IPO Size: Rs. 960 cr - Entirely offer for sale (OFS)

• 78% of OFS by investor Verlinvest (trimming 47.3% holding to 21.6%)
• balance by the Promoter, other financial investors and individual shareholders

Price band: Rs. 340-357 per share

M cap: Rs. 2,913 cr, implying 33% dilution

IPO Date: Mon 12^th Dec to Wed 14^th Dec 2022, Listing: Thu 22^nd Dec 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

India's Largest Wine Company

Sula Vineyard enjoys 50% market share in India’s wine market, with FY22 revenue of Rs. 454 cr, of which, Rs. 67 cr was contributed by wine tourism segment. Improved product mix expanded EBITDA margin to 26% in FY22 from 10% in FY20, leading to PAT of Rs. 52 cr and net margin of 11% in FY22. On H1FY23 revenue of Rs. 224 cr, trailing twelve months (TTM) revenue stood at Rs. 519 cr, reaching pre-covid revenue of Rs. 520 cr clocked in FY20. Since Q3 is a peak consumption period, TTM PAT rose to Rs. 78 cr with an EPS of Rs. 9.6 (FY22 EPS Rs. 6.8), given low base of H1FY22.

‘Unfavourbale’ Shareholding Structure

IPO is merely to provide exit route to the company’s single largest shareholder Verlinvest, with 47% stake, first invested twelve years ago in 2010. Given the long holding period, post expiry of 6 month mandatory lock-in, Verlinvest’s 22% post IPO stake may eventually come up for sale, which will lead to a big overhang on its share price, as was seen recently in Nykaa, PayTm, PBFintech, Zomato, Delhivery etc. As not a single penny flows to the company in the IPO, 33% dilution is also high. Also, post-issue promoter holding will only be 28%, implying limited skin in the game.

Imprudent Financial Allocation

Rs. 4.5 cr dividend of FY20 jumped to Rs. 39 cr and Rs. 26 cr in FY22 and H1FY23 respectively, translating into a dividend payout ratio of 75% and 85% respectively. Profits being distributed among existing shareholders just before the IPO does not leave a good taste for the incoming IPO investors, even as the single largest shareholder makes a substantial part-exit.

Given the nature of business, inventory holding period is as high as 4 months and company’s net debt to equity ratio stands at 0.4x (on Rs. 210 cr debt) against cash-rich balance sheet for peers United Spirits, United Breweries, GM Breweries and 0.1x for Radico Khaitan and 0.2x for Globus Spirits. While post listing dividend payout will be closely tracked, it also calls for prudent financial management, as company embarks on 30% capacity expansion (surprisingly not mentioned in the RHP), to be internally funded, so debt remains.

‘Not Left Money on the Table’

On TTM basis, Sula Vineyards is being offered at revenue multiple of 6x and PE multiple of 37x, which is seen on the higher side. Biggies United Breweries and United Spirits, having over 12 times the revenue, cash rich balance sheets and foreign promoters with 56-60% holding, are trading at revenue multiples of 6x.

Similar sized peers Global Spirits and GM Breweries are ruling at much lower – TTM revenue multiple 1.5-2x and PE multiple of 19x and 11x respectively. Globus Spirits, with TTM PAT of Rs. 138 cr (1.5x Sula), has m cap of less than Rs.2,800 cr (lower than Sula’s Rs. 2,913 cr) while GM Breweries has topline similar to Sula (Rs. 557 cr TTM revenue) yet higher net margin of 18% (against Sula’s 15%), besides debt free status, is ruling at a PE multiple of 11x.

Even if the wine industry is projected to grow at a faster pace of 14% p.a. for the next 2-3 years, Sula’s IPO pricing more than captures this upside, given small revenue of Rs. 500 cr and 12% RoE. Thus, Sula’s valuations multiples are at a steep premium, and they more than compensate for rising earnings.