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Sula Vineyards Gets A 'Buy' As CLSA Initiates Coverage

CLSA has a 12-month price target of Rs 475, implying a potential upside of 44% for the stock.

<div class="paragraphs"><p>(Image source: Sula Vineyards website)</p></div>
(Image source: Sula Vineyards website)

The global consumer shift towards the low-alcohol beverage segment and a healthy operating margin plays in favour of Sula Vineyards Ltd., CLSA said.

The brokerage firm has initiated coverage on the stock on Tuesday with a 'buy' rating. CLSA has a 12-month price target of Rs 475, implying a potential upside of 44% for the stock.

"With strong backend capabilities and a pan-Indian distribution network, Sula is India's market leader in wines with a market share greater than 52% in the 100% grape wine category," it said in a note.

"Its healthy Ebitda margin gives Sula the ability to invest in category development, which would be key for long-term growth. We expect an EPS CAGR of 18.6% over the next two years," the note said.

India is the third-largest alcoholic beverage market in the world at Rs 2.5 lakh crore as of the 2020 financial year, CLSA said citing a Technopak analysis.

Low-alcohol beverages—beer and wine—contribute about 8% to the overall alcohol consumption in India. But wine’s share in the country was at 0.7%, or Rs 1,900 crore, in the 2020 fiscal. The tailwinds can help the country's wine industry achieve a 14.4% compound annual growth rate from the 2022 financial year to to 2025 fiscal, according to the note.

Sula Vineyards listed on the exchanges on Dec. 12 at Rs 357 per share. It is trading at Rs 340.85 apiece.

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Competitive Advantages

Controlling well over half the market share, Sula Vineyards dominates in value and volume, and across price segments and wine variants in India's wine industry, according to CLSA. "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."

CLSA said Sula Vineyards' incremental strategy was to grow its own brands over third parties, supported by its strong brand recognition and backend capabilities.

The research firm said wine is a premium opportunity and Sula Vineyards guides consumers towards its premium wines through upselling using a price-straddle approach. "Strategic investments to further drive market penetration and expand its wine tourism business are additional levers for growth."

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Focus On Growth

Focus on high-margin premium brands helped Sula Vineyards increase its Ebitda margin to over 29% in the first nine months of the current fiscal. However they should moderate to 27.3% by 2024–25 as the company focuses on category development. Change in wine incentives schemes remains a key regulatory risk, it said.