CLSA cheers to Sula, sees up to 40% upside in this recent debutant

Brokerage firm CLSA has initiated its coverage on Sula Vineyards and sees a strong upside in the recent Dalal Street debutant. The brokerage believes that the Sula is a pioneer in the industry with strong opportunities and the taste of consumers is shifting towards low-alcohol drinks. It has cited change in wine incentives schemes as a key regulatory risk.

Sula Vineyards is well placed to leverage the global consumer shift towards the low-alcohol beverage segment - beer and wine. With strong backend capabilities and a pan-Indian distribution network, said CLSA. Sula is India’s market leader in wines with a more than 52 per cent market share in the 100 per cent grape wine category, it said.

Shares of Sula Vineyards jumped 9 per cent to Rs 371.20 on Wednesday, before giving up its gains partially. The scrip had settled at Rs 340.85 on Tuesday, which is about 21 per cent below from its 52-week high at Rs 432 hit on January 23, 2023.

"Sula is the market leader in India’s wine industry, dominating in value and volume and across price segments and wine variants. The vineyard’s key competitive advantages include the largest national wine distribution network, robust manufacturing capabilities and strong sourcing ability with respect to long-term contracts with third-party farmers," it said.

Sula has very strong brand recognition and backend capabilities in place and its incremental strategy is to grow its own brands over third parties. "It guides consumers towards its premium wines through upselling. Strategic investments to further drive market penetration and expand its wine tourism business are additional levers for growth," said CLSA.

Shares of Sula Vineyards were listed at the bourses on December 21, 2022 and its mandatory anchor lock-in expired on Tuesday, March 21, 2023. The company raised more than Rs 960 crore by selling its shares for Rs 357 apiece between December 12-14.

Incorporated in 2003, Sula Vineyards is India's largest wine producer and seller. The company also distributes wines under a bouquet of popular brands including its flagship brand 'Sula' and various other brands. The company is also active in the wine tourism business.

Sula’s focus on growing its own high-margin premium brand has helped it increase Ebitda margin to more than 29 per cent in 9MFY23, against 25 per cent in FY22, the global brokerage firm said. "We expect a 17.5 per cent revenue CAGR and an 18.6 per cent EPS CAGR over the next two years but Ebitda margins should moderate to 27.3 per cent by FY25CL."

"We value Sula at 34x FY25 EPS, which is about 15 per cent discount to the average of other alcohol beverage companies, and initiate with a buy rating and target price of Rs 475," it said. Its target price suggests a 40 per cent upside from its previous close.

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