Sula vineyards – pioneers in indian wines

Firstly, congratulations on having built a good position and making a decent profit. Cannot fault exiting a company if it is not letting you sleep peacefully (subject to general points about long term compounding of course)

However, I have a contrary view on the opportunity presented by the news. I had an initial tracking position in Sula and was looking for an opportunity to build to the next stage of my position size at a more reasonable valuation. The decline has provided me the opportunity based on my internal valuations. I am sharing my interpretation of the news purely to provide an alternate view (this does not mean the view is correct) and my subsequent actions

• I would like to differentiate an unpleasant surprise from a disclosed risk vs an undisclosed risk. The management had already disclosed this risk in their annual report – and it is unfortunate that the risk has materialised (although it seems the management is still confident of challenging and overturning the payment). If this was an undisclosed risk of this magnitude, there would be more concerns on the management

• The current management view is that this does not have any implications for the future operations of the business. My interpretation of this is that this is a historical dispute and does not have implications for excise for the future. This definitely needs to be confirmed (perhaps in the quarterly call on Aug 10), as there is a difference between one-off and on-going. As a one-off you could argue this is a 2-3% impact on Enterprise Value (Rs 115 cr on Rs 4000 cr). And of course, dividend payments for FY24 would likely be impacted

• Liquidity risk seems low – ability to pay the disputed amount if it becomes due. It seems they should be able to pay this off based on cash and other financial assets (and Q4 is peak working capital due to grape payments)

So overall the risk from the news, subject to further management confirmation, does not seem to merit a breaking of the business (but affect FY24 dividend). I have added to my position and will add to the next stage of my position size of if it drops further.

Wish you the best

Disc. Invested and likely to be biased