Winemaker Sula Vineyards has capitalized on the changing tastes of an emerging population, the perception that low-alcohol beverages are healthier, and the shift toward premium consumer experiences. The established market leadership, the security of long-term raw material contracts with farmers (access to over 2,800 hectares of vineyards) and the continuous focus on own brands as well as the success in the premium portfolio are the anchors of the investment thesis for Sula.
Since going public at ₹357 per share (47 times P/E) in December 2022, the stock has posted decent gains (up 35 percent) in line with healthy earnings performance. We had recommended subscribing to the IPO.
However, Sula’s trailing 12-month P/E rating stands at 47. While this looks expensive, expected growth is supportive. Sula is expected to post year-over-year revenue growth of 16 to 18 percent and earnings growth of 16 to 17 percent, supported by 29 percent EBITDA margins for FY24 and FY25. In fact, Sula’s current valuation is close that of alcohol and beverage market leader United Spirits (50x), for which we recently began coverage with a hold rating.
Sula experienced a 10 percent correction from the previous peak (₹535) in 2018 amid new developments in the Maharashtra excise mix case. While we await the final outcome on this matter, the correction has accounted for most of the risks. Sula is expected to continue to deliver good earnings growth. However, at current levels, the risk/reward trade-off appears to be balanced.
Harvest in progress
Hailing from Nashik, India’s “Napa Valley”, Sula was the country’s first company to introduce varietal wines to India in 2000. Over the years, the company has grown to become the market leader (with a market share of over 50 percent), supported by a strong network in all key geographic markets, product availability and visibility of its brands – “Sula”, “The Source”, “RASA” and ” Dindori”. Sula is a leader in all four price segments – namely Elite (more than ₹950 per bottle), Premium (₹700-950), Economy (₹400-700) and Popular (less than ₹400). The company’s strategy is based on premiumization, with the “Elite” and “Premium” areas in the foreground.
The addressable market for wine in India is large, which puts Sula in a prime position to capitalize on it. Low-alcohol beverages currently account for just 8 percent of the Indian market, compared to over 50 percent globally. In addition, per capita consumption of wine in India is less than a tenth of the world average at less than 100ml per year. The 1,345 crore wine market clearly has potential for better penetration and growth (from 2 million cases in FY21 to an estimated 3.4 million cases in FY25).
Sula’s long-term exclusive contracts secure the supply of raw materials. The company has four wineries in Maharashtra and two in Karnataka, both of which are the top wine-producing states, and these states account for over 60 percent of the company’s sales.
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Consolidated operating revenue for FY23 increased 22 percent year-on-year to ₹553 crore. Sula’s “private label” sales growth for FY23 was 26 percent. The Elite and Premium categories grew even more (29 percent) than “Overall Own Brands”. The EBITDA margin was 29.1 percent and EBITDA increased 38.7 percent year-on-year to ₹161 crore. Sula had an after-tax profit of ₹84 crore in FY23, up 61 percent.
According to the first quarter sales update (results to be released shortly), Sula posted its highest-ever first-quarter net sales for both its own brands and wine tourism businesses. Own brands saw growth of around 24 percent, with the elite and premium segment leading the way with growth of around 30 percent.
For FY24 and FY25, Sula’s revenue is expected to grow by 18 percent and 16 percent year-over-year, respectively, according to Bloomberg. Margins remain at an odd 29 percent. This should typically help Sula deliver 15 to 17 percent year-over-year EPS growth in both years.
However, recent developments in the case of Maharashtra’s excise mix in 2018 (previously disclosed in IPO documents) have cast a slight shadow. An initial excise duty notice from the Government of Maharashtra of 116 crore for the period 04/01/2006 to 03/31/2014 was first received by Sula on 02/17/2018 and was subsequently appealed by the company. A postponement was granted on September 19, 2019. This temporary residence has now been cleared. Sula has appealed the order. According to Sula, the order has no impact on existing business or operations, indicating a one-time impact when we assume the bottom line is unfavorable. Worst-case scenario, the 10 percent correction in stocks could have stalled.
In our note on Sula’s IPO, we mentioned that all spirits companies in India face high regulatory and political risks.
Ratings and Risks
Many listed wine stocks worldwide are losing, while those making money, such as Duckhorn Portfolio (US) and Treasury Wine Estates (UK), are in mature wine markets compared to the segment’s burgeoning state in India. Our long-term positive stance on Sula is a result of clear growth prospects in India, but Sula’s risk/reward trade-off is balanced. Given the healthy fundamentals, investors could continue to hold the stock.
Risks to our call include the threat of imported wines from well-known European and Australian brands to demand for Indian-made wines, the reduction/removal of high import duties on international wines, and unfavorable changes in licensing and excise regimes. Other risks include adverse climatic conditions affecting the quality of the grapes and pending litigation between companies, subsidiaries, promoters and directors.
Why
The rating brings with it the most positive aspects
Long road to intact growth
The spirits business is subject to regulatory and political risks
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