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Equity Research: Sula Vineyards Ltd.
Sula Vineyard looks strong with improving profit along with growing CAGR, increasing export data and declining import data. Wine consumption in India is expected to grow at 16%, similar to China due to increase in per capita income. Company’s board of directors has strong background along with execution capabilities and company ready to capture growth opportunities in the industry.
SULA is a leading wine manufacturer with largest installed capacity. Being an early mover in a nascent stage wine market, SULA Vineyards established a strong brand recall. Company offers wide range of label across various flavours and price points. Change in its product mix has helped to improve profitability. Growing urbanization, social drinking to drive growth of Wine market and SULA expected to benefit from the same. Wine consumption in India is expected to grow at 15%, similar to China due to increase in per capita income. Company’s board of directors has strong background along with execution capabilities and company ready to capture growth opportunities in the industry. India's largest wine producer, Sula Vineyards, is renowned for its high-end wines and dedication to perfection. They operate in the major grape-growing regions of the nation with wineries in Maharashtra and Karnataka. Sula, which Rajeev Samant founded in 1996, has played a significant role in revolutionising the Indian wine sector through innovation and environmentally friendly practises. It is now a well-known brand on a global scale, with a broad range of award-winning red, white, rose, and sparkling wine varieties in its portfolio.
Since its incorporation in 2003, Sula has built a strong network across key markets, which gives it a competitive advantage over other wine players. It commanded a 52% wine market share (value) in FY22. The “Sula” brand is recognised as the market leader across wine variants, including red, white and sparkling wines. In addition to “Sula”, the company also owns the “Rasa”, “The Source”, “Dindori”, “York”, “Satori”, “Mosiac”, “Madera”, “Samara” and “Dia” brand names, among others, which are strong individual brands with distinct identities. It is among the top 10 most followed vineyards in the world, having a large following on social media of ~1.2 lakh followers on Instagram, ~1.2 lakh likes on Facebook and ~0.14 lakh followers on Twitter. The company also launched the first wine-themed music festival in India, “SulaFest”, at its Nashik facility in 2008. It has been widely recognised as the largest wine music festival in India and one of the largest wine music festivals in Asia, based on attendance. Sula aims to tap the potential of the under penetrated wine industry in India with an offering of the widest product range in the Indian wine market. The share of wine as a form of alcohol consumption in India in FY22 was less than 1% whereas globally, the contribution of wines to alcohol consumption was close to 13.5%, suggesting significant room for growth. The demand for wines in urban and semi-urban areas of India is on the rise. The company has extensive experience, tailored specific capabilities across product development, marketing, technology, supply chain, fulfilment and consumer service and sought to create a differentiated ecosystem for its consumers. Sula has launched a total of seven labels under own brands The Source, Rasa and Dindori, in the last five years, which have all been in the ‘Elite’ category and together were able to acquire a market share of 11% in the ‘Elite’ category by the end of FY23. Its product portfolio of 56 domestic wines labels and 21 imported alcoholic beverage labels comprising wines and spirits, serves a large cross-section of customers (by type, income and demography), providing them the widest range of choices at price points between | 250 to | 1895 per 750 ml bottle in Maharashtra for own brands. It has also been the market leader in terms of range of labels across price segments with more than 50 wine labels.
Shareholding:
Industry Research:
Spirits, beer, and wine are the three main types of alcohol used, and each has a different global consumption pattern. Globally In terms of overall alcohol consumption, beer accounts for a considerable portion (63%), followed by wine (11%), spirits (10%), and other beverages (16%). While spending patterns in industrialised economies are more entrenched, changes are constantly taking place in developing nations. Developing nations tend to choose spirits, whilst industrialised nations tilt more towards beer and wine. Beer continues to be the most often consumed category in terms of volume. In terms of sales volume, wine consumption roughly resembles that of spirits. Wine's share of overall alcohol consumption has consistently climbed, according to the World Health Organisation (WHO), from 8.6% in 2005 to 11.7% in 2016, with an expected increase to 13.5% in CY 21 based on recorded 100% pure alcohol consumption.
India is primarily a spirits-dominated market, with over 90% of alcohol consumption at- tributed to spirits. The per capita consumption of spirits in India ranks among the highest among major global economies. When compared to global averages, low alcoholic bever- ages constitute more than 50% of overall alcohol consumption. In developed countries, this figure exceeds 75% of total consumption, while in China, it surpasses 30%. However, India's share of low alcoholic beverages stands at approximately 8%, indicating significant potential for correction in favor of wine and beer categories. This suggests a prolonged period of transition where wine and beer are expected to gain prominence in the Indian market. In India, the per capita consumption of wine is less than 100 ml, accounting for less than 1% of overall alcohol consumption. This is significantly lower compared to the global average of around 13%, with developed countries in Europe reaching nearly 30% wine consumption. When comparing India and China, although wine contributes to only about 3% of overall alcohol consumption in China, China's per capita wine consumption is more than 50 times that of India.
India is experiencing rapid growth in its alcohol market, making it one of the fastest- growing among major economies. The per capita consumption of pure alcohol in India has increased significantly, from 0.9 liters in 2000 to 3.5 liters in 2018, with a com- pound annual growth rate (CAGR) of over 8%. Currently, approximately 41.7% of the global population consumes alcohol, and this figure is expected to stabilize around 44% by 2025. In India, the percentage of the population that drinks alcohol is project- ed to reach approximately 35% in FY 2021 and 38% by 2025. In FY 2020, the Indian alcohol industry was estimated to be over one billion cases per year. From 2000 to 2010, the recorded per capita consumption of pure alcohol increased from 0.9 liters to 2.8 liters, showing a robust compound annual growth rate (CAGR) of approximately 14%. However, since 2015, the recorded per capita consumption has remained steady at around 3.5 liters. The Indian alco-beverage market is the third largest globally, trail- ing only China and the USA in terms of actual alcohol content volume in CY 2020. It holds the title of being the largest market for Western spirits. Projected to grow at a CAGR of 14% in volume from FY 22 to FY 25, the Indian market outpaces the expected global market growth of 1.5% during the same period, according to IWSR. In terms of value, the Indian market is forecasted to grow at a rapid pace of 15% per annum from FY 22 to 25. The market is predominantly driven by Indian Made Foreign Liquor (IMFL), contributing about 69% of the overall market value in FY 22. The Indian spirits market is dominated by the top two global spirits companies. In FY 2022, the top three players in the spirits market collectively hold nearly 54% of the market share in terms of volume. Similarly, in the beer market, the top three players control around 85% of the market share by volume. In the case of wines, the top three players com- mand approximately 85% of the market value in the domestic 100% grape wine segment. Alongside these key players, there is a presence of numerous regional strong players, particularly in the spirits market.
Wine Manufacturing Process:
Grape Harvesting: Grapes are carefully hand-picked or mechanically harvested, considering factors such as ripeness and quality.
Sorting and Crushing: Grapes undergo sorting to remove any undesirable or dam- aged fruit, followed by gentle crushing to release the juice.
Fermentation: The must is transferred to fermentation vessels, where yeast con- verts sugars into alcohol through fermentation.
Pressing and Clarification: After fermentation, the wine is pressed to separate liquid from solids, clarifying the wine.
Aging and Maturation: Wine is aged in various containers like oak barrels or stain- less steel tanks to develop flavors and complexity.
Blending and Fining: Winemakers blend different wines or grape varieties to achieve desired flavor profiles, and may add fining agents for clarification.
Filtration and Stabilization: Filtration removes remaining solids or microbes, while stabilization prevents unwanted reactions.
Bottling and Packaging: The finished wine is transferred to bottles, which are cleaned, sterilized, and sealed with closures. Labels and branding elements are applied.
Investment Rationale:
Demand will converge on SULA as a well-established player in a developing market:
Since 2009, SULA has consistently led the wine industry in terms of both value and volume. The company holds the top spot in all categories, including Elite, Premium, Economy, and Popular. In a wine business that is poised for strong expansion, it has established itself as the main player (in terms of capacity and market share). We project it to grow topline at 16% for the FY24–25E period. Over the years, the company established a recognised brand value of "SULA" through the use of tourism and social media, and it does command a strong recall in consumer minds.
Major Product Mix Revamp to Maintain Recent Profitability:
Over the past three years, the company has seen a good steady adjustment in the mix of products that has increased revenue from its own brands relative to third-party distributors. In the wine business, own brands now account for 96% of sales, up from 69% in FY22. Own brands have greater pricing power than third-party distributes, which increased EBITDAM from 15% in FY20 to 35% in FY23. We think this is a significant revision to the company's business strategy and anticipate higher revenue from its own brands to maintain recent profitability on a long-term basis.
Working effectively in the capital-intensive wine industry; establishing hurdles to entry:
Asset turns for the company are 0.8(x) because of a high working capital cycle, but higher profit margins make the company's operations more productive (in terms of ROCE) and able to produce more cash. Compared to other Alcobev products, the wine industry operates with a comparatively high capital expenditure. Unlike distilled beverages, the traditional wine production cycle is prolonged by elements like natural fermentation and ageing. The entrance barrier in the wine market is created by the need for the new entrants to assure ideal working capital management and reliable estimates of future wine demand.
The Indian wine industry is in its early stages compared to larger markets like China, France, and Italy, it is expected to grow at 18% volume CAGR during 2022-2025E period. However, as wines gain popularity in the On-Trade channel, more consumers are discovering this emerging category. The On-Trade channel is crucial for product dis- covery and attracting new customers. Off-Trade sales will capitalize on the excite- ment generated in the On-Trade channel and significantly expand the category's size. The pandemic has already led to high Off-Trade sales, and this trend will continue as people become accustomed to drinking at home. Wine is increasingly popular as a social drink for in-home consumption. Sula Vineyards dominates the On- Trade segment, holding over 55% market share. Not only is Sula Vineyards the leader in on-trade channels, but it has also achieved remarkable off-trade sales growth in the past three years. In Fiscal 2021, its off-trade sales accounted for a significant 79% of its total sales, compared to 64% in Fiscal 2020. Sula Vineyards serves approximately 8,500 hotels, solidifying its strong presence in the industry.
While imported wines have played a significant role in developing the wine category in India, domestic wines are gaining traction in the market. The contribution of im- ported wines is expected to slightly decline from 18% in volume in FY 2020 to 16% by volume in FY 2025. International wine players have faced challenges in establishing themselves in the Indian market, as they have relied on importers rather than invest- ing in local vineyards. Integrated alco-beverage industry players have made attempts to enter the Indian wine market but with limited success, mainly due to a lack of focus given the smaller size of the business compared to the more profitable spirits market in the country. Currently, the top two players in the spirits market have lim- ited involvement in the wine category through imports. However, the expanding Indi- an wine market may attract interest from large international players, considering the market's long-term potential.
SULA has reported a revenue growth of 5% during FY20-FY23 and is estimated to clock 16% topline CAGR of FY24-FY25Eperiod due to continuation of its dependence on its Own brands. The Wine indus- try in India is projected to grow at 18% volume CAGR by 2025E and while management of SULA has guided similar 19% volume and additional 2-3% value growth in the topline for next 2-3 years. Company being major leading player to act as market maker in our opinion. The awareness about Wine and SULA brand set to increase as com- pany management plans to emphasis significantly on overall Adver- tisement and marketing expenses. The full scaled mode of proposed Canned version of Wines hold potential to bring volumes and remains potential dark horse for next level of growth driver. The corporation gradually lowered the third party brand and distribution, which formerly made up a sizeable amount of the topline (34% in FY20 and 29% in FY21), down to 8% and 6% in FY22 and FY23, respectively. Due to the fact that the distribution of third-party brands is a trading operation, total margins are smaller. The company has successfully functioned with the same in addition to significant development in topline, showing success of its brands along with sustainability in the trend. The years following the pandemic have assisted the corporation to scale up sales of its Own brands (holds pricing power). This resulted in revised return ratios and improved profitability.
Company has 10 major brands in its Own bands under which is sales various labels are different price points, as it also has 18 wines, 2 vodka and 1 brandy label under third party distribution. Company has well brand recognition under SULA brand. The wine business has reported a sale of INR 703 Cr in FY23 and is estimated to grow at 18% CAGR during FY24-FY25E. Company also plans to popularize Wines through sale of Can mode which may enable to tap in additional volumes. The popularization of Canned wines similar to Beer holds healthy prospects for SULA’s Topline. Company also has a differentiated approach in its Wine servings, as it also generates revenue from it resorts/Villas at two locations names as “Beyond By Sula” with 7 rooms, 3 villas and “ The Source at Sula” with 67 rooms at Nashik location. Company generates equivalent revenue to Room rents from the foods and beverages served (ex-alcoholic drinks) during rented period. Sula has testing rooms at its places to taste wines for visitors. Wine tourism busi- ness provides physical appearance to its brands aiding in gaining market share in visitors mind.
SULA has India’s largest installed Wine capacity of 160 Lakh litres as on FY23. it has scaled the same from 130 Lakh litres in FY20 and estimated to be 190 lakh litres of capacity by FY25E. Its wine capacities are spread across Maharashtra and Karnataka with 158.5 lakh litres and 14.4 lakh litres capacity respectively. Its largest single location capacity (97.4 lakh litres) situated in Dindori tahsil (Nashik District) followed by 56.4 lakh litres in Nashik. IT also owns two leased wines in Maharashtra and Karnataka with capacity of 11.9 lakh litres and 9.7 lakh litres respectively. The second largest installed capacity after SULA is with Grover Zampa Wines (4900 lakh litres) followed by Fratelli Wines (1500 lakh litres) which explains dominant size of Sula Wines. The India’s Largest installed wine capacities are being used with healthy capacity utilization as it has averaged at 71% in last three years. The company has to keep 27% of capacities for buffer use and thus making its 85-95% utilised. Company has increased its capacity each year rom FY23 with reported increase in capacity utilization signalling robust demand for its products, Despite being No 1 capacity holder. We expect this to continue ahead due to change in estimated product mix to- wards its own brands rather than third party distribution. Hence capacity expansion is going to be parallel with topline growth along with other major expenses such as marketing & Advertisement.
Management Profile:
Mr. Chetan Ramachandra Desai, Chairman and Non– Executive Independent Director: He has previously worked with Haribhakti and Co., LLP
He is a CA with 39 years of experience and is a member of Institute of CA of India.
Mr. Rajeev Samant, Founder, MD & CEO (Promoter): Established Sula Vineyards, Nashik’s first winery in 1999. This historic move transformed Nashik into India’s Wine Capital, and today, Sula Vineyards is globally recognized as India’s most important wine producer. He holds an Undergraduate degree in Economics and a Master’s degree in Engineering Management from California's Stanford University.
Mr. Riyaaz Amlani, Non-Executive Independent Director: Holds A master’s degree in Entertainment Management from UCLA, MD at Impresario Entertainment and Hospitality Pvt Ltd. Former two-term President of the National Restaurant Association of India (NRAI).
Mr. Alok Bajpeyi, Non-Executive Independent Director: A bachelor’s degree in economics from the London School of Economics and Political Sciences. Previously worked with Swiss Bank Corporation, Dawnay Day AV Financial Services, Daiwa Capital Markets India, Avendus Capital and British High Commission, New Delhi.
Mr. Roberto Italia, Non-Executive Director: Currently serving as the CEO and MD of Verlinvest S.A., Holds master’s degree in economics from Libera Università Internazionale degli Studi Sociali Guido Carli, Italy and an MBA degree from INSEAD, France.
Mrs. Sangeeta Pendurkar, Non-Executive Independent Directors: She is Currently serving as CEO of Pantaloons. Previously worked with Kellogg India, HSBC, Coca-Cola India, Hindustan Lever. Holds a bachelor’s degree from the University of Mumbai and MBA from Savitribai Phule Pune University.
Mr. Chaitanya Rathi, Chief Operating Officer:
He has been with Sula since April 2019 as COO and earlier from 2006 to 2013 in various capacities. Previously worked with Everstone Capital and Mswipe Technologies.
Mr. Bittu Varghese, Chief Financial Officer: Previously worked with Marico, S.C. Johnson, Hindustan Coca-Cola Beverages and Pernod Ricard India. Has been with SULA from 2019, He is the member of Institute of CA of India.
Mr. Karan Vasani, Chief Wine Maker: He has been with Sula since October 2013 in various capacities, Holds a graduate diploma in viticulture from Lincoln University, New Zealand. Previously worked with CRISIL and Cuvaison Estate wines.
Financials:
Balance Sheet:
Profit & Loss:
Cash Flow:
Valuation:
Company’s stock trades at Forward PE(x) of 24.4 for FY25E earnings, reasonable considering its 18% estimated growth and market position alongwith the increasing market share and rising demand of beverages in the country along with improving export data and reducing wine imports. SULA has been able to generate higher sale since last decade barring in FY22, which shows topline drives are place. Company has improved its sales with subdued single digist CAGR of 5-6% in last 4 years. Its has able to generate FCFF In last three years and has healthy cash generation abilities though business operations.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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