When Sula Vineyards Ltd announced in early December that it would raise Rs 960 crore ($116 million) through an initial public offering (IPO), it was a refreshing change in a business news cycle dominated by tech-startup flotations. 

The 23-year-old company, founded by Rajeev Samant, is nothing short of a category creator. So much so that for more than a decade after Sula hit the market, wine simply meant Sula for most drinkers. And while India has listed spirits companies and brewers, Sula will be the first winemaker to join them when on the bourses on 22 December. (The IPO was subscribed 2.33 times.) 

What’s more interesting, though, is that the Nashik-based company is not seeking to raise any money for its business. Instead, the entire issue is to facilitate its investors and Samant to partially cash out. This is despite Sula operating in a very nascent industry. 

How does it fund its expansion then? Maybe with its own cash. But the thing is, it doesn’t have a lot of it. As of March, Sula only had cash of less than Rs 20 crore ($2.5 million). 

So what gives? 

Well, the way Sula has allocated its capital seems to indicate that the company is not anticipating breakout growth.  

Race to list

Sula will list at a price-to-earnings (P/E) ratio of 38.5X compared to its much-larger spirit makers, including United Spirits and Radico Khaitan, which trade at a median P/E of 59.5X

The Nashik-based company handed out dividends worth a total of ~Rs 70 crore ($8.5 million) during the fiscal year ended March 2020, March 2022, and the first nine months of the fiscal year ending in March 2023. While the payment of dividends denotes strong financial standing, businesses that anticipate a steeper growth curve typically reinvest the proceeds of its operations.

The cash from operating activities of Rs 252 crores in FY20-22 was used to repay debt of Rs 139 crores and pay dividends. This signifies our capability to fund future growth while maintaining our debt at acceptable levels .

Company Spokesperson

Hence an IPO whose only objective is to give the existing investors an exit. Some of the company’s largest shareholders include Belgian late-stage investors Verlinvest and Samant.

Samant may have built a market-dominating company with a solid moat in a niche segment. But it faces its own set of problems in the form of a narrow market and dependence on friendly government policies to exist as a sustainable business in India. 

Putting a cork on growth

At present, Sula is the only alco-bev company in Verlinvest’s portfolio.