The five main risk factors associated with the problem

From advertising restrictions to adverse weather conditions and business seasonality, here are the top five risk factors associated with Sula Vineyards’ IPO.

Sula Vineyards’ Rs 960 crore initial public offering (IPO) is open for subscription today. The company’s Rs 960 crore IPO will see existing developers and investors sell their shares. The entire issuance is an offer to sell (OFS), meaning the company will not receive any proceeds from the IPO.

Apart from the fact that the IPO is an offer to sell, here are some other risk factors associated with the company:

Unfavorable climatic conditions and concentration of activities

The company has long-term supply agreements with around 500 contract farmers. Sula’s RHP states that there is no guarantee that adverse weather conditions will impact the quality of purchased grapes. Establishing a new vineyard takes more than two years and therefore any disruption in the supply of a key raw material will impact the business.

Moreover, most of the wine grape cultivation activities, the main raw material, are concentrated in the western and southwestern states of the country. Sales are also mostly concentrated in specific states. For example, in FY 2022, nearly 70% of Sula’s overall sales came from three states: Maharashtra (48.6%), Karnataka (14.5%) and Haryana (6.4 %).

Government Regulations and Advertising Restrictions

Sula Vineyards can only adjust the retail prices of its products with the approval of state governments in states where wine market prices are controlled, including Delhi, Telangana, Tamil Nadu, Odisha, Andhra Pradesh and Kerala .

However, these states do not have a significant contribution to the company’s turnover.

Additionally, any increase in inflation could increase the Company’s expenses, which may not be able to adequately pass them on to their customers, which could affect the Company’s operations. In the event that state governments where prices are controlled do not approve price increases, the resulting higher costs could hurt Sula’s margin.

Under the Cable Television Networks (Regulation) Act 2002 and the Cable Television Networks (Amendment) Rules 2009, advertising of alcoholic beverages is restricted in India. As a result, Sula Vineyards is unable to advertise its products through traditional means.

Therefore, they rely on social media, word of mouth and other means of publicity such as hosting 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 traditional forms and also warns that there is no assurance that they would be able to hold Sula Fest in the future.

Disputes against the company

A complaint was filed by the Deputy Registrar of Companies in July 2021 before the Mumbai Metropolitan Additional Magistrate against the company and its promoter Rajeev Samant.

The company’s HRP highlights 1 criminal proceedings, nine tax proceedings and eight legal and regulatory actions with a total amount involved worth Rs 125 crore.

Sula Vineyards also made news for income tax raids conducted in November 2017 where the IT department raided 20 company premises based on information related to the Panama Papers. The promoter denied any connection to the Panama Papers.

Risk of change

The company is exposed to foreign exchange risks because certain activities depend on imports and exports of alcoholic beverages, which involves foreign exchange transactions. The currencies in which the company deals include Indian Rupee, Euro, US Dollar and Australian Dollar.

Any change in exchange rates may adversely affect the operations of the Company. Although the company engages in hedging to minimize exposure to currency risk, these activities are not always sufficient to protect against any potential loss from large fluctuations, according to the RHP.

Company seasonality

RHP of Sula Vineyards mentions that their business is highly seasonal and cyclical in nature. Demand for its products is high starting with the holiday season in October and peaking in December. Demand then drops in early January to remain almost stable until the end of the financial year.

Among 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 capital expenditure and working capital requirement of wines compared to other alcoholic beverages.


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