher margins. SVPL is also able to utilise its established sales network to market and promote its trading business. SVPL has entered into exclusive sale agreements with international brands such Remy Martin, Beluga Vodka, and Asahi Beer for sale in India. Consequently, the revenue of SVPL has grown at a CAGR of 12% in the last 5 years. SVPL is the only profitable wine maker in India with revenue of more than 6 times the next competitor. Established brand and focus on premium segment wines are expected to improve margins going forward.
 
Weaknesses:
* Working capital Intensive operations: The operations are working capital intensive as reflected in Gross Current Asset (GCA) days of 270-300 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. Debtor had improved to 127 days in March 2019; however are estimated to have increased to 145 days in fiscal 2020. Debtors are high as most of the sales in southern states are through corporation model resulting in debtor days of more than 3 months.
 
* Moderate debt protection metrics: Debt protection metrics are moderate with adjusted interest coverage and net cash accruals to total debt at 2.29 times and 0.09 times estimated as on March 31, 2020 respectively. However, capital structure is healthy as reflected in TOL/TNW of less than 1.5 times in the past, which is expected to continue.
 
* 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. In fiscal 2017 local body tax was also reintroduced by Maharashtra on liquor; however the same was withdrawn post GST implementation. As a result, operating margins were impacted with margin in fiscal 2017 dipping to 10.8% from 15.0% in fiscal 2016. In Fiscal 2018 operating margins have recovered to over 13% as the impact of highway ban subsided.
Liquidity Adequate

SVPL's liquidity is adequate based on modest cash accruals of Rs 11 crore in fiscal 2021 along with cash and cash equivalents of Rs 35 crore as on March 31, 2020 as against term debt obligations of around Rs 45 crore. SVPL is expected to refinance around Rs 30 crore of term debt repayments. SVPL also has access to fund based limits of Rs 252 crore, which were fully utilized as of March 2020. SVPL has a moderate capex plan of Rs 10 crore in fiscal 2021 to be funded through internal accruals. CRISIL believes that the extension in moratorium up to August 31, 2020 as per the RBI guidelines released on May 21, 2020 would support liquidity of the company, however, the internal accruals are expected to be tightly matched with its repayment obligations and, thus, the liquidity will remain a key monitorable.

Outlook: Negative

CRISIL believes that SVPL's credit risk profile may weaken over the medium term due to a sluggish domestic demand scenario leading to weaker than expected operating performance.

Rating Sensitivity factors
Upward factors
* Significant improvement in operational performance on back of increasing market share or growth in industry.
* Significant reduction in debt leading to improved debt protection metrics and improvement in Debt to EBITDA to below 4 times on a sustainable basis
 
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 increase in Debt to EBITDA to more than 5 times on a sustainable basis.
* Lower than anticipated operational performance due to adverse regulatory policies or increasing competition impacting the business profile.
About the Company

Sula is a winery and vineyard located in the Nashik region of western India, 180 km northeast of Mumbai. Established in 1999, by Rajeev Samant, Sula vineyards 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 12 million litres, of which 10 million is housed in the state of Maharashtra and 1.65 million in Karnataka. Its Karnataka capacity increased after it acquired Heritage Winery, which has a capacity of 1 million litres, earlier this year.

Key Financial Indicators
As on/for the period ended March 31 2019 2018
Revenue Rs crore 466 379
Profit after tax Rs crore 19 12
PAT margins % 4.1 3.3
Adjusted debt/Adjusted networth Times 0.89 0.75
Interest coverage Times 2.87 3.24

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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! NA NA NA 60.00 NA CRISIL A1
NA Working Capital Demand Loan& NA NA NA 0.8 NA CRISIL A1
NA Working Capital Demand Loan@ NA NA NA 55.00 NA CRISIL A1
NA Working Capital Demand Loan^ NA NA NA 40.00 NA CRISIL A1
NA Working Capital Demand Loan* NA NA NA 45.2 NA CRISIL A1
NA Working Capital Demand Loan% NA NA NA 30.00 NA CRISIL A1
NA Working Capital Demand Loan# NA NA NA 21.00 NA CRISIL A1
NA Term Loan NA NA July-2024 59.5 NA CRISIL A/Negative
NA Term Loan NA NA Aug-2023 29.55 NA CRISIL A/Negative
NA Term Loan NA NA Dec-2023 9.4 NA CRISIL A/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA 20.0 NA CRISIL A/Negative
NA Proposed Short Term Bank Loan Facility NA NA NA 5.55 NA CRISIL A1
!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 0.8 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
%Interchangeable with FCNR Loan to the extent of Rs. 30 crore, Packing credit/Post Shipment to the extent of Rs. 6 crore as a sub-limit, Bank Guarantee to the extent of Rs. 6.5 crore as a sub-limit, Letter of Credit to the extent of Rs. 30 crore as a sub-limit, Buyer's Credit to the extent of Rs. 6.5 crore as a sub-limit
#SBLC for Trade credit Rs20 crore as a sub-limit, Interchangeable Letter of credit and Bank Guarantee to the extent of Rs 20 crore as a sub-limit, EPC/ PCFC EBRD/PSFC Rs 15 crore as a sub-limit.
 
Annexure - List of entities consolidated
Entities consolidated Nature of consolidation Rationale for Consolidation
Artisan Spirits Private Limited Full consolidation Due to the similar nature of operation of these entities
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  28-06-19  Withdrawal  26-06-18  CRISIL A1    --  -- 
                15-06-18  CRISIL A1       
Fund-based Bank Facilities  LT/ST  376.00  CRISIL A/Negative/ CRISIL A1  01-06-20  CRISIL A/Negative/ CRISIL A1  28-06-19  CRISIL A/Stable/ CRISIL A1  26-06-18  CRISIL A/Stable/ CRISIL A1    --  -- 
                15-06-18  CRISIL A/Stable/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST    --    --    --  26-06-18  CRISIL A1    --  -- 
                15-06-18  CRISIL A1       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 20 CRISIL A/Negative Proposed Long Term Bank Loan Facility 25 CRISIL A/Negative
Proposed Short Term Bank Loan Facility 5.55 CRISIL A1 Term Loan 71 CRISIL A/Negative
Term Loan 98.45 CRISIL A/Negative Working Capital Demand Loan 40 CRISIL A1
Working Capital Demand Loan! 60 CRISIL A1 Working Capital Demand Loan** 30 CRISIL A1
Working Capital Demand Loan& 0.8 CRISIL A1 Working Capital Demand Loan^^ 30 CRISIL A1
Working Capital Demand Loan@ 55 CRISIL A1 Working Capital Demand Loan 45 CRISIL A1
Working Capital Demand Loan^ 40 CRISIL A1 Working Capital Demand Loan## 75 CRISIL A1
Working Capital Demand Loan* 45.2 CRISIL A1 Working Capital Demand Loan&& 30 CRISIL A1
Working Capital Demand Loan% 30 CRISIL A1 Working Capital Demand Loan%% 30 CRISIL A1
Working Capital Demand Loan# 21 CRISIL A1 - 0 -
Total 376 -- Total 376 --
!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 0.8 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
%Interchangeable with FCNR Loan to the extent of Rs. 30 crore, Packing credit/Post Shipment to the extent of Rs. 6 crore as a sub-limit, Bank Guarantee to the extent of Rs. 6.5 crore as a sub-limit, Letter of Credit to the extent of Rs. 30 crore as a sub-limit, Buyer's Credit to the extent of Rs. 6.5 crore as a sub-limit
#SBLC for Trade credit Rs20 crore as a sub-limit, Interchangeable Letter of credit and Bank Guarantee to the extent of Rs 20 crore as a sub-limit, EPC/ PCFC EBRD/PSFC Rs 15 crore as a sub-limit.
** Bank guarantee limit of Rs 5 Crs as a sub-limit
^^Fungible with LC/BG upto Rs 15 crore
&&Interchangeable with Overdraft facility, Short term loans, Import Letter of Credit, Standby Letter of Credit, Pre-Shipment financing under export orders facility, Pre-Shipment financing under export letter of facility, Export bill discounting
##Interchangeable Letter of credit and Bank Guarantee to the extent of Rs 1 crore
%%Interchangeable with FCNR Loan to the extent of Rs. 30 crore, Packing credit/Post Shipment to the extent of Rs. 15 crore, Bank Guarantee to the extent of Rs. 30 crore, Letter of Credit to the extent of Rs. 30 crore, Buyer's Credit to the extent of Rs. 10 crore
 
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation

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