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Posted: Tuesday, August 25 2009. 17:45

TechTalk : Leasing as Growth Engine for Wineries

Increasingly, in US a number of vineyard and winery owners are choosing to lease new or used equipment over purchasing but the practice is not common in India where the initiative needs to be taken by the Wine Board and the Food Processing Industry Ministry, writes Rajiv Seth.

In order to enjoy these benefits by Indian wineries, I suggest newly formed Indian grape Processing Board to look into the ins and outs of Equipment leasing, which can discuss the same with policy makers of ministry of food processing industries. A scheme can be floated by NABARD or a number of nationalized banks which already have a equipment leasing arms to expand their horizons to include winery equipment in their lists for leasing.

The Board can also approach a number of foreign or Indian equipment leasing companies for a syndicated deal to make the offer look attractive for leasing companies. State governments which are coming up with their wine parks and provide land on a seventy five years lease, like in case of MIDC (Maharashtra Industrial Development Corporation), should also provide funding for construction of winery building and give these buildings on a twenty year lease to the applicants.

The lease should be so designed to recover the full amount of construction with interest in the lease period and at the end of the lease the land owner will be asked to pay the price of land one more time, This will be considered as a buy out amount.

Corporation has no risk of investment at all because in case of default it can always cancel the lease. Secondly land and building have appreciating values so no entrepreneur will like to lose that opportunity. In order to use the subsidy amount provided by MFPI which is capped at Rs. fifty lacs for wineries equipment, the subsidy should be phased towards the rentals of leasing companies. Now it should be directly paid by the ministry and after utilizing the full subsidy amount wineries will start paying the lease rentals for the balance years. This will help wineries to stand on their own with in no time.

What is a lease?

"A lease is nothing more than a long-term rental," With a lease, the lessee trades off the benefits of ownership to the lessor for a lower cost over the term of the lease.

Leases have several variables, but the three basic variables are the term or length of the lease, the payment, and the buyout. The buyout (or purchase option) amounts to how much of the value of the equipment remains at the end of the lease.

There are essentially two types of leases: the operating lease and the capital lease which is really a conditional sales agreement.

In an operating lease, "you agree to a specific payment for a specific time, and the buyout will either be fair market value or 10% based on the original cost of the equipment.

In a capital lease, "you agree to a specific payment for a specific time and agree to purchase the equipment at the end. In this type of lease you’re given the option of buying the equipment for a minimum price at the end of the lease. This is called minimum price buyout option.

Benefits of equipment leasing

Leasing may be beneficial for the following reasons:

a). Leasing frees working capital for more productive use.
b). Leasing could provide 100% funding as opposed to other sources of capital that usually provide  only 60-70 percent funding.
c). Accelerated depreciation write off is available in lease.
d). A leasing arrangement is simple to negotiate and administer.
e). Leasing provides off balance sheet funding.
f).  A leasing arrangement does not limit the firm's ability to raise credit.
g).  Most expenses associated with the leased equipment can be incorporated into the lease and can be shown in the balance sheet as expenses.
 

A reasonable cap on the FMV (amount at which buy back will be there) will not exceed 20%. Some equipment, such as tanks, will still be worth a significant percentage of what they were bought for at the end of the lease. Except for barrels and hoses, winery equipment lasts for many years,

Flexible payment schedules

Though most lessees opt to make their lease payments on the traditional monthly basis, the wine industry is such a cyclical business that the potential flexibility of lease payment schedules can be particularly appealing. If you have more cash in summer and less in winter, you might have a payment that is half in winter and doubles in summer.

What kind of equipment can be leased?

The experts agree that nearly any kind of equipment can be leased. In the wine industry, people most often lease trucks, tractors, tanks, bottling lines, presses, de-stemmers and barrels. Leasing companies are also quite open to leasing used and custom-built equipment.

The big picture

"While leasing is growing dramatically in popularity with the more sophisticated producer," I still find that often Indian vineyard and winery owners are not familiar with or understanding the lease product. Their acceptance of leasing will change once they become more informed about this alternative financing tool.

At present, people in general are not taking advantage of leasing because of a lack of understanding and a sense of mistrust. I would like to suggest our newly formed grape processing board that instead of focusing on the mother units in Krishna wine park and Vinchur  wine park they should focus on new innovative financial tools to sustain the growth of small players of Indian wine Industry.

I feel the role of mother units in Sangli and Nashik is very limited one and the concept will not eventually help the growth for a large number of wineries. Its scope is very limited and ill conceived. We should work to make our wineries self reliant in finances as well as in infrastructure.

 Rajiv Seth

Rajiv Seth became the first Indian in 1987 to receive a gold medal from wine and spirit education trust, London. Presently he is making continuous efforts in educating the lab assistants of a number of wineries on procedures of micro vinification through his manuals. Rajiv can be reached at  'royalcellar@yahoo.co.in'

       

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