Wine Industry and the rise of Sula

Sula Wineyards – India’s largest wine producer and seller, Sula has been a consistent market leader in the Indian wine industry in terms of sales volume and value (on the basis of the total revenue from operations) since Fiscal 2009. It has 56 labels to choose from portfolio of 13 distinct Own Brands and 20 international labels (18 wine labels and two spirit labels) that they import and distribute.

Brands- “Sula”, “RASA”, “Dindori”, “The Source”, “Satori”, “Mosaic”, “Madera”, “Samara”, “York” and “Dia”, with “Sula” being  flagship brand. Sula is the market leader in terms of range of labels across price segments with more than 50 wine labels. 50% market share by value in the domestic 100% grapes wine market in Fiscal 2012. Market leader across all four price segments, being ‘Elite’ (INR 950+), ‘Premium’ (INR 700-950), ‘Economy’ (INR 400- 700) and ‘Popular’ (<INR 400). Combined sales revenue in the ‘Elite’ and ‘Premium’ segments contributed 70.57%, 68.58% and 67.81% of  revenue from our Own Brands in Fiscals 2022, 2021 and 2020, respectively.

India is one of the fastest growing alcohol markets among the top economies in the world. The recorded per capita consumption of pure alcohol in India has moved from 0.9 litre in 2000 to 3 litre in 2015 at a CAGR of more than 8%. The percentage drinking population of world is close to 41.7% and projected to stabilize around 40% in 2025. India’s percentage of drinking population is projected to be close to ~33% in FY 2021 and 39% in 2025.

Wine –

Wine was introduced into India by the Portuguese and the French, initially in Goa in the early 16th century, but the establishment of the British Raj ensured that spirits took center stage in the Indian alcohol industry. Modern wine making in India was begun in the 1970s with multiple initiatives, but wine as an industry in India is largely a post calendar year 2000 phenomenon. Prior to 2000, wine produced domestically was largely small scale and confined to pockets, or comprised imported products that were essentially sold in 5-star hotels.

Wine making –

The harvest of wine grapes in India typically runs for four months from December and continues until March each year. Once the grapes have been delivered to wineries during this period, the basic process of producing wine involves the conversion of the sugar in grapes into alcohol through fermentation by yeast. The fermentation period lasts between 1.5 to 3 weeks, and once complete, the wine is aged (if required), blended, stabilized, filtered and bottled.

Wines are made in refrigerated stainless-steel tanks, some of the higher end “Elite” wines are aged in oak barrels. Red wines generally require longer ageing compared to white and rosé wines, prior to bottling. Some of the Elite wines (both red and white) that are aged in oak barrels require around 6-12 months before bottling. Typically, white wines are ready for bottling within two months post completion of the fermentation process, while red wines take around three to four months. Typically, wines in premium category are aged for a longer period of time.

White wines incorporate white grapes, with the fermentation process incorporating the grape’s juice only, with no interaction with the grape skin. For red wines, the fermentation process also involves the red grape skin, which results in an extraction of color from the skin to the wine. Rosé wines have a limited duration of grape skin contact thereby giving them a paler color in comparison to the traditional red wine.

Fortified wines, which are produced by adding in distilled spirits to red or white wine. Fortified wines are generally of a lower quality priced under ₹200 for a 750 ml bottle, contributing to the lower end of the Popular category in the Indian wine market. The share of low-quality fortified wines has been on a decline in the recent years reducing from 38% in 2014 to 17% to 2019.

India’s growth story –

The Indian alcoholic beverage market is the third largest market in the world after China and Russia. The Indian wine industry is growing at a much quicker pace at 18.3% by value between Fiscal 2014 to Fiscal 2021 than the IMFL market growing at 10.8% during the same period. According to Technopak, wine category in India is estimated at 2 million cases in Fiscal 2021 and projected to grow to 3.4 million cases by Fiscal 2025 with a CAGR of more than 14% in volume. Indian market is projected to grow at 11% per annum in value terms for the period between 2021 to 2025. Indian market is dominated by Indian-made foreign liquor which contribute close to 68% in value to the overall market.

India’s per capita consumption for wine is less than 100 ml. The contribution of wine to overall alcohol consumption in India is less than 1% against the world average of close to 13%. Consumption of wine is higher in developed countries which is as high as close to 30% in Europe.

A comparison between India and China shows that in China, even though the contribution of wine to overall alcohol consumption is close to only 3%, China’s per capita consumption of wine is more than 50 times that of India’s. Growth of per capita consumption of wine in China has a strong co-relation with the economic growth of the country. In China, the per capita consumption of wine grew from 170 ml in 1980 to cross one liter in the year 2000 with an annual growth of more than 10%, as per capita income grew from close to USD 195 to USD 960 in the same period. India with the per capita income of close to USD 2100 in the calendar year 2019, has crossed the per capita income threshold as benchmarked to growth of wine consumption in China, which augurs well for growth in wine consumption in India. The current per capita consumption of wine in India at close to twenty-five milliliters is the lowest among top economies in the world but is one of the fastest growing countries in the world. A very low base underpinned by economic growth, positive demographic dividend and increasing acceptance of low alcohol content alco-beverages is set to drive Indian wine market to a prolonged period of strong growth. Indian wine market has the potential to grow in multiples leveraging growth opportunities.

Indian Wine Market is expected to grow at a CAGR of 14% in terms of volume from FY 2021 to FY 2025 with domestic players dominating volumes. The Indian wine market by value reached ~INR 1,900 Crore in FY 2020 and then decreased to INR 1,550 Crore in FY 2021.

Wine Tourism

Wine tourism has been one of the key factors leading to the success of premium wine consumption in the global wine industry, with the Napa valley in the state of California being the most widely recognised example. Revenues from Wine Tourism Business increased to ₹346.21 million in Fiscal 2022 from ₹281.67 million in Fiscal 2020. The Nashik region in Maharashtra, where they have been instrumental in developing indigenous wine tourism offerings, is often regarded as India’s equivalent to the Napa valley.

“The Source at Sula” and “Beyond by Sula” vineyard resorts located adjacent to facility in Nashik, Maharashtra, having a combined room capacity of 67 rooms. During Fiscals ended March 31, 2022, 2021 and 2020, our resorts recorded an approximate revenue per room of ₹10,367, ₹9,044 and ₹8,759, respectively.

Wine vs. other Alco beverages -

Indian wine market is concentrated with top three players dominating the market. Wine making involves investment of capital and time in development of vineyard, investment in relationship with farmers and development of expertise in wine making. In addition to that an annual harvest unlike other alco beverages which are not dependent a harvest cycle elevates the demanding nature of the wine making and wine selling business.

Supply Side differences - The unique attributes of wine business on the supply side include an annual harvesting season, wine production, storage and ageing period leading to a high inventory business model as compared to other alco-beverages. Unlike other alco-beverages, wine industry has only one raw material production cycle in a year - usually from December to March in Nashik region. Wine production starts with the harvesting season in December and continues till April. Wine storage and ageing happens throughout the year. Due to only one harvesting season in a year, Inventory for the full year is effectively build up in just four months (December to March) resulting in high year-end inventory. The inventory levels go down from April onwards as sales pick up and there is no new stock of grape coming in. The perishable nature of grapes and one harvest season effectively increases the capital expenditure of the wine makers and limits its opportunity to use its assets as in case of other alco-beverages like beer and spirits. A wine manufacturer can make only one liter of wine from one liter capacity in a season whereas in case of beer and spirits the production cycle can be repeated multiple times a month leading to higher capacity turnover.

The demand side factors including high seasonality skewed towards the festive season from October onwards which peaks in December and then drops at the start of January to remain close to flat till the end of financial year. Among all four quarters, the third quarter has the highest sales followed by the fourth quarter or the second quarter and then the first quarter. These factors increase the capex and working capital requirement for wines as compared to other alco-beverages.

Long gestation period for maturing of vineyard –

The wine value chain process is very long and may take a couple of years before the wine is ready to be bottled. The grape vines, once planted, will require a minimum of two years to mature and during this period the vines will require intense care. Post-harvest, it takes up to two years to manufacture authentic wine. The economic life cycle of a vineyard in India is typically 15 to 20 years with a relatively long gestation period (of approximately two years) associated with its setting up. Longterm contracts are signed between wineries and the farmers with a typical term of 12 years to ensure remuneration for the farmers.

Regulatory Barrier –

There exist fragmented state-wide policies for alcohol across the country with differing freedoms and restrictions accorded by the state governments. This makes it difficult to constantly keep track of the pricing, labels, production method, excise, etc. Complex and differing regulations in each state applicable to the production and sale of alcoholic beverages require extensive compliance, gives an advantage to the for the bigger players and brands.

Food Safety and Standards (Alcoholic Beverages) Regulations, 2018 (the “Alcoholic Beverages Regulations”)

In relation to wine, the Food Safety and Standards (Alcoholic Beverages) First Amendment Regulations, 2020 prescribe additional labelling requirements such as, among other things, the declaration of the country of origin, range of sugar, generic name of variety of grape or fruit used, the name of residues of preservatives or additives present as such, or in their modified forms, in the final product. Additionally, the Draft Food Safety and Standards (Alcoholic Beverages) Amendment Regulations, 2021 prescribe that “non-alcoholic counterpart of alcoholic beverage” which is non-alcoholic beverage having alcohol content less than or equal to 0.5% abv, shall meet all the requirements of the respective alcoholic beverage of origin. Further, the alcoholic beverage of the origin must undergo the process of fermentation and the produced alcohol should be removed thereafter.

Maharashtra’s Grape Processing Industry Policy, 2001 (the “Maharashtra Grape Processing Policy” or “Policy”)

The Maharashtra Grape Processing Policy aims to encourage the production of wine in the state of Maharashtra for the benefit of farmers producing grapes, particularly in the districts of Nashik and Sangli in Maharashtra. Accordingly, the Maharashtra Grape Processing Policy prescribes certain benefits in relation to wine industries, including: i) consideration of wineries as small-scale industries within the limits of investment prescribed for small scale industries;

ii) concessions on levy of excise duty and sales tax;

iii) permission for sale of wine by beer bars and grant of license to wine bars for the sale of wine;

iv) simplified the procedures involved in the issuance of licences for production of wine in the state of Maharashtra and prescribed a one window system for various requirements of the wineries, such as essential licenses, plot, telephone etc;

v) permitted tourists to visit wine product units for testing wine and such units will also be given a license for selling wine on retail basis;

vi) grant of the status of food processing units to wine production units in order for them to avail facilities provided by the State Government to such units.

The Policy also discusses taxation on imported wines similar to the taxation of domestic wines, such as levying a tax equivalent to the percentage of excise duty and charging a fee on their labels/ brands. Further, the Policy establishes a committee consisting of the Principal Secretary (Excise) and other members to simplify the procedure in the collection of excise duty and seeks to establish other bodies such a Wine Institute and a Grapes Processing Industry Board to cater to various aspects of the wine industry.

Karnataka Grape Processing and Wine Policy, 2007 (the “Karnataka Grape Processing Policy”)

The Karnataka Grape Processing Policy was notified on March 14, 2007. The policy, among other things, declares wineries as horticultural and food processing industries which are entitled to receive all incentives and facilities provided by the State Government for such industries and simplifies the procedures involved in the issuance of licences for production of wine in the state of Karnataka. The State Government also extended a subsidy of 50% on the installation of machinery required for agro-based industries to grape processing units. Further, the sale of wine through wine taverns and wineries, and by bars which have obtained licences for wholesale trade of wine is permitted. Under the Karnataka Grape Processing Policy, the excise duty levied on wine produced in other states would be four time greater than the applicable duty on wine produced in Karnataka. Further, waivers or reductions were granted in relation to the excise registration fee, licence fee, labelling fee imposed on production and sale of wines in Karnataka. It also provides for additional subsidies for setting up of wineries in the state.

The Cable Television Networks (Regulation) Act, 1995 (the “Cable Television Regulation Act”)

It read with the Cable Television Network Rules, 1994 prescribe an advertising code which provides that advertising in the cable services shall be so designed as to conform to the laws of India and should not offend morality, decency and religious susceptibilities of the subscribers of cable services. In addition, the advertising code prohibits advertisements which indirectly or directly promote production, sale or consumption of cigarettes, tobacco products, wine, alcohol, liquor or other intoxicants (“prohibited products”). However, it allows advertising of a product that uses a brand name or logo, which is also used for the prohibited products subject to certain conditions including, that the story board or visual of the advertisement must depict only the product being advertised and not prohibited products in any form or manner, that the advertisement must not make any direct or indirect reference to the prohibited products and that the advertisement must not contain any nuances or phrases promoting the prohibited products.

Risks –

1.   Regulatory Risks- Industry is subject to a licensing and excise regime with changing laws, rules and regulations and legal uncertainties. Partial pricing power due to regulation laid down by state governments.

2.   Import Duties – Largely benefit from high import duties imposed on imports of international wines in India, but these duties could be reduced or eliminated in the future, adversely affecting the Wine Business. Import of alcoholic beverages in India attracts an import duty at the rate of 150% of the value of the wine being imported.

3.   Climate and raw material - Adverse climatic conditions may impact the quality of wine grapes. The establishment of new vineyards take more than two years, and any disruption caused by adverse climatic conditions could disrupt our supply of grapes, hence adversely and materially affect our business.

Raw Material-

Processed raw materials such as glass bottles are one of the largest components of cost of goods sold, and the cost of purchase of glass bottles contributed to 43.87%, 45.96% and 45.66% of the total packing material purchases for Fiscals ended March 31, 2022, 2021 and 2020, respectively. Enter into long term supply agreements (with a contract life of up to 12 years and renewable with mutual consent) with farmers for the supply of grapes.

The freight and handling charges incurred constitute 2.66% of total expenses. While they do not rely on third parties for the bottling of the products, they have lease units for the manufacture of bulk wine, which contribute 11% of the total production capacity as of March 31, 2022.

The farming of wine grapes which is the major raw material for our operations, is concentrated in the west and south-western states of India. Their wine processing units are also located in the west and southwest of India, with flagship facility located in Nashik, Maharashtra, and wine processing units located in Nashik and Dindori in Maharashtra, and Bengaluru and Basavakalyan in Karnataka.

Wine manufacturing and processing for Sula –

Sula has manufacturing and processing infrastructure comprising four wineries in Maharashtra and two in Karnataka, Nashik Winery (a tank capacity of 46.40 lakh litres), Domaine Dindori (tank capacity of 66.21 lakh litres), Domaine Sula (tank capacity of 11.39 lakh litres) and York facilities (Acquired in Fiscal 2022 with a tank capacity of 4.84 lakh litres).

Total Installed capacity – 145.40 Lakh litres. Utilization – 115.50 lakh litres.

Innovations –

Introduced the ‘Charmat’ method for producing sparkling wines, which enables them produce  wines faster and more efficiently. Also introduced screwcaps on wine bottles in 2006. Screwcaps in place of cork ensures that wine is not spoilt due to leakage or cork taint.

On Trade and Off trade channels -

On-Trade sales for the alco-beverage industry refer to consumption at hotels, restaurants, and caterers (“HoReCa”). Alco-beverage segments have varying contributions from on-trade sales. It is highest in low concentration alco beverages including beer and wines and lower in the spirits segment. This implies a correlation between premiumization and increasing share of On-Trade channel as spirits has the highest contribution to the value segment in the alco-beverage industry.

Management –

Promoter and Managing Director, Rajeev Samant, who established the business in 2003 and has extensive experience in the Indian wine industry. Rajeev Samant is the Managing Director, Chief Executive Officer and the Promoter of our Company. He holds a bachelor’s degree in economics and a master’s degree in science (industrial engineering) from Stanford University, United States of America. He is the founder of our Company. He has previously worked with Oracle Corporation.

Base Salary: ₹ 19 million per annum and entitled to an amount equal to 2.5% of the Company’s profits after tax based on the consolidated financial statements of the Company, which shall be payable on a half-yearly basis, on actuals.

Chaitanya Rathi is the Chief Operating Officer of our Company. He has been working with our Company since April 1, 2019 as the chief operating officer and previously between December 26, 2006 and March 31, 2013 in various capacities. He has also provided consultancy services in relation to our Company’s hospitality business in the past. He holds a bachelor’s degree in science in biotechnology from the University of Mumbai, a master’s degree of science in food biotechnology from the University of Strathclyde and a master’s degree in business administration from INSEAD. He has previously worked with Everstone Capital Advisors Private Limited and Mswipe Technologies Private Limited in various capacities. In Fiscal 2022, he received an aggregate compensation of ₹20.02 million (including ₹0.79 million accrued as variable pay for Fiscal 2021) from our Company. Further, for Fiscal 2022, ₹0.41 million accrued as variable pay, which was paid in Fiscal 2023.

Aggregate outstanding borrowings of ₹2,466.50 million.

RPT - The percentage of the aggregated absolute total of  related party transactions to revenue from operations for Fiscals ended March 31, 2022, 2021 and 2020 was 46.37%, 40.52% and 24.42%, respectively.

Land leased from Rajeev Samant (main promoter) and residential flats purchased by company in Nashik.

Pledging - Rajeev Samant,  pledged 5,550,877 Equity Shares, held by him, representing 6.80% of the paid-up share capital of the Company, in favour of IIFL Finance Limited, as security for a loan availed by Rajeev Samant for the purpose of exercising the warrants that were held by him.

Number crunching -

Revenue – 500 Cr

Peer to peer analysis :

Country wise distribution

Sales growth - 12.8% (2011-21) 

Inventory days – 465. Wine category has higher inventory days vis-à-vis spirits and beers. March is also the peak inventory month, which leads to highest inventory levels in the wine industry. The average inventory goes down as sales pick up and its lowest at the end of quarter 3.

Distribution platform included over 47 distributors, 10 corporations, 23 licensed resellers, 7 company depots, 4 defence units, over 23,000 points of sale (including over 13,500 retail touchpoints and over 9,000 hotels, restaurants and caterers) and a sales force of more than 130 permanent employees as of March 31, 2022.

ESG :

KPIs

ENERGY MANAGEMENT Energy efficiency practices and assessing our consumption internally, through daily monitoring and trend analysis. Some of the best practices include:

• Chilling operations only during solar hours.
• Converting fluorescent lighting to LED lighting.
• Utilizing Variable Frequency Drives (VFDs) to reduce energy consumption of equipment, such as pumps.
• Insulated wine storage tanks to prevent heat loss.
• Reducing energy use during cold stabilization by using ion exchange and electro-dialysis for wine stabilization.
• Replacing old air conditioner units with invertor based ACs.
• Insulating barrel rooms to prevent heat loss during wine ageing.

SUSTAINABLE CONSTRUCTION With the aim to reduce our ecological footprint, the company has opted for a pre engineered metal building (PEMB) rather than traditional construction for winery expansion at our Domaine Dindori unit. 

Material used for the construction of PEMBs is finished away from the installation site, this greatly reduces the volatile organic compounds and other suspended solid particles from the air. By opting for a PEMB will lead to saving of approximately 400 Tons of CO2 emissions, which is about 25% lower than conventional construction.

Sula became an applicant member to the International Wineries for Climate Action (IWCA). The IWCA, founded by Familia Torres (Spain) and Jackson Family Wines (USA),

Gender Equality: Equal Opportunity Employer and ensure zero discrimination during hiring or at the workplace. There is no gender-based discrimination for determining the compensation packages or during promotions. The corporate office in Mumbai has 47% female employees.

Disclaimer - This is not an investment advice. Do your own research before investing. I am not SEBI registered investment advisor.