Sula Vineyards IPO: Listing gains likely for investors

Sula Vineyards Limited, India's largest wine producer and seller, is tapping the capital markets with its offer for sale of 2,69,00,530 equity shares in a price band of Rs 340-357. The issue will open through December 12-14. The fundraiser at the top end of the price band would be Rs 960 crore. The selling shareholders include the Promoters and PE Investors.

Sula has a dominant market share and is slightly higher than half by value in the 100 per cent grapes wine market. The company has its wine making facilities in the States of Maharashtra at Nasik and in Karnataka. The business is skewed towards Nasik in Maharashtra which is the largest grape growing belt in the country. The company has two broad categories of business. The first is the production of wine, import of wines and spirits and the distribution of wines and spirits whether manufactured by Sula or imported. The second business is the sale of services from ownership and operation of wine tourism venues which include vineyard resorts and tasting rooms.

The company reported revenues of Rs 453.91 crore for the year ended March 2022. Revenues in the six months ended September 21 were at Rs 159.15 crores which have risen to Rs 224 crore in the current six months ended September 22. Net profit for the full year was at Rs 69.53 crore. For the current six months they were at Rs 41.25 crore against Rs 5.62 crore. The EPS for the year ended March 22 was at Rs6.53 crore. The PE band at this price is 52.07-54.67 times. The company has chosen to compare itself with breweries and liquor manufacturers like United Spirits, Radico Khaitan and United Breweries. These companies are strictly not comparable as they are in allied business but certainly not identical business.

The company operates and sells wines under four broad categories. These are Elite, Premium, Economy and Popular. In FY22, the company had a revenue mix of 24 per cent, 46 per cent, 13 per cent and 15 per cent in these four segments. The wine tourism business contributed 7.63per cent of the total revenues in FY22. The sourcing of grapes which happens during the period January to March is primarily through long term contracts from farmers in the grape growing fields. There is a subsidy which was given on the export of grapes which has been withdrawn recently. Similarly, the refund of state taxes which was available for wine in the State of Maharashtra has been put on hold and would act as a big dampener on the performance of Sula.

In the six months of the current financial year ended September 22, Sula has seen this amount of government grant double from Rs 9.62 crore to Rs 19.46 crore. Wine production and sales are both cyclical in nature and the third quarter is the best quarter in terms of sales for the company. Manufacturing happens in the fourth quarter and also sales which are lower than the third quarter but second best. Fair to assume that the second half would have revenues of between 62-65 per cent while the first half would be between 35-38 per cent. The production being skewed to the fourth quarter, results in very heavy inventory at the end of the financial year in March.

There is uncertainty about the subsidy for the current year and this could affect the company in many ways. Firstly, it includes the expected amount of subsidy in revenues during the quarter. This implies that the amount due appears as receivables and affects the cash liquidity of the company. Secondly, as the company contracts buying grapes from farmers contractually, it cannot be said that they pay higher to them based on the reimbursement that they receive. Thirdly, if one were to assume for a moment that the money would not come, Sula would become an average company in profitability from a highly profitable company.

The mood of the market as regards consumption and lifestyle stocks will ensure that the issue gets more than subscribed. There will be listing gains as well for the lucky applicants. There will be question marks on the long-term sustainability of the business without the subsidy being granted and paid for. Readers would be well rewarded to apply for the issue and on being successful, booking profits. In the medium term, allow the subsidy issue to get resolved either way as that could be very important and a matter which could see sustainability being at stake.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)