Fratelli Vineyards Limited (541741) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Fratelli Vineyards Limited Q3 and 9 Months FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you.

Thank you, Yashashri. Good afternoon, everyone, and thank you for joining us today on Fratelli Vineyards' 9M FY '25 Conference Call. We are joined today by senior members of the management team, including Mr. Gaurav Sekhri, Managing Director; Mr. Rajesh Garg, Chief Financial Officer; and Mr. Hemant Arora, Chief Business Officer. We shall commence with opening remarks from the management, following which we will have a question-and-answer session. Before we begin, I would like to state that some of the statements made today could be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation that has been uploaded to the stock exchange website. With that, I would like to invite Mr. Sekhri to make his opening comments. Over to you, sir.

Hi. Good afternoon, everyone. Am I audible, okay?

Yes, sir.

Great. Good evening, ladies and gentlemen. Thank you for joining our call to discuss our 9-month FY '25 performance. I will commence with a brief introduction to our business and strategy and shall follow with an overview of our financial and operational performance. At Fratelli Vineyards, we aspire to be considered among the finest winemakers. Everything that we have done to create our end-to-end presence in the business, we have accomplished with that vision. For those who are new to our company or to the wine industry, let me share a few thoughts. The journey of a bottle of wine starts in the vineyards. And over 15 years ago, that is where we began. We grow our own grapes. We are farmers first and introduced imported grape varietals into India. From there, we built a portfolio of wines in the premium and luxury categories. Since then, we have scaled up operations and sales. Over the years, we have also commenced contract farming of our own clones and now have over 1,000 acres under contract farming. Thus, at the end of FY '24, we have supplied almost 0.5 million cases of wine across the country. Our wineries are located close to the vineyards, allowing us to focus on quality. In the luxury category, which we help create with our brands like J'NOON and Sette and Master Selection ranges. These brands have won multiple international awards, underlining our commitment to the art of winemaking. We continue to invest in our -- in building our brands, business and the wine category within alcobev. HoReCa remains a strong growth channel for us, which increased listings year-on-year across prestigious restaurants and hotels. Our premium wines are gaining momentum in metros, Tier 2 cities and beyond, reflecting a broader adoption of wine culture. To strengthen our world-class winemaking business, we are scaling up our production by [Audio Gap] acres of vineyards by H2 FY '25 with another 60 acres planned to be planted before Q2 of FY '26, ensuring the higher quality grape supply for our most premium wines. Additionally, we have commenced operations at our new 50,000 square feet winery building. This will position us for higher volume growth in the premium category and significantly enhance our production capabilities in the coming quarters as we ramp up from here. The new winery building, and the investments made in solar energy will result in savings of over INR 10 million in costs annually. As we gear up for the next phase of business expansion, we are also investing in back-end processes and updating technology in sales and distribution to enhance efficiency and operational control. While making us more agile, these programs are designed to make us leaner and contribute towards better margins. Whereas I have covered initiatives on the vineyard and manufacturing side, let me highlight to you our plans for developing facets of business beyond the sale of wine. As you may know, we are developing an exclusive vineyard resort at Akluj, Maharashtra. The work on this is in advanced stages of planning, and we expect to open in financial year '27 as a first-of-its-kind property in India with multiple experiences besides vineyard tourism and luxury space are being planned. During the quarter, we launched Pour Room, which is our brand for wine and coffee bars in collaboration with Blue Tokai. The very first Pour Room has opened at Koramangala in Bangalore to an encouraging response. This venture is set to expand across Bengaluru and other major cities, offering consumers an experiential setting to enjoy our wines. We continue to invest in new product development and brand communication to support and grow wine consumption as a category. I am glad to share that our RTD offering, Shotgun, has been soft launched in the current quarter. Shotgun is an accessible, all occasion wine-based drink, and we see vast potential in it as category broadening initiative. Considering the country's demographic growth, the core alcohol consuming class is expanding and with it, wine brands are gaining traction. Wine consumption is fast evolving in India with increasing adoption across diverse consumer segments. Over 70% of our sales come from premium and luxury wines, and we remain geared to sustain our position here as the category further develops within alcobev. Let me turn my attention to operational and financial highlights for the year-to-date period. The year thus far has seen moderated performance owing to a few factors, including higher number of dry days during the period, coupled with transition to new RTMs in key states. The country has also encountered lower urban consumption that has had impact on our category as well. We believe we represent the best of the wine business ecosystem, and it is, therefore, contingent upon us to deliver the best wine experience and to really invest in this category. Thus, we maintain our focus on things that we do best. They are: Making the best wines, operational excellence and driving profitable initiatives. As seen in our gross margins, we have stayed committed to our plan. This has enabled us to drive world-class initiatives in vineyards, wineries and trade with long-term investments in category development, infrastructure and brand salience. Our EBITDA margins include stepped-up expenses on long-term initiatives. We continue to build a business that is in the mold of a leader. Our premium-focused portfolio and emphasis on delivering best wine experience are helping us sustain growth. Strategic associations and collaborations with key events have played an integral role in our journey. During the quarter, we participated in Nykaaland, ProWine, Nagpur fest and Viva La Vino, where consumers sampled our renewed Master Selection range and recently introduced Pinot Noir wine. We also took TiLT, our wine-in-a-can brand, to music festivals like Bandland and Doon music festival, strengthening our presence in lifestyle events and driving greater sampling and discovery. We are part of the wine lifestyle, which we are helping to develop and have seen greater sampling and discovery each time year after year. Moving on to outlook. The coming year we'll see increased production capacity and a promising harvest, both reinforcing our position in the premium wine segment. With a strong portfolio, distinct brand engagement and strategic initiatives, we are confident of scaling both our top line and bottom line performance going forward. With that, I conclude my remarks and request the moderator to open the forum for questions. We will be happy to address any queries. Thank you.

[Operator Instructions] Today we will take the first question from Surya Narayan Nayak from Sunidhi Securities.

Am I audible, sir?

Yes, please go ahead.

Yes, sir. Please go ahead.

Okay. Just to understand the business of the wines, which is related to the agriculture scenario, especially the wines or vineyards. So I mean, the gross margin is very low in your case. So I mean, what kind of sustainable gross margin you are looking at and so as the operating margin going ahead because you have substantially entrenched your position, I'm looking at the past many years' trend. So close to around INR 300 crores to INR 400 crores of revenue you are doing, but the operating margins are not improving. So any idea where you will be improving the current operating margins?

So a couple of feedback, sir, on your question. One is that I think you kindly view our numbers on stand-alone basis to get a better perspective of our company and our business because the operating company is a subsidiary of the listed entity. And the business operations in the holdco have been scaled down over the last 1, 2 quarters, and that may be distorting the gross margin number that you are seeing. I can tell you to the best of our knowledge, our gross margins are probably the best in class amongst the winemakers in the country, and we are at around 77%, 80% gross margin today, and that has been very stable over the last many quarters.

Okay. But I was looking at your presentation, Page #34, there the gross margin has improved. But again, the revenue has dipped and resulting the EBITDA actually squeezed and EBITDA margin has fallen to 5% from 16%. So that's where the -- year ending, it was 13%. So you just tell about the seasonality of the business, whether any seasonal angle is there or in case of any sort of -- because majority of the winers would be falling in the Maharashtra and your positions are in there. So any sort of drought conditions how you would be combating?

Sure, sure. So just to clarify, sir, I initially answered -- your question was very specific to gross margin. So gross margin level, we are best-in-class in our view and very stable. Previous year, this year, there is hardly any change. In fact, it's marginally improved. At EBITDA, [ you're absolutely ] right, our EBITDA margin has dropped from about 13.2% to about 4.88% for the current 9 months. And that is largely because the company has increased its brand investments and generally expenses in line with some new product launches, new initiatives and many of those things will only begin to show its reward in the coming quarters.

How long you have been in the business...

Yes. And lastly, I think you mentioned something about drought, et cetera. There is no such concern. Just to clarify.

So in this business, how long you have been in our country, I mean, in the business just to understand?

Over 15 years.

15 years. And this is -- and you were basically increasing the farming area where you are eying for 100 acres of farming from currently 40 acres to 60 acres to 100 acres size, sir?

That is the addition, sir, this year. We are already farming almost 300 acres since last more than a decade. And what we are talking of this 40 and 60 acres, that is additional acres planted this year and 60 acres, which we will plant going forward. So we will have almost 400 acres.

So what would be the sustainable EBITDA margin for your case going forward?

We are aiming for around 10% to 12% in the near future.

Near future. And any sort of revenue growth you are looking at?

Definitely, sir, we are gearing up this year is an aberration. Overall, the entire alcobev industry has grown only about 2%. This is as per some even newspaper article, which came just day before yesterday. So this year has been a flat year for more or less the entire alcobev industry. But we expect to get back to some sort of normalized growth of between 10% to 15%, and we expect to do better than that.

That is value growth or volume growth you are expecting?

Both.

Both. But sir, the industry has not grown that fast actually. I mean it is always stayed below 3%, 4%.

See, I didn't understand your last question. Can you repeat please?

I'm saying the industry has not performed more than 4%, 5% in any year and especially wines are actually different to total market. So I don't think -- I mean, your expectations are a little bit high. So are you seeing in the market that you'll be able to achieve 10% plus? I mean that is a little bit on the higher side.

Anyway, sir. We will wait and see. I think it is hard to discuss numbers and debate over them on this forum. But if you see our historical performance, in FY '21, our wine business was about INR 92 crores. And now in FY '24, we are almost INR 200 crores, so that shows a growth of more than 20%.

Which are the states we are majorly present at the moment?

I didn't understand what you just said, sir. Can you repeat?

Which are the states we are majorly present?

We are present pan-India. The only states we are not present are Chhattisgarh, dry states like Bihar and 1 or 2 states in Northeast.

[Operator Instructions] We'll take our next question from the line of Saurabh Shroff from QRC Investment Advisors LLP.

Just that to get a better understanding of your business since this is the first time we are interacting, if you could maybe help me understand how much inventory do you typically carry? What is the aging cycle that you follow and how that sort of ranges across the spectrum of your products, right, from luxury all the way down to value, et cetera?

This is Gaurav Sekhri. In terms of inventory, I mean, wine as a process takes at least 90-odd days to make in tanks. So you've got 3 months there just in the process of wine-making. And then after that, it is carrying at least a couple of months of sale inventory. So our business inventory turnover ratio by nature of the business is fairly long. So that is one part. And in regards to -- sorry, what was the second part of your question?

So when you say that 70% of our portfolio is premium and luxury, does that by its very nature means that these are wines which are aged longer? Or is this just a differentiation in terms of the kind of grapes that we are using?

It is a differentiation in terms of grapes as well as price point. There is also some element of aging involved, but that is on very few select wines, which are sort of luxury segment, you're looking at INR 2,000 plus.

Okay. So just to make sure that I've understood this correctly. So typically, 5 to 6 months is the inventory cycle that you would run. Is that right?

Yes.

Okay. And you mentioned that the canned portfolio has sort of grown at about 20-odd percent in the first 9 months. Can you maybe explain to us where you are seeing this success coming from? Obviously, it's still a small part of your portfolio, but it's a very interesting innovation, it's not something that we've seen anywhere else before. So where is this sort of -- how is this product doing? How are you marketing this differently? What is sort of driving this? And what percentage of mix do you think this can become? One. And second is, given that glass is typically a big cost item, at least for the alcohol beverages companies, obviously, this, I'm guessing, does provide you better gross margin overall. Is that a fair assumption?

So yes, I'm glad you asked this question because we would really like for the investor community as well as our consumers to develop a better understanding on cans. The canned business is really to make wine more approachable to consumers. We've seen in the past, there's a lot of formality around drinking wine. Do I have the right glass, et cetera. So our aim of putting wine in a can was to remove that formality, make it more accessible, more approachable where you can consume it in any setting without any of those established preconceived notions around wine. We are seeing very good response from different pockets, very diverse actually. We have seen very good growth in UP. We have seen excellent response in West Bengal. Haryana is a good market for us. Uttarakhand is a good market for us. And also pockets in Bangalore, et cetera, I think where you have mostly young people who are just coming into legal drinking age, I think who have just become of legal drinking age, those consumers tend to sample it and then kind of approach it without any preconceived notions. That has been our experience with it. And we have grown 20-odd percent in FY '24, and it continues to be a good focus area. On the cost side, see, aluminum cans are also more sustainable form of packaging. This whole concept is also very close to our heart that we wish to be as sustainable as possible. Aluminum is recycled any number of times. And yes, it's a more economical form of packaging. But in terms of gross margin, packaging is only one part. There's also the kind of liquid and the price points that you are wishing to achieve all play a role in that. So it is comparable to our bottles business. It is, in fact, probably a few percentage points lower than our bottles business. But we hope it will be a far larger volume business.

Understood. And can you just maybe explain to us how are regulation -- so my understanding is that the regulations on wine are obviously significantly more benign versus alcohol, at least in the state of Maharashtra and some of the other states. Can you maybe just help us understand, is that the case across the length and breadth of the country? And what is it that sort of we are doing? So you said, obviously, things like category creation and you are taking the role of the industry leader. So maybe if you can just help us understand what is that entailing? How much money are you investing in this so that we get a better picture for what is the inherent profitability of this business? And what is the investment that may not necessarily get repeated after another few quarters or a few years?

Sure. So firstly, in regards to regulations, all states are more or less very similar. So what you have observed in Maharashtra, other states are not too different. There are only some very specific -- state-specific requirements which we have to follow. So that is point one. And point two, I think wine, for it to be better understood and communicated, I think it will require a sustained form of investments and brand initiatives. I believe we see this at least for another year, 1.5 years.

And what is the quantum of investments that you have made?

I can e-mail you that number if you e-mail this query to us. But we continue to spend about 8% to 9% of our top line on brand investments.

Okay. Fine. And in terms of -- again, sort of coming back to regulations, in terms of price increases, et cetera, do you have to go to each of the state governments? Or is the pricing sort of more free?

It is absolutely like any other alcobev. We have to go to each state. Alcohol regulations are state subject. Any price increase, et cetera, has to be discussed with each state individually.

[Operator Instructions] As there are no further questions, I now hand over the call to management team for closing comments. Over to you, sir. Sir, you're on mute.

Thank you very much, everyone, who has participated today and shown interest in our company. We wish you a lovely evening ahead. Thank you.

Thank you. On behalf of Fratelli Vineyards Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.