Fratelli Vineyards Limited (541741) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Fratelli Vineyards Limited Q1 FY '27 Earnings Conference Call hosted by Co-India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to [ Mr. Adi ] Go-India Advisors. Thank you, and over to you, sir.

Thank you, Pari. Good afternoon, everyone. It is my pleasure to welcome you on behalf of Fratelli VineyardsLimited. Thank you for joining us today for Q1 FY '27 Earnings Call. We have on the call Mr. Gaurav Sekhri, Chairman and Managing Director; Mr. Aditya Sekhrii, Director; Mr. Rajesh Garg, Chief Financial Officer; and Mr. Hemant Arora, Chief Business Officer. Please note that today's call discussion may include certain forward-looking statements and must therefore be viewed in conjunction with the risk that the company faces. I would now like to hand it over to the management for opening remarks. Thank you, and over to you, sir.

Thank you, and a very warm welcome to everyone joining us today. Am I audible okay?

Yes, sir, you're audible please, proceed.

Yes. Good afternoon, everyone. With India approaching its 80th independent way, there is a strong sense of optimism around the country's growth story. And my best wishes to all proud Indians on the independently tomorrow. At Fratelli , we are immensely proud to be an Indian wine brand that is building a strong presence across the domestic market and on the global stage. It was a particularly proud quarter for Fratelli and Indian mines as Fratelli became the first Indian winery to get 5 wines with 90-plus points at the prestigious decant world wine awards further validating the quality of Indian wines and the strengthening in credibility of our brands, both in India and internationally. We have started FY '27 on a positive note expanding our presence into 2 new geographies and building on the positive EBITDA momentum achieved in FY '26. We delivered a resilient start to the year, reporting a positive EBITDA of INR 1.1 crores in Q1 FY '27. Turning to 2 growth engines of our business, Wines and the RTD segment both delivered healthy momentum in the first quarter. Core wine business grew by approximately 8%, while the RTD business more than doubled. Overall revenue grew by 22% year-on-year. Our premium and above portfolios contributed 71% of total revenue in Q1 FY '27 a mix we have been able to maintain consistently. Super premium category grew by approximately 7% year-on-year during the quarter, where our flagship brand, Jilun growing 436% year-on-year, driven by strong momentum across the portfolio. Within the luxury segment, Fratelli continues to maintain its market leadership. This performance reaffirms Fratelli position as a category creator and a leading player in the luxury wine segment. We are also seeing encouraging traction from the brands we launched last fiscal, particularly in terms of geographic expansion. The SETA 15th anniversary limited edition in collaboration with Manish Malhotra is now plan across 7 states since its launch in January. Fratelli [indiscernible] has expanded from 4 states to 9 states, and we will expand it to 15 states by end of H2. Once these brands gain distribution, they can build good traction in the market, so expanding their geographic presence will remain an important growth for us. In addition, Shira Cabin, which was launched in April 26, is already registered across 11 states and seeing very good response. Coming to our value portfolio. This segment delivered strong growth of 26% and the value portfolio helps us maintain our presence in Tier 2 and Tier 3 cities, while giving consumers an entry point into the Fratelli portfolio with the opportunity to trade up. Coming to our RTDs, which has strong -- which has really emerged as a success story for us and is becoming an important growth engine for the company, short term, sold approximately 50,000 cases in Q1 and continues to deliver strong market traction doubling safe year-on-year basis. During the quarter, we added Chatisgarh and Karnataka, taking our footprint to 22 states. So a large part of our runway here is simply about taking short-term deeper into the distribution network that we already have. We now have 4 unique favors, and shotgun Jamun is slated to be launched in Q2 of FY '27. Overall, we remain well on our way towards our ambition of crossing 200,000 cases sale of shotgun this financial year versus about 80,000 cases in the last year. I should also reiterate the sector we are seeing with our CSD listings, the Army canteen or the CSD business contributed approximately 8% of our top line in Q1. Filtrete, Tilton Shira, which vested in Q4 in the Army canteen have deputed strongly. Tilt is particularly significant for us as it is the first win in a can product to be listed in the Army canteen. Melo and no sparkling wine will begin from Q2, while shotgun strong is expected in edu, so we expect CSP to become an increasingly meaningful contributor through the year. Internationally, we are now present in 17 countries where exports of tilt and short term have also commenced along with our bottles business. Overall, we are encouraged by the FY '27 has started. The wine business continues to strengthen its premium positioning. RTD business is helping us give a scale. Our distribution footprint is expanding, and we are beginning to see the benefits of efficiency and scale come through in profitability. With that, I hand over to Aditya to take you through the operating and financial details. Thank you.

Thank you, and good afternoon, everyone. Let me take you through the financial performance in the quarter. We delivered robust revenue growth in Q1 despite temporary regulatory challenges in Delhi and Uttar Pradesh are was impacted by delays in label registrations, while also today saw some changes in the excise policy during the quarter. These are essentially procedure that is importantly not a reflection of any weakness in demand. Strong performance across Chandigrah, Haryana, Telangana, Odisha and Pondicherry offset some of that impact. With these temporary headwinds largely behind us, we remain confident in the strength of our underlying business and our accrual to Jeffry remains strongly intact. Net revenue from operations increased to INR 46 crores approximately in Q1 FY '27 from INR 37 crores, representing approximately 22% year-on-year growth and approximately 25% sequential growth over INR 30.3 crores recorded in Q4 FY '26. The growth was driven by both parts of the business. The wine business grew approximately 8%, while RTD more than doubled. We largely maintained a gross margin at 80% despite the change in product mix. EBITDA for the quarter stood at roughly INR 1 crore compared to an EBITDA loss of INR 2.3 crores in Q1 FY '26. Brand investments remained disciplined during the quarter, with the weighted with the focus weighted towards the RTD portfolio as we continue to build shotgun and continue to launch it in more markets. Depreciation INR 2.5 crores compared to INR 2.3 crores in the quarter last year, broadly in line. Finance cost was INR 3.8 crores compared to INR 3.1 crores primarily reflecting borrowings taken for working capital as the business continues to scale. Overall, with revenue continuing to grow at over 20% gross margin at the upper end of our guided range, and our cost base already geared up for a much larger business. We remain on track towards vision 2030. We believe Q1 is an encasing first half towards our objective, and we remain focus on delivering profitable growth as the business games. With that, I would request the moderator to open the floor for future questions. Thank you.

[Operator Instructions] The first question is from the line of [indiscernible] Gogri from Choice Institutional Equities.

I wanted to ask with the RTD sales doubling Y-o-Y? Or what revenue contribution are we expecting from short term by like the year-end FY'27?

Shotgun on its own should roughly contribute about 10% of our overall top line by end of this year.

Okay. Got it. And what EBITDA margin are we expecting for this year? And then last year as well.

Gross margin for Shotgun.

Yes.

Gross margin for short run will be around the lines of 70%.

Okay. Got it. I -- I was asking about the EBITDA margin, the outlook for the same quarter FY '27 and '28?

Our EBITDA margin for the year projected is around 5% to 6% for the year.

The next question is from the line of [ Randhir Kumar ] from Randhir HUF.

Sir, [Foreign Language].

[Foreign Language] but I think your question is, are our wines fortified or not? Is that your question?

No, sir. My question is, sir, on 1 wine segment, [Foreign Language] .

We have no impact, sir, on -- as part of those regulations, there's no impact on our wine business at all. It is therefore other categories you are [Foreign Language].

[Foreign Language].

[Foreign Language] it is with the expectation of a certain scale to be achieved in this financial year. And of course, that is a little bit we are giving guidance with what we expect to achieve and it's an efficiency now of scale where Fratelli is poised at. So as the top line growth efficiency in expenses will be there. And as a result, it will have a direct impact, positive impact on EBITDA margins. But this guidance is where we expect to be in this financial year.

[Foreign Language].

Sir, we are going to do our best always. As you know, for Alcoa business, usually, Q1 is a slightly weaker quarter -- but in that also, we have delivered a 22% growth year-on-year. So I'm optimistic that in the year that we will see [Foreign Language].

[Operator Instructions] The next question is from the line of [ Akshat from AG Capital. ]

So my first question will be, as you have already completed 1.5 months of your quarter 2, sir. Sir, could you give us some early color on the demand environment, sir?

Sir, we are not -- we resist from giving such granular kind of forecast. [indiscernible] have to be taken in a slightly more generic and general manner. So at this stage, to answer your question will be a bit premature.

Okay. Sir, my next question will be -- are you seeing ready-to-drink demand strengthen further from Q1 level, sir? And how is the demand environment for the luxury wine segment, sir?

For the further shotgun portfolio, the demand continues to grow. As we mentioned already, we are right now in the process of again, widening our distribution. That is the first thing that we are looking to do. We have achieved inclusion of shotgun in more than 20 states already. So the first goal for shotgun is to widen our entire distribution scale across the network that we have already in the country. And demand continues to grow. That's why we've had a much better quarter 1 as well than last year. So we will be able to give better clarity on these factors after H1, hence, as the momentum continues to grow. On the luxury portfolio, our performance has been very robust. Canon, which is our flagship brand, continues to grow north -- so the demand is very favorable in that category, too.

Okay, sir, understood. Sir, my next question is, sir, could you give us some more colors on your export business, sir? Like what is the total revenue currently coming from your exports, sir?

Export business revenue still is at roughly about 1.5% of overall net sales. It's still very small in exports, 1 very good development at RN is that we still continue to get into new geographies. We've added 2 new geographies already in quarter 1 of this year. And we still look to add some more growing geographies in quarter 2 as well. So export is a very small base at the moment. And still, we are seeing very good traction in a lot of newer geographies. And also an update on exports that we've also commenced exports for our RTD segment, both in cans and in the shotgun.

Okay. Sir, which is the major export market right now for you, sir?

We have 5 or 6 core export markets, all being a good export contribution from us. A large part of it at the moment is coming from Asia and European market for us.

Okay, sir, understood. And sir, further continuing with this question, how do you see the growth and profitability of this export business, sir?

Export business is profitable, and I think it's more of a factor of scale now and exports for us. But I expect it to be a good contributor in the coming years for the business.

The next question is from the line of Deepesh from Maanya Finance.

Yes, Yes. How much of our total expenses are currently allocated towards brand building as a percentage of the revenues? And how do you see the spending going forward?

Yes. So roughly, if you see a trajectory for the last couple of years, you've been spending between 5% to 7%, looking at our entire portfolio performance. This year, again, the guidance remains at around 5% of net sales.

Now okay. So given the approximately 20% EBITDA margin guidance, could you help us understand key levers that will drive this margin expansion?

So for us, as you know, the EBITDA guidance that we've given for FY 2030, in that perspective, now as our gross margins are extremely healthy. In fact, we have industry-leading gross margins at about 79% to 80%, that's been the range for us. So a lot of the EBITDA expansion that you see will come as the business grows in scale. So as the business is going to be even both RTD and the bottle business, as you see more scale in the business, you will see these EBITDA expansion during the coming years up to FY 2030, which is the guidance we've given.

And you've also guided for INR 500 crores of revenues. -- what contribution do you expect from hospitality business? And what will be the overall revenue and margin mix, I mean, which will be looked into this hospitality?

This is Gaurav Sekhri. Yes, we have declared our ambition and aspiration to reach INR 500 crores -- and that does have a contribution from the hospitality business as well. But I have guided over the last 2 or 3 quarters, due to last 2 financial years being flat for the overall bottles business. we are taking our own time to roll out hospitality. As you know, it is capital expenditure heavy, and we have penal to focus on our core business of selling line to strengthen that first, and that is the priority for us. Therefore, the tracking and rollout of the RTD. So those are the businesses where we see a better reward and return for the company. So to answer your question, yes, in INR 500 crore revenue forecast. We do have hospitality as part of the plan, but that may be slightly delayed. Saying that, we expect to achieve this INR 500 crore top line even from our core business of selling wine, whether it comes TD, core business or portals or possibly even a third new element that we may add to our business in the next year or so.

Right. And now you already have about 400 acres of wine yards. How much of a production comes from our captive -- I mean, for the support of our captives? And at what production level do we need to state from the open market?

So this ratio changes a little bit year-on-year, but we are approximately 1/3 of our pay requirements come from our own vineyards, 1/3 comes from our contract farming arrangements and the balance comes from just spot buy-sell transactions with...

Right. And since the grade prices have almost doubled recently, putting significant must be putting significant pressure on industry margins. given our captive sourcing advantage, how sustainable is the margin resilience towards these higher prices of revs?

So we have been able to manage our gross margin quite well because of this hedge that we've had from the inception of business of having our own vineyard but more importantly, what motivates us to the farmers ourselves is the quality of wine that we are going to produce by undertaking acting at performing ourselves. Our primary motivation is that, sir.

Right. And all this 400 acres approximately right now, what is the value of this line?

Pso the vineyards do not sit on the balance sheet of Fratelli. So I must verify that. So it is not so relevant for Fratelli. These are where we have farming arrangements -- these are lands which we have taken under long-term lease on a dry lease basis, where Fratelli undertakes all the farming. .

Right. And the hospitality, which we are planning to do, I mean, that is on the same land or that is on our own land?

Very good question. For the hospitality, 10 acres has been acquired within the vineyard by Fratelli, that sits on Fratelli's balance sheet.

Okay. So 10 acres is what is on Fratelli balance sheet, right?

That's right. That's right which is the earmark for hospitality project.

The next question is from the line of [ DBM Beta ] an Individual Investor.

Jai Hind, the team Fratelli Vineyards. I'm in Wing Commander DGM Teja from Indian Air Force. And I want to congratulate the team for a good set of numbers with the ready-to-drink products in the Army and also various other canteens? My question is, what is the growth guidance or the profitability that is expected from the PSC phase, hence?

Sir, Gaurav Sekhri. Firstly, thank you for your service to the nation. And thank you for your compliment to the company as well. Regarding the forecast, we are expecting this financial year, we want to maintain this growth trajectory of about 20% plus that we have already achieved in Q1. And with that, we are fully expecting to be net-net breakeven in this financial year.