Daybreak - Why Sula shares are soaring

Episode Date: January 12, 2024

Earlier this week, India’s biggest winemaker, Sula, saw its share price reach historic high. The winemaker controls more than half of the market share of India's domestic wine industry. When it went for an IPO at the end of  2022, it was successfully subscribed by almost two and a half times.So you might think the jump in the share price makes sense. Afterall, Sula dominates the wine market in India. But you see, India is not a wine drinking country in general. The share of wine in the country's total alcohol consumption is minuscule.Turns out, the global brokerage CLSA saying Sula could rise 50% in the next year sent its shares soaring. But this was not because Sula Indians suddenly have become wine drinkers or because Sula has entered the new market.Tune in.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.   

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 Ramon 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 an alert as soon as we release our first episode,

please follow Intermission on Spotify and Apple Podcasts 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. Earlier this week, India's biggest winemaker saw its share price reach a historic high, almost double its original listing price. You've obviously guessed who I'm talking about, right? It's Sula. But do you realize why you thought of Sula in the first place?

Because in India, if you talk about wine, it means Sula. It has become synonymous with wine for most Indians. And that makes sense because it controls more than half of the market share of India's domestic wine industry. The winemaker went for an IPO at the end of 2022 and it was successfully subscribed by almost two and a half times. So you might be under the impression that the recent jump in the share price makes sense because Sula dominates the wine market in India. But you see, India is not a wine drinking country in general. We like our whiskeys and our rums and beer.

So wine is actually only making up a teeny tiny percentage of our total alcohol consumption. So what could be the reason then for the sudden. jump in Sula's share price. Turns out, the global brokerage CLSA said that Sula could rise 50% in the next year. But this is not because Indians have suddenly become wine drinkers or because Sula has entered a new market. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Dar Sharma, and I don't chase the new cycle.

Instead, thrice a week on Mondays, Wednesdays and Fridays, I will bring you one business story that is worth understanding and worth your time. Today is Friday, the 12th of January. It has been around for over two decades now. It was founded by Rajiv Sarmand, and now, like we know, it is the market leader when it comes to wines in India. It is miles and miles ahead of its closest competitor

in terms of raw material, availability, production capacity, and distribution channels. In fact, Sula operates in volumes that completely dwarf its competitors. It has built the largest distribution network among wine companies in India. It is available in more than 13,000 retail and more than 8,000 hotels and restaurants across the country. And that is more than its two rivals, Fratelli and Grover combined. In fact, the company even handed out dividends worth a total of 70 crore rupees over the last three years or so. Now, companies normally pay dividends to shareholders when they are comfortably profitable and have

excess money than their projected investment needs. And businesses that expect a good growth curve usually reinvest the proceeds of their operations. But that was not the case with Sula. Sula went public to allow its investors to cash out, meaning none of the money that came from going public actually went back to the company. And here comes the point that I told you about earlier. You see, India is a spirits-dominated market. More than half of the alcohol consumed in a country by volume is spirits. And by spirits, I mean hard liquor, like whiskey, rum, vodka, you get the drift. Beer makes up 40% of it. And wine makes up less than 1% of overall sales. Now think about it. How many people in

non-metro cities actually drink wine. Things are not like they are in Western countries, right? Like where we see in movies, at least, most families drinking a glass of wine with dinner every day. Entering non-metro market in India is a huge challenge for any wine maker. And if Sula wants to do it as the largest wine maker, 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. And knowing the demographic, it'll take a lot of patience and convincing. And it still might not show immediate gains. Even though wine sales by volumes are expected to rise by 85% in the next five years, there is no denying that wine is still a very niche category in India, which basically means that the prospects of growth, even for the country's largest wine maker, are quite low or slow. Some of Sula's largest shareholders include Belgian late-stage investors, World Invest and Founder Saman. At present, Sula is the only alcohol beverage company in World Invest's portfolio.

The IPO allowed the investment company to offload more than 50% of its total holdings. And even Saman, 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. Now, neither World Invest nor other investors like VC firm, Haystack and Samar Capital have put in money in Sula in the last few years. In fact, World Invest Asia actually sold a partial stake in Sula vineyards through block deals in August last year. But things seem to have turned around now with Sula's share prices.

To understand this, we first need to look at how Sula prepared for its IPO in the first place. Stay tuned. Sula improved its EBITA margins to nearly 26% in the year that ended in March 22 from under 10% two years before that. EBIDA, by the way, stands for earnings before interest, taxes, depreciation and amourization. And this was despite operating in a very young market and not to forget, the pandemic. So 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. The thing is, these imports were attracting a huge 150% duty. The company has also made a big shift in the mix of products that it offers. It now is focusing on the premium and elite category. And the step has actually paid off because revenue contribution from both labels in these two categories actually went up for Sula by March 22.

The company also undertook cost reduction measures to improve its margins. For example, it began sourcing more than 90% 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 were costing it 27 rupees. Sula also managed to find a way to reach customers directly since it could not legally advertise its products. And this is through its hospitality business which started in 2008. And it happens to be another revenue segment for the company that has grown significantly.

But despite all this, many in the industry were not so sure about Sula maintaining its EBITA margins in the years to come. And this included Abhay Kewatkar, who had previously served as the chief winemaker at companies, such as Chateau Indarge, Four Seasons and Grover Vineyards. He spoke to the Ken last year and his skepticism was mainly because of government policy. You see, the Maharashtra government in 2009 had introduced a production-linked scheme to encourage the wine industry. It was called WIPS or Maharashtra's Wine Industrial Promotion Scheme. And according to it, the government paid back 80% of the value at a tax or WAT,

collected on the sale of wines from grapes harvested within the state. But in December 2021, there came a big blow for Sula. The government stopped the scheme during the COVID lockdowns due to financial reasons and the bad news did not end there for the Indian winemakers. The government also decided to levy an additional marginal rate of excise duty of 10 rupees per bulk litre on wine producers from the beginning of 2022. But guess what? Everything changed in 2024.

Maharashtra has brought back WIPS. And now not only will winemakers be eligible for this subsidy for the next five years, but they will also be able to get the same for the last four years. And this, dear listeners, is what promoted CLSA to upgrade its rating on Sula, which in turn sent its shares hitting the roof. And while there is nothing wrong with that, there is one problem that my colleague Sita Raman pointed out. Sula's future seems to be dependent more on whether a government policy will survive a change in regimes than on the actual dynamics of Indian wine industry.

And that is not a very good place to be in. 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 am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.