Sula Vineyards

Market leader across wine variants

Plans to launch new products in the elite and premium categories to boost revenue

Sula Vineyards was India’s largest wine producer and seller as of March 31, 2022. The company has been a consistent market leader in the Indian wine industry in terms of sales volume and value (based on the total revenue). Its market share of grape wine grew from 33% in FY 2009 to 52% in FY2022.

The company is market leader across all four-price segments: (1) Elite: Rs 950+, (2) Premium: Rs 700-950, (3) Economy: Rs 400- 700, and (4) Popular: less than Rs 400. Further, the company has higher share of approximately 61% by value in the elite and premium categories in FY 2022, as compared to its overall market share of 52% in the Indian wine industry.

As of September 30, 2022, the company had presence in 25 states and six union territories in India. It also entered the overseas markets in 2003, and currently offer wines in over 20 countries, including Spain, France, Japan, the United Kingdom, and the United States.

Company is also recognized as the market leader across wine variants, including red, white, and sparkling wines. Sula Shiraz Cabernet is India’s largest selling wine by value in FY2021. Gross billings of Sula Shiraz Cabernet amounted to Rs 91.82 crore, Rs 47.56 crore and Rs 31.97 crore in FY2022 and in the six months period ended September 30, 2021, and September 30, 2022, respectively.

The company’s business can be broadly classified under two categories: (i) production of wine, the import of wines and spirits, and the distribution of wines and spirits (the wine business); and (ii) sale of services from ownership and operation of wine tourism venues, including vineyard resorts and tasting rooms.

The company distribute wines under a bouquet of popular brands. In addition to the flagship brand Sula, popular brands include Rasa, Dindori, The Source, Satori, Madera and Dia.

As of September 30, 2022, the company produced 56 domestic wines labels and imported 21 alcoholic beverage labels from a portfolio of 13 distinct brands at four owned and two leased production facilities located in Maharashtra and Karnataka.

The company’s own brands contributed 84.85%, 82.08%, 83.40%, 68.16% and 63.38% of total income in the six months period ended September 30, 2022, and September 30, 2021, and FYs ended March 31, 2022, 2021 and 2020, respectively. In comparison, imported alcoholic beverages contributed to 5.20%, 8.56%, 7.82%, 26.36% and 30.86% of total income.

The company experienced a significant rise in its off-trade sales in the last three years, with off-trade sales contributing 72.25% of its secondary sales in FY2022, compared to 61.33% in FY2020. In the six months period ended September 30, 2022, and September 30, 2021, the contribution from off-trade sales was 70.75% and 72.95% of its secondary sales, respectively.

The company has largest distribution network among wine companies in India, with close to 13,000 retail touchpoints across the country in 2021.

The company also has a strong direct to consumer (D2C) selling channel primarily through its wine tourism business facilities in Nashik (Maharashtra) and Bengaluru (Karnataka), with the highest number of D2C sales in the Indian wine industry in FY 2021. Its D2C sales were Rs 15.75 crore, Rs 7.28 crore and Rs 24.20 crore in the six months ended September 30, 2022, and September 30, 2021, and FY ended March 31, 2022, respectively.

The company entered long-term supply arrangements (of up to 12 years) with grape growers for approximately 2,290 acres as of September 30, 2022.

As part of its wine tourism business, the company owns and operates two vineyard resorts located at and adjacent to its winery in Nashik, Maharashtra, under The Source at Sula and Beyond by Sula brand names, having room capacities of 57 and 10 rooms as of September 30, 2022, respectively.

The company is the most visited vineyard in India, with approximately 368,000 people visiting its vineyards in FY2020.

The company intends to continue to leverage its distribution capability to launch new products in the elite and premium categories to further increase its revenue and market share in the Indian wine market.

Clean renewable energy is a key focus area of the company. It has over 2MW of installed solar PV capacity providing more than 60% of its annual energy needs in FY2022.

Offer and its objects

The IPO will be complete offer for sale of Rs 960.35 crore by the existing shareholders.

The price band for the IPO is Rs 340 to Rs 357 per equity share of face value Rs 2 each.

The company will not directly receive any proceeds from the offer. All proceeds will be received by the selling shareholders, in proportion to the offered shares sold by them.

The promoter of the company is Rajeev Samant. Promoters and promoter group hold an aggregate of 23,945,864 equity shares, aggregating to 28.44% of the pre-offer issued and paid-up equity share capital. The post IPO shareholding is expected to be around 27.33%.

The issue, through the book-building process, will open on 12 December 2022 and close on 14 December 2022.

Strengths

The company has established market leadership in the Indian wine industry, with leading brand Sula. The company is market leader across price segments and wine variants.

The company was one of the fastest growing alcoholic beverage companies in India as of March 31, 2021, with a CAGR of 13.3% between FYs 2011 and 2022.

Positive demographic factors, including the addition of more than ten million people each year to the population of eligible alcohol consumers, make India one of the most attractive markets for alcoholic beverages.

Sula Vineyards is the largest wine producer in India with the widest and innovative product offering supported by an efficient production mechanism. With access to more than 23,000 points of sale (including over 13,500 retail touchpoints and over 9,000 hotels, restaurants, and caterers) as of March 31, 2022, its products have a high visibility and availability across the country.

The share of wine as a form of alcohol consumption in India in the calendar year 2021 was less than 1%, whereas globally, the contribution of wines to alcohol consumption was close to 13.5% in the same period, suggesting significant room for growth.

The company has emerged stronger in the aftermath of the covid-19 pandemic, gaining additional market share, and accelerating its profitability. In FY2022, its profit after tax was Rs 52.13 crore and in the six months period ended September 30, 2022 and September 30, 2021, its PAT was Rs 30.50 crore and Rs 4.53 crore, respectively.

The wine market in India is expected to remain concentrated with high barriers to entry due to the nature of the product in addition to the trade barriers prevalent in the alcoholic beverage market.

The demand for wines in urban and semi-urban areas of India is on the rise. To cater to that demand, company launched seven labels under its brands The Source, RASA and Dindori, in the last five FYs. These new launches have been well received by consumers.

The company introduced the Charmat method for producing sparkling wines, which enables it to produce wines faster and more efficiently. Further, using screwcaps in place of cork ensures that wine is not spoilt due to leakage. It has helped retailers store higher quantity of wines.

The company has long-term supply arrangements (of up to 12 years with an option to renew further with mutual consent) with approximately 500 contract farmers.

The company managed to reduce the weight of its champagne, burgundy, hock and bordeaux shaped bottles by 28.14%., 22.64%, 13.33% and 9.28%, respectively, over FYs 2020, 2021 and 2022 by working with local vendors to develop lighter weighing bottles.

The company has a successful wine tourism business. In FYs ended March 31, 2021, 2022, and the six months period ended September 30, 2021, and September 30, 2022, its wine tourism business recorded an approximate revenue per room of Rs 9044, Rs 10,367, Rs 10,225 and Rs 10,195 and an occupancy rate of 43.66%, 70.97%, 55.69% and 77.37%, respectively.

Weaknesses

The legal, regulatory and policy environment in which the company operate is subject to a licensing and excise regime with changing laws. Any unfavorable change could adversely impact business.

The company benefits from high import duties imposed on imports of international wines in India. But these duties could be reduced or eliminated in the future, adversely affecting its wine business.

Any disruption caused by adverse climatic conditions could affect the quality of wine grapes.

Processed raw materials such as glass bottles is one of company’s largest components of cost of goods sold. Any supply disruptions in such raw materials could adversely affect business. In the six months period ended September 30, 2022, and September 30, 2021, and FYs ended March 31, 2022, 2021 and 2020, glass bottles contributed to 40.29%, 42.50%, 43.87%, 45.96% and 45.66% of total packing material purchases.

The company’s revenue from operations is dependent upon a limited number of customers (which includes state run corporations, wholesalers, and independent distributors). Any adverse developments to maintain such relationships could have an impact on business.

India does not have a strong wine drinking culture unlike in European countries, where it is paired with meals. Wine drinking culture in India is an occasion-led event, where people drink wines at parties and social gatherings.

The company’s processing units, raw materials and business operations are primarily concentrated in the western and south-western parts of India. Any significant social, political, or economic disruption in these regions could have an adverse effect on its business.

The wine tourism business is subject to seasonal and cyclical variations that could result in fluctuations in results of operations.

The company’s statutory auditors have included an emphasis of matter in its report on company’s financial statements for FYs ended March 31, 2022, March 31, 2021, and March 31, 2020.

There are outstanding legal proceedings involving the company, subsidiary, promoters, and directors. The aggregate amount of Rs 125.07 crore is involved in outstanding litigation against the company. Any adverse judgment in some of these proceedings could affect business.

The company’s business is capital intensive, and it has to incur high fixed costs on a recurring basis to sustain and expand business operations.

Valuation

In H1 FY2023, consolidated net sales were up by 40.79% to Rs 224.07 crore compared to H1 FY2022. The OPM increased by 988 bps to 27.94%, which led to 117.83% increase in operating profit to Rs 62.62 crore. Other income increased 29.08% to Rs 1.69 crore, while interest cost fell 17.42% to Rs 10.47 crore and depreciation increased 7.09% to Rs 12.58 crore. PBT increased 632.90% to Rs 41.26 crore. Tax expenses for H1 FY2023 was of Rs 10.75 crore compared to tax expense of Rs 1.1 crore in H1 FY2022. Net profit rose 573.27% to Rs 30.51 crore.

In FY2022, consolidated net sales were up by 8.60% to Rs 453.92 crore compared to FY2021. The OPM increased by 1038 bps to 24.96%, which led to 85.84% increase in operating profit to Rs 113.29 crore. Other income fell 21.64% to Rs 2.78 crore, while interest cost fell 31.34% to Rs 22.92 crore and depreciation fell 8.12% to Rs 23.61 crore. PBT increased 1181.32% to Rs 69.54 crore. Tax expenses for FY2022 was of Rs 17.40 crore compared to tax expense of Rs 0.17 crore in FY2021. Net profit increased 1644.36% to Rs 52.14 crore.

The TTM EPS on post-issue equity works out to Rs 9.28. At the upper price band of Rs 357, P/E works out to 38.48.

As of 8 December 2022, its listed peers such as united Spirits trades at TTM P/E of 61.59, Radico Khaitan trades at TTM P/E of 58.87, United Breweries trades at TTM P/E of 85.02 and Globus Spirits trades at TTM P/E of 18.76.

For FY2022, Sula Vineyards OPM and ROE stood at 24.96% and 13.19%, respectively, compared to 16.56% and 16.72% for United Spirits, 14.02% and 12.98% for Radico Khaitan, 11.93% and 9.28% for United Breweries, and 20.81% and 24.24% for Globus Spirits, respectively.