Thread by @anuran17

India's largest wine player SULA VINEYARDS filed its #IPO papers, making it 1st wine manufacturer to list in India.

Grab a drink🍷🧋 as I take you through wine making business in India, a closer look at Sula's financials, risks, challenges & more🧵👇

@ipo_agarwal
@ipo_mantra

Consumption of alcohol has gotten slower in India. Surprised? But that's what data from DRHP of Sula suggests.

Per capita alcohol consumption in India
0.9L in 2000
1.6L in 2010
2.7L in 2019.

CAGR 12% : 2000-2010
CAGR 6% : 2000-2019

How does wine have a case then?

Answer lies is the under-penetration of Wine as a drink in India.

The runway available is immense. Comparison vis-a-vis with world average puts things in perspective.

Per Capital wine consumption in India is 0.04 Liters vs world average of 5.45L.

While consumption of each of Spirit, Beer & Wine has slowed down in 2010-2019 phase, wine comparatively has shown greatest resilience and spirits the least.

Business of wine revolves around peculiarity of the production process. The grape harvest season in India lasts from December until March. Major wine producing states being Maharashtra & Karnataka. The entire supply for the upcoming financial year is made in this harvest season.

On the consumption side too, bulk of the demand comes in towards the onset of festive season from October rising till December before flattening out till the end of fiscal year.

These factors makes wine business capex & working capital intensive.

While loosely wines are said to be made from grapes but its specifically wine grapes that are used as raw material.

Normal grapes (which are also called Table grapes) needs a small tweak during production to become wine grapes.

With wine grapes being more profitable to farmers

With higher per quintal returns, farmers are happy to harvest wine grapes provided returns are guaranteed.

But there is lot of hard work required by farmers who needs to spend many years waiting for the first harvest.

Post harvest also it can take up to 2 years to manufacture authentic wine.

This is where long term contracts lasting 10-12 years becomes a critical piece.

Wineries get into such contracts with the farmers making it tough for new players to jump in the business overnight.

Launching new wine brands & products are time consuming process. A strong entry barrier, but is a twin edged sword. As the cash conversion cycles etc, gets impacted due to this nature of harvesting, demand & long term contracts

Indian wines business is top 3 players contribute 80% of the market in value terms. Sula Vineyards commands market leadership with 52% in FY20 (by value) followed by Fratelli Wines & Grover Vineyards limited.

Sales from operation has not been able to live up to the whole story of growth of wines. In fact it has slowdown last 3 yr period. While COVID is partly to be blamed, discontinuation of Beer business by its subsidiary PADPL (cease to be Sula's part from FY21) played primary role.

For viewing the complete P&L Breakdown and its trend check out this article in my newsletter - Dalal Street Rafting on @SubstackInc. You can subscribe to get future article delivered straight to your mailbox. Cheers 🍷🍷🍷

dalalstreetrafting.substack.com/p/sula-vineyar…

Back to Sula's business.

Alcohol consumers stay loyal to their brand and once a while up trade (go for pricier brands/labels).

The YoY improvement in Gross/Net margins due to conscious & constant ‘Premiumization’ effort of Sula.

Wine Tourism - a concept Sula has pioneered in India, is another engine which is working to make wine consumption experiential while introducing new consumers to wine.

The revenue contribution is still modest ~8% but its showing healthy growth.

In the article I have mentioned how Excise duty impact played out and can play out in the future, along with different innovations across value chain for cost control & different operating ratios.

As there are no listed wine players, Sula doesn't have a direct peer. But I placed it beside major listed alco-beverage to see how it compares.

The high inventory, high working capital requirement and higher debt levels owing to that is clearly showing up on most metrics.

However, the premiumization game is quite strong for Sula, which stands out in Net Margins.

Sula has yet to come out with its IPO pricing. But, its worth looking at where the listed players stack against each other on valuation front.

Now, for the challenges. The biggest one is behavioral.

For Indian consumers, idea of deriving pleasure from an alcoholic drink is primarily about getting a high. Even those seeing it as an experience, wine hasn't caught as a preferred drink. Wine loyalists are far & few.

Other challenges are Imported Wines & Revenue concentration from top-5 customers (Wholesale/Distributors/State corporation) details of which I have covered in the article.

Being capital intensive, long term contract heavy business provides natural barrier to entry but also hurts the cash flows. Cash raised through IPO could have certainly helped retire some long term debt, but its disheartening to know this issue is completely an Offer For Sale.

Pricing of the issue will be critical but looking at listed players’ valuation, I think this issue will be valued at the higher end citing no listed wine players (scarcity premium) and long growth runway available.

Will be happy to be proved wrong!

The bang for the buck in wine business lies with rapid adoption of wine as a drink of choice in alco-beverage category. Its a demand problem. If you feel that’s inevitable you should consider this IPO, because as a market leader Sula will benefit most out of it.

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