The Sula Vineyards IPO in December 2022 was a tepid one. After trading at a discount in the grey market, and after being subscribed a mere 2.3x, the homegrown wine manufacturer debuted flat against the issue price.
However, since its listing, in a matter of just three months, the stock has appreciated by 17% - compared to the 4% decline in the Nifty 50. It’s easy, in a market as volatile and choppy as now to cash the returns. However, this may just be the beginning for Sula.
With several near and long-term tailwinds, the stock has the potential for significant wealth creation. What’s getting us excited?
1. The Indian wine scene is still nascent
Although the country produces 40 million cases of wine annually, the average Indian only drinks one bottle per year, compared to two in China and 50 in Italy or the United States.
However, this is rapidly changing as wine is perceived as healthier than spirits and is also gaining popularity because of its aspirational stature.
Although wine accounts for less than 1% of total alcohol consumption in India, the global average is close to 13%, and therefore this is a huge untapped potential for the wine industry.
Between FY14 and FY19, the Indian wine sector grew by 18.3% in value terms, which is significantly more than the growth of the formalised liquor market, which was 12.3%.
2. Dominating the wine industry
In FY22, Sula controlled 52% of the wine market by value. The "Sula" brand is the most popular in the industry, and this includes both still and sparkling wines. The other major Indian player in the space Grover Zampa has a distant second place and a 15% market share.
In addition to "Sula", the company owns a number of other brand names. These brands are strong on their own and have their own identities across different price points ranging from Rs. 250 to Rs. 1,895 per 750 ml bottle (in Maharashtra).
The strategy is similar to what many FMCG players deploy to gain dominance in the same category but across different consumer groups.
3. Deep moat business
There are several entry barriers in the wine industry, which make it difficult for new players to enter and disrupt the market. Sula’s early entry, rapid success and achievement of scale have deepened these moats.
Cost of entry - Developing vineyards is a costly affair. Sula has access to 2,521 acres of vineyards, which is much more than the 460 acres owned by the second-largest wine firm in the Indian market to sell ~900K cases of wine in FY22
Secured supply - The business is secured through long-term supply agreements with contract farmers for 2,290 acres
Time to market - Planting a vineyard in India often necessitates a minimum commitment of 12 years from the producer due to the lengthy value chain process and the time it takes for the wine to be ready for bottling
Quality control - Sula helps farmers by educating them on the best farming practices, which increases their output and the quality of their wine
These factors have resulted in Sula enjoying leadership in a highly consolidated market, with just a few other local players.
Additionally, domestic players get a significant cost advantage given the hefty import tariffs, and the high storage and transport expenses associated with importing wine.
4. Strong Distribution
Sula is present in 25 of India's states and 6 of its union territories. With access to more than 23,000 points of sale, including more than 13,500 retail touchpoints and more than 9,000 hotels, restaurants, and caterers.
Products made by Sula are well-known and easy to find all over the country. Its products are sold across India by its distributors at places like general trade, hotels, restaurants, cafes, and modern trade channels like e-commerce platforms and a few supermarkets.
The company also has a strong direct-to-consumer sales channel at its wine tourism facilities in Nashik and Bengaluru, where an average of 2.3 lakh bottles are sold each year
Typically, alcohol companies command a high valuation given their high customer stickiness, brand loyalty, pricing power, non-cyclical demand, high profitability and high return ratios.
In India, listed companies like United Spirits and United Breweries trade at an average of 45x one-year forward PE. However, the wine business isn’t entirely comparable, and valuations need to be adjusted to make them contextual. The wine business has several reasons for both a premium and a discount to peers.
Premium: Nascent market, higher-growth market, premium branding and pricing, higher operating margins (27% in FY22 compared to the 12% average of listed breweries)
Discount: The production lifecycle for wine is much longer which requires higher working capital (200 working capital days for Sula in FY22, versus 50-100 for peers), and squeezes return ratios
Considering all the above factors, we think a 10% discount to peers in the alcohol segment is justified.
Sula is expected to post decent revenue growth of ~15% CAGR with similar PAT growth, over the next couple of years.
This puts the value per share at Rs. 450 at 40x FY24 EPS which comes to a ~20% upside at current levels.