Evolving tastes of an upwardly mobile population, the perception of low-alcohol beverages being healthier and a shift towards premium consumption experiences are driving Indians towards the 2.6-million cases a year wine market. The supply of reasonably priced domestic wines and easy access, including online delivery, has helped the Indian wine sector grow much faster than the IMFL (Indian Made Foreign Liquor) market between FY14 and FY19.

For those looking to own a share of a wine business in India, the Sula Vineyards IPO is an option. With an overall market share of 52 per cent in the grape wine market, Sula is India’s largest producer and seller and also category-creator in elite and premium wine segments. Sula is on a strong footing, thanks to 10-25 per cent Ebitdae margin over the last three years, resulting from a strong roster of brands, extensive distribution network and security of long-term raw material contracts with farmers.

Sula’s selling shareholders, including promoter and Belgian investment firms Verlinvest and Cofintra, are making an offer-for-sale of 2.69 crore shares to garner ₹914-960 crore at the price band of ₹340-357/share. This is being offered at about 47.5 times annualised H1FY23 earnings without factoring in a third quarter boost (November-January) on account of festivity-linked sales. Liquor stocks in India tend to trade at premium valuations on account of the limited basket of such stocks in the listed space and the perception of the business being recession-proof. Investors with a long-term horizon can thus subscribe to this offer for sale, though it isn’t cheaply priced.

Glass half full

India is predominantly a market where spirits with high alcoholic content are preferred, with over 90 per cent share. Unlike globally, where over 50 per cent share is held by low alcoholic beverages, for India it is just 8 per cent. One can view this as offering a limited addressable market for a player like Sula which is focussed only on wines. But the world over, younger consumers are lately preferring beverages with lower alcoholic content. With affluent young Indians entering the workforce, social drinking is gaining more acceptance. These trends, along with reduction in social taboo around alcohol consumption, could work in favour of beverages with low-alcohol content such as wines.

The share of wine in alcohol consumption in India stands at less than 1 per cent in comparison to over 10 per cent global average, 20-50 per cent for European nations and nearly 4 per cent for China. With per capita consumption of wine in India at less than 100 ml a year, the small-sized ₹1,345-crore wine market seems to have potential for far better penetration and growth. As per capita income of countries rises, wine consumption tends to rise, based on aspirational demand. A Technopak report estimates wine sales in India to rise to 3.9 million cases by FY25 (CAGR of 14 per cent from FY22).

The wine industry in India started in the late 1980s. Sula Vineyards was founded in 1996 in Nashik, India’s ‘Napa Valley’. Sula was the first to introduce varietal wines in India in 2000 with the launch of Sauvignon Blanc, Chenin Blanc, and Zinfandel etc. It set up India’s first winery tasting room in 2005, which marked the birth of wine tourism (contributes 8 per cent to sales). Since FY09, Sula has been the consistent market leader and boasts of Shiraz Cabernet India’s top selling domestic 100 per cent grape wine. The company has access to 2,500+ acres of vineyards, significantly higher than Grover Zampa and Fratelli — the next two largest wine producers in India. 

With an installed capacity over 13 million litres, Sula has four owned and two leased manufacturing facilities located in Maharashtra and Karnataka. It leads across all four price segments namely, Elite (more than ₹950 a bottle), Premium ( ₹700-950), Economy ( ₹400-700) and Popular (less than ₹400), Sula has the highest number of labels (56) like Sula, RASA, Dindori, The Source, etc. Together with own brands, Sula also imports and distributes 20 international brands (Beluga, Hardy’s Le Frand Noir, etc). Its business is classified under two broad categories — wine (92 per cent) and wine tourism. Besides the on and off trade channels, Sula’s direct to consumer channel has potential (nearly 5 per cent share).

Investment thesis

The investment thesis for Sula revolves around three pillars.

One, it is the established market leader with leading brands across wine variants including red, white and sparkling. It has built a strong network across key markets and is a leader in distribution (over 23,000 points of sale), product availability (highest number of 56 labels) and visibility.

Two, Sula has long-term exclusive contracts securing the supply of raw materials. This ties up procurement for up to 12 years. More than 90 per cent of Sula’s annual supply of wine grapes is covered. Its hold in top wine-producing States of Maharashtra and Karnataka acts as an entry barrier for newer players, also given the fact that this business has a long gestation period.

Three, the company’s continued focus on own brands, rationalisation of third-party brand business, and success in premiumising its portfolio, efforts to increase wine awareness and consumption in Tier-1 and 2 cities can increase its market share further, deepen presence in certain geographies and improve profitability.   

Financials

Over FY20 to FY22, Sula’s annual revenue was stagnant but its bottomline has progressed from losses to reasonable profits. In FY22, revenue grew over 8 per cent YoY, driven by nearly 33 per cent sales growth in its own brands. Sula’s own brands’ contribution grew to nearly 84 per cent in FY22 from 69 per cent in FY21. In H1 of FY23, total income at ₹225.7 crore rose 40.7 per cent while profit grew 7-fold to ₹30.2 crore. The second half will likely see bigger growth on the back of the November-January period sales boost. Margin improvements have been achieved by reducing the imported and traded component in the portfolio and focusing more on owned brands.

Sula’s gross margin stood at 65.2 per cent in FY22, expanded from 53.3 per cent in FY21, helped by focus on sales, distribution and marketing of its own brands. Gross margin for H1 of FY23 rose to 70.41 per cent. Ebitda before exceptional items (Ebitdae) margin rose to 25.6 per cent in FY22 from 15.4 per cent in FY21, due to expansion in gross margin and higher efficiencies of scale. This was enhanced to 28.7 per cent in H1 of FY23. Similarly, profit margin inched up to 13.61 per cent in H1 of FY23 from 11.49 per cent in FY22. The company carries about ₹200 crore of debt, which it is confident of servicing through internal accruals. It has no capital raising plans in next one year.

Effectively, investors in this IPO have a limited track record of financials to rely on. But available numbers show Sula to compare well on margins and profitability with much larger rivals such as United Spirits and Radico Khaitan. (see table)

Valuations

At upper price band, Sula’s P/E ratio would work out to a steep 47.5 times based on annualised numbers (H1 i.e. September 30, 2022). This is by no means cheap, but is at a discount to valuations of listed bigger alco-bev players such as Radico Khaitan, United Spirits and United Breweries who trade at 60, 50 and 84 times respectively of current year earnings. Based on FY22 numbers, Sula’s PE at 52 times is also at a discount to Radico Khaitan, United Spirits and United Breweries who trade at 55, 71 and 127 times respectively. Many listed wine stocks globally are loss-making, while those who make money such as Duckhorn Portfolio (US) and Treasury Wine Estates (UK) are in mature wine markets that have reached some point of saturation compared to the nascent state of the segment in India.

For the IPO to pay off at these valuations, the thesis on wine consumption in India taking off in a big way and Sula holding on to its dominant market share, need to come good.

Risks

All liquor businesses in India are exposed to high regulatory and policy risks, with State government policies towards this sector often dictated by political considerations and cronyism. It being a business that is highly dependent on agro-climactic conditions, supply disruptions are a material risk. Setbacks to the yield and quality of grapes in any particular year can affect wine yield and taste.

The wine industry in India is characterised by seasonal demands, with highest being in November through January. Unlike other alco-beverages, the wine industry has only one raw material production cycle (December to March). Year-end inventories are generally high (449 days in FY22) and so is cash conversion cycle (347 days in FY22). The biggest threat to aspirational demand for India-made wines arises from imported wines from well-known European and Australian brands. Recent Free-Trade agreements that seek to lower the barriers for imported wines to enjoy easier access to Indian consumers can cannibalise on the niche market that Sula is currently catering to.

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