fcf0009 - indage vintners limited debt hangover!

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opyIndage Vintners Limited: Debt Hangover!Indage Vintner limited (Indage), a pioneer of authentic wines in India, produces a rich variety of

exquisite red, white and sparkling wines. It has vineyards spread over 2,500 hectors, with 20 varietiesunder cultivation and over 137 varietals under plantation.1 It has state-of-art technology at itsmanufacturing facility in Narayangaon that produces 15 million litres of wine and a bottling capacityof 15,000 bottles per hour making it the largest wine production facility in India. It is the first sparklingwine producing and exporting company in India, exporting to 69 countries across the world. Theirrange of exquisite wines include Chantilli, Ivy, the flamboyant Marquise de Pompadour whichhave won several awards ranging from International Wine and Spirit Competition (IWSC) held atLondon to Wine Style Asia from Singapore to National levels at the INDYs. Stock analysts regardedIndage stock as the over performer with exciting growth prospects in 2006. But the untimely continuousglobal acquisitions through foreign currency convertible loans and raising the debts through mortgageslanded the company into financial crisis in 2009. Companys share prices fell drastically due to lossesand economic slowdown in 2008 and investors were losing their money in the company. Salarieswere not paid and operations took a backseat due to working capital crunch. The company wasplanning to raise more funds to pay its debts. However, to what extent will it be able to raise moneyto reduce its debt and emerge from the financial crisis remains unanswered.

Breweries and Distilleries Industry: Cheering upIndia has emerged as one of the fastest growing markets for wine consumption in the world.

Although only 2% of the population drinks wine, it still accounts for a staggering 20 million people.2

India has a population of 1.1 billion and wine consumption is extremely low which indicates that, it hasa vast potential for future growth. The countrys per capita consumption of wine was estimated ataround 9 milliliters in 2008 and is expected to grow by 25%30% annually between 2009 and 2012.3 As

This case study was written by Parveen Sultana under the direction of Fathima Reshma Taj H., IBSCDC. It is intended to be used asthe basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The casewas compiled from published sources.

2009, IBSCDC.No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoeverwithout the permission of the copyright owner.

1 Indage Vintners Ltd., http://www.indagevintners.com/2 Indian Wine industry prospects Tsnumi, Indian Wine News and Messages3 Indian Wine industry Forecast to 2012, http://www.researchandmarkets.com/research/34a479/indian_wine_indust , November

2009

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Indage Vintners Limited: Debt Hangover!

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per RNCOS4, a market research firm, the anticipated consumption of imported wines is expected torise at a Compounded Annual Growth Rate (CAGR) of around 32% during this period.5

Wine was known to Indians from the times of Vedic period and was often referred to as Somarasa.It was believed to be associated with Lord Indra (The Rain God), and was a part of religiousfestivals. Some of the wines which were consumed between Harappan civilisation and MauryanEmpire were Drakshasava and Somarasa. It was later that European travellers brought wine tothe Mughal emperors like Akbar, Jehangir and Shahjahan during their reign in India.

The next important contribution was made by the Portuguese in the 16th century when theysettled in Goa. They improved the wine quality and introduced a new variety of wine Vindaloo forthe Indian sub-continent. This practice was continued by the sailors who came to India for trade.The famous Persian wine Shiraz was often sent to the Moguls in India and later to the British rulersin India through these sailors. But the real growth of wine dates to the time when the British rulersset up a factory at Surat (Gujarat) in 1612. It was then that wine became familiar to the Indiansociety. In order to reduce the high cost of shipping wine to India, British started planting vineyardsin Surat and Kashmir.

The initial growth of vineyards and wine production was on slow pace due to lack of awarenesson the farming and production of grapesviticulture6 in India and also and there was non availabilityof standard wine varieties to produce good quality wines. In 1890s, when the Indian wine wasbecoming popular, the vineyards were decimated by the grapevine pest phylloxera which affectedthe production of wines in the country.7 To meet the domestic demand, British rulers imported grapesand wine on a large scale from different countries. Since then wine making in India remained acottage industry and unknown to the rest of the world until Champagne Indage Ltd., started toproduce wine on an industrial scale in 1982.8

In 1980s and 1990s, the wine market started burgeoning with the new players like Grover Vineyards(Nandi Hills, Bangalore), Sula wines (Nasik, Mumbai) and Sankalp wineries (Nasik Mumbai) etc.,and subsequently the wine market grew increasing the revenues of the existing players (Exhibit I).There are three major types of wine available in the Indian market still or table wine, sparklingwine and fortified wine. The different categories of wines had increased over the years in terms ofvolume and revenue (Exhibit II). However, the premium wine segment in India is dominated byimported wines because the domestic wines are still unable to demand a high price due to low brandawareness and lack of quality taste.9

4 RNCOS is a research company that provides company specific reports to give insight into a companys operations,financials, market position and its core competencies.

5 India wine consumption to record 28% CAGR, http://www.commodityonline.com/news/India-wine-consumption-to-record-28-CAGR-22921-3-1.html, November 13th 2009

6 Viticulture is the scientific study of the growing of grapes.7 Indian Wine Sector Searches for Supplies in Australia, http://en.epochtimes.com/news/8-3-24/67964.html, March 24th

20088 Ibid.9 Indian Wine Industry Forecast to 2012, http://www.milagrow.in/k-solutions/knowledge-bank/products/indian-wine-industry-

forecast-2012, November 2009

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Exhibit IIndian Wine Market Winery Sales

(in INR million)

Company 1997 2002 2003 2004

Indage 25,000 85,000 100,000 110,000

Grover 12,500 21,000 35,000 42,000

Sula 0 12,000 15,000 27,750

Others 0 0 2,000 8,000

Imported 12,500 40,000 60,000 70,000.00

Total 50,000 158,000 212,000 259,754

Source: Indian Wine Industry Report, http://www.centroesteroveneto.com/pdf/Osservatorio%20Mercati/I n d i a / R i c e r c h e % 2 0 d i % 2 0 M e r c a t o /Indian%20Wine%20Industry.pdf, page 11

The growing demand for wine in Indiatriggered grape cultivation at a wider scale.During 2001 2007, grapes cultivation forthe production of wine was increased from50 acres to 5,000 acres.10 In 2006, theoverall sale of wine was around 600,000cases (one case contains 12 bottles of 750millilitres each) a year of which Table wineaccounted for 88%90% of the totalproduction and the remaining was occupiedby the expensive varieties of vintage wines.

India produced about 1.3 million casesin 2007, which also includes imports of220,000 cases compared to 60,000 casesin 2001. There are nearly 54 wineriesacross the country of which 52 are inMaharashtra accounting for 94% of thecountrys wine production.11 India atpresent imports 72,000 wine cases, of which 32,000 cases are bottled in origin and the rest importedin bulk flexi bags which is subsequently bottled by Indian wineries.12

Source: Indian wine Industry Report, http://www.centroesteroveneto.com/pdf/Osservatorio%20Mercati/India/Ricerche%20di%20Mercato/Indian%20Wine%20Industry.pdf, page 30

Exhibit IIIndian Wine Market: Category-wise

Category 1997 20012002 20022003 20032004 20042005

Volumes Revenue Volumes Revenue Volumes Revenue Volumes Revenue Volumes Revenue

PremiumWines (still) 40,000 16.8 120,000 57.6 172,000 82.56 209,840 105.8 272,792 130.9

SparklingWines 10,000 6 30,000 21.6 35,000 25.2 39,200 29.2 43,120 32.3

Cheap andFortifiedWines 100,000 12 220,000 29.04 240,000 34.56 247,200 35.6 271,920 39.16

* Note: Revenues are in INR crore

10 Menon Sudha, Grape farmers raise a toast to wine industry, http://www.livemint.com/2007/12/29005631/Grape-farmers-raise-a-toast-to.html, December 29th 2007

11 Indian Wine Industry,http://www.indialawoffices.com/pdf/wineindustry.pdf, page 412 Mitra Amit, Wine adds fizz to Maharashtras economy, http://www.thehindubusinessline.com/2007/10/09/stories/

2007100950140800.htm, October 9th 2007

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The Indian wine industry is not capital intensive. It requires capital of INR 10 million15 million tosetup a wine plant with a capacity of 100,000 litres13. The key raw materials such as grapes, bottlesand cork account for 20% of the total costs, which is higher than the international norms. There arelow entry barriers, high marketing costs and low volumes. At present, the Indian wine industry isconcentrated and dominated by three large players namely Indage, Sula wineries and Grover vineyards.Together they enjoy over 90% of the total market share.14 The growth of the Indian wine industry isattributed to the change in drinking habits, changing lifestyle, favourable and promotional governmentpolicies, higher disposable incomes and growth in foreign tourists.

The demand for wine has instigated the expansion of wineries in India. There is a strong growth inthe imported wine market with many Indian importers importing from countries like Australia, US andBulgaria. Some of the well known wine producers in India are Moet and Hannessey worlds largestChampagne house, E&J Gallo Winery a US Winery and Howling Wolves Wine Group (HWWG) anAustralian Winery. There is 100% Foreign Direct Investment (FDI) permitted on the automatic routefor distillation & brewing of alcohol subject to licensing by the appropriate authority.15 The wine Industryis facing competition from other form of beverages such as spirits, alcohols, beer, etc.

The wine industry grew at a rapid pace in the last 5 years (20032008) and came down crashing in2009 with sales falling for the first time since 2001.16 Although there was an increase in the grapecultivation for wine production in the year 2008, the economic slowdown followed by November terroristattacks in 2008 led to a fall in the sale of wine for 2009. The Industry has seen revival with festival seasonduring October 2009 to March 2010 which in turn expected to increase the sales by 10%20%.17

Looking at the growth prospects and the demand for wine, Indian farmers began cultivating winegrapes without having contracts with the wineries which resulted in over-production of grapes. Dueto the drastic fall in industrys growth, no new vineyards were planted in the planting season December2008. To make the matter worse, banks which were once eager to lend loans to the wine farmersgot impatient, as many of their loans turned into Non-Performing Assets18.

The wine industry is still facing huge challenges in terms of high competition from the globalcompetitors in Europe. Besides that it is also facing challenges in terms of improving the quality ofwines in India, sustaining high growth rates, and increasing consumption of wine.19 In addition, theindustry is also facing teething troubles like poor storage and transport facilities, lack of promotionalactivities and unfavourable rules for domestic marketing20 and discouraging tax structure.

13 Indian Wine Industry report, http://www.researchandmarkets.com/reports/302724/indian_wine_industry_report.htm14 Ibid.15 Indian Wine Industry, http://www.emmeplus.eu/index.cfm/3,104,346,0,html/indian-wine-industry-emc.pdf, page 616 Samant Rajeev, Indias Wine woes now will benefit consumers later, http://winesinasia.com/?tag=industry17 Mohandas Poornima, Wine makers expect sales to rise 10-20% in Oct-March, http://www.livemint.com/2009/11/15221853/

Wine-makers-expect-sales-to-ri.html, November 15th 200918 A loan or an advance that is lent by financial institutions/banks which has not been repaid by the borrower is known as Non-

Performing assets.19 Wine Market Outlook in India, http://www.bharatbook.com/Wine-Market-Outlook-in-India.htm20 Pande Archana, A Profile of the Wine Industry in India, http://www.chillibreeze.com/articles_various/Wine-industry.asp

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Indage Vintners LimitedThey were issuing fresh shares and using them as the basis to buy properties and assets outside thecountry, and then leveraging with foreign currency loans. What were they doing?21

Rajeev Samant, Founder and CEO, Sula Wines

Indage Vintners Ltd., (Indage) formerly known as Champagne India Ltd., is the oldest and thelargest producer of wines in India. It produces more than 1.5 million cases of wine from 4 state-of-the art wineries and has complete backward integration from nurseries to biotech in its own estatevineyards of more than 2,000 acres. It is the market leader which controls more than 70% of marketshare of wines produced in India.22

Indage was set up in 1982 as 100% Export Oriented Unit (EOU) and was named as ChampagneVineyards and later as Champagne India.23 The company was in technical collaboration withChampagne Technologies of France for manufacturing wines. Under the agreement ChampagneTechnology would provide process know-how, assist in selecting machinery and depute technicalpersonnel to supervise and monitor the trial runs and commercial production.24 The controlling stakeof the company was under the hands of promoters and directors until 1983.

In 1984, the company diluted its stake by reserving and allotting 1,500,080 equity shares to itspromoters. Around 300,000 equity shares were reserved for preferential allotment to NonResidential Indians (NRIs) on repatriation basis25 of which only 198,200 shares were subscribed.The balance of 900,080 equity shares and 101,800 shares not taken up by NRIs were offered tothe general public.26

The EOU norms and regulations prohibited Indage to sell or export wines produced in India andhence Shamrao Chougule, the founder of Champagne Indage incorporated another company (IndageIndia Private Ltd.) in 1985. It issued 80,000 convertible debentures at a coupon rate of 15% at a facevalue of INR 100 each in 1986 on rights issue basis in a proportion of 1 debenture for every 25 equityshares held. In order to facilitate the smooth supply of raw materials (grapes) for production purposes,Indage set up winery unit at Narayangaon in the state of Maharashtra (India) which was consideredas its main production unit.

In 1987, Indage was converted into a Public Ltd. company 27 In 1988, the company launched itsflagship wine product Marquise De Pompadour which gained recognition in the domestic andinternational markets. Since then the company came up with new brands named Chantilli, Riviera

21 Flock Elizabeth, Wine Maker Indage Vintners sees recovery from hangover, http://www.moneycontrol.com/news/management/wine-maker-indage-vintners-sees-recovery-hangover_425360.html, November 17th 2009

22 Leaders Speak, http://archives.indiainfoline.com/news/showleader.asp?storyId=768&lmn=1&cat=1, May 22nd 200923 Ibid.24 Company HistoryIndage Vintners, http://www.moneycontrol.com/company-facts/indagevintners/history/IV0125 Issue of equity shares to selected/specified entities at specific prices and the proceeds of which either Income/dividend interest

earned, or sale/maturity on proceeds of investment can be repatriated outside India at any time or credit to NRI a/c ofInvestor subject to deduction/payment of Income Tax.

26 Company HistoryIndage Vintners, op.cit.27 History, http://www.indagevintners.com/

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Blac de Blanc and Ivy. In 1993, the company went into financial crisis as it incurred heavy losses dueto un-remunerative prices for its products and heavy interest payments in the overseas market.28 As apart of restructuring strategy, hotels and the engineering division of Champagne Indage were hived offand winery division of Champagne Vineyards Ltd., was merged with Indage in January 1997.29

During 2004, the net sales of the company where INR 235.08 million and had grown at a rateof CAGR 74.08% for the next three years. The other incomes of the company grew from INR30.91 million to INR 274.83 million during 20042007. Total cost excluding depreciating and interestas a percentage of net sales for 2004 is 88.40% and this ration had grown to 94.79% in 2007.During 20042007 depreciation an interest had grown from INR 5.03 million and INR 16.85million to INR 18.43 million and INR 41.83 million respectively. Extraordinary expenditure for2004 was INR 4.40 million. Tax as a percentage of EBT after extraordinary items is 7.84% for2004 and is estimated to increase to 16.38% in 2007.

Over the years Indage launched many brands under its wine group. The companys maindomestic brand portfolio includes Indage Vineyards and Chateau Indage. Indage Vineyards Ltd.,was in the business of viticulture and production of wines while Chateau Indage (ChampagneIndage Ltd.) was involved in producing and selling wines in domestic market, engineering andhotel business till 1996. During the period 20002008, Indages production capacity of wine increasedfrom 500,000 litres3,252,000 litres.

In 2007, Indage acquired UK wine agent, McKinley Vintners, and Australian alcohol companyTandous wine making arm. During the year, Indage announced plans for 1,000 wine bars across thecountry, and opened a wine resort and spa in Nasik, Maharashtra.30 In the financial year 20072008,it had a production capacity of 10,809,100 litres.31 It flooded the market with excess wine forcing thedistributors to sell with buy-one-get-one-free deals,which ultimately resulted in high inventory leadingto disputes with the distributors as poor storage turned wine into vinegar. Indage relied heavily onforeign currency loans for foreign acquisitions. One of the former employee revealed that around40% of its current debt was in foreign currency.32

Indage took full advantage of the boom in wine sales that coincided with 5 years of Indiasblazing economic growth until 2008. The sales grew by 46.57% over the previous year 2007 andthe other incomes had an abnormal growth of about 3.0265 times of the previous year. By 2008,Indage was exporting to 69 countries and had 56,000 acres of vineyards under cultivation. Itreceived 28 awards for its wines in that year alone. In March 2009, in order to secure the supplyof wine of all types from different regions at all price points to become efficient and reliable globalplayer, it acquired an ill-fated Australian Loxton Winery (Loxton) in an all-cash transaction forAUS $60 million (INR 225 crore). Companys goal was to combine the capacity of 8,000,000

28 Company HistoryIndage Vintners, op.cit.29 History, op.cit.30 Wine Maker Indage Vintners sees recovery from hangover, op.cit.31 Indage Vintners Ltd, http://www.hdfcsec.com/Research/FResearch.aspx?Heading=FundamentalResearch&FP_Code=522059

&View=FRHistory.ascx32 Wine maker Indage Vintners sees recovery from hangover, http://www.moneycontrol.com/news/business/wine-maker-

indage-vintners-sees-recoveryhangover_425360.html, November 17th 2009

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cases with 3,750,000 cases in South Australia and 3,000,000 cases in UK with 1,250,000 cases inIndia. But, the November 2008 Mumbai terror attacks and recession resulted in heavy losses tothe wine industry due to which Indage was unable to pay Loxton and had to settle a painful lawsuitof $ 6 million33. In the process Indage had also acquired some of the foreign companies likeDarlington Wines (UK) and Vinecrest (Australia).

Continuous acquisitions in the international markets through foreign currency loans and expansioninto businesses such as Indian-made foreign liquor and hospitality over the past couple of years34

combined with the economic slowdown affected the financial position of the company with mountingdebt and shortage of working capital needs. Most of the companys debt amounting to INR 457.38million was secured by hypothecation of movable assets, current assets both present and future andgave a first charge to lead bankers and second charge to other consortium bankers on the fixedassets of the company at its Narayangaon division.35 The total cost including interest and depreciation,excluding taxes grew by 66.71% over previous year 2007. Depreciation and interest of the companygrew to INR 46.19 million and INR 139.99 million respectively. In September 2009, around 250employees in the middle and senior level management had resigned as the company failed to paysalaries since November 2008. One of the former executives commented that The company has afinancial liability of at least INR 450 crore to be paid off immediately, as on September 1st 2009.The debt increased to 117.88% to INR 1,285.2 million in 2008 from INR 589.86 in 2007 (Exhibit III).

Exhibit IIIDebt and Equity Mix from 20042008

Compiled by author from companys annual report

(in INR million)

Particulars 2004 2005 2006 2007 2008

Shareholders Fund 285.53 313.53 894.33 1,839.24 2,928.83

Debt 248.81 511.05 459.84 589.86 1,285.2

Number of Equity Shares 6.67 6.67 10.32 10.32 14.58

In June 2009, Indage planned to give away 40.28% stake of the company for INR 90.6 crore tofour investors Anam Transport Pvt. Ltd., Sanjivani Horticulture Pvt. Ltd., Arsh Advisors andOwners Ltd. and Asian Sirius Energy Ltd., in order to reduce debt, to fund existing operations and tomeet long-term working requirements. It also planned to raise a further INR 110 crore by selling itsshares to qualified Institutional buyers and INR 2 billion through rights issue. The huge debt and

33 Australian Vintage Ltd, http://www.australianvintage.com.au/LinkClick.aspx?fileticket=tqcH%2FkQ12tM%3D&tabid=162&mid=648, September 10th 2009

34 Indage Vintners slumps as employees exit , http://www.capitalmarket.com/Cmedit/story2-0.asp?SNo=338595, September1st 2009

35 Indage Vintners Ltd. annual report 2008, http://www.indagevintners.com/pdf/CIL-AR-07-08.pdf , page 108

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interest payments forced the promoters of the company to pledge 97.9% of their 25.42% of companysstake in August 2009.36 Indage share prices fell from INR 103.2 in December 2008 to INR 53.30 inOctober 2009 and has not yet published its annual report for the FY 2009 (as of December 2009)(Exhibit IV). The company is prone to earnings risk emanating from risk of project execution, fundingrisk, sourcing risk and exchange risk in addition to its working capital crisis. It built up inventories dueto the fact that mature wines commanded a premium price in the market. But due to the recessionthe company was not able to sell the entire stock as customers restrained themselves on spendingtoo much on mature wines and instead opted for cheaper wines.37

36 Unnikrishnan C.H., and Kalesh Baiju, 4 firms to acquire 40.28% stake in Indage Vintners, http://www.livemint.com/2009/06/23233502/4-firms-to-acquire-4028-stak.html, June 24th 2009

37 Shah Shilpa, Champagne Indage Ltd., http://www.moneycontrol.com/news_html_files/news_attachment/2008/Champagne-Nov2008.pdf, November 6th 2008, page 1

Exhibit IVSensex and Stock Prices of Indage Vintners Ltd.

Compiled by the author from www.bseindia.com

(INR 000s)

Month & Year Indage Vintner Ltd. Stock Price* Sensex

November 2008 98.25 9,092.72

December 2008 103.20 9,647.31

January 2009 88.00 9,424.24

February 2009 53.35 8,891.61

March 2009 47.80 9,708.50

April 2009 57.70 11,403.25

May 2009 90.65 14,625.25

June 2009 77.10 14,493.84

July 2009 67.40 15,670.31

August 2009 74.55 15,666.64

September 2009 69.00 17,126.84

October 2009 53.30 15,896.28

*Note The prices taken from the Bombay Stock Exchange (BSE) and are the monthly prices.

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With the increase in financial risk, will the investors show any interest in the companys shares isdebatable as the share price of the company fell by 48.35% since December 2008. How will Indageemerge from the financial crisis in the current economic situation especially now that the wineindustry is beginning to grow and is facing tough competition from new wine makers and importers?Though the industry is expected to grow at an annual pace of 27%30%, will it be able to raisefinance to pay its debt is debatable. What could be the other possible sources of finance that companymay attempt to raise to emerge from the financial crisis given its shrinking share prices remainsunanswered.

fcf0009 - indage vintners limited debt hangover!

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