Sula Vineyards Case Study Analysis

Question No. 9: How did the product mix change over time, and how did this impact future cash flow?

Answer:

The Sula Vineyards were producing two kinds of wine: white wine and red wine with the difference in the color and taste. Champagne style brut was yet another kind of wine produced by the company. Hite and Red wines were subdividedinto three more wine categories, with the highest price of Champagne Style Brut, but this has low demand as compared to White and Red wines. In case of White and Red wines, the highest price was allotted to the categories of Red wines. The company should produce and sell more of the red wine to have a great effect on the future cash flows.

Question No. 10: Red and white wines are both liquids in the physical sense of the word.  In the financial sense, which is more liquid and why?

Answer:

Red and white wines are liquid, but White are more liquid in a financial sense, as because of the competitive prices and higher production of white wines made them more liquid. One of the other main reason was the aging period required for red wine was 24 months and can be sold withintwo or three years after the date of production.

Question No. 11: Assess Sula Vineyards’ financial performance over the last five years (2003-2007) using common size statement analysis and financial ratios and the data provided in Exhibits 5–7 (Exhibits 5 and 6 are provided in excel as a starting point).  What conclusions can be drawn with respect to the company’s operating and financial performance over this period?  As part of your analysis, include a discussion of changes in Sula’s cash conversion cycle and what was driving the changes.  Also include a calculation and discussion of the company’s sustainable growth rate based on 2007 data.

Answer:

Refer to appendix.

Question No. 12: Evaluate scenario C presented in exhibits 11 – 16 (Exhibit 13 is provided in excel as a starting point).  Create a pro forma income statement and balance sheet for Scenario C for 2008-2012 based on data from case exhibits 5-14.  If external financing is needed, use the category “Additional Funds Needed” (AFN) on the projected balance sheet as your plug figure.  If excess funds are generated, created a short-term asset called “Short Term Investment” in order to balance the balance sheets.  What conclusions can you draw from your analysis?

Answer:

Refer to appendix. After the careful analysis, reasonable assumptions and judgments, we can conclude that Additional Fund Needed (AFN) was continuously increasing which is not a sign of relief for the company’s management. It means the company will be deploying in more loans and other facilities to meet its expanding requirements. It is advised to the management of the Sula Vineyards that instead of focusing more on external sources of financing the expansion plan, they should go for the internally generated funds or even they can have the option of equity generating through shares.

Question No. 13: Calculate the free cash flow for Sula Vineyards for 2003-2007 and for projections based on Scenario C using the projected financial statements you prepared in question 12 above.

Answer:

Refer to appendix.

Question No. 14: Value the company for Scenario C using discounted cash flow techniques and multiples analysis.  Use a discount rate based on WACC, assuming Sula’s before tax cost of debt is 7% and their beta is 1.0.

Answer:

See appendix.

Question No. 15: What financial and strategic recommendations would you make?  Include recommendations on capital structure, sources of financing, and potential uses of funding.

Answer:

After the analysis and evaluation of the case, we suggest that, since it was assumed that the growth of wine in the Indian market will be 20-25% per year. Based on these expectations of this market growth, the management of the Sula Vineyardsmust make sure to improve its cash flows by incorporating efficient and economical management of the working capital in order to increase the net profits. Additional fund needed requirement could be completed by equity funding through external source of capital such as common stock and preference sharescan provide quick access to funds.

Between the years 2004 to 2007, Sula Vineyards has not generated feasible cash flow from its operations. On the other hand, Sula Vineyards have not been able to generate sufficient operating income even to cover interest expense, which means there will be no more room for taking extra debt. After the close analysis of the networkingcapital changes, the cash flows were negatively affected bythe inventories................................

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Question No. 1: As compared to Sonoma, California, what adaptations did Sula need to make to allow the growth of grapes for fine wine in India?

Answer:

As compared to the Californian region, the Indian territory was considered best for the production and growth of fine quality of grapes. The major peculiarities of the climate play a vital role in the growth of grapes. Water was yet another most precious of all commodities, especially in the summer season of in India. The company Sula Vineyards was located in the one of the favorable locations for the production of wine. Irrigation of the fields was another factor behind the potential success of the company’s product. Sula Vineyards needed to assess the all the factors and natural climates of India and perform accordingly for the success in the industry.

Question No. 2: What varieties of grapes were selected and why?  How did these complement the local Indian Cuisine?

Answer:

Once the careful analysis about the growing conditions of the wine industry was made, the selection of the type of grapes was another problem. Mr. Rajeev has choose Sauvignon Blanc, a classic grape from the region of France and Chenin Blanc also from France. But the problem was, neither of these have ever been produced in India. Rajeev decision was followed by the marketing and production combination, as it was expected that these varieties will grow well and the wine would stand tall in terms of flavors according to the Indian cuisine. The moto behind this decision was that the company was more concerned about the quality standards.

Question No. 3: How did the price of wine grapes at retail compare to table wines?

Answer:

Mr. Rajeev has decided to contract with the original grape growing farmers in the region in order to a have a steady supply of grapes and advance an incentive to the local economy of India. That is what the main reason behind the difference in the retail price of table wine and grape wine, as the table grape farmer were offered $0.3 per kg, while grapes retailed for $70 plus.

Question No. 4: Describe the types of supplies that were imported.

Answer:

The supplies that were imported to India are: Sparkling Wines, Premium Wines, Economy wines and others. The most of the cost was incurred on the import of Premium Still Wines, as the demand for the Premium class wines was high in Indian wine consumers because of the high quality and fine flavors.

Question No. 5: Domestic production was expected to grow at 20-25% CAGR.  What was fueling the growth in imported wines?

Answer:

Domestic growth was expected to be 20-25% because of the increase in the demand and on the consumption of wine. These two factors were the key behind the continuous growth in the production and selling of wine. As a result of high demand, the investors have invested heavily in the industry as the wine producing industry was capital intensive and these investments have been continuously used in the expansion of the wine industry.

Question No. 6: What valuation did GEM India Advisors invest at? What are the equity value and enterprise value of the company equivalent to in terms of multiples of revenue and EBITDA based on the financial statements at the end of 2005?

Answer:

Refer to appendix.

Question No. 7: What was the price per share of the GEM India Advisors' investment, assuming it carried the same par value as the stock issued in 2003?

Answer:

Refer to appendix.

Question No. 8: If the original equity investment consisted of 200K shares at $1 each, what generated the capital surplus of $400K in the 2003 balance sheet, assuming the initial formation of the company occurred in 2003?

Answer:

In the given case, if it was assumed that the company Sula Vineyards was formed in the year of 2003, and the company has issued 200,000 shares of par value $1 each, then the amount of $400,000 can be considered as the Share Premium surplus, it was just because of the wide range of wine market. As the investor suggested that the industry of wine would be growing faster, they invested more in the company and consequently the prices of shares have risen from the per value......................

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Rajeev Samant, founder of Sula Vineyards, a pioneer in the nascent Indian wine industry. After selling a minority stake to private investors in 2005 to raise funds for expansion of the winery, Rajeev in mid-2007 once again faced with the problem of deciding whether and, if so, at what rate rise Sula to meet the projected rapid growth in demand for Indian wine. He has developed financial forecasts to present to the board of Sula. Rajeev now need to decide on an appropriate intention to submit to the board, as well as the expected level and sources of funding to support the plan. In search of new tools, Rajiv was aware of the tradeoffs inherent in new equity financing, which could lead to further dilution of ownership control, compared to the new debt financing, which would place additional claims on future cash flows and increase the financial risks Sula. "Hide
by Armand Gilinsky, Jr., Raymond J. Lopez Source: North American Case Research Association (NACRA) 24 pages. Publication Date: July 15, 2008. Prod. #: NA0054-PDF-ENG

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