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.
The Nashik-based company handed out dividends worth a total of ~Rs 70 crore ($8.5 million) in the years ended March 2020, March 2022, and March 2023, until the filing of its IPO documents in July. While the payment of dividends denotes strong financial standing, businesses that anticipate a steeper growth curve typically reinvest the proceeds of its operations.
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 investor 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. The fund is offloading 54.3% of its total holdings in this offer for sale (OFS) and will likely be looking for another late-growth-stage company to back. Even Samant, who invested around Rs 80 crore (~$10 million) across several rounds of allotment during the last three years (the latest allotment being in May 2022), has cashed out shares worth around Rs 33.5 crore ($4 million).
Neither Verlinvest nor other investors like venture-capital firms Haystack and Saama Capital have put money in Sula in the past few years. That could be read as a response to Sula’s single-digit growth in recent times.