Fratelli Vineyards Limited (FRATELLI.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Fratelli Vineyards Limited Q1 FY '26 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Priya Sen from Go India Advisors. Thank you, and over to you.

Thank you, Vishakha. Good afternoon, everybody, and welcome to Fratelli Vineyards Limited earnings conference call to discuss the Q1 FY '26 results. We have on the call Mr. Gaurav Sekhri, Chairman and Managing Director; Mr. Aditya Sekhri, Director; Mr. Rajesh Garg, Chief Financial Officer; and Mr. Hemant Arora, Chief Business Officer. We must remind you that the discussion on today's call may include certain forward-looking statements and must, therefore, be viewed in conjunction with the risks that the company faces. May I now request Mr. Gaurav Sekhri to take us through the company's business outlook and the performance, subsequent to which we will open the floor for Q&A.

Thank you, and over to you, sir. Good afternoon, Priya. Am I audible?

Yes, sir, you are audible.

Okay. Thank you. Good afternoon, everyone. Thank you for joining us for the Q1 FY '26 Earnings Conference Call of Fratelli Vineyards Limited. The financial results and investor presentation have been uploaded to the stock exchanges, and I hope you've had a chance to review them. For those joining us for the first time, please allow me to take a moment to briefly introduce Fratelli Vineyards. We are one of India's leading premium wine companies with a presence across 29 states and union territories. Our diverse portfolio spans both value and premium segments, catering to the evolving preferences of Indian consumers. With over 400 acres of vineyards under active farming and nearly 1,000 acres under long-term partnerships, our operations are backed by more than 15 years of viticulture expertise. Our fully integrated facility in Akluj Maharashtra, spanning vineyards to bottling ensures consistency, scale and uncompromising quality. In recent years, we have undertaken strategic investments in infrastructure, brand and people to build a strong foundation for scalable, sustainable growth. We are now a future-ready wine company with a clear focus on long-term growth. As we step into FY '26, consumption is looking promising, supported by improving macroeconomic indicators and a young population with aspirational consumption patterns. These are encouraging trends that closely align with Fratelli long-term vision and commitment to a luxury and premium wine company. On the regulatory front, Maharashtra's recent excise duty hike on spirits caused a temporary disruption in wine sales, while excise duties on wine remain unchanged, and this is beneficial overall for the wine businesses. Additionally, the U.K.-India free trade agreement came into effect this quarter. Although its full impact is still unfolding, we do not expect it to have any negative impact on sale of Indian wines. That said, we are seeing continued traction in aspirational and luxury-led consumption. Our flagship labels, Sette and J’Noon continue to gain market share within the luxury segment, which grew 15% in Q1 FY '26 and now contributes 6% of our top line. The master selection range in the super premium segment also recorded steady progress this quarter, around 6% to revenues. At the same time, we are deepening our presence in Tier 2 and Tier 3 cities and enhancing reach in regions with traditionally low wine consumption. The premium portfolio remains the anchor of our brand identity, while innovation continues to unlock newer audiences. We remain committed to unlock India's untapped potential of wine and increasing TAM. A prime example of steps that we have taken in this direction is the launch of Shotgun, our crafted wine RTD offering launched in February 2025. Within just 3 months, it has secured a 5% market share in tracked states and is now present in 9 domestic markets. The overall RTD industry grew 29% in Q1 and with a INR 400 crore addressable market in wine RTD, we see significant headroom for expansion and sustained momentum for short gun. While we continue to grow in the core wine segment, shotgun represents an additional vertical, a new opportunity designed to strategically deepen our penetration in Tier 2 and Tier 3 cities as well as in regions where wine consumption is still at a nascent stage, meeting evolving consumer expectations for convenient, high-quality beverages. We are targeting presence across 15 states for Shotgun by the end of FY '26. On wine in a can format, Tilt continues to build relevance across emerging urban markets. We are among the few players actively shaping a modern wine culture in India, one that resonates with younger lifestyle-driven consumers. we continue to be market leaders within the dominant -- with a dominant market share in the wine and can format. I'm pleased to inform that the company has invested approximately INR 70 crores in FY '23 to FY '25. These investments have gone into fixed assets like expansion of winery building, new state-of-the-art equipment and vineyards. We have approximately INR 12 crores of CapEx planned in FY '26 as well, and this will largely complete our CapEx cycle for capacity expansion required for envisaged growth over next 3 to 5 years. Also, we are at the planning stage for our wine tourism and hospitality vertical -- over the next 2 to 3 years, we expect to invest around INR 100 crores in hospitality in Maharashtra, and we plan to set up our own winery in Karnataka. These investments will not only diversify our growth, but also deepen consumer engagement. Our focus remains steadfast in top line growth and margin expansion. With that, I'll now hand over to Aditya to take you through the financial and operational highlights for the quarter.

Thank you, and good afternoon, everyone. This quarter's performance reflected steady operational progress alongside near-term challenges. Net sales declined 16%, driven by a temporary slowdown in urban consumption and deliberate supply chain optimization to protect wine quality. In Maharashtra, a key market for Fratelli, the revision in spirit prices following excise duty changes caused a temporary disruption that affected wine sales, even though the excise duties on the wine itself have not changed. In Q1 FY '26, the premium and above segment continued to make progress, contributing over 70% of total sales, underscoring the brand strength in the high-value space. Fratelli's recent new launch, Pinot Noir, one of the world's most popular wine varietals launched in July '24 is now available in more than 1,000-plus outlets across the country. The company continues to command roughly 1/3 share of the Indian wine market, supported by its portfolio of premium offerings. Gross margins continued their upward trajectory, delivering an improvement of 700 basis points, supported by disciplined cost control and operational efficiency. EBITDA margins were softer, reflecting increased investments in Shotgun and other long-term initiatives such as category development, infrastructure enhancement and brand building. Finance costs rose due to borrowings for capacity expansion, while depreciation increased with the commissioning of new assets. These investments are building capabilities and positioning us for future readiness. On the capacity front, we now have 5.5 million liters of winery capacity alongside a new 47,000 square feet facility in A. Plantation of 100 acres of new vineyards in Jambhali is progressing as planned, strengthening our integrated value chain and ensuring consistent quality and supply. These capabilities make us well prepared for rising demand as we expect our offerings to extend our presence in newer geographies. Our international expansion includes entry into 3 new markets, increasing our footprint to now 12 countries and 2 duty-free zones in Delhi and Mumbai. On the domestic front, we have established a presence in Chhattisgarh as well now, bringing our total reach to 29 states and union territories. Operationally, we continue to sharpen efficiency and systems. Sales force tracking now provides real-time sales visibility and supply chain optimization measures are preserving product integrity across key markets. In line with our sustainability commitment, we have now installed 520 kilowatts of solar capacity, meeting 50% of our electricity needs and generating annual savings of approximately INR 50 lakhs. As we look forward, our priorities are clear: expanding the reach of RTD Shotgun, advancing our premium portfolio, strengthening our hospitality vertical and widening our presence across markets. Supported by scalable capacity and established portfolio and a defined growth pathway, we are well placed to consolidate our position in the premium wine space. Guided by our operational discipline and a long-term approach, we aim to deliver consistent revenue growth and healthy margin improvement while shaping evolving consumer trends in wine consumption across India. Our diversified portfolio and consistent focus on delivering superior wine experiences continue to enhance brand strength. Driving EBITDA improvement remains our key objective. We are meeting evolving consumption patterns and engaging new wine drinkers through innovative offerings like Shotgun and TiLT. Fratelli is expanding its reach by introducing such forms appealing to both seasoned consumers and notices, alongside continued investments in capacity, brand building and systems, the foundation for sustained long-term growth. That concludes my remarks. We may now open the floor for questions and answers. Thank you.

Thank you. [Operator Instructions] The first question is from the line of Aryan Otswal from [indiscernible].

Am I audible sir?

Yes, absolutely. Please go ahead.

Yes, sir. So sir, I have a few couple of questions. The first question is, are there any new product launches planned for the coming quarters? And how do they align with the company's premiumization strategy?

Aditya here, I'll take the question. So we have recently just launched Pinot Noir, as I just mentioned, in the last fiscal year. That continues to be a long-term priority for the brand. And we, of course, look to increase it in more touch points in the next coming quarters. We have 2 major rebrands which are planned as well, one being the Grand Cuvee Brut but for which you will be hearing more about in the subsequent quarter. And of course, the major focus for this year will be alongside our premium growth, getting Shotgun in roughly 15 markets.

Okay. Got it, sir. And sir, what is the estimated size of the addressable wine market in India? And how do you expect it to evolve over the medium term?

So, the current market size for the Indian wine industry, not inclusive of RTDs is roughly INR 1,000 crores for the domestic market and about INR 500 crores for the imported segment at the moment. We, as Fratelli, are expecting the industry to grow at about 15% to 20% for the next 3 to 4 years, and we remain firm on that.

Okay. And sir, one last question. Sir, were there any supply chain constraints such as grape harvest challenges or packaging shortages? And how have input costs per liter moved year-on-year.

Gaurav Sekhri here. We have not had any challenges on the procurement of grapes or any major changes in the price of even grapes that we procure from outside. Our otherwise contracts are long term with farmers. And therefore, you will see the -- there are no major changes in the gross margin profile of the company.

The next question is from the line of Karan Kamdar from Choice Institutional Research.

Sir, Am I audible?

Yes. Please go ahead.

Yes. Sir, I just wanted to have your view on how you see the market as because it seems like the consumer is favoring imported brands more. So how do we plan to challenge that and sort of get the consumer back to domestic wines?

See, there is no denying that the general perception that we carry in India, not just for wine, but even for other products tends to be that what is imported is superior. And this is even more so in the case of wines. However, the kind of quality that is being offered, especially by Fratelli and also by the other wine industry people in India, I think as and when consumers are trying and experiencing the product, they realize that at that price point, the kind of quality that is being delivered by the Indian wine industry is far superior to import it. So you're right, there is a perception issue, but it has been overcome and it will continue to be overcome by just producing higher quality product.

Got it, sir. Sir, on the hospitality front, you announced, I think, one in Maharashtra and one in Karnataka also. How do you see that? And how much percentage of our revenue do you expect to contribute, let's say, 1, 2 years down the line once it gets fully established?

See, firstly, I'll clarify. Our intention initially is to only roll out the hospitality venture in Maharashtra, not in Karnataka. In Karnataka, we expressed our desire to have our own winery. At the moment, we are working with a leased asset. So that is what we had mentioned. And regarding the revenue contribution from hospitality, et cetera, it's a bit premature to talk about that today because we are at least 2 years away from that happening. And I think it is better we discuss it down the road.

[Operator Instructions] The next question is from the line of Chetan from Systematix Group.

Hi, thank you for the opportunity. Sir, could you share the EBITDA margin differential between our premium luxury SKUs and say, our fast-growing RTD products? And are RTDs accretive or dilutive at the gross margin level?

So I can -- Aditya here, I'll comment on this. So I can't comment on the EBITDA margins, but I can give you a view on the gross margins. Our gross margins for our premium and above brands are north of 70%, and they have remained so for the last 3 years. On the -- in the RTD segment, the gross margins are relatively lower. We are operating between 65% to 70% gross margin in the RTD segment.

Okay. And sir, again, a second question. So if we see over 70% of our sales are from premium and luxury wines. So what is our internal target for this mix by, say, FY '30, where we are targeting a 20% plus kind of margin?

So the overall mix may reduce as a whole. But when it comes to our bottles business, I definitely believe our mix will be 70% plus at least for the next 5 years from premium and above brands. But considering Shotgun is a product in which our focus will be there. Therefore, as a whole, in terms of our overall top line, it may drop to about 65%. But if we look at our bottles business as a whole, it should remain above 70%.

Okay. Okay. Got it. And sir, lastly, I wanted to ask on the Maharashtra, this wine promotion scheme. So do we have any estimated number like which we can expect in FY '26?

See, the Maharashtra VIP scheme benefit is basically linked to the sales that you do in Maharashtra, and we are only in Q1 because that benefit is only applicable for sales within Maharashtra. But maybe our CFO can try and give you a range. Rajesh, would you like to maybe give an indication of range of the benefit we may expect this year?

Yes. See, Rajesh this side. Like Gauravji informed that, I mean it is too early to inform the projections which we'll be having from VIPs revenue. But last year, we booked around INR 8 crores of VAT subsidy. So I mean, it will be too early to say by the end of the year. But like we are projecting around 15% to 20% growth on the top line. So I mean, similar maybe expected in that segment also.

The next question is from the line of Shyam Garg from [indiscernible].

Thank you for the opportunity. My first question is with respect to how many RTD cases have been sold to date? And what is the sales ramp-up expectations?

So our plan, as I just mentioned, we've launched in about 9 states already. Our endeavor is to do more than 1 lakh cases by the end of this financial year, but we'll be able to give a better update by end of Q2.

Okay. And how many have sold so far?

I will not be commenting on that as of now. But as I said, we have reached a 7% market share in the RTD space in Q1 already in states where data is available.

Okay. Got it. Sir, my second question is with respect to how differentiated is our approach to Tier 2 and Tier 3 markets compared with Tier 1 markets, particularly in terms of product development, packaging, for example, cans and RTDs and marketing.

Gaurav Sekhri here. There is no difference in the packaging at all between Tier 1, 2 and 3. It's very consistent and exactly the same. However, our approach is a bit different for Tier 2, Tier 3 cities. There, there is a larger effort needed in getting consumers to try the product, sample the product, and that is how we are sort of also putting our energy. But there is absolutely no difference in the product. Of course, in Tier 2, Tier 3 cities, the consumption is more skewed towards the premium to value range versus the luxury range of products.

Okay. Sir, my next question is with respect to what is the cost optimization initiatives that have been planned for FY '26 and how will they will lead to margin expansion road map?

So we have various initiatives underway. We had mentioned already about solar. We implemented solar energy in our facilities, and that will result in savings. We've already given an estimate of that. We are also working on operational efficiency at the vineyards level, in the vinery level, even supply chain optimization. So all of those things will result in savings. We are working towards the plan.

Okay. Okay. Sir, any absolute numbers or any expected margin expansion that we can expect from these plans?

It will be very -- I think it's a little sensitive. We consider that information to diverge in that kind of detail. But certainly, we expect it to improve about maybe 200, 250 bps to EBITDA.

The next question is from the line of Manan Gandhi from Keystone.

Am I audible?

Yes, please go ahead.

Sir, with more than 70% of the portfolio positioned in the premium segment, how might the launch of TiLT and Shotgun influence our overall mix? And how do you anticipate the revenue composition evolving over the next few years?

So I already answered this question. Premium and above brands will continue to consist of about 70% of our revenues when it comes to our bottles business. But considering the overall TAM in both the TiLT and the Shotgun segment, we see very good growth opportunities in those segments. And therefore, our overall mix may come down to about 63%, 65% from premium and above brands in this year, if you look at overall revenue. But if you talk about only the bottle segment, it will remain north of 70%.

Okay. Okay. And sir, just on a promoter holding side, one query, like we were at 73.81% promoter holding, and now we are like going down to 57%. So like what exactly would be the reason for the same? Because the stock price is also falling since quite a long time.

So Manan, Gaurav Sekhri here. Firstly, the 73.81-odd percent that you saw was the promoter holding prior to the reverse merger of Fratelli into the business. Since the time Fratelli has become the holdco and a 100% subsidiary of the listed entity, the promoter holding is consistent at just a shade below 58%.

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

Am I audible?

Yes, Deepesh, please go ahead.

Okay. What is the strategic rationale behind introducing a wine-based RTD -- and how will it differentiate from the existing market offerings?

So Gaurav Sekhri here. Firstly, wine-based RTD, as it suggests, it is wine liquid. And we have better expertise than anybody else in the country. We would like to believe in the making of wine and the vineyards, et cetera. So that clearly gives us a competitive advantage. Secondly, our rationale of getting into wine RTDs is to have one fast-moving product within our portfolio, which expands us as a business beyond just the traditional wine consumption area, number one. Number two, it opens many new Tier 2, Tier 3 markets for us, increases our touch points because there are many small retailers, as you can imagine, maybe in interior Maharashtra, interior Haryana, interior UP, where the sale of traditional bottled wine is possibly only maybe 5 or 10 cases over 2 or 3 months. So to service those markets can be a bit challenging. But with Shotgun, we can service them with higher frequency. So it gives us much better access to touch points and increasing TAM.

Okay. And who's currently leading the wine-based RTD category in India? And how does Fratelli intend to capture the market share and stand out from the competition?

Sure. So there are -- the clear standout leader in this segment is a product called Bro Code. And I think the others are not so relevant. They are much smaller. We have now thrown our hat in the ring as well, and we expect to become a brand to reckon with within our year 1 of launch.

Okay. And when do you expect the EBITDA margins to go back to 9% to 10% level? And what are the levers in place to drive that?

See, for us, it is really about the top line expansion and some operational efficiencies, which will bring the EBITDA to even beyond 10%. But like there is some work cut out and involved in getting there.

Okay. And how much of the Q1 FY '26, I mean, 76% year-on-year revenue drop was due to the volume decline, pricing changes or product mix shifts?

Again, I think just please recheck the numbers that you're seeing regarding revenue decline because I think you are comparing the business of the holdco, the listed entity prior to Fratelli was reverse merged into it, and that was a trading business with much higher revenues. So that would not be the right comparison.