homebusiness NewsSula Vineyards IPO: The five key risk factors associated with the issue
business | Dec 12, 2022 5:11 AM IST

Sula Vineyards IPO: The five key risk factors associated with the issue

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From advertising restrictions to adverse climate conditions and business seasonality, here are the five key risks factors associated with Sula Vineyards' IPO.

Sula Vineyards' Rs 960 crore Initial Public Offer (IPO) opens for subscription today. The company's Rs 960 crore IPO will see promoters and existing investors sell their shares. The entire issue is an Offer For Sale (OFS), which means the company will not receive any proceeds from the IPO.

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Price band for the issue has been fixed between Rs 345 - Rs 357 per share, and investors can place their bids in a lot size of 42 shares and multiples thereafter.
Besides the IPO being an offer for sale, here are some other risk factors associated with the company:
Adverse Climatic Conditions & Business Concentration
The company has long-term supply agreements with approximately 500 contract farmers. Sula's RHP says that there is no guarantee of adverse climatic conditions impacting the quality of grapes procured. The establishment of a new vineyard takes more than two years and hence, any supply disruption to a key raw material will impact the business.
Additionally, most of the business of farming wine grapes, the major raw material, is concentrated in the west and south-western states of the country. Sales are also majorly concentrated in specific states. For example, in financial year 2022, nearly 70 percent of Sula's overall sales came from three states - Maharashtra (48.6 percent), Karnataka (14.5 percent), and Haryana (6.4 percent).
State Government Regulations & Advertising Restrictions
Sula Vineyards can only adjust the retail prices of their products with approval from state governments in states where the wine market prices are controlled including but not limited to Delhi, Telangana, Tamil Nadu, Odisha, Andhra Pradesh, and Kerala.
However, these states do not have a significant contribution to the company's revenue.
Also, any increase in inflation could increase the company's expenses, which may not be able to adequately pass on to their customers, which may affect the company's business. In case the state governments where prices are controlled, do not approve of price hikes, the resultant higher costs may hurt Sula's margin.
Under the Cable Television Networks (Regulation) Amendment Act, 2002 and the Cable Television Network (Amendment) Rules, 2009, the advertising of alcoholic beverage products is restricted in India. As a result, Sula Vineyards is not able to advertise its products by traditional means.
Therefore, they rely on social media, word-of-mouth and other means of advertising such as organising their annual wine and music festival - The Sula Fest, at their Nashik vineyard since 2008. The company admits that these forms of advertising are less effective compared to the traditional forms and also warns that there is no assurance that they would be able to conduct the Sula Fest in the future.
Litigations Against The Company
A complaint was filed by the Deputy Registrar of Companies in July 2021 before the Additional Metropolitan Magistrate in Mumbai against the company and its promoter Rajeev Samant.
The company's RHP highlights 1 criminal proceeding, nine tax proceedings and eight statutory and regulatory actions with an aggregate amount involved to be worth Rs 125 crore.
Sula Vineyards was also in the news for Income Tax raids conducted in November 2017 where the I-T department raided 20 premises of the company on the basis of information linked to the Panama Papers. The promoter denied any connection with the Panama Papers.
Forex Risk
The company is exposed to foreign exchange risks as some of the business is dependent on imports and exports of alcoholic beverages, which entails foreign exchange transactions. The currencies in which the company deals in include the Indian Rupee, the Euro, US Dollar, and the Australian Dollar.
Any changes in foreign currency rates can adversely affect the company's operations. Although the company engages in hedging to minimise the exposure to forex risks, these activities are not always sufficient to protect against any potential losses against significant fluctuations, according to the RHP.
Business Seasonality
Sula Vineyards' RHP mentions that their business is highly seasonal and cyclical in nature. The demand for its products is high starting from the festive season in October and peaks in December. The demand then drops at the start of January to remain close to flat till the end of the financial year.
Among all the four quarters, the third quarter (October-December) has the highest sales, followed by the fourth quarter (January-March) or the second quarter (July-September) and then the first quarter (April-June).
All of these factors increase the capex and working capital requirement for wines as compared to other alco-beverages.
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