Kotak initiates 'add' rating on Sula Vineyards, sets target price at Rs 500

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Brokerage firm Kotak Institutional Equities has initiated coverage on Sula Vineyards Ltd with 'add' rating and set the target price at Rs 500 a share.

The valuation is based on a June 2025 estimated price-to-earnings (PE) multiple of 37 times. However, they have applied a 15 percent valuation discount to United Spirits Ltd and United Breweries Ltd, considering Sula's comparatively weaker return profile and its high reliance on two states, Maharashtra and Karnataka, where it benefits from favourable regulations.

The brokerage house says Sula can see re-rating if it consistently outperforms its alcoholic beverage peers and maintains its market share in the overall wine market, including both domestic and imported segments. However, one key concern for investors is the possibility of subsidies being withdrawn in Maharashtra.

The Maharashtra government implemented the Wine Industry Promotion Scheme (WIPS) in CY2009 to promote wine production. Under this scheme, a subsidy is offered in the form of an 80 percent refund on the value-added tax (VAT) paid on wine sales within the state. In Maharashtra, the VAT rate is 20 percent, and 16 percent points of the VAT amount are refunded as a subsidy.

For Sula, the WIPS subsidy, in the form of the VAT refund, accounted for approximately 28% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) in FY2023. Around 50 percent of Sula's EBITDA in FY2023 originated from operations in Maharashtra, indicating the significance of the WIPS subsidy for the company's financial performance.

The brokerage firm says in its assessment, a complete roll-back of subsidies would impact Sula's earnings per share in the short term. "However, if the withdrawal is phased, as is likely, the impact can be mitigated. Additionally, compared to its domestic counterparts, Sula is in a relatively advantageous position, and we anticipate minimal changes in its competitiveness compared to imported wines", Kotak said.

Sula holds a prominent position as the top producer and seller of wine in India, maintaining a market share of over 50 percent since FY2009. Furthermore, it boasts an impressive market share of 60 percent+ in the premium/elite segment of the domestic 100 percent grape wine market.

"We estimate 13 percent/12 percent/14 percent CAGRs in revenue/ EBITDA/ PAT over FY2023-26, driven by (1) own wine brands volume CAGR of 10 percent, primarily led by 13 percent volume CAGR in elite plus premium segments, (2) 3.4 percent CAGR in realization and (3) robust and steady 30 percent EBITDA margin (easing glass bottle prices would enable higher A&P investments). We expect decent PAT-to-FCF conversion of 60 percent+ after factoring in growth capex and working capital requirements. We assume a stable regulatory regime," said Kotak Institutional in its report.