IPO Analysis: Sula Vineyards Limited

IPO Rating: Invest for long term

About the issue:

Sula Vineyards is the country’s largest wine producer and seller in the Indian wine industry in terms of sales volume and value since FY09. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Rs 2 per equity share. The price band of the issue has been fixed at Rs 340 to Rs 357 per equity share. The issue size is Rs 960.35 crore at a higher price band.

The IPO opening date is December 12, 2022, and it will be closing on December 14, 2022. The issue is likely to be listed on the exchange on December 22, 2022. The IPO market lot size is 42 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (546 shares or Rs 1,94,922) at the upper price band.

Objects of the Issue

The company will not receive any proceeds from the offer and all such proceeds will go to the selling shareholders.

Promoter holding

The pre-issue shareholding is 28.44 per cent, post the IPO the promoter stake will be 23.21 per cent.

About the company:

Sula Vineyards Limited, incorporated in 2003, is India's largest wine producer and seller as of March 31, 2022. The company also distributes wines under a variety of popular brands such as RASA, Dindori, The Source, Satori, Madera, and Dia, with its flagship brand Sula being India's "category creator" of wine.

The company's operations are divided into two categories: first is wine production, importation of wines and spirits, and distribution of wines and spirits (the "Wine Business"); and second is the sale of services derived from ownership and operation of wine tourism venues, such as vineyard resorts and tasting rooms (the "Wine Tourism Business").  Wine Business accounts for majority of the revenue and contribute around 90 per cent of the total revenue while Wine Tourism contributes the rest.

The company currently produces 56 different wine labels at four owned and two leased production facilities in the Indian states of Maharashtra and Karnataka.

In 2021, the company will have built the largest distribution network among wine companies in India, with nearly 13,000 retail touchpoints across the country.

In addition, the company has a strong direct-to-consumer ("D2C") selling channel, which is primarily through the Wine Tourism Business facilities in Nashik and Bengaluru. As of September 30, 2022, Sula Vineyards Limited had entered into long-term supply agreements (of up to 12 years) with grape growers for approximately 2,290 acres. This gives a visibility on the supply of grapes to the company, which is used as prime raw materials.  

As of September 30, 2022, the company's distribution platform included over 50 distributors, 11 corporations, 14 licenced resellers, 7 company depots, and 3 defence units. As of March 31, 2022, the company had over 23,000 points of sale (including over 13,500 retail touchpoints and over 9,000 hotels, restaurants, and caterers).

Financial

On the financial performance front, for the last three fiscals, Sula Vineyards Ltd has (on a consolidated basis) posted a turnover/net profit of Rs 523.21 crore/ Rs. -15.94 crore (FY20), Rs 421.53 crore/Rs 3.01 crore (FY21), and Rs 456.7 crore/Rs 52.14 crore (FY22). For Q2 of FY22, the company earned a net profit of Rs 30.51 crore on a turnover of Rs 225.76 crore. Thus, for the last 3 years, it has marked sharp improvements in its top and bottom lines.

Valuation and Outlook

The issue is priced at a P/BV of 6.5x based on its NAV of Rs 55.05 as of September 30, 2022. If we annualize H1FY23 earnings, then the asking price is at a P/E of around 47.47x. There is no listed company that has the same business model, however, when compared to United Spirits, Radico Khaitan, and United Breweries, the issue is available at discount.  The company paid a dividend of 120 per cent in FY22 and has been guided to adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. The operating profit margin of the company has improved from 17.63 per cent in FY21 to 53.29 per cent in FY22 and the net profit margin from 5.58 per cent in FY21 to 11.41 per cent in FY22. The company is a market leader and a dominating player in the Indian wine industry.

The issue price seems to be discounting most of the positives and is coming at a higher valuation, however looking at the financial performance and improving margins, investors can apply for long term.