Daybreak - What Sula's IPO means for its public-market investors

Episode Date: January 3, 2023

After 23 years of business in India, Sula has grown to become the giant that dominates the Indian wine market.Last month, the wine-maker decided to go public through an IPO. The money, however, went straight to some of the investors who cashed out.And on Dec 22, when it listed on the stock exchanges, Sula’s stock opened flat and fell into discount. What does the IPO mean for Sula's public-market shareholders then?Tune in to find outWith inputs from Aayush Agarwal

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Last month, India's biggest winemaker, Sula Vineyards Limited, went public. After 23 years of business in India, Sula has become synonymous with wine in the country. It controls 52% of the market share of India's domestic wine industry.

It is a giant. So Sula's IPO or initial public offering was successfully subscribed 2.3 times. The company received over 44 million bids for the 19 million shares that were on offer. But on 22nd of December, when it listed on the stock exchanges, Sula's stock opened flat and slipped into discount. It was puzzling. The shares fell by nearly 7.5% on their trading debut. The next day, they saw another 6% drop.

The stock slipped as low as 311 rupees. It was well below the IPO price of 357. Now, a company usually goes public for one of three reasons. One, to raise money to fund its growth. Two, to allow its existing investors to cash out, or three, to do both. Sula did not go public to raise money for its business. It did so so that its investors and its founder, Rajiv Samant, could partially cash out. What does this mean for Sula's public market shareholders?

Welcome to Daybreak, a brand new podcast from the Ken. I am your host, Nick Da Sharma, and in each episode, I will tell your business story that is current, significant and most importantly interesting. Today is Tuesday, the 3rd of January, and the year is 2023. I think it was Pliny the elder, the Roman philosopher who once said that in wine there is truth. Now, Pliny might have been referring to something else altogether, but today, let us get to the truth about Sula. 23 years after being founded by Rajiv Samant, Sula is the market leader when it comes to wines in India. It is miles ahead of its closest case. competitors in terms of raw material availability, production capacity and distribution channels.

In fact, Sula operates in volumes that completely dwarves its competitors. It has built the largest distribution network among wine companies in India. It is available in 13,000 retail outlets and 8,000 hotels, restaurants and cafes. That is more than two of its rivals, Fratelli and Grover's example. combined. The company even handed out dividends worth a total of 70 crore rupees over the last three years or so. Now, a company paying dividends means that it has a strong financial standing, right? And businesses that expect a good growth curve usually reinvest the proceeds of its operations back into the business. But that is not the case with Sula. Like I told you earlier,

Sula went public to allow its investors to cash out, meaning none of the money that came from going public went back to the company. And here comes the catch. You see, India is a spirits-dominated market. 59% of the alcohol consumed in the country by volume is spirits. By spirits, I mean hard liquor like whiskey, rum, vodka, you get the drift. Beer makes up 40%.

and wine makes up less than 1% of the overall sales. Think about it. How many people in non-metro cities actually drink wine? Things are not like they are in Western countries in India, right? Where we see, at least in movies, most families drink a glass of wine with dinner every day. So entering the non-metro market in India is a massive challenge for any wine company. And if Sula wants to do it, as the largest wine maker of India, it will have to lead the way by introducing smaller cities and towns to the pleasures of wine drinking.

That is a lot of advertising and a lot of money involved. And knowing the demographic, it will take a lot of patience and convincing, and it still might not show immediate gains. Even though wine sale volumes are expected to rise by 85% in the next five years, there is no denying that wine is still a very much. very niche category in India, which basically means that the prospects of growth, even for the country's largest winemaker, are still quite low. Some of Sula's largest shareholders include Belgian late stage investors, Wurl Invest and Founder Samant. At present, Sula is the only

alcoholic beverage company in Wurl Invest's portfolio. The IPO allows the investment company to offload more than 50% of its total holdings. Even Samant, who invested around 94 crore rupees across several rounds of allotment during the last three years has cashed out shares worth around 33.5 crore rupees. The company spokesperson claims that this was done to facilitate repayment of the loan that Samanth had taken to fund the equity infusions. Now, neither will invest nor the other invests. investors like venture capital firms Haystack and Samar Capital have put money into Sula in the last few years.

Now, this could be because of Sula's single-digit growth in recent times. Between March 2017 and March 2022, Sula's top line grew at a compound annual growth rate or CAGR of less than 6%. This is despite Sula offering wines in almost all price categories, from popular and economic, to premium and elite. How then did Sula prepare for the IPO? Sula improved its EBTA margins to nearly 26% in the year that ended in March 22 from under 10% two years ago. Ibita stands for earnings before interest, taxes, depreciation and amortization.

This was despite operating in a very young market and not to forget the pandemic. How did Sula pull this off? by exercising restraint. It shifted towards selling its own product rather than trading imported wines. Sula also offloaded its alcohol beverage trading subsidiary called Progressive AlcoBev Distributors to focus on its own line of brands. After moving away from the expensive business of importing and distributing third-party brands, its revenue contribution of imports dropped below 8% in the year that ended in March 22.

It was 31% two years ago. The imports were attracting a huge 150% duty. The company has also made a huge shift in the mix of products that it's offering. It is now focusing on the premium and elite category of wines. And the step has actually paid off because, revenue contribution from these labels in these two categories actually went up for Sula. The company also undertook cost reduction measures to improve its margins. For example, it began sourcing 96% of its packaging material from India. It bought bottles from vendors in the domestic

market at 16 rupees per bottle instead of using imported bottles that used to cost Sula 27 rupees per bottle. The company also managed to find a way to reach to customers directly since it cannot legally advertise its products. This is through its hospitality business which it started in 2008. And it happens to be another revenue segment for the company that has actually grown significantly. Despite all this, many in the industry are not so sure about Sula maintaining its EBITA margins in the years to come. This includes Abhe Kevartkar, who previously worked as the chief winemaker at companies such as Chateau Indage, Four Seasons and Grover. His skepticism has to do with government policy. The Maharashtra government back in 2009 had introduced a production

linked scheme to encourage the wine industry. It was called WIPS or Maharashtra's wine industrial promotion scheme. According to it, the government paid back 80% of the value-added tax or Watt collected on the sales of wine from grapes harvested within the state. Sula recorded 92 crore rupees worth of the grant under its revenue in the last three years. And outstanding receivables from the scheme make up 89% of the company's total current financial assets as of September. But in December 2021, there came a big blow. The government stopped the scheme during the COVID lockdown due to financial reasons.

And the bad news did not end there for Indian winemakers. The government also decided to levy an additional marginal rate of excise duty of 10 rupees per bulk liter on wine producers from the beginning of last year. Also important to remember is that a little more than five years ago, the income tax department had raided Sula. This was because of the company's alleged connection to the Panama Papers. Founder Samant denied any connection with the leaks, but Sula still has a fair share of pending legal battles with the tax department.

In its prospectors, the company disclosed that a sum of 125 crore rupees was involved in outstanding litigation against Sula Vinyards Limited. But the company spokesperson says that it has a strong case and that is why it has not considered this as a contingent liability. To sum it all up, even if Sula expands the wine consumer market by a big margin, it will still make for a micro share of India's alcohol consumption pie. Probably not enough to sustain a rate of growth that will make its public market investors very happy. So for now, Sula's glass is still half empty. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform.

What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I'm Snickda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.