On the wheels VIP Industries
Edelweiss reports despite the GST dampening impact, VIP Industries had robust quarter
By Neha Seth
VIP Industries Ltd, established in 1971, is the flagship company of DG Piramal Group. It is Asia’s largest luggage manufacturer commanding 50 per cent market share in luggage market in India, followed by Samsonite and Safari. Its four factories produce nearly five million pieces a year, making it the second largest producer of luggage in the world. The company operates in luggage and moulded furniture segments and manufactures a range of hard-sided and soft-sided luggage including trolleys, suitcases, duffels and overnight travel solutions, executive cases, backpacks and school bags. It has a state-of-the-art VIP Design Lab at Nashik, which is to be credited for several international patents and design registrations and has a manufacturing facility in Haridwar, Uttarakhand. It also manufactures moulded furniture under the Moderna brand.
VIP Industries has a global footprint with its products available not just across India but also all over Middle East, the UK, USA, Germany, Spain, Italy and select African and South East Asian countries. It has acquired UK luggage brand Carlton in 2004.
The company offers its products primarily under the following brands: VIP, Carlton, Footloose, Alfa, Aristocrat, Skybags, and Buddy. It derives 45 per cent of its sales from the VIP brand, more than 27 per cent shares comes from Skybags brand, followed by 20 per cent from Aristocrat and Alfa combined, and 8 per cent combined from premium brands such as Carlton and Caprese.
Volume-led revenue growth driven by domestic business
For the quarter April-June’17, VIP Industries top line grew 9 per cent year on year (YoY). Revenue stood at Rs 400 crore, driven entirely by domestic growth as international business was flat. Domestic revenue growth of 9 per cent was entirely volume led.
The volumes for April and May months were strong; however, there was slowdown in June due to GST related destocking.
Gross margin improved by 90bps to 45.5 per cent due to a stronger rupee appreciation and improved product mix. This led to EBITDA margin expansion by 170bps YoY to 15.3 per cent, which was further backed by cost controls as other expenses, as a percentage of revenue, fell by 1.12 per cent. This was VIP’s highest EBITDA margin in the recent past.
EBITDA, for the quarter stood at Rs 61.3 crore and witnessed increase 22.5 per cent YoY, despite GST related de-stocking as the sales for Canteen Sales department segment for the month of June sales were subdued.
Moreover, prices hiked for VIP by six per cent in the middle of June, to partially absorb the impact of higher tax rate under GST on margins. However, the impact of GST on margin is a concern as the price hike taken may not entirely offset the increase in tax rate going forward.
The spoilsport GST
In the short term, GST is a dampener. After the implementation of GST, the applicable tax rate for VIP is 28 per cent, which is significantly higher than the existing blended tax rate of 18 to 19 per cent.
The management believes the company gained market share due to strong performance, despite a tough June whereas sales in July month are also expected to be tepid. Going ahead, the new rate may also impact margins and the management expects the impact of GST on margins to normalize within a year.
Capacity expansion in Bangladesh
An investment of Rs 25 crore has been announced to enhance manufacturing capacity in Bangladesh. It will double the capacity from current 70,000 units, and will take around 12 months for the project to become operational. This will lead to reduction of sourcing from China by 5 to 10 per cent and will allow better control over its operations. The plant manufactures soft luggage and caters to all of VIP’s brands. VIP India purchases from Bangladesh in the same way and same prices as it does from Chinese vendors, though manufacturing margins are added in consolidation. This subsidiary offers a strategic alternative to China as it gives more control over operations. The subsidiary currently has around 450 workers as operations are labor intensive.
Performance across Brands and Channels
Skybags has become the leading brand for backpacks and continued to be the best performing brand, logging the fastest growth.
Aristocrat: To counter the stiff competition, focus is also on the value brand, Aristocrat, and it is doing well. The logo was redesigned and has got celebrity endorsements for the brand.
VIP continues to be tepid, however management is focusing on reinventing the brand through campaigns.
Premium Brands: Caprese and Carlton are high-margin brands and continue to grow well, though they are still a small proportion of revenues. Gross margin for Caprese handbags is around 5 per cent more than luggage.
Modern trade: The channel has continued to grow well and the transition to GST in modern trade was swift.
Canteen Stores Department (CSD) channel: The management has guided that the month of June was challenging for as the company undertook destocking of inventory taxed under the old regime before placing orders for GST taxed goods. More strong impact was felt in July and August may also be slow for the segment.
E-commerce segment has also gathered pace. Other channels have done well and were not impacted by GST as much.
Valuations: Strong visibility
Despite GST could slacken the conversion from unorganised to organised impacting sales in short term, it is expected to positive owing to: sustained margin expansion due to favourable currency and operating leverage; VIP’s strengthening leadership drawing on its portfolio of brands across price points; and pricing power reflected in its 6 per cent price hike to pass on the GST impact.
VIP is well positioned with rising penetration of branded luggage leading to revenue CAGR of 14 per cent and sustained margin expansion leading to 26 per cent earnings CAGR and return on capital employed (RoCE) expansion by 6.13 per cent over the upcoming period of 2017-19. At current market price of Rs 186, VIP Industries trades at 19.8 times its expected earnings per share of 2019.
Risks faced by VIP Industries
Stiff competition from organised sector: Increase in competition from the organised sector can affect VIP’s sales and profitability growth as players like Samsonite post have grown strong in market share and are now focused on profitability, while players like Safari are strongly focused on gaining market share.
Increase in raw material prices: The company currently derives 30 per cent of its revenues from hard luggage that is manufactured in-house. Major raw materials consumed in manufacture of hard luggage are polypropylene and aluminum. Any substantial increase in their prices will adversely impact the company’s margins and, hence, profitability.
Fluctuation in exchange rates: Appreciation in Yuan currency could hit VIP’s realizations and earnings as the company imports its entire soft luggage, which comprises 70 per cent of sales from China. Additionally, the impact of currency depreciation, is passed with a lag.
Working capital: The working capital of the company can deteriorate if the modern trade channel grows aggressively.