Indage Vintners Ltd Management Discussions

INDAGE VINTNERS LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS The Wine Industry is experiencing tremendous changes. Wine - an alcoholic beverage made by the fermentation of the juice of the grapes, is now a well defined and growing part of the global alcoholic beverage business. More and more consumers globally are turning to wider and more frequent consumption of wine and are moving away from high alcohol beverages such as whisky, gin and rum. Even non wine producing countries such as the UK now consume in excess of 110 million cases of wine annually while even Brazil and Argentina have reached per capita consumption of wine in excess of 80 litres. Until about 30 years ago, wine was largely sold by appellation - the region in which it is grown and limited to the grape varieties grown there. Traditional wine growing regions such as France, Italy, Spain and Germany were the dominant players in the global wine business with many small to medium producers selling their wines based on reputation, tradition and the fame and popularity of the region in which they produced. Wine remained quite expensive and difficult for new consumers to be initiated as knowledge was low, therefore availability and experimentation within the industry. Then came the emergence of new world wine growing regions such as Australia, New Zealand, Chile and California who started to drive utility and convenience to the wine industry globally. Labels became easier to understand and the variety of wine was of greater focus than the region in which it was produced. This led to a paradigm shift in the wine business with rapid development of large format retailers such as supermarkets as the big buyers and the creation of brands within the industry. Wine suddenly became cheaper and conformity and consistency the key factors to success. In India, the scenario was quite different due to limited domestic consumption of wine and non availability of standard wine varieties to produce good quality wines of international standards. Indias grape growing industry, largely confined to pockets in Maharashtra, Karnataka and Andhra Pradesh never provided much emphasis to research and value addition to what is essentially a perishable commodity. Therefore, Commercial wine grape production in India has only begun since the early 80s with Indage being the first producer of wine in Asia and 9th in the world to produce bottle fermented sparkling wine in the French Champagne method. The Indian wine industry is very young and there is a great opportunity to develop a professional industry. There is considerable interest in wine as a category from every part of the supply chain - vineyard growers to producers to consumers, even up to policy makers both at the central and the state level. Everyone has realized the tremendous value addition that wine presentstransforming a bunch of grapes into a hygienic beverage. Considering that alcohol still has a social taboo attached to it, it may seem paradoxical that the wine industry has grown rapidly in India. Like all businesses, the industry faced teething troubles like poor storage and transport facilities, lack of promotional activities and unfavorable rules for domestic marketing. However displaying exceptional determination, the companies grew from strength to strength improving their product and made a mark overseas as well, no doubt helped by the positive impetus provided by the Maharashtra state government in the wine policy of 2001. The state abolished excise duty on wine, de-licensed the production capacities and promoted the availability of wine through newer, less expensive retail and wine bar licenses. Being a market leader, this encouraged Indage to significantly expand the supply chain of its wine business - from grape to glass, to ensure higher efficiency in the wine industry and grow the scale of the business in line with International trends that were leading to the emergence of wine brands in the global wine business. Starting from contract farming to own land acreage for further development of vineyards to higher capacity for crushing and storage including production overseas to wider and more expansive product portfolios and ending with wider and deeper distribution and availability of its products, the Company invested heavily into the supply chain and therefore the overall working capital of the business. The culmination of all this expansion was the FY 2008-2009 where the Company and its stake holders would start to reap the benefits of this expansive growth. Then came a series of events that eventually destructed the basic working operations of the Company. The global recession led to the cancellation and withdrawal of a series of funding that was lined up to fuel the growth including equity and debt. Sales in critical markets such as Mumbai, Delhi, Goa, Rajasthan were practically eliminated due to the November terrorist attacks of Mumbai and some negative labelling and tax implications of various state governments led to significant finished goods stock being built up in the supply chain which could not be converted back into cash. Your Company has been facing numerous problems for the past few years ever since these unfortunate series of events. This has considerably affected the Company in its various aspects of day to day functioning from financial, marketing, human resource to production which resulted in numerous Winding up Petitions being filed by various creditors. At the same time, the Company approached the Corporate Debt Restructuring Cell (CDR) to restructure various lenders liabilities in line with new business plans. Ultimately, and faced with massive shortcomings in defending itself from creditors and within a few days of the CDR cell approving the restructuring of a large majority of the debts, a winding up order was passed against the Company on 19th March, 2010. Aggrieved by the said order, the Company preferred an appeal in front of The Divisional Bench of Honble Bombay High Court to stay the winding up proceedings. The said order is currently stayed and is slated for further hearings. Further, the Company has filed a Composite Scheme of Amalgamation & Arrangement (the Scheme) under the provisions of Sections 391-394 of the Companies Act, 1956, for amalgamation of Industrial Agencies Indage Private Limited and settlement of all the creditors of the Company over a period of time. The Scheme focuses on the core idea to revive the Company back to its original position. It also places emphasis on the financial and operating profits that a Company would be able to gain on amalgamation. It also sees an injection of funds from promoters through the sale of certain privately held assets to kick start the Companys operations. In furtherance, a Court Convened Meeting was conducted on 16th September, 2010 to obtain the approval of Lenders as well as Members whether secured or unsecured to the Scheme. The scheme was approved by all classes of stakeholders/ creditors with requisite majority. The Company has already undertaken various measures with respect to the proposed restructuring of debts to give financial stability and generate viability for the Company. While the scheme is being heard in the Honble courts, despite a stay on the operations, your Company is focusing on implementing best possible measures to re-achieve a strong and dominant position in the market, rationalise costs and stay as flexible as possible to cater to emerging market opportunities. INDUSTRY STRUCTURE AND DEVELOPMENTS: The Current Indian alcohol industry remains dominated by Country Liquor and Indian Made Foreign Liquor (IMFL) comprising of beer, whisky and rum. Wine remains less than 2% of the Industry and while there is an increasing tendency for higher taxes in the IMFL segment, wine maintains a government friendly approach with regards to taxation policy due to its food processing nature. Moreover, the food processing ministry, Government of India, have incorporated an Indian Grape Processing Board to promote and establish a larger and more robust wine industry with effective spends to promote the production and availability of wine in India. OPPORTUNITIES AND THREATS: Every major wine consuming region in the world has followed an emerging market trend where brown spirit consumption reduces to pave way for higher wine consumption. For example, Australia, while as recent as 25 years ago had per capita consumption of wine of less than 5 litres, today the consumption has already exceeded 20 litres. India will follow a similar trend as the countrys consumers become increasingly aware of global trends and, combined with higher levels of health awareness and higher disposable incomes, wine will be consumed in higher quantities. Raw material availability in the wine industry, specifically wine grape cultivation, continues to be a threat as India is a tropical region and viticulture techniques remain more trial by error than documented facts that can be relied upon to control disease and quality in wine. Differences in state taxation policy and labelling requirements do pose certain logistical concerns in the liquor industry overall but the Indian Grape Processing Board aims to rationalise the legislation concerning the wine industry in India. SEGMENT WISE OR PRODUCT WISE PERFORMANCE : The business of your Company is only in one segment, namely wine production. As highlighted in detail earlier, the performance of the Company has been severly affected and the Winding up order has also rendered the significant stocks of the Company in an unutilised state. However, the CDR restructuring plan combined with the scheme will allow the Company to regulate and implement a well devised plan that is focussed on recovery of the losses and regaining market position. OUTLOOK: The outlook for the Industry and your Company remains strong. Although the other players in the industry have received significant benefit from your Company not being able to produce given the lack of working capital in the business, the brands still remain in strong demand and very little replacement of market standing has taken place. RISKS AND CONCERN: Given the fact that your Company is currently under a winding up order which is stayed, the future business and ability to return to normal business operations lies solely with the Honble Court. This remains the single largest and only risk to the business. INTERNAL CONTROL SYSTEM AND ADEQUACY: Internal Control plays a very important role and is essential for effective and smooth functioning of any organization. The Management is responsible for timely and adequate disclosures for maintaining Internal Control. However, given the nature of the problems faced by your Company during this financial year, no internal audits were conducted during the year. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE: Although the Companys current financial position is not in a strong position as can be seen in various deviations in past few years, the Directors are very hopeful for recovering such losses. The Company assures the shareholders, subject to the Honble Court approval, on significant turnaround and improvement from the present situation through a return to normalcy in operations. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED: The Company is aware about the losses which have resulted in Human Resources front. The Company is trying to rebuild the lost personnel and develop a healthy relationship with the existing employees. The Company is also keen on maintaining sound relations with other class of persons such as distributors, marketing agencies and so on. Your Company is going through testing times but is happy and grateful about having a dedicated staff and who has supported in all possible manners. The Company is thankful and obliged on having staff which have a lot of faith that the Company will surely be able to overcome all the problems which it is currently undergoing. The Management is glad to have such continued support, faith and confidence in the Company from the shareholders at this very important stage of revival. The Company aims to achieve all its objectives and that all the immediate as well as long term business plans are implemented effectively. The Company is heartily obliged for having shareholders to have shown tremendous dedication in the Company in all its aspects.