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

Ladies and gentlemen, good day, and welcome to the Fratelli Vineyards Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Riddhi Shah from Go India Advisors. Thank you, and over to you.

Thank you, Steve. Good afternoon, everybody, and welcome to Fratelli Vinyards Limited Earnings Conference Call to discuss the Q2 and H1 FY '26 results. We have on 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 be, therefore, viewed in conjunction with the risks that the company faces. May I now request Mr. Gaurav Sekhri to take us to the company's business outlook and the performance subsequently to which we will open the floor for Q&A. Thank you, and over to you, sir.

Thank you. This is Gaurav Sekhri. Am I audible?

Yes, sir, loud and clear.

Okay. Thank you. Good afternoon, everyone, and thank you for joining us today. It's always a pleasure to connect with all of you and share Fratelli's progress. As we look back at the first half of FY '26, the Indian wine industry has been facing some near-term headwinds. That said, our continued innovation is driving us forward. Our latest launch in the wine-based ready-to-drink segment Shotgun is showing great promise. It is seeing encouraging traction. And within just 6 months of launch, it has already taken 6% market share and is steadily expanding the consumer base amidst the -- amidst industry headwinds. By investing ahead of the curve and building a brand that resonates with Gen Z and millennials, we are strengthening a category that is now translating into solid traction in the market. As per the recent article published in the newspaper, RTD segment is poised to grow at 20% and Shotgun is very well positioned to capitalize on this opportunity. We are also cautious of the ongoing FDA discussions, including the Australia agreement and the negotiations with the EU. We expect Indian government to not make any further concessions beyond what has been made to Australia, and we are already preparing our business ahead of time for this. India may still be one of the most underpenetrated wine markets globally, and that is where lies the opportunity for companies like Fratelli. Consumer interest in wine continues to deepen. Premiumization is accelerating, and the category is steadily becoming a part of mainstream urban consumption. Over the last few years, we have completed majority of our core CapEx, strengthened our vineyards and production capabilities and built a fully integrated value chain. This gives us scale, flexibility and cost structure needed to operate confidently. More importantly, it enables us to deliver best-in-class wines to our customers and build strong brand loyalty. Fratelli has remained focused on strengthening its core business and expanded its reach. In Q2, our revenue remained stable at approximately INR 46 crores. Even with temporary pressures in select markets, our business has turned EBITDA positive in Q2. And this has been brought about by our premium mix of products and efficiency initiatives. Our luxury range continued to perform exceptionally well in Q2, maintaining more than 50% market share in the segment delivering 18% year-on-year growth. I'm pleased to share with you that Fratelli wines now is 1/3 of the Indian wine market. Our luxury segment reflects the strength of Indian winemaking and its highest expression, and we are encouraged by the consistent demand for labels such as J'NOON and Sette across key markets. Our new launch Pinot Noir has been extremely well accepted, and it is now available in more than 1,450 outlets, further strengthening our presence in the premium space. On the domestic front, H1 FY '26 marked a period of steady progress. We expanded into Chhattisgarh, taking our footprint to 29 states and union territories. UP, one of our most important growth markets delivered strong double-digit gains, and our CSD business continued its upward trajectory. Telangana and Karnataka saw a moderate decline due to industry-wide reset I mentioned earlier. But the underlying consumption trends remain healthy, and we are hopeful of good demand coming from these states as we get into the festive season. Internationally, we expanded into new markets, including Australia, Mauritius and the Maldives. Exports contributed close to 3% of revenue in Q2 compared to 1% in the last year. And we see meaningful headroom from exports as Indian wines gain more recognition globally. Margins remained steady and resilient. Gross margins for the quarter stood at approximately 79%, reflecting stable performance despite a shifting product mix. Our focus on operational discipline and a premium debt portfolio continues to support long-term margin health. Sustainability remains a core principle for us. At our Akluj Winery, 45% of our energy requirements are now met through solar power, contributing in a meaningful way to cost efficiency as well as long-term environmental responsibility. Beyond the core wine business, innovation continues to be a key driver. We are preparing to launch a new sparkling wine in the super premium segment and a port style wine in the value segment in Q3. These additions will broaden our offering and cater to distinct consumption occasions. We are finalizing plans to build a boutique high-end resort on our 170-acre vineyard property in Garwad village, very close to our binary. We hope we can begin work in early 2026, and we hope that we will be able to open the resort in 2028. The first half of FY '26 has given us a steady foundation, and we look forward to building on this momentum in the months ahead. With that, I will now hand over the call to Hemant, our Chief Business Officer, to take you through the operational and financial performance for the quarter. Over to you, Hemant.

Thank you, sir. Thank you, everyone, for joining the call. Let me take you through our financial and operational performance for Q2 FY '26. Net revenue for Q2 stood at INR 46.3 crores, broadly in line with the INR 46.4 crores in Q2 FY '25. Despite the flat Y-o-Y number, underlying demand remained healthy, supported by our premium wine and steady attraction in RTD. Shotgun has scaled well across the key states backed by strong repeat offtake. As mentioned earlier, within 6 months of a launch, it has captured a 6% market share in [ track ] states and is now available across more than 6,000 touch points. The brand is present in 11 states with the expansion to 15 state target by end of FY '26. As our distribution widens, RTD are set to deepen our reach, bringing in the new cohorts, added incremental volumes. Premium and super wine -- super premium wines remained steady contribute through the quarter and supported overall margin stability. Gross margin for Q2 was 79% compared to 80% in Q2 FY '25, reflecting a marginal mix impact but healthy margin performance overall. From a profitability standpoint, Q2 EBITDA stood at INR 1.47 crores compared to INR 1.32 crores in Q2 FY '25, reflecting an improvement despite continued investment in Shotgun brand initiatives and systems. Depreciation increased to INR 2.3 crores versus INR 1.9 crores over last year with the new assets coming online, while finance costs rose to INR 3.4 crores versus INR 2.8 crores owing to borrowing taken for expansion. On the market side, the temporary disruption in Telangana due to retail license transition affected industry-wide volumes during the quarter. With the transition now complete, we expect a more normalized movement in H2. As we look ahead, we expect the second half to benefit from our strongest season demand, improving state dynamics and the establishment of Telangana. Our priorities remain scaling Shotgun, strengthening our premium wine portfolio and driving operating leverage as volume build. With that, we can now open the floor for questions. Thank you.

[Operator Instructions] The first question comes from the line of Chetan with Systematix Group.

Firstly, sir, we saw an impact in the business in Telangana and Karnataka. So can you tell us how much is the share of revenue from these 2 states?

Hemant, this side. Telangana and Karnataka is a very high contribution for our business, around 20% contribution in our business. That -- and that's why overall business impacted due to change in licensing policies.

And sir, my question is on CapEx now. So this INR 100 crores CapEx will be utilized for hospitality business and brand building for RTD, right?

Gaurav here. That's correct. We are envisaging this INR 100 crore CapEx is -- the large part of it is for the hospitality project because the bulk of our CapEx for our core business of wine is already done.

Okay. So sir, can you specify like how much will be for RTD, brand building?

See, I think we will be able to give you more accurately in the next earnings call. We are still finalizing our budget. But my expectation is out of the INR 100-odd crores, about 70% will go towards CapEx and the balance 30% will go towards brand building, just strengthening the balance sheet with some cash and liquidity.

Okay. Got it, sir. And sir, again, on RTD. So for wine RTD, the TAM is around INR 500 crores and our share is 6%. So what is the target for the next 2 to 3 years in terms of market share gain? And if you have any number at what rate this industry is growing?

Gaurav again. So as per a very recent article published in the newspaper, various agencies and consultants are predicting RTD market to grow at a clip of 15% to 20% year-on-year. In regards to our own projections, since we have only just launched and its early days, but we do expect our business to -- basis the response that we are getting and the repeat ratios to be double next year.

Okay, sir. Sir, and just one last question. Does the 29% contribution from value segment include Shotgun?

No, in the bottle division -- Hemant this side. In the bottle division, our premium [Technical Difficulty] more than 70% and 29% value contribution. So to answer your question, it does not include Shotgun.

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

Am I audible?

Yes, please, go ahead.

What is the current market share in wine in the can segment, tilt? And how has this category evolved since launch?

Hemant this side. Like in wine category, we are present in almost 17 states, and we are a market leader because we are present more than 17 states now.

Gaurav here, I would like to add that the sales for the wine in a can business or can sales are stable. They have not yet grown in any remarkable fashion. I must share that with you. And I think a large part of that is because this is -- we are the dominant players in this category. I think it would be good to see some other players also enter so then category expansion happens. But at this point of time, this format is a little bit lost between the people who consume wine still are taking time to accept that it can also be consumed out of a can. And the people who don't really consume wine, I mean, for them, these cans are not an option. So I think it's going to take a little bit more time. That we are, I think, a little ahead in time with the cans category for Indian market. Saying that, this year, we have seen some very interesting response for export on the cans. And we have now sent 2 consignments into Europe and the response seems quite encouraging.

And so -- how will your wine tourism strengthen the Fratelli brand over the medium term? And also, you mentioned that you are looking out for someone for the resort partnership. The whole CapEx will be done by the person who's coming in? Or will it be done on the Fratelli side?

So on the wine tourism side, wine tourism is a very well-established concept globally, whether it is South Africa, Italy, France, et cetera. Even in India, there are a good example of success in wine tourism. I think the brand building that happens, and the brand connect that develops is noteworthy. That is our primary attraction to get into this business. In regards to CapEx, the CapEx will be undertaken by Fratelli. And most likely, we will get an operator to come and operate the property as hospitality is not really our core business or our area of expertise.

Right. And what revenue potential do you foresee in the wine tourism business over the next maybe 2 to 3 years and if not 2 to 3 years, then going ahead?

I think it's a little premature to get into that today because, like I said, at this point of time, we have not completely committed to this. I think we can give you more clarity of this in our next earnings call.

Okay. But you mentioned that you're planning to have a INR 100 crore CapEx. What will be your debt situation? And how do you plan to put this kind of a CapEx? Were you looking for a fundraise or something?

It is -- that is -- we are thinking along the lines of doing a fundraise. So we are still working on that idea. We are not intending to take any more substantial debt on our balance sheet.

What is the debt situation right now? And what is the cost of debt?

We have approximately INR 120 crores of total debt on our balance sheet, INR 37-odd crores is long-term debt, and the balance INR 83 crores is working capital and short term. Our average borrowing cost is approximately 10%.

The next question comes from the line of Manan Pamani with Mission Street.

So sir, firstly, on the impact of FTA now that we have some history. What is your observation on the market evolvement post the deal with U.K. And do we stick to the fact that the Indian domestic wine consumption will grow at a faster clip than, say, imports or some general industry observations that you might have and then I'll ask my second question.

Sure. Thanks for the question. Firstly, in the U.K. FTA, Government of India has not made any concession for wine. Any concessions made is only on spirit. That's point number one. If we go by the FTA India has signed with Australia, there is protection for wines up to $5 value per bottle. The duty remains unchanged at 150%. So to that extent, we believe the Indian wine business should continue to not face any unfair competition. There is that element that India is not really known for making wines. And if there's a flood of imported wines at very low value, then that can possibly adversely impact the business because of perception, not for any other reason. So at this point of time, the FTA, what has been negotiated, what is under negotiation, I think the Indian wine industry is okay with that. I also think that there is a big challenge in the way wine is traveling and handled. And I think that works to the advantage of Indian origin wine because the wines we are able to get to the market are very fresh and better handled versus wines which are traveling in containers and then lying around in ports and bonded warehouses, et cetera. And I think the consumers, as they are getting more educated are realizing that just because something is imported, it is not necessarily of high quality. And I think handling of those wines also plays a role in it. So these are some things to keep in mind in relation to the competition that exists between India and imported wines. I hope this helps your understanding.

And sir, secondly, on the margin trajectory, I know we have been guiding for some numbers and solar, et cetera, would help us. So over the quarter, have -- are you on track to have further cost optimization that you had laid out? And what could be -- are you guiding for any margin or may not be in the shorter term, but let's say, FY '27 or '28.

So firstly, we are confident of achieving between 12% to 15% growth over the previous year in the current financial year. And if you see our performance quarter-on-quarter as well for the previous 3 quarters, our Q4 sales were INR 32 crores. Q1 was INR 37 crores. And now in Q2, it is INR 46 crores. So we are acutely aware of how the business and the top line, et cetera, is performing. And every business reaches an inflection point where the benefits of scale start showing in the operational efficiency. And I believe for Fratelli, that number is around INR 210 crores, INR 215 crores of top line. So we are heading in that direction.

Got it. And lastly, if I may, on the Maharashtra WIPS, is there any change? And are we getting those benefits? And now that we are about to enter December, Jan, so for FY '27, again, should we expect similar number as FY '26?

Sure. My colleague, Rajesh, our CFO, is besides me. He will take this question.

Rajesh here. Good afternoon, everybody. So I mean, we will -- this benefit has continued and -- this benefit is continued, and we are getting this benefit in this year also. And this policy is up to March '28. So like earlier, it was up to, let's say, March '23, and we got extension. So we are hoping so. And we are in the same direction actually.

Yes. So sir, we have only 1 unit, right, which is benefit -- because we get benefit of what is sold in Maharashtra only, right? So that number was somewhere around INR 8 crores to INR 15 crores -- I think INR 8 crores to INR 12 crores, what you had said on the last call.

Yes, yes, yes, that's correct.

The next question comes from the line of Yash Bajaj with Lucky.

Sir, my first question is on just the overall wine industry is kind of going through, if I can say, like tough times in terms of growth if you compare to other categories in alcobev. So can you help us understand, is there any change in customer preferences? Yes, that's my first question.

Gaurav here. I think you're absolutely right in your assessment. There has been some headwind in the overall growth of the wine sector, but I believe this is temporary. We are seeing pockets of growth which are showing excellent trends. And I think some regions take off a little bit earlier and some will follow later. Overall, I think the lifestyle associated with wine, that whole personality of consumption of wine is very much intact. We believe in it. And I think in order for us to have a more -- to shorten the time period between us reaching our consumers and them graduating to having finer wine, our launch of Shotgun, which is a wine-based product is a way to attract and recruit consumers at an early stage when they come of legal drinking age, and they start drinking alcohol. And we firmly believe that the overall dynamics and factors relating to wine consumption in India is still intact, and we will see a revival within the next maybe 2 or 3 quarters.

Understood. Understood. And just a follow-up to that, sir, is that -- so is there any kind of impact we face when it comes to shelf space at any of the outlets when other categories in alcobev, suppose like whiskey, gin, vodka, when they become relatively more aggressive when it comes to pushing products, do we -- are we facing something around that?

Not necessarily. I mean if you go to premium outlets in Indore city, you will see that a large amount of space is still given to wine simply because of the depth of choice. So I don't think wine is fighting for space with other spirits or beer. We have seen growth in consumption in India in tequila, for example. So a lot of young consumers have -- are taking -- are enjoying tequila 2, 3, 4 years ago, they were enjoying gin, then they shifted to premium rums and that was a shorter phase and now they've sort of taken a shine to tequila. So I think consumers will [ flirt ] with various options. But I think when it comes to alcohol beverage to enjoy with your meal, it is still really wine. People are [Technical Difficulty] spirits anywhere in the world with their food. So I think wine has its own very unique spot within the alcobev space.

Okay. Okay. Understood, sir. Sir, my second question is what -- as of today, what is our touch number in terms of point of sales today? And what do we expect in the next 2, 3 years? How should we think about increasing our point of sales?

Yes. Hemant this side. Currently, we have a touch point of 25,000 touch points as of now, but with the help of RTD -- yes, and with the help of RTD Shotgun in the -- within the launch, we reached 6,000 touch points alone as a Shotgun. And within a Shotgun, we have increased our WT15 touch points. So our estimation will be soon between around 28,000 to 30,000 touch points.

Okay. Understood. Understood, sir. And how should this number look like in the next 2, 3 years?

Definitely it will grow further. But I will -- can't give a guidance, but definitely we will grow further because the Shotgun is a product which we can sell to even like a C and B class category of the shops where we are not avail as a wine category.

Yes. Gaurav here. I just want to little add to what Hemant just said in the last sentence that within the touch points for alcohol, wine is a premium product and only the premium outlets is where typically in our historically, we only get placed there. But now with Shotgun, we have a very interesting opportunity to penetrate into the other non-premium outlets as well and at least some of our value wines can go along with Shotgun. And that increases our reach.

Understood. And last question is 3%, 3.5% EBITDA margin, and we are a healthy 80% gross margin. So how should we -- which suppose line items are in P&L where you see benefit kicking in because of operating leverage once you reach a INR 250 crores, INR 300 crores kind of revenue run rate?

Like any other business, even in our business, there are many fixed costs relating to brand investments relating to monies paid to retail outlets for shelf displays or for listings in hotels and restaurants. So that gets spread much, much more efficiently as the top line increases. And that benefit should accrue. We are, I think, more efficient than our peers when it comes to gross margin level, our administrative costs and things like that. So I think some of those benefits also we will start seeing as the top line grows, we will be able to translate that into a higher degree of conversion to a better EBITDA margin.

Understood. Understood. Sorry, just one final question is of our total revenue, how much will be off and on-premise?

We have been very consistent as a business actually on that front. About 65% of our revenue is from retail and about 35% is from on-trade.

The next question comes from the line of Smith Gala with RSPN Ventures.

My concern was [Technical Difficulty] we have business kind of the business of wines, a very dynamic business, which we see -- the impact which we saw in Telangana or there will be some elections going around was there in Maharashtra, the DMC elections coming, West Bengal is around the corner. So there will be kind of impacts. I think we should be more proactive in terms of our planning. So these kind of outside events don't impact our business potential and the FTAs with U.S. or U.S. FTA around the corner, et cetera. So what is your view on it? Can the company or the business be more proactive to using the impact of kind of [Technical Difficulty]

Your voice sort of comes and goes. So I didn't fully understand your question. But let me attempt to answer to the extent I've understood. As a business, you see there are some external factors, events like FTA, et cetera. These are larger macro government level events, state elections or those kind of disruptions. We can at best prepare ourselves and be ready for such events. But I don't think there is a way to avoid these events because it is not in our hand.