COLLEGE OF BUSINESS ADMINISTRATION

Case Study / Analysis of SULA Vineyards

In partial fulfillment of the requirements in FM-EL 4 (2018) - A (LEC): Venture Capital for the
1st Semester of S.Y. 2022-2023

Submitted by:

Submitted to:
COURSE INSTRUCTOR

SEPTEMBER 27, 2022

1.) What are the key investment risks for Shahdadpuri in GIAs investment in Sula?

Suggest ways to mitigate each.

Investment Risks Mitigation

Legal Uncertainty Hiring a competent lawyer will help to reduce the regulations
complexity and aid in the proper completion of the company's
taxing procedure in the long run.

Cultural factors affecting It would be ideal to start with giving a positive and compelling
the demand of wine piece of evidence that helps educate others and show that wine is
not just for women but for everyone who is of legal age. It could
be through giving of fliers or online advertisment.

Lacking relevant market To mitigate it, he can conduct a more in-depth analysis and
data and Transaction comparison with other established companies.
history

Threat posed by local It would be best for them to create a strong customer base and
competitor establish a strong brand equity.

Threat posed by imports It would be ideal for the business to concentrate on what it could
do best and what others couldn't. Analyze their rivals and make the
necessary improvements, particularly to their wine's quality.

Production and The company can mitigate this risk by stepping up its marketing
Distribution initiatives, expanding its management group, and developing new
product modifications.

Operating Risks: By keeping an open line of communication with his partner on

● Potential their respective conflicts of interest and focusing on what is best
disagreement with for the business, the firm may reduce this danger. By maintaining
partner sanitary conditions, pest infestation in the wine-making process
● Pest Infestation may be avoided. The best way to guarantee that you make the
● Problems with the proper choices is to fully understand the barreling process from
barreling process beginning to end and being aware of certain frequent mistakes will
● Rising cost the help you avoid them. Look for alternatives to reduce the cost of the
raw materials raw ingredients, but make sure the wine's quality isn't
compromised.
2.) Using either a Comparable Analysis or a Discounted NPV Analysis (see Valuation for

VC) estimate the enterprise value of Sula as of January 1st 2005? What are the key

assumptions?

The wine industry of India continues to grow every year leading domestic consumption

to increase over 5 million liters in the next few years. It is expected to reach 20 million wine

consumption and is assumed to have a growth rate of 20% annually. The wine industry is

expected to grow due to the adjustments made to make changes in the economy that is also in

favor of the local producers and manufacturers, changes in target consumers, wine sales tax

reduction and distribution. These adjustments slowly adjust the limited culture of India, thus,

these changes lead to an assumption of 22% compound annual growth rate (CAGR) and will be

increasing 25% in a decade, due to the positive factors the regulators see as the improvements of

the economy and the impact of the wine industry. It is assumed that adjustments will be made to

decrease wine tax from 20% to 4% to help the wine industry as well as the economy. However,

the market outside India or export would remain weak due feeble recognition of the brand

outside the area and very limited wine producers. Expansion of the business would require

wider and vast land for further grape farming, thus, expenditure on capital would also increase.

However, Projections and growth are expected to be met as stated in exhibit 6 that wine

consumption is increasing 20% annually.

KEY ASSUMPTIONS

Net Sales 22% “Wine industry has grown 22% per year.” (used
as basis for assumption to solve for the net sales)

EBITDA 22% “Wine industry has grown 22% per year.” (used
as basis for assumption to solve for the EBITDA)
 Tax Rate (wine) 4% Given

Inflation Rate 11.99% Data were retrieved from the internet

in 2010 (www.macrotrends.net)

Wine Consumption 20% Given (used as basis for working capital).

Discount Factor 20% Assumption

*For the Working Capital, since wine consumption would have a 20% increase, we can assume
that the capital needs to increase by 20%

*Initial Investment = 30,000,000 INR [ / 48.61 INR (equivalent to 1 USD in 2002)]

= USD $617,156.96

Cash Flow:

CFt = EBITt x (1 – T) + DEPRt – CAPEXt – ΔNWCt

(EBITDA minus tax rate minus changes in working capital)

2005 CF = $890,000 - 35,600 – 177,741.20 = $ 676,658.80

2006 CF = $1,085,800 – 43,432 – 213,289.44= $ 829,078.56

2007 CF = $1,324,676 – 52,987.04 - $255,947.33= $ 1,015,741.63

2008 CF = $1,616,104.72 - $64,644.19 - $307,136.80 = $ 1,244,323.73

2009 CF = $1,971,647.76 – 78,865.91 – 368,564.16 = $ 1,524,217.69

2010 CF = $2,405,410.27 – 96,216.91 – 442,276.99 = $ 1,866,916.86

Terminal Value:

TVT = [CFT x (1 + g)] / (r - g)

(2005 cash flow + 2010 cash flow multiplied by (1 plus inflation rate) divided by (discount rate -
inflation rate)
= [($676,658.80 + 1,866,916.86 x (1 + 0.1199)] / (0.20 - 0.0425)

TVT= $ 26,778,533.87

Net Present Value

NPV = [CF1 / (1 – r)] + [CF2 / (1 – r)2] + [CF3 / (1 – r)3] + [CVT + TVT) / (1 + r)T]

(Cash flow year 2005 / (1-discount rate) + (Cash flow year 2006 / (1-discount rate)^2 + (cash
flow year 2007 / (1-discount rate)^3 + (cash flow year 2008 / (1-discount rate)^4 + (cash flow
year 2009 / (1-discount rate)^5 + (cash flow year 2010 + 2010 terminal value / (1+discount
rate)^6 )

= [$ 676,658.80 / (1 - 0.20)] + [$ 829,078.56 / (1 - 0.20)^2] + [$ 1,015,741.63 / (1 - 0.20)^3] +

[$1,244,323.73 / (1 - 0.20)^4 ] + [$1,524,217.69 / (1 - 0.20)^5 ] + [$1,86,916.86 +
$26,778,533.87 / (1 + 0.20)^6 ]

NPV= $ 21,407,875.56

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