Kotak Institutional Equities has reportedly initiated coverage on Sula Vineyards Ltd, giving it an 'add' rating and setting a target price of INR 500 per share.
According to the brokerage firm, the valuation is based on a projected price-to-earnings (PE) multiple of 37 times for June 2025. Kotak has taken into account a 15% valuation discount compared to United Spirits Ltd and United Breweries Ltd, considering Sula's weaker return profile and its reliance on Maharashtra and Karnataka, where it benefits from favorable regulations.
The brokerage firm believes that Sula could experience a re-rating if it consistently outperforms its peers in the alcoholic beverage industry and maintains its market share in the overall wine market. However, one concern for investors is the potential withdrawal of subsidies in Maharashtra.
For the record, in 2009, the Maharashtra government introduced the Wine Industry Promotion Scheme (WIPS) to boost wine production. The scheme offers an 80% refund on the value-added tax (VAT) paid on wine sales within the state. Sula's earnings before EBITDA in FY2023 included approximately 28% from the WIPS subsidy. Maharashtra operations accounted for around 50% of Sula's EBITDA in the same period, highlighting the subsidy's significance for the company's financial performance.
Kotak stated that a complete withdrawal of subsidies would impact Sula's earnings per share in the short term. However, if the withdrawal is phased, which is likely, the impact could be mitigated. The brokerage firm also believes that Sula is relatively well-positioned compared to imported wines and anticipates minimal changes in its competitiveness.
In a report shared by Kotak Institutional Equities, it is stated that the firm anticipated revenue, EBITDA, and PAT CAGRs of 13%, 12%, and 14% respectively over FY2023-26. They mentioned that this growth would be driven by the volume of Sula’s own wine brands, with a 10% CAGR, primarily led by a 13% volume CAGR in the elite plus premium segments.
The report also expected stable EBITDA margins of 30% and a PAT-to-FCF conversion of 60%+ after considering growth capex and working capital requirements. Kotak Institutional noted that their assumptions were based on a stable regulatory regime.