Will Sula Vineyards leave investors in high spirits or high and dry?

They say you should never count your glasses of wine. But you should definitely count an IPO’s grey market premium (GMP). Nashik-based Sula Vineyards is currently commanding a GMP of Rs 30 per share, said market watchers, indicating healthy retail excitement for the upcoming public issue.

India’s largest wine maker, Sula has set the price band for its initial public offering (IPO) at Rs 340-357 a share. The issue will open for subscription on December 12 and close on December 14. At the upper end of the price band, the issue size comes to Rs 960.34 crore.

“At the current GMP, retail investors can expect a listing gain of approximately 9-10 percent,” said Mehul Bumtaria, an active participant in the IPO market.

A reason behind this excitement could be Sula Vineyards’ relative valuation discount to its peers. According to the draft red herring prospectus, the company’s earnings per share (EPS) stood at Rs 6.79 as on March 31, 2022. So at the upper end of the price band, the price-to-earnings (P/E) ratio is 52.5 times FY22 earnings. Meanwhile, its peers Radico Khaitan, United Spirits and United Breweries are trading at TTM (trailing twelve months) P/E of 55.16, 80 and 127 times, respectively.

Sula’s financials

As of September quarter end, Sula Vineyards had outstanding borrowings of Rs 231.5 crore and cash and cash equivalents of Rs 13 crore.

Over the last five years, Sula’s financial performance has been inconsistent. For the year ended March 2018, it reported net profit of Rs 12.3 crore. Next year, net profit was Rs 7.2 crore followed by a loss of Rs 16 crore. For the year ended March 2021, which was the COVID-affected year, net profit was Rs 3 crore. And the year after that, right before the IPO, net profit jumped to Rs 52 crore.

Sales have also grown inconsistently over the same period, rising from Rs 433 crore to Rs 557 crore, then falling to Rs 531 crore, and further to Rs 421 crore before picking up a bit to Rs 456 crore.

So, is the comparison with peers fair?

According to business research firm Technopak estimates, the wine category in India was at 2 million cases in FY21 and is projected to grow to 3.4 million cases by FY25. But that is only a small drop in the alco-beverage ocean.

Currently, the entire alco-beverage consumption market in India stands at 987 million cases. Of this, 30 percent is beer, 69.3 percent spirits and only 0.7 percent is wine. Going by Technopak’s projections for 2025, the total market will grow to 1.23 billion cases. Of this, 450 million cases will be beer, 781 million cases will be spirits and about 4 million will be wine. That is still just about 0.5 percent of the market.

For the wine industry, a compound annual growth rate (CAGR) of 14 percent between FY21 and FY25 might seem far-fetched, believe industry experts, as the industry grew at only 6 percent CAGR in the pre-COVID era, between 2010 and 2019.

“The company might boast a 52 percent market share by value in the wine segment but we are talking about changing consumer preference over here to expand the market further. Why would a guy from tier-2 or tier-3 city buy a bottle of wine, when they can buy good IMFL brands at the same price?” asked a portfolio management service fund manager who holds Radico Khaitan in his portfolio.

IMFL stands for Indian-made foreign liquor.

Apart from IMFL, IMIL or Indian-made Indian liquor has also been gaining ground in the country. Of the total spirits market in India, IMIL currently holds more than 50 percent share. IMIL or ‘country liquor’ includes brands like Santra, Nimboo, Ghoomar and Heer Ranjha.

Globus Spirits, a manufacturer of IMIL that has a higher return on equity than Sula Vineyards, is available at a cheaper valuation of 18.45 times FY22 earnings. So is GM Breweries at 11.34 times.

Sula Vineyards’ business model of wine sales and wine tourism is more similar to that of global peers like Duckhorn Portfolio and Treasury Wine Estates. Duckhorn Portfolio, known for its wine estates in Napa Valley, California, trades at a P/E of 29.6 times FY22 earnings.

Other listed global alcohol stocks are also trading at valuations cheaper than Sula’s.

Back home, wine pioneer Indage Vintners delisted in 2011 after debt and cash problems. The stock that had once touched a high of Rs 974 in 2007 ended its run at around Rs 13. But to be fair, Sula is the most credible wine producer from India.

Key risks

“Growth triggers are certainly there. It is currently a ‘winner takes all’ market and Sula is the winner. Wine can be easily sold in grocery stores and premium retail formats. Tax component in the MRP is also low compared to spirits,” said Karan Taurani, senior vice president at Elara Capital.

But he too sees a problem in scaling up the business. The top wine producing states, Maharashtra and Karnataka, are also the top consuming states, accounting for close to 57 percent of the overall market in India.

“As Sula enters tier 2 and tier 3 cities, we will have to wait and watch to understand how newer markets are reacting to this category of liquor,” he added. In 2014, India’s per capita consumption of wine was less than 10 ml. Today, it is about 30 ml, according to Technopak.

According to analysts, premiumisation could be a growth trigger for Sula Vineyards, but here, it faces the likelihood of competition from foreign labels.

Currently, the import of wine and spirits in India attracts duty at the rate of 150 percent of the value being imported. Thus, the wine market in India has limited international players.

“If the government reduces the import duty on wine, we may face increased competition from international labels, which may have higher appeal to consumers in terms of variety and pricing,” the company said in its red herring prospectus.

For instance, in April this year, India entered into a trade agreement with Australia which, when in force, will offer a phased reduction of import duty over 10 years on certain Australian wines.

When it comes to premiumisation, there is also the perception and taste battle to be won. Optimal conditions for growing grapes are generally found between 30 and 55 degrees latitude on either side of the equator. India, which lies in the northern hemisphere, does not fall in this area.

“If it follows the northern hemisphere cycle, the grapes are too diluted because of the rains and moisture,” said an industry expert on condition of anonymity. “That makes it suitable for eating but not for wine-making. If it follows the southern hemisphere cycle, the grapes stop ripening by the time of harvest due to extreme heat. So, Indian wines cannot be compared to the premium wines of Napa or Europe.”

Only offer for sale

The issue is a complete offer for sale (OFS) of up to 26,900,530 equity shares. “In full OFS, the company does not receive any amount. Only the selling shareholders will benefit. In a fresh issue, funds could have been used by the company in expanding its business and for other general corporate purposes,” said Manan Doshi, co-founder, of unlistedarena.com, a pre-IPO-focused platform.

That, say experts, should be a warning signal for potential investors. The listing is to aid existing investors get an exit, rather than to fund any expansion or even reduce its borrowings.

“I would rather buy a bottle of their wine at the same price than invest in their stock,” concluded the PMS fund manager quoted earlier.

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