A quick look at the business of Sula

India's market leader in premium wines

Seeing India’s alcohol mix is a gentle reminder of why most Indians drink. To get drunk!

Source - Technopak analysis (from Allied Blenders DRHP)

Less than 1% of India’s total alcohol consumption by concentration is through wine and Sula is the biggest player in that tiny space.

So, why does India have such low wine consumption?

With a GDP per capita still shy of $3000, drinking needs to be affordable, and spirits fit the bill. Unlike beer and wine, which may require refrigeration and have lower alcohol content, spirits pack a stronger punch. So, if the goal is to feel a buzz while keeping a check on the expenditure, spirits are favoured.

I also think a lot of this has to do with our history and culture. Consider the chart below.

Winemaking in Italy can be traced back to ancient civilizations such as the Etruscans and Greeks, who established vineyards and produced wine as early as the 8th century BCE. Clearly, wine has been an integral part of Italian culture, tradition, and daily life. The same cannot be said for Netherlands or for that matter India.

Okay, now let’s get to Sula.

Disclaimer - This article is written purely for educational purposes and should not be considered investment advice.

Sula Wines?

As you may know, Sula is a leading winery in India. It is the market leader in premium wines in India and boasts an impressive portfolio, so much so that if you have had wine in India, chances are you have tried a Sula brand. It has over 50 brands and some of the recognized ones are -

1. Rasa

2. Dindori Reserve

3. The Source

4. Sula (the most common one)

The wines can be further classified by quality (and price).

• Elite Wines - More than Rs 950

• Premium Wines - Between Rs 760 & Rs 950

• Economy Wines - Rs 450 - Rs 700

• Popular Wines - Rs 400

Sula focuses primarily on the Elite and Premium section. As of FY23, the Company has five production plants in Maharashtra and Karnataka and has an installed capacity of 16.7 Mn liters of wine. For context, that is enough wine to fill close to 7 Olympic-sized swimming pools.

How is wine made?

To start with, you need grapes. The grapes you and I buy from supermarkets are table grapes, which are not typically used to make wine. Wine grapes, on the other hand, have thicker skin, imparting more flavor to the wine. They are also smaller than table grapes, resulting in a more concentrated taste.

Interestingly, for their cheaper wines, Sula uses table grapes. However, their "Premium" and "Elite" wines are made from wine grapes.

Table grapes have an abundant supply and are easily sourced. Sula has long-term contracts with close to 500 farmers who provide them with wine grapes. They barely own or lease any land and mostly rely on these farmers for the grapes.

The most important asset for Sula, in my opinion, is their relationship with these farmers. Any newcomer will find it difficult to create this relationship, as wine grapes are not grown immediately. They take a lot of time, and the newcomer will have to support the farmer during this period. Furthermore, the fact that Sula already has this relationship with these farmers helps build trust, which a newcomer will not possess.

Anyhow, let’s get back to the winemaking process.

• Crushing: The grapes are harvested between December and March. After harvest, the grapes are crushed to release the juice. Wine grapes, with their thicker skins, contribute to a more concentrated taste.

• Fermentation: The crushed grapes or grape juice, along with their natural yeasts or added yeast cultures, undergo fermentation. Yeast converts the sugars in the grapes into alcohol and carbon dioxide.

• Blending: Different batches of wine may be blended to achieve the desired flavour profile and characteristics.

• Aging: The wine may be aged in various types of containers. Most of Sula’s wines are aged in stainless steel tanks, with a select few in oak barrels.

• Stabilization & Filtration: Wines are heat and cold stabilized as well as filtered.

• Bottling: After aging and any necessary adjustments, the wine is bottled. Sula has its own bottling plants.

A Very - Very regulated market

The Indian alcohol market is very-very regulated.

1. Bans: Multiple states in India like Gujrat, Bihar, etc have implemented partial or complete bans on the sale and consumption of alcohol.

2. Import Duties: Importing alcohol into India is subject to heavy taxation and high import duties, often exceeding 100% of the product's value. (Free trade agreements with select countries may change some of this)

3. Excise Duty - Different states apply a different rate of excise duty on the sale of alcohol. Its a significant source of Income for states and so its not going anywhere.

4. Pricing control - When you think of MRP that price includes the ex distillery price (manufacturing price including some profit for the manufacturer), the excise duty, the wholesale margin, the retail margin and other taxes.
   
   One can divide India into states with free pricing and states with controlled pricing. Maharashtra, Karnataka, and Goa are among the most prominent free pricing states, contributing significantly to Sula’s revenue stream. Over 70%. There is flexibility in taking price hikes here, which of course is great for Sula. On the other hand, fixed pricing is predominant in states such as Tamil Nadu, Delhi, Haryana, and across the entire northern, eastern, and southern regions, excluding Karnataka. In certain fixed pricing states, the government controls the entire supply chain, which means even the wholesale and retail margin is fixed by the government. Companies can be expected to make a lower margin in such states.

5. Distribution - Apart from pricing there are different levels of intervention when it comes to distribution of alcohol too. Of course you need licenses to sell. That’s a given. But its different for different states. Some states have set up corporations which control distribution of alcohol both at wholesaling and retailing whereas some control only the wholesale distribution and retail is private. In select states, distribution is completely private both at wholesale and retail stage. Some states have set up state-controlled retail outlets which get stocks directly from manufacturers.

6. Incentives by States: It’s not all gloomy when we talk about regulations. Multiple states are providing incentives in a manner that encourages winemakers to source grapes from local farmers, thereby benefiting farmers and the winemakers.

   1. The Government of Maharashtra has waived the excise duty for wine produced within the state, but only if it's made without adding alcohol. Even if the wine is blended with imported concentrate it would not be applicable for this waiver. It will be interesting to see how long this exemption lasts.

   2. WIPS, the Wine Industry Promotion Scheme, applies exclusively to winemakers in Maharashtra who produce wine using grapes grown within the state. Usually, wineries are subjected to a 20% value-added tax (VAT), but with WIPS, 16% of that 20% is refunded to them as a rebate. This rebate was temporarily removed, but it seems to have been reinstated, and winemakers are expected to receive rebates on VAT they paid in the past too.

   3. Under the Karnataka Grape Processing Policy, the excise duty imposed on wine produced in other states would be four times greater than the duty applied to wine produced within Karnataka.

   While I have only mentioned a few important incentives here, what I am trying to emphasize is that the duration of these incentives and the possibility of additional incentives offered by other states are bound to significantly affect Sula’s profitability and shape its growth strategy.

Wine Tourism

Sula has two wine tourism resorts, ‘The Source at Sula’ and ‘Beyond by Sula’, located in Nashik, Maharashtra. These resorts offer services such as wine tasting, vineyard tour, wine making, etc. In FY23 Sula’s vineyard had close to 340,000 visitors and was 8.1% of the companies total revenues.

I like the idea of their tourism business. It markets the brand in an industry where advertising is not really allowed. Also, it seems to be doing quite well.

My 2 cents

Let me start with some of the negatives.

The promoter owns less than 30% of the company and that has been reducing over time. There was an Income tax raid back in 2017 and at least according to the DRHP the company has been fighting multiple cases.

Snippet from Sula DRHP - Page 22

Hard to get a lot of comfort with all this going on. (That’s just me though) Moreover, there is a risk that the incentives Sula is currently benefiting from will be revoked.

Now lets move to the positives. Alcohol is not the taboo that it was back in the day and wine culture is here to stay and grow. It is so underpenetrated in India that the opportunity is undeniable and Sula is an early mover in a space and has already become a recognisable brand.

When thinking about a business I like to think about 2 important factors -

Growth & risk.

1. Growth - If Sula can grow its revenues from FY23 by 15% annually for another 20 years, its revenues in FY43 will be similar to that of current United Breweries. Goes to show the low penetration that wine has and the opportunity that is present. The market potential is huge.
   
   The next question is whether Sula will be able to meet this potentially high demand. I think so. Currently operating wineries in only two states, there's bound to be considerable interest from other states to have Sula wineries present. (it helps the grape farming industry of that state) With incentives likely to be offered, it seems quite natural for Sula to eventually expand into other states.

   
   The final question on growth would be if Sula has the funds to carry out that potential expansion in the future? Yes. A quick look at the financial statement should suffice here.

2. Risk - I have spoken about the regulatory risk in a lot of detail. Another important risk factor I wanted to touch on was climate risk.
   
   As mentioned earlier, to make wine you need wine grapes and Sula has 12-year-long contracts with farmers to supply them with wine grapes. These grapes, though, are bound to be affected by factors like unseasonal rain, changing monsoon conditions, and the drastic and sudden peaks of temperatures within the same season. Due to all these reasons, Sula needs to maintain a buffer in inventory. This leads to higher inventory days. Its not a solution but is simply some insurance for when things go South.

While I have not bought the stock (as of the date of publishing this article) but if I were to, this is probably what I would be playing and expecting.

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