Sula is India’s largest wine producer and seller as of March 31, 2021. 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). Currently, the company produces 56 different labels of wine at four owned and two leased production facilities located strategically in Maharashtra and Karnataka, due to its lucrative policies. The company services close to 8,000 hotels, restaurants, and caterers, which makes them the leader in terms of footprint among wine players in India. The company also has tie-ups with distributors in Maharashtra, Haryana, Delhi, Goa, and Punjab. To that end, Sula has managed to build the largest distribution network among wine companies in India, with close to 13,000 retail touchpoints across the country in 2021. The company also has a strong direct-to-consumer (D2C) selling channel primarily through Wine Tourism Business facilities in Nashik and Bengaluru, with the highest number of D2C sales in the Indian wine industry in FY21. D2C sales were ₹24cr during FY22. In the case of wines, Sula’s revenue is more than three times that of the second-largest player. Apart from the production of wines the company is in the business of wine tourism. Sula has won numerous awards including the Decanter world wine awards, the India wine awards, and the International wine challenge.
The company is committed to growing sustainably and having a positive impact on the environment and communities of the regions in which they operate. In FY21 more than 60% of its electricity needs were met by solar energy from its installed solar PV capacity. Also, meets a portion of its water requirements from its rainwater harvesting reservoirs at all the facilities. The company has a combined capacity of 36.83 million liters capacity and it reduced water usage per case produced by more than 11% between FY20- FY22.
Industry overview:
India is 3rd largest alcoholic beverage market in the world and one of the fastest-growing alcoholic beverage markets in the world, growing from a small base of 1.3 liters per capita of recorded consumption in 2005 to 2.7 liters in 2010. In addition to the growth in per capita alcohol consumption, positive demographic factors, including the addition of more than ten million people each year to the population of eligible alcohol consumers,
makes India one of the most attractive markets for alcoholic beverages. The percentage drinking population of the world is close to 41.7% and is projected to stabilize at around 40% in 2025. India’s percentage of the drinking population is projected to be close to ~33% in FY 2021 and 39% in 2025. Indian alco-beverage is projected to grow by a CAGR of 8% in volume for the period between FY 2021 to FY 2025 against the projected world market growth of 1.5% in volume for the same period as per IWSR. Indian market is projected to grow at 11% per annum in value terms for the period between 2021 to 2025. Indian market is dominated by Indian-made foreign liquor which contributes close to 68% in value to the overall market.
The wine industry is concentrated with high barriers to entry due to the nature of the product in addition to the trade barriers prevalent in the alco beverage market. Winemaking involves an investment of capital and time in the development of a vineyard, investment in the relationship with farmers, tackling inventory management issues, and development of expertise in winemaking. In addition to that, an annual harvest unlike other alco beverages which are not dependent on a harvest cycle elevates the demanding nature of the winemaking and wine-selling business and it has a long gestation period.
The Indian wine industry is relatively still young, it started in the late 1980s and gained momentum after the arrival of Sula in 1998. The Indian wine industry is growing at a much quicker pace at 18.3% by value between FY 2014 to FY 2019 than the Indian made foreign liquor (IMFL) market growing at 10.8% by value for the same period. The Indian wine market exceeded 2.5 million cases in FY 2020. However, the sluggish economy followed by the COVID-19 pandemic pulled the market down. The Indian wine market is projected to grow to 3.4 million cases by FY 2025. The Indian wine market today is dominated by domestic wines with the share of imported wines coming down from 17% in FY 2020 to 13% in FY 2025 in volume terms. Indian Wine Market is expected to grow at a CAGR of 14% in terms of volume from FY 2021 to FY 2025 with domestic players dominating volumes.
The top wine-producing states, Maharashtra and Karnataka, are the top consuming states, contributing close to 57% of the overall market. Wine consump
tion gets its majority of consumers from the top urban centers in the country, with Mumbai, Bengaluru, Delhi NCR, Pune, and Hyderabad contributing more than 70% of the overall market. The low penetration of wines in India and the concentrated nature of the market is a big opportunity to grow the market in new territories.
Wine consumption in India:
India’s per capita consumption of wine is less than 100 ml. The contribution of wine to overall alcohol consumption in India is less than 1% against the world average of close to 13%. Consumption of wine is higher in developed countries which is as high as close to 30% in Europe.
In China, the contribution of wine to overall alcohol consumption is close to only 3%. Even though the wine contribution in China is similar to India, China’s per capita consumption of wine is more than 50 times that of India. The growth of per capita consumption of wine in China has a strong correlation with its economic growth. In China, the per capita consumption of wine grew from 170 ml in 1980 to cross one liter in the year 2000 with an annual growth of more than 10%. The current per capita wine consumption in India is the lowest among the top economies in the world. A very low base underpinned by economic growth, positive demographic dividend, and increasing acceptance of low alcohol content alco-beverages is set to drive the Indian wine market to a prolonged period of strong growth. The Indian wine market has the potential to grow in multiples leveraging growth opportunities.
Table showing CAGR growth of Alcohol beverages:
Wine consumption has not reached the world average levels or even China’s level due to Wine’s cultural image in India. In western countries wine is considered a cultural drink to the Christian community and wine is known for its health benefits and is widely consumed during a meal. Alcohol is still considered taboo in India and low alcohol content drinks only contribute 8% of overall alcohol consumption in India. Factors like growing income, rapid urbanization, growing international travel in the country, and growing alcohol consumption by women are expected to lead to the growth of the wine category in India. As seen from the table above low alcohol drinks, including wine is poised for significant growth in the future.
Moreover, with the rise in disposable income, consumers would tend to upgrade their preferences, resulting in higher demand for prestige, premium, and luxury segments. Rapid urbanization is also leading to spur in aspirational values of people, leading to higher consumption of premium alco-beverage brands. Indians traveling abroad is also leading to an upgrade towards premium segments in the alco-beverage market. The trend is further amplified by the rising influence of social media on millennials and rising aspirations.
Wine Connoisseur (market leader):
One of the most important moats of Sula is its market leader position in the market. The company has attained its position by recognizing the opportunity and effectively creating a local wine production for the market, withholding its positio
n by constant innovation, and expanding its line of business. In the case of wines, Sula’s revenue is more than three times that of the second-largest player. Sula wines are available at various price points between ₹235 to ₹1,850 per 750 ml bottle, making them accessible for consumers with different budgets — appealing to mass markets as well as having a premium product strategy. In particular, Sula’s 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. Sula’s wines have been segment leaders under each of these four categories in the last five years from Fiscal 2017 to Fiscal 2021. The company has consistently gained market share (on the basis of our total revenue from operations) from 33% in Fiscal 2009 in the 100% grapes wine category to 52% in value in Fiscal 2020 and further increased to 52.6% in Fiscal 2021. The company also regularly introduces new products, with seven labels launched in the last five Fiscals. Sula is one of the fastest-growing alco-beverage companies in India as on March 31, 2022, with a CAGR of 13.7% between Fiscals 2011 and 2021. The company has emerged stronger in the aftermath of the COVID-19 pandemic, gaining additional market share and accelerating profitability.
Skin in the game & IPO details:
The promoters own 29.34% of the shares outstanding, out of which Rajeev Samant (CEO&MD) owns 28.01% of the shares outstanding and he is selling 937,203 shares out of 26,900,530 (3.5%) shares allocated for the IPO. Although the promoter's shareholding is less than its peer companies, it is still a founder-led company.
Ahead of IPO, Sula raised ₹288.1cr from the anchor book at ₹357 per share on 9th December 2022. Promoter with other selling shareholders, including Cofintra SA, Haystack Investments, Saama Capital III, SWIP Holdings, Verlinvest France SA, Verlinvest SA, and others, will participate in the Offer for sale (OFS). Under OFS, new shares are not issued, only the existing shares are sold in the open market. Hence, the company will not receive any proceeds from the OFS from the selling shareholders. The company expects that IPO will enhance its visibility and brand image and provide liquidity to its Shareholders and will also provide a public market for Equity Shares in India.
Unconventional methods of advertising:
Advertising alcoholic beverages have been banned in India as per the Cable Television Network (Regulation) Amendment Bill. So, the company has been forced to advertise by non-traditional means through social media, Wine tourism, wine tasting rooms, scale up influencer-based marketing programs, and Sula music fest (SulaFest). A review of vineyards on Instagram shows that Sula is among the top 10 most followed vineyards in the world. It has a large following on social media with ~103,000 followers on Instagram, ~123,000 followers on Facebook, and ~14,000 followers on Twitter. SulaFest is an innovative marketing strategy that the company undertook in 2008, which includes a two-day celebration of wine, music, and food, in Nashik. SulaFest is widely recognized as the largest wine festival in India, with more than 10,000 people in attendance in 2020, making it one of the largest wine music festivals in Asia as well. The company has also introduced a new line of wine (Dia) packed in aluminum cans, being single-serve offerings at a lower average selling price as its latest marketing strategy.
Financial analysis:
Table showing the breakup of revenue:
Although the revenue has increased by 8.6% YoY to ₹453.9cr in FY 2022 it has not yet reached the levels of FY 2020 due to the pandemic effects. But it should be noted that for the past 10 years, Sula has consistently shown positive YoY revenue growth with a 10-year revenue CAGR of 22.7%. The company managed to have a steady increase in revenue by maintaining good relationships with its top five customers (which includes state-run corporations, wholesalers, and independent distributors), which represented 37.25% of revenue in FY 2022. Among its revenue variables, the wine tourism business has shown a good growth trajectory, it has increased by 22.9% from the 2020 level to ₹34.6cr and it has increased its revenue contribution to 7.63% in FY 2022. The company continues to increase its Wine tourism business as a means to advertise, increase brand awareness, and its brand image among its financial goals. It should also be noted that the company’s import business has been reduced significantly due to its transition to focus on its own brand ever since covid-19 supply chain complications.
Table showing the company’s financial ratios:
Although 2022–2022 was stagnant for its top-line growth, the margins of the company withstood the whirlpool of the pandemic effects. The company managed to increase the margins during these unfavorable times by managing its business efficiently, discontinuing part of its import business which produced low margins and focusing on its own brand and wine tourism which produce high margins.
Gross profit margin increased by a staggering 11.97ppt YoY to 65.29% and EBITDAE increased by 10.13ppt YoY to 25.57%, which is a great margin in any line of business, especially for a manufacturing business. Net asset turnover increased steadily over 2020–2022 to 0.87x, portraying the company's rise in its asset’s efficiency in generating revenue. The cash conversion cycle increased steadily to 347 days due to a steady increase in days inventory outstanding. Days sales outstanding decreased and Days payable outstanding increased steadily, easing the working capital requirements but it is offset by an increase in Days inventory outstanding, resulting in an increase in net working capital days. ROCE increased significantly by 10.19ppt YoY to 20.86%, showing the company’s efficient capital allocation abilities. Debt to equity ratio and Debt to EBITDAE ratio decreased substantially from 0.99x to 0.58x YoY and 4.67x to 1.97x YoY respectively, showing the company’s effort to reduce its debt while increasing its operational efficiency. PAT increased multi-folds from ₹3cr to ₹52cr (17X growth) YoY and the PAT ratio increased by +10.77ppt YoY to 11.49%.
It is safe to say that the company is improving its efficiency financially, even during the pandemic. In fact, the company has now emerged stronger in the aftermath of the COVID-19 pandemic, gaining additional market share and accelerating its profitability.
Valuation:
Based on the peer group information (excluding Sula), the highest P/E ratio is 116.82, the lowest P/E ratio is 45.94 and the average P/E ratio is 77.27. Sula’s PE ratio is 51.3, based on its EPS of ₹6.79 at end of FY 2022 and the price of ₹348.5 (Average of 340 and 357). The company’s PE ratio is not far off from the lowest PE ratio in its peer group and its EPS is growing at a rapid pace from ₹(2.09) in FY 2020 to ₹6.79 in FY 2022. The company’s NAV/share was at ₹50.29 at the end of FY 2022 and its net debt stood at ₹206.5cr on 31, March 2022. The company’s latest share transfer other than the warrant exercise was priced at ₹240/share on December 14, 2021.
Conclusion:
As seen above, the company is by no means a bargain but it is still valued fairly in comparison to its peers. The company constructs its valuation based on some qualitative factors such as being, Established market leader in the Indian wine industry with the largest wine distribution network and sales presence, High barriers of entry in the industry, Secured supply of raw materials with long-term contracts exclusive to the brand (Generally contracts with a length of 12 years), Leader and pioneer of the wine tourism business in India, Early adoption and focus on sustainability, Experienced Board, a qualified senior management team.
Although the company has splendid qualitative factors, production and distribution efficiency, good top-line, and profit growth, the wine market in India is very low contributing less than 1% of total alcohol consumption against the world average of 13%. The company can only continue its organic growth depending on the macroeconomic trends in relation to wine consumption in the country, a shift in consumer behavior from spirits to wine in tier 2 and 3 cities, and import restrictions. However, if the Government reduces the import duty on wine in India, the company may face increased competition from international labels by its competitors or other distributors, which may have higher appeal to consumers in terms of variety and pricing. For instance, on April 2, 2022, India entered into an interim Australia –India Economic Cooperation and Trade Agreement which when in force, will offer a phased reduction of import duty over a period of 10 years on certain Australian wines imported to India. It should be noted that 40% of wine imported is from Australia. Currently, the import of alcoholic beverages in India attracts an import duty at the rate of 150% of the value of the wine being imported.
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