Sula Vineyards IPO: Detailed Analysis

Sula Vineyards’ IPO opens for subscription on 12th December. The company is looking to raise up to Rs 960.35 crore through the public issue. Here are the details:

Sula Vineyards Limited (SVL) IPO Details

• Sula Vineyards Limited IPO Date: 12 December - 14 December 2022
• Sula Vineyards Limited IPO Price band: Rs 340 - Rs 357
• Sula Vineyards Limited IPO Issue Size: Rs 960.35 crore (Only Offer for Sale)
• The size of the offer for sale component is up to 25,546,186 equity shares
• Reservation: QIB 50%, Retail - 35%, NII 15%
• Minimum Investment: Rs 14,994
• Post Issue Implied Market Cap: Rs 2,863 – Rs 3,006 crore
• Bid lot: 42 shares, and in multiples of 42 shares

Sula Vineyards Limited IPO: Objects of the Issue

It is an offer for sale, and hence the company will not receive any proceeds of the Offer for Sale from the selling shareholders.

Sula Vineyards Limited IPO: About Sula Vineyards

• As of March 31, 2022, Sula Vineyards is India's largest wine producer and seller. 
• The company also distributes wines under a bouquet of popular brands including, 'RASA', 'Dindori', 'Satori,' 'The source', 'Madera' and 'Dia' with its flagship brand 'SULA' being the category creator wine in India.
• SVL produces 56 different labels of wine at four owned and two leased production facilities located in Maharashtra and Karnataka. They also have a wine tourism business.
• They have built the largest distribution network among wine companies in India, with close to 13,000 retail touchpoints across the country (2021).
• As of September 2022, SVL has entered into long-term supply arrangements with grape growers for approximately 2,290 acres.
• Their distribution platform included over 50 distributors, 14 licensed resellers, 11 corporations, 7 company depots, and 3 defense units.

Sula Vineyards Limited IPO: Business verticals

The company's business has can be divided into two categories:

• Wine Business: It includes the production of wine, the import of wines and spirits, and the distribution of wines and spirits.
• Wine Tourism Business: The sale of services from ownership and operation of wine tourism venues, including vineyard resorts and tasting rooms.

Sula Vineyards Limited IPO: Industry Outlook

• As per WHO, the contribution of wine to the consumption of alcoholic beverages has progressively risen from 8.6% in 2005 to 11.7% in 2016 and has reached 13.5% at the end of 2021.
• The contribution of wine to overall alcohol consumption in India is less than a percent against the world average of close to 13%. Though wine consumption is low in India, positive factors can lead to a multi-fold jump in wine industry growth.
• The Indian wines industry is growing at a much quicker pace at 18.3% by value between FY14 to FY19.

Sula Vineyards Limited IPO: Listed Peers

The company has three listed peers and includes popular names like United Spirits, Radico Khaitan, and United Breweries. Below is the comparison of Sula Vineyards with listed peers. It is important to note that Sula is completely focused on wine, while other players are in the alcoholic industry with a wider product range.

• In terms of revenue (FY22), Sula Vineyards is the smallest player, while United Spirits is the largest player with revenue 68 times that of SVL.
• The Earning Per Share (EPS) is the lowest for Sula Vineyards at 6.53. The highest EPS is for Radico Khaitan - 19.70. 
• Sula Vineyards operates in an industry where the PE is usually higher. The average PE for the other three players is approximately 83, while at the upper band, Sula is quoted at a PE of 54.67 (FY22), which is lower than the peers.
• Return on Net Worth (RoNW) is highest for United Spirits, followed by Radico and Sula. United Breweries is at the bottom of the list.

Sula Vineyards Limited IPO: Financials

• The revenue from operations for FY20, FY21, and FY22 was Rs 521.63 crore, Rs 417.96 crore, and Rs 453.92 crore, respectively. The revenue fell nearly 20% in FY21 (over the previous year) and increased by 8.6% in FY22.
• The EBITDAE (EBITDA + exceptional items) for FY20, FY21, and FY22 was Rs 50.49 crore, Rs 64.51 crore, and Rs 116.07 crore, respectively. The EBITDAE has more than doubled in this period. 
• The reason for the jump in EBITDAE is an increase in EBITDAE margins - it has increased from 9.68% in FY20 to 25.57% in FY22.
• The net profit for the same period was Rs (15.94) crore, Rs 3.01 crore, and Rs 52.14 crore, respectively.
• Return on Capital Employed (RoCE) for the same period was 4.09%, 10.67%, and 20.86%, respectively.
• For the last three financial years, the average EPS and RoNW were 1.64 and 2.57%, respectively.
• The Debt to Equity ratio for SVL has come down significantly from 1.23 in FY20 to 0.58 in FY22.

Sula Vineyards Limited IPO: Unique Selling Propositions

High entry barriers: The wine market in India is expected to remain concentrated with high entry and trade barriers prevalent in the alcoholic beverage market. For example, the wine value chain process is long, each state has a different alcoholic policy, and winemaking requires expertise - all these create high entry barriers.

Established market leader: The company has built a strong network in the last two decades across key markets which gives them a competitive advantage over other wine players. The 'SULA' brand is recognized as the market leader across wine variants, including white, red, and sparkling wines.

Largest wine producer in India with innovative products: Sula is the market leader in the Indian domestic wine industry with a market share value of 52% in FY22. They lead in terms of volume and value of sales since FY09.

Secured supply of raw material: They have access to approximately 2,521 acres of vineyards, which is significantly higher than the 460 acres of its nearest competitor. They have entered into long-term supply arrangements (of up to 12 years) with contract farmers for approximately 2,290 acres.

Sula Vineyards Limited IPO: Growth Potential

Continue to focus on brand: SVL will continue to focus on its own brands over third-party brands that they import and distribute. They have made a clear shift towards focusing on their own brands in FY20. Sales of own brands accounted for 85.49% of their revenue for the six months ended September 30, 2022, as compared to 63.57% in FY20.

Focus on premiumization of product portfolio: Sula currently produces and markets a total of 34 labels under the ‘Elite’ and ‘Premium’ categories, providing the largest offering in the Indian wine market. SVL intends to continue to leverage its distribution capability to launch new products under these categories to further increase revenue and market share in the Indian wine market.

Increasing wine awareness and consumption: Its distribution network enables them to increase the availability and visibility of its brand. They seek to continue to focus on increasing sales volumes in geographies by expanding their distribution network, optimizing distribution operations, and increasing product supply to the under-penetrated markets mentioned above.

Sula Vineyards Limited IPO: Risks

Business is highly regulated: The industry in which the company operates is subject to licensing and excise regimes with changing laws, rules and regulations, and legal uncertainties, including the adverse application of corporate and tax laws. The business and financial performance could be adversely affected by the unfavorable changes mentioned above.

Climatic condition risk: Grapes are their key raw material, and adverse climatic conditions impact the quality of wine grapes. They generally address the climate change risk by crushing higher quantities of grapes when the harvest is conducive to managing inventories in case of a failed monsoon or bad crop in the next harvest cycle.

State regulations: They may only adjust the retail prices of their products with approval from the state governments in certain states where the wine market is price-controlled. If they are unable to increase revenues sufficiently to offset increased costs due to inflation, it could hurt their business.

Sula Vineyards IPO: Detailed review and Analysts' Recommendation

• Revenue Slowdown: Sula Vineyards’ revenues have witnessed a slowdown in recent years. Between FY20- 22, revenues have fallen from Rs 521.63 crores to Rs 453.92 crores.
• Healthy rise in profits: Sula Vineyards’ net profit scenario has improved in recent years. From reporting a loss of Rs 15.94 crores in FY 20, the company clocked a net profit of Rs 52.14 crores in FY 22. 
• Growing margins: Sula Vineyards’ EBITDA margins have shown an improvement from 9.68% in FY20 to 25.57% in FY22.  
• Market Leader: Sula Vineyards is an established market leader in the wine market with a strong distribution network. Sula Vineyards had a market share of 52% in FY22. They lead in terms of volume and value of sales since FY09.
• Reasonable valuations: At the higher end of the price band,  Sula Vineyards IPO is priced at a post-issue PE ratio of ~52.58 times FY22 annualized EPS on a fully diluted basis. This is lower than peers United Spirits (61 times) United Breweries (9.72 times), and Radico Khaitan (13.4 times).
• Sula Vineyards IPO review: Given factors such as a leading market share position , healthy rise in profits, solid brands and a strong distribution network, various external analysts have given a ‘positive’ rating on the company’s long-term prospects.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.