💎 Sula, Airbnb & Reliance (13th November, 2022)

This week we talk about the following in our Expert Take section:

1. Sula Wine's out-of-the-box marketing

2. Airbnb setting new records

3. Reliance goes on shopping again

Also, in our Investment Insights section, we talk about how perpetual bonds work and whether you should you be investing in them.

Expert Take

EXPERT TAKE #1 - 45 sec read ⏱

Sula Wine's out-of-the-box marketing

Last week we all heard about one of our favorite wines, Sula receiving a go-ahead for the IPO from SEBI. The brand started 23 years back and has a good fan following amongst wine lovers.

But all of it is without spending on advertising. Because, in India, the regulators don't allow them to advertise alcohol or sell it through e-commerce. How did the brand come this long way then?

Strong reach

A natural consumer behavior is to first try a small quantity before they go on to purchase a bigger quantity. Sula wine today is available in 8000+ restaurants and 13000+ retail alcohol stores so that they can reach the eyes of the consumers.

An interesting fact is, consumers first experience the wines in a restaurant before they go to a retail store to buy the bottles.

They make money from marketing too

Unlike other businesses, where marketing is an expense, for Sula, marketing earns them money. How? Since they can not directly advertise, they have come up with innovative ways like Sula fest or stay bookings in their vineyards, which is also known as wine tourism.

They had 10000+ visitors in the 2020 Sula fest. The visitors paid for the tickets and of course left the fest with a higher recall value of the brand. Their wine tourism business (or hospitality) already forms 20% of their total revenues.

Our take📝

When other brands are exploring and figuring out ways around how to directly reach consumers (D2C), Sula made consumers reach and experience them through innovative marketing techniques. And this has added to their profits too.

The brand has proved that even when you are bound by too many limitations given the industry you choose, there is a way to think out of the box and get things working for you.

EXPERT TAKE #2 - 40 sec read ⏱

Airbnb setting new records

"Just like during the Great Recession in 2008 when Airbnb started, people are especially interested in earning extra income through hosting", Airbnb's CEO, Chesky made an interesting statement last week. This came at a time when the company announced a quarter with a record of $2.9 billion in revenue, the highest they have ever seen.

So how does the demand-supply for Airbnb change during inflation and recession-hit environments?

Travelers: the demand side

People look for cheaper options to travel during such inflationary periods. An apt example is how in India, during the last year, Airbnb saw a 140% increase in the bookings of non-urban properties, compared to 2019.

Also, due to work flexibility, people now forgo their rented apartments in metro cities and move to remote areas. That's why non-urban nights booked for long-term stays (28 days-plus) in India more than doubled when comparing the second quarter of 2019.

Hosts: the supply side

Renting out on Airbnb becomes the second source of income for hosts, especially in times when you might not get good salary hikes or feel insecure about your job.

The number of new hosts under age 25, was up 90% in the second quarter of 2022 compared to the same period a year ago. Young people — who don’t yet have kids—not only travel on Airbnb as guests but also become hosts, and use that to subsidize their travels.

Our take📝

Well, as some of us would already know, Airbnb was founded during the recession of 2007-08, and they are one of the few startups to grow during those difficult times. After acing through multiple economic scenarios, they keep themselves prepared for what's coming.

That's how they already had properties in non-urban areas listed when rentals in metro cities were increasing. And now we know how all of it added up to hitting the highest revenue and good profits.

EXPERT TAKE #3 - 50 sec read ⏱

Reliance goes on shopping again

Our very own Reliance Industries is all set to rescue this German brand, Metro AG’s cash and carry business in India. Metro AG India has been going through a rough patch, with 2018 as the only profitable year for them.

While several companies like Amazon, Avenue Supermarts (Dmart), Udaan, and Swiggy were looking at acquiring it, last week Metro agreed to Rs. 4,060 crore acquisition offer from Reliance.

Metro Cash & Carry business

Metro AG acts as a wholesaler where customers come to the outlet, select their own purchases and carry these back themselves, instead of placing orders with multiple vendors. Lately, with the entry of Udaan, Reliance, and eCommerce grocery delivery, the space had become very competitive. Therefore Metro had to reduce margins to survive.

So while the parent entity is profitable, Metro India saw a net loss of INR 67 crores in FY’21. With a focus on global profitability, they started reviewing their business to explore strategies, culminating in the acquisition.

Synergies between Reliance and Metro

Reliance Industries (RIL) has its arm Reliance Retail, which is the largest retailer in India. It owns brands like Reliance Digital, Reliance Fresh and Reliance Trends.

Reliance Retail also owns JioMart catering to B2B online e-commerce, and Reliance Market catering to the cash and carry business. Reliance’s acquisition of Metro Cash and Carry not just helps them grow their B2B business, but also complements their retail business.

Our take📝

The B2B e-commerce space is currently a duopoly - with Udaan and Reliance grabbing major market share. Metro’s acquisition could be a stepping stone for Reliance to acquire more customers via that route and get them on the JioMart platform, further strengthening its market share.

With Reliance Retail’s profit (Rs. 4,934 crores) currently contributing one-third to Reliance Industries’s profits, investors need to monitor that number after loss-making Metro’s acquisition, and if it increases the reach and profits of Reliance as a brand.

Investment Insights

INVESTMENT INSIGHTS - 60 sec read ⏱

Perpetual Bonds

In today’s section, we’re going to talk about an investment that can provide income for life - Perpetual Bonds.

As the name suggests, Perpetual Bonds (commonly known as Perps) are bonds that don’t have a maturity date. This means that they cannot be redeemed, and have a fixed interest (coupon) that is given to the investor in perpetuity.

Some Perps come with a call option, where the issuer of the bond can “call it back” when they want to (typically 5-10 years) - meaning, the investor can redeem the bond if this option is exercised by the issuer. The most common Perpetual bonds are AT-1 bonds, which have a minimum investment size of Rs.1 Crore. These are issued by banks to increase their capital when needed, as per regulatory norms.

Why Perps are great!

1. Since they’re ongoing in nature, they give a steady stream of income to the investor for life.
2. Issued mainly by banks, perpetual bonds currently offer better yield (or returns on investments) than regular bonds.
3. The interest here is locked in so investors here don’t need to worry about reinvesting it at an equal (or higher) rate of interest.

But, there are limitations too!

1. Perps can only be redeemed when the issuer allows, your capital to be blocked (unless you find buyers at the right price in the bond trading market, which is not so easy).
2. The coupon given to investors generally remains the same forever. So there could be a scenario where your bond is giving less than the prevailing interest rate in the market - not a good position to be in.
3. With AT-1 bonds, in case the bank is in a financial crisis and needs a bailout, RBI can ask it to just cancel the bonds, without consulting investors. This is what happened with YES Bank in Mar’20, when Rs. 8,000 crore worth of investor money in these perpetual bonds was wiped out.

Our take📝

While perpetual bonds give higher returns compared to regular bonds, they have terms and conditions in the fine print and are ideally meant for institutions and experienced investors who can understand them well.

Given the issues with liquidity and the fact that it exposes the investor to perpetual credit (or default) risk, these bonds are good to be avoided by new investors, until they become seasoned enough to analyze the risk-reward matrix well.