Introduction

Sula Vineyard is India’s largest wine producer and seller as of March 31, 2022. They have been a consistent market leader in the Indian wine industry in terms of sales volume and value since Fiscal 2009 crossing 50% market share by value in the domestic 100% grapes wine market in Fiscal 2012. They have consistently gained market share from 33% in Fiscal 2009 in 100% grapes wine category to 52 % in value in Fiscal 2022. Furthermore, they are the market leader across all four price segments, being ‘Elite’ (INR 950+), ‘Premium’ (INR 700-950), ‘Economy’ (INR 400- 700) and ‘Popular’ (<400 INR) with a higher share of approximately 61 % by value in the ‘Elite’ and ‘Premium’ categories in Fiscal 2022, as compared to overall market share of 52 % in the Indian wine industry. Their business can be broadly classified under two categories (i) the production of wine, the import of wines and spirits, and the distribution of wines and spirits; and (ii) the sale of services from ownership and operation of wine tourism venues, including vineyard resorts and tasting rooms. In addition to the flagship brand “Sula,” popular brands include “RASA,” “Dindori”, “The source,” “Satori”, “Madera” & “Dia” with its flagship brand “Sula” being the “category creator” of wine in India. Sula Shiraz Cabernet is India’s largest selling wine by value in Fiscal 2021. Currently, they produce 56 different labels of wine at four owned and two leased production facilities located in the Indian states of Maharashtra and Karnataka. Furthermore, the company is also recognized as the market leader across wine variants, including red, white and sparkling wines. Sula vineyard is the most visited vineyard in India, with approximately 368,000 people visiting our vineyards in Fiscal 2020. The company was one of the fastest growing alcoholic beverage companies in India as of March 31, 2021, with a CAGR of 13.3 % between Fiscals 2011 and 2022.

Investment Rationale

The Rs 960 cr. IPO is purely offer for sale and nothing will be received by the company. Post the IPO the promoter shareholding will fall to 27.33%. The Indian wine market is relatively young, with the domestic wine industry taking shape only in the 1990s. The size of the Indian wine market is small as compared to the size of other developed and developing economies. In addition, India does not have a strong wine drinking culture unlike in European countries where it is paired with meals. Wine drinking culture in India is an occasion-led event where people drink wines at parties, social gatherings, and events.

As of September 30, 2022, they had long term supply arrangements (with a contract life of up to 12 years with an option for renewal) with approximately 500 contract farmers. The rates payable under these contracts are fixed on a per kilogram basis subject to the fulfillment of predetermined parameters. The supply of table grapes, which forms part of our ‘Economy’ and ‘Popular’ wine segments, is abundant and we procure these from grape growers directly. ‘Economy’ and ‘Popular’ wine segments represented for the six months period ended September 30, 2022 and September 30, 2021, and Fiscals ended March 31, 2022, 2021 and 2020, which contributed 29.47 %, 30.33 %, 29.43 %, 31.42 % and 32.19 % of their own Brands sales for the same periods.

By setting up our manufacturing facilities in Maharashtra and Karnataka, they have been able to diversify and safeguard our operations from potential impacts of adverse climatic conditions in one region. The farming of wine grapes which is the major raw material for operations is concentrated in the west and south-western states of India. The wine processing units are also located in the west and southwest of India, with our flagship facility located in Nashik, Maharashtra, and our wine processing units located in Nashik and Dindori in Maharashtra, and Bengaluru and Basavakalyan in Karnataka, as on the date of this Red Herring Prospectus.

The company also imports and distributes 21 international labels (18 wine labels, two vodka labels and one brandy label) in India, which are priced in line with our ‘Elite’ category. Their imported alcoholic beverages accrued a total of Rs.117.39 million, Rs.137.33 million, Rs.357.23 million, Rs.1,111.24 million and Rs.1,614.76 million, respectively, for the six months period ended September 30, 2022 and September 30, 2021, and Fiscals ended March 31, 2022, 2021 and 2020, which contributed to 5.20 %, 8.56 %, 7.82 %, 26.36 % and 30.86 % of our total income for the same periods. The import of alcoholic beverages in India attracts an import duty at the rate of 150% of the value of the wine being imported, so the company benefit from high import duties imposed on imports of international wines in India. However, if the Government reduces the import duty on wine in India, we may face increased competition from international labels by our competitors or other distributors, which may have higher appeal to consumers in terms of variety and pricing. Their product offering under their own Brands accrued a total of Rs.1,915.47 million, Rs.1,317.04 million, Rs.3,808.91 million, Rs.2,873.00 million and Rs.3,316.22 million, respectively, for the six months period ended September 30, 2022 and September 30, 2021, and Fiscals ended March 31, 2022, 2021 and 2020, which contributed to 84.85 %, 82.08 %, 83.40 %, 68.16 % and 63.38 % of our total income.

Our revenue from operations from our top five customers (which includes state run corporations, wholesalers and independent distributors) for the six months period ended September 30, 2022 and September 30, 2021, and Fiscals ended March 31, 2022, 2021 and 2020 was Rs.793.90 million, Rs.657.20 million, Rs.1,690.76 million, Rs.1,494.43 million and Rs.1,685.19 million, respectively, which represented 35.43 %, 41.29 %, 37.25 %, 35.76 % and 32.31 % of our revenue from operations for the same periods.

The distribution platform included over 50 distributors, 11 corporations, 14 licensed resellers, 7 company depots, 3 defence units as of September 30, 2022 and over 23,000 points of sale (including over 13,500 retail touch points and over 9,000 hotels, restaurants and caterers) as of March 31, 2022.

Companies’ debt to equity ratios were 0.48, 0.76, 0.58, 0.99 and 1.23, as at September 30, 2022 and September 30, 2021 and March 31, 2022, March 31, 2021 and March 31, 2020, respectively. Interest coverage ratios were 4.03, 1.10 and 0.47, as at March 31, 2022, March 31, 2021 and March 31, 2020, respectively. As of September 30, 2022, they had aggregate outstanding borrowings of Rs.2,315.16 million (including bank guarantee) comprising, inter alia, term loans, working capital loans and bank guarantees.

They serviced close to 8,000 hotels, restaurants and caterers. During the six months period ended September 30, 2022 and September 30, 2021, the contribution from our Off-trade sales was 70.75 % and 72.95 % of our secondary sales. The  Wine Tourism Business (2^nd business category) has been successful with our resorts, recording an approximate revenue per room of Rs.9,044, Rs.10,367, Rs.10,225 and Rs.10,195 and an occupancy rate of 43.66 %, 70.97 %, 55.69 % and 77.37 % for the Financial Years ended March 31, 2021, 2022, and the six months period ended September 30, 2021 and September 30, 2022, respectively.

Due to only one harvesting season per year, inventory for the full year is effectively built up in these four months, resulting in high year-end inventory. The inventory cycle was 449 days, 358 days and 252 days for FY 2022, 2021 and 2020, respectively. Calculations of day’s inventory outstanding for Fiscals 2021 and 2020 also took into account the inventory and cost of goods sold of our erstwhile subsidiary, PADPL.

In Fiscal 2022, revenue from operations was Rs.4,539.16 million with a net sales margin of 69.83 %, and profit after tax of Rs.521.39 million in the same period. For the six months period ended September 30, 2022 and September 30, 2021, revenue from operations was Rs.2,240.68 million and Rs.1,591.50 million, with a net sales margin1 of 74.32 % and 70.39 %, and profit/(loss) after tax of Rs.305.06 million and Rs.45.31 million in the same periods, respectively. Consolidated EBITDAE increased from Rs.645.12 million in Fiscal 2021 to Rs.1,160.71 million in Fiscal 2022 and was Rs.643.06 million during the six months ended September 30, 2022 as compared to Rs.300.55 million during the six months ended September 30, 2021. Our EBITDAE margin2 has improved year-on-year from 9.68 % in Fiscal 2020 to 15.44 % in Fiscal 2021, 25.57 % in Fiscal 2022 and 28.70 % for the six months ended September 30, 2022 as compared to 18.88 % for the six months ended September 30, 2021.

Sales of their Own Brands accounted for 85.49 %, 82.75 % and 83.91 % of our revenue from operations for the six months period ended September 30, 2022 and September 30, 2021, and Fiscal 2022, respectively, as compared to 63.57 % in Fiscal 2020, when we had a significant Third Party Brand distribution business, contributing 30.96 % of our revenue from operations during the same period.