Result Snapshot

Champagne Indage’s Q1 FY08 results excelled our expectations. Net sales jumped 186% yoy (our expectation: 264%), operating profit shot up 146% and net profit rocketed 94% (our expectation: 94%). The operating margin dropped 380bp—from 26.4% to 22.6% (our expectation: 14.6%)— due to the change in product mix. The consolidated results include those of Seabuckthorn Indage, Indage UK and Thachi Wines, which were not there in the same quarter last year and hence the results are not comparable. At the CMP of Rs 632, the stock trades at 17.6x FY08E earnings of Rs 36.0, and at 10.5x FY09E earnings of Rs 59.9. We expect the scrip to be an OUTPERFORMER.

Result Highlights

Strong sales growth

For Q1 FY08, Champagne Indage has reported a 186% yoy jump in net sales—from Rs 117 million to Rs 334 million (we expected Rs 425 million). The results include the sales of Seabuckthorn Indage (fruit juice business), Thachi Wines (Australian wine operations) and Indage, UK (distribution arm), which were not there in the same quarter last year. Hence the results are not analogous. Most of growth came from the rise in volumes, as there has been no major price change. The company has initiated several retail measures like the opening of wine bars, shop-inshop, display at shopping malls, etc. The Maharashtra Government has allowed wine as a “food” item and relaxed storage and distribution norms. It has also abolished excise duty on wines. These steps have helped boost sales growth.

Drop in margin

During the quarter, Champagne’s operating margin 380bp—from 26.4% to 22.6% (we expected 14.6%)—due to the change in product mix, as there was a greater proportion of low-margin products, namely Australian bulk wine and fruit juice. Material costs shot up 2,340bp—3.5% to 26.9% of net sales—from the change in product mix. Personnel expenses slipped 40bp—from 14.1% to 13.7% of net sales—due to strong sales growth. ‘Other expenses’ too dropped, 1,930bp—from 56.0% to 36.7% of net sales—due to strong sales growth and a tight control on marketing expenses.

Higher interest and depreciation

Interest cost jumped 84%—from Rs 14 million to Rs 26 million—due to enhanced working capital in view of strong top line growth. Depreciation also increased, by 347%—from Rs 4 million to Rs 16 million—with the additional depreciation of the Australian operations.

Net profit improved

Net profit shot up 94%—from Rs 14 million to Rs 26 million (matching our expectation)—due to the integration of businesses and strong volume growth. The EPS for the quarter rocketed 76%—from Rs 1.30 to Rs 2.20.

Investment positives

The acquisition of Thachi Wines (TW), Australia, has given Champagne Indage a global footprint. TW has contractual arrangements for vineyards and a winery in Australia, and processes 2.7m litres of wine a year. At present, TW markets its products in Australia, China and Europe under the brand name Broken Earth. Most of this wine is sold unbranded. The acquisition would provide a ready-made market for CIL to hawk its own brands in these countries through TW’s distribution channels.

CIL plans to bring TW’s bulk wine to India and bottle it at its plant here. This is likely to be marketed domestically as a wine of Australian origin. This would generate additional revenue.

The company’s economy brand, Vino, has reported healthy growth in FY07 and brings in about 12% of revenue. CIL expects beer drinkers to migrate to Vino due to the latter’s attractive price of Rs 99 a bottle.

The juice business of Seabuckthorn Indage is growing at 400% (on a smaller base). In the home market CIL has introduced 10 juice varieties under the brand name Leh Berry in 200-ml and 1-litre tetra packs. The juice business is likely to be another growth driver.

The company has set up a 100% subsidiary in the UK under the name Indage (UK) to market its products to Indian restaurants in the UK and Europe. This is likely to enhance its exports.

CIL’s established brands come at all price points. It has more than an 80% market share in the home market. With the national wine policy under implementation and the relaxation of distribution norms, the company is likely to benefit in future.

Sale of wine in supermarkets is now allowed in Maharashtra, Karnataka, Chandigarh, Goa and Haryana. This is likely to widen and deepen wine consumption.

Financials and Valuations

We expect CAGRs of 154% in net sales and 97% in net profit over the next two years — from the acquisition of TW and the juice business of the group company. We expect the juice business to contribute Rs 0.95 billion and Rs 2.5 billion to sales in FY08 and FY09 respectively. We expect TW to contribute Rs 2.1 billion and Rs 2.9 billion to sales in FY08 and FY09 respectively. We expect the operating margin to drop—from 24% in FY07 to 17.7% in FY08, and further to 16.4% in FY09. The decline in the margin would be attributable to the lower margins in TW and the juice business. The CMP of Rs 632 discounts the FY08E EPS of Rs 36.0 by 17.6x and the FY09E EPS of Rs 59.9 by 10.5x. We expect the scrip to be an OUTPERFORMER.