Sula Vineyards IPO seen to be first-of-its-kind-listing in wine segment. Key triggers

As per data on BSE, at around 2.09 pm, Sula IPO received bids for 29,24,964 equity shares — 16% of the total size of 1,88,30,372 equity shares that were offered. As of now, retail investors had shown a healthy appetite for the IPO as the portion reserved for this category gets subscribed by 29%, while lacklustre demand was seen by qualified institutional buyers and non-institutional investors.

Ahead of the IPO, Sula had raised ₹288.10 crore from anchor investors on December 9.

In the IPO, the offer for sale will be up to 26,900,530 equity shares at a price band of ₹340 per share and ₹357 per share. At the upper price band, Sula’s IPO is valued around ₹960.35 crore. However, the company will not utilise the proceeds from the IPO, since selling shareholders who will participate in the issue will receive it. Of the total, 50% of the IPO size will be allotted to qualified institutional buyers (QIB) for bidding, while 15% will be reserved for non-institutional investors (NIIs) and the remaining 35% will be kept for retail individual investors.

Under the OFS, the selling shareholders are — promoter Rajeev Samant, and investors such as Cofintra S.A, Haystack Investments, Saama Capital III, SWIP Holdings, Verlinvest S.A, and Verlinvest France S.A. Others are — Dinesh G. Vazirani, J.A. Moos, Karishma Singh, Major A.V. Phatak, Narain Girdhar Chanrai, Ruta M. Samant, and Sanjay Naraindas Kirpalani.

For the IPO, companies like Kotak Mahindra Capital Company, CLSA India, and IIFL Securities are the book-running lead managers. While KFin Technologies is the registrar of the offer.

Sula Vineyards have been a consistent market leader in the Indian wine industry. Sula has made remarkable progress in over a decade. Currently, the company produces 56 different labels of wines across 13 district brands at its four-owned and two leased production facilities that are situated in Maharashtra and Karnataka.

In FY22, the company’s revenue from operations was ₹4,539.16 million with a net sales margin1 of 69.83% and profit after tax of ₹521.39 million in the same period. In the first half of FY23, the company’s revenue stood at ₹2,240.68 million with a net sales margin of 74.32% and profit after tax of ₹ ₹305.06 million.

As per the red herring prospectus, in its strategies ahead, the company stated that it to continue focusing on its own brands over third-party brands that they import and distribute. Further, the company will continue to leverage its distribution capability to launch new products. Also, they will increase wine awareness and consumption, and penetrate further into Tier-1 and 2 cities in India.

Should you fancy the Sula IPO? 

In its IPO note, Reliance Securities said, “Based on FY22 earnings, the company is valued at 57.7x P/E, 28.4x EV/EBITDA, and 7.1x EV/ Sales. The company has a strong presence across India, 20 countries including Spain, France, Japan, the UK and the US and it will also continue to expand Wine Tourism. This business is likely to provide further opportunities to the company in terms of expanding its business. However, valuation at 58x FY22 leaves nothing meaningful on the table with limited return.”

However, Motilal Oswal and ICICI Direct held different opinions.

Motilal Oswal believes investors can subscribe to Sula Vineyards IPO for listing gains.

In its report, Motilal said, “Sula has market leadership in India’s grape wine industry, especially in premium brands. It enjoys high entry barriers and is well-placed to capture industry growth. We like its focus on D2C model, premiumization, and efforts on improving its operational efficiencies. The IPO is valued at P/E of 49x 1HFY23 annualized EPS. Given, the first-of-its-kind listing in the wine category, there could be fancy for the IPO. We suggest investors can Subscribe for listing gains.”

According to Motilal’s report, Sula Vineyards’ market cap post listing would stand at ₹3,000 crore — which is far lower compared to its peers. By end of December 9, United Spirits had a market valuation of ₹68,400 crore, while United Breweries was valued at around ₹46,600 crore and Radico Khaitan had a capitalisation of ₹14,500 crore. By end of FY22, Sula Vineyards’ return on equity (RoE) was at 14.9% versus United Spirits and Radico Khaitan who had an ROE of 17.9% and 13.2% respectively. United Breweries ROE stood at 9.7%. Meanwhile, the price-to-equity ratio stood at 57.7% of Sula Vineyards by FY22-end compared to the PE ratio of United Breweries (127.5%), United Spirits (82.5%), and Radico (58.2%).

Meanwhile, ICICI Direct highlighted that post-pandemic Sula has shown strong growth on the profitability front from FY22 onwards, which the management expects to stay range bound (due to higher premiumisation and own brands sales). It added, ” The stock is a pure play on the wine sector, which currently sits on a low base (less than 1% of alcobev industry) but is expected to surpass industry growth due to higher acceptability, affordability, perceived health benefits, etc.”

Further, ICICI Direct’s note added, “We assign a rating of SUBSCRIBE with a long-term horizon to the IPO as the industry is currently in a nascent stage and demand centres remain concentrated mainly in a few metros.”

ICICI Direct also highlighted key triggers for Sula Vineyards in the future. These are:

– Wine, as a category in India, is expected to grow at 20% CAGR in value (less than 1% of alcobev sector) vs. 12% for the overall alcobev sector. Sula commands a 52% share in the 100% grape wine segment (which itself is ~85% of the overall wine segment).

– Own brands focus from FY20 onwards is accounting for 84% in H1FY23, helping achieve better profitability.

– Premiumisation of brands: Overall P&A brands contributed 71% to revenues from own brands in H1FY23. The company has launched seven labels in the P&A category in the last five years.

– Secure raw material supply: Sula has access to ~2521 acres of vineyards, significantly higher than the second largest wine company in the Indian market at close to 460 acres.

– High barriers to entry.

On high barriers to entry, Reliance Securities highlighted that the wine business has a high inventory business model compared to other alcoholic beverages, and one of the unique attributes on the supply side is the annual harvesting season, which increases the demanding nature of the wine making business. Unlike other alcoholic beverages, the wine industry has only one raw material production cycle in a year, which is usually from December to March. Wine storage and ageing happens throughout the year.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.