Sula Vineyards IPO review (May apply)

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Review By Dilip Davda on December 8, 2022

•    SVL is India's largest wine producer with over 52% market share.
•    Sudden boost in margins for the last 18 months' performance raises eyebrows.
•    The issue appears fully priced discounting near-term positives.
•    Lower promoter's holding raises concern. 
•    Cash surplus investors may consider investment for a long-term reward.

ABOUT COMPANY:
Sula Vineyards Ltd. (SVL) is India's largest wine producer and seller as of March 31, 2022 (Source: Technopak Report). It has 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) since Fiscal 2009 crossing 50% market share.

SVL has consistently gained market share (on the basis of total revenue from operations) from 33% to 52% in the grapes wine category. Furthermore, it is the market leader across all four price segments i.e. Elite, Premium, Economy, and Popular categories. It is also recognized as the market leader across wine variants, including red, white, and sparkling wines (Source: Technopak Report). Sula Shiraz Cabernet is India's largest-selling wine by value. 

SVL distributes wines under a bouquet of popular brands. 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 (Source: Technopak Report). Currently, the company produces 56 different labels of wine at four owned and two leased production facilities located in the Indian states of Maharashtra and Karnataka.

It has entered into long-term supply arrangements (of up to 12 years) with grape growers for approximately 2,290 acres as of September 30, 2022. As of the said date, SVL has 757 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
For listing benefits and providing exit to some of its stakeholders, SVL is coming out with a maiden IPO, of 26900530 shares having a face value of Rs.2 per share, by way of an Offer for Sale (OFS), i.e. pure secondary issue to mobilize Rs. 960.35 cr. (at the upper cap). It has announced a price band of Rs. 340 - Rs. 357 for its OFS. The issue opens for subscription on December 12, 2022, and will close on December 14, 2022. Minimum application is to be made for 42 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 31.95% of the post-IPO paid-up equity capital of the company. Even though the company posted a loss for FY20, SEBI has permitted it to allocate 50% for QIBs, 15% for HNIs, and 35% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., CLSA India Pvt. Ltd., and IIFL Securities Ltd., while KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity at par, SVL raised/converted further equity capital in the price range of Rs. 2.12 - Rs. 240.00 (based on FV of Rs. 2 per share) between June 2005 and November 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NA, Rs. 1.43, Rs. 6.98, Rs. 10.76, Rs. 41.38, Rs. 58.64, Rs. 96.46, Rs. 101.74, Rs. 170.00, and Rs. 175.42 per share. 

This being a secondary issue, SVL's paid-up equity capital post-issue will remain the same at Rs. 16.84 cr. Based on the upper band of the issue price, the company is looking for a market cap of Rs. 3005.90 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SVL has (on a consolidated basis) posted a turnover/net profit - (loss) of Rs. 523.19 cr. / Rs. - (15.94) cr. (FY20), Rs. 421.51 cr. / Rs. 3.01 cr. (FY21), and Rs. 456.70 cr. / Rs. 52.14 cr. (FY22). For the first half of FY23 ended on September 30, 2022, it earned a net profit of Rs. 30.51 cr. on a turnover of Rs. 225.76 cr. The sudden boost in margins raises eyebrows. Management clarified this as the shift of high-margin products and premium brands and is confident of maintaining such trends in the future as well with plans afoot. 

For the last three fiscals, SVL has reported an average EPS of Rs. 3.06 and an average RoNW of 5.24%. The issue is priced at a P/BV of 6.11 based on its NAV of Rs. 58.40 as of September 30, 2022.

If we annualize FY23 earnings and attribute it to post-IPO fully diluted equity capital, then the asking price is at a P/E of around 49.24. Thus the issue is fully priced discounting all near-term positives. 

DIVIDEND POLICY:
SVL paid dividends at the rate of 30% (FY20), NIL (FY21), 245% (FY22), and 155% (FY23) till the filing of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, SVL has shown United Spirits, Radico Khaitan, and United Breweries as their listed peers. They are currently trading at a P/E of 63.53, 61.26, and 84.00 (as of December 08, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKERS' TRACK RECORDS:
The three BRLMs associated with the offer have handled 59 public issues in the last three fiscals, out of which 17 issues closed below the issue price on the listing date.

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