Sula Vineyards Limited IPO

About the company:

Sula Vineyards Ltd.

Introduction

Sula Vineyards are India’s largest wine producer and seller as of March 31, 2022. They have been a consistent market leader in the Indian wine industry in terms of sales volume and value (on the basis of the total revenue from operations) since Fiscal 2009 crossing 50% market share by value in the domestic 100%. grapes wine market in Fiscal 2012.

The business has consistently gained market share from 33% in Fiscal 2009 in the 100% grapes wine category to 52% in value in Fiscal 2022. Furthermore, they are the market leader across all four price segments, ‘Elite’ (INR 950+), ‘Premium’ (INR 700-950), ‘Economy’ (INR 400- 700) and ‘Popular’ (

Sula’s business can be broadly classified under two categories (i) the production of wine, the import of wines and spirits, and the distribution of wines and spirits (the “Wine Business”); and (ii) the sale of services from ownership and operation of wine tourism venues, including vineyard resorts and tasting rooms (the “Wine Tourism 195 Business”).

Key Positives

A wide array of products offered

Their consumer proposition focuses on offering customers extensive varieties of wine at varying price points, with 56 labels to choose from and a portfolio of 13 distinct brands as of September 30, 2022. The wines are classified under four broad categories, namely the ‘Elite’ category with 21 labels, followed by the ‘Premium’ category with 13 labels, the ‘Economy’ category with 13 labels, and the ‘Popular’ category offering 9 labels.

Catering to large business outlets

They serviced close to 8,000 hotels, restaurants and caterers, which makes Sula the leader in terms of footprint among wine players in India. They have tie-ups with distributors in Maharashtra, Haryana, Delhi, Goa and Punjab.

Wine tourism

As part of the Wine Tourism Business, Sula owns and operates two vineyard resorts located at and adjacent to our 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.      

Risks

Adverse climatic conditions may impact the quality of wine grapes which are our key raw materials

The company’s main raw material is grapes. The same is exposed to a lot of erratic climatic conditions. This is a major risk for the company. A bad grape harvest could lead to a shortage and inadequate supply of grapes and wine for the season.

Seasonality

Months November to February record the highest sales given the festival season. Post this the sales are moderated and hence the nature of the business depends on the festive outlook.

High debt ratios

Debt to Equity Ratio was 1.23x in 2020 to 0.48x in H1FY23. While its Debt to EBITDAE Ratio had been 7.29x in 2020. In March 2022, it remained at 1.97x. Though declining the debt ratio remains high.

High product concentration

Sula only deals in wine which is consumed by a concentrated population. The wine tourism business too is restrained to Maharashtra and Karnataka and contributes ~8% to the top line of the business. Any changes in consumer preference can affect the business.

Financial Snapshot

(Rs. In Crores)

Conclusion

The wine market is seeing growth but still remains a small population. The key raw material for Sula Vineyards, grapes, and cultivation is limited to Maharashtra and Karnataka. Though the company has a long-term supply of farmers for grapes, the same can be adversely affected by nature. The debt levels remain higher than regular levels while the cash conversion cycle remains long. Taking these factors into consideration, Sula comes at above comfortable valuations which is why we advise our investors to avoid the IPO.