Sula Vineyards: A multi-year growth story

22 Mar 2023 , 11:07 AM

Recommendation: Buy

Target Price: Rs 390

With 53% market share in domestic 100% Grape Wine market, 25%+ EBITDA margin, secured long-term contracts for grapes, and highest distribution in the industry — Sula, is well placed to benefit from the secular growth story. Moreover, valuation at 27x FY25 EPS is at ~30% discount to United Spirits, despite higher growth, which factors in risks to a large extent. Analysts at IIFL Securities have initiated coverage on the company with a Buy recommendation and a price target of Rs 390.

Market leader in an underpenetrated, fast growing sector

Less than 1% of alcohol is consumed in the form of wine in India versus 13% globally. Per-capita consumption is 40ml versus 1.6L in China and 5.5L globally. Moreover, the 100% Grape Wine industry has grown sales at a CAGR of 21.8% FY14-19 versus overall Alcohol market growth of 10.8%; which means that the story is playing out. Sula, with over 50% market share in this industry, is best placed to benefit from the story. Moreover, the company is also a play on the Wine Tourism industry with 8% of sales and a higher percentage of profit contributed by this segment.

Moats in the industry resulting in high margins

The company derives 90% of its grape supply via long-term contracts, which have minimal inflation built into the price. Moreover, the company has presence across the price ladder (~Rs300-2,000) and is benefiting from premiumization in the category. FY23 estimated EBITDA margin is 30.4%, versus 12.6% in FY20 (ex-discontinued business-PADPL), driven by price increases, supply chain initiatives, trade margin rationalization, amongst others.

Robust growth at reasonable valuation

Analysts at IIFL Securities have forecasted 18.7% sales growth FY22-25 and 27.3% EPS growth. Discontinuance of VAT refund by Maharashtra is the key risk, but is priced in, at least to an extent. The stock trades at a PE of 27x on FY25 (~30% discount to United Spirits standalone) despite higher likely growth rate.