Having a strong earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin allows Sula Vineyards Ltd to engage in category development, which is essential for long-term growth, believes global brokerage firm CLSA.
The brokerage firm has initiated coverage of the stock with a 'buy' recommendation and a price target of ₹475, a 40% upside from the stock's current price.
Premiumisation and operational efficiencies have been the major factors for an improvement in the EBITDA margins. In the first nine months of FY23, the company reported EBITDA margins of more than 29%.
For the whole of FY23, the brokerage anticipates overall EBITDA margins to arrive at 28%. It expects a slight fall in Q4FY23's EBITDA margins as compared to the previous quarter, as Q3FY23 is considered as the robust month for sales.
The global brokerage house expects the country's largest wine making company's revenue to grow at a compound annual growth rate (CAGR) of 19% over FY22-25CL (calendar year) with EBITDA growing by 1.86 times during the same period.
For the quarter ended December, the revenue from operations increased by 14.5% on year to ₹209.17 crore driven by premiumisation, and the net profit jumped 15.5% to ₹39.28 crore driven by an increase in the market for premium wines and as visits to its vineyards and resorts reached pre-pandemic levels.
"Sula’s focus on growing its own high-margin premium brand has helped it increase EBITDA margin to >29% in 9MFY23 vs c.25% in FY22. We expect a 17.5% revenue CAGR and an 18.6% earnings per share (EPS) CAGR over the next two years but EBITDA margins should moderate to 27.3% by FY25CL as the company focusses on category development. Change in wine incentives schemes remains a key regulatory risk," said the brokerage in its report.
The largest selections of wines in the Indian wine market under the 'Elite' and 'Premium' categories are presently produced and marketed by Sula under a total of 34 labels. In terms of value, it held about 60% of the 'Elite' and 'Premium' groups in FY20 and FY21.
Further, the brokerage values the wine maker at 34x PE - a 15% discount to other alcohol beverage companies in India (United Spirits, United Breweries and Radico Khaitan).
"We believe the discount is justified given that wine is still a nascent category in India and some evidence of category development is awaited," said the brokerage in its report.
Following the global brokerage's bullish comments, shares of the company surged nearly 9% on Wednesday. The stock recorded an intraday high of ₹371.15 and low of ₹348.35. So far this year, the stock has gained nearly 8%.
Further, the stock price rose 6.7% and outperformed its sector by 6.9% in the past week. At 13:38 IST, the stock was trading at high volume of 1.8 million with price gain of 7.29%.