Sula Vineyards Limited

Sula Vineyards' Q1 FY26 performance for its own brands was impacted by two major factors: persistent softness in urban demand and a temporary disruption in Maharashtra's wine market. The latter followed an excise duty hike on spirits, leading to a significant reduction in wine offtake during the last two weeks of June. Adjusted for a one-time^📎 gain of INR 10.4 crores from WIPS unwinding in Q1 FY25, the company's revenue stood fairly flat year-over-year at INR 118 crores.

In contrast to the challenges faced by own brands, Sula's wine tourism business demonstrated robust growth, increasing by over 20% in Q1 FY26. This growth was driven by a healthy increase in footfalls and record Q1 resort occupancy of 82%, up significantly from 70% in the previous year. The spend per guest at wine tourism facilities also improved by 6%, reflecting successful efforts to enhance the visitor experience.

The company experienced a 450 basis point compression in gross margin during Q1 FY26, primarily due to a change in the wine sourcing model for its wine tourism business. This involved transitioning from intra-group sourcing to procuring wine from a third-party distributor, which contributed to a 20% plus increase in COGS. Management clarified that this is a temporary impact, and gross margins are expected to normalize^📎 to around 80% from Q3 FY26 onwards, once a comparable base is established.

Sula is actively pursuing strategic initiatives to drive future growth. The 'Elite and Premium' portfolio continues to perform well, contributing 75% to own brand revenue. The 'The Source' brand, a standout performer, recorded robust double-digit growth and now accounts for nearly 10% of own brand revenue, with plans to expand its national footprint this year. The company also launched Sula Muscat Blanc, a new low-alcohol still musket wine, and strengthened its CST portfolio by adding 4 new labels, bringing the total to 9.

Expansion plans for wine tourism are progressing, with a new 30-key resort, 'Haven by Sula,' slated to open near the York winery in time for the festive season. This will expand room capacity by 30% to 134 keys and introduce much-needed convention facilities. Additionally, the recent opening of the Mumbai-Nashik section of the Samruddhi highway is expected to shorten travel time by 45 minutes, significantly improving accessibility for visitors to Sula's facilities.

Sula Vineyards' major capital investments are largely complete, with annual capex expected to moderate^📎 to around INR 35 crores for FY26 and beyond, a reduction from INR 50-60 crores in previous years. This reduced capex, coupled with lower inventory levels, is anticipated to help contain any further increase in debt. Despite a 5% rise in interest costs due to a marginal increase in average debt, the company's debt-to-EBITDA ratio remains healthy at approximately 2x.

The company acknowledges facing 'pretty brutal discounting' from competitors, particularly in the HoReCa segment, but aims to maintain its pricing integrity. Regarding potential tariff reductions from Free Trade Agreements (FTAs), management believes such changes could lead to market expansion, benefiting Sula due to increased market development activities by global brands. However, they emphasize that the government prioritizes farmers' interests in FTA negotiations and does not foresee imminent significant tariff reductions.