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  • Stock Recommendation: VIP INDUSTRIES LTD – BUY – TP: Rs 414

    Publish date: OCTOBER 04, 2018

    VIP Industries share price has declined by 32% in the past two months, post achieving our last target price on the back of unfavorable macro developments including depreciation of rupee, higher crude prices and increasing interest rates. We believe this steep recent correction offers another opportunity to invest in the stock which has been reporting strong quarterly performance on a sustained basis. Unfavorable macros force us to cut earnings (by 4%/7% respectively for FY19/FY20) and target multiple. However, we continue to have positive view on the stock as volume growth and delivery remains strong from the market leader. Recommend BUY with a target price of Rs 515 (versus Rs 570 earlier) at 39x FY20 earnings (versus 40x early).

    The domestic passenger traffic to continue to grow at a healthy pace of ~15% per annum due to conducive factors like relatively low penetration levels, lower yields , support from regulatory environment (i.e. regional connectivity scheme) and development of new airports. However, the recent spurt in crude prices, global increase in interest rates and depreciation in rupee can hurt the growth of the sector going forward. If the macro environment remains in bad shape for some more time, in H2FY19 we can see aviation companies deferring their capacity addition and also resorting to hike in ticket prices. This could hurt passenger air traffic going forward.

    There is strong correlation between air traffic, air travel and demand for branded luggage and we would want to be cautious here given the current precarious state of the aviation industry.


    Before GST, VIP has been paying an effective indirect tax of 20% against our estimate of 12% paid by the unorganized players. GST of 18% is applicable now (reduced from 28% in November 2017) to the entire luggage industry which has maintained the indirect tax situation for organized players, but increased the tax burden of unorganized players.

    We estimate the unorganized players to have taken price increase for their products to recover the increased indirect tax impact, which has reduced the pricing gap between the organized and unorganized players creating a level playing field. Management indicated that this development has led to shift of volumes from the unorganized towards branded organized players like VIP with customers preferring to have branded luggage at similar prices. This has helped and would continue to help VIP to grow at faster pace over unorganized players and improve market share.


    Management indicated that the company has been experiencing increasing raw material trend (since Q4FY18) in both the 2 major categories of inputs - polypropylene (for hard luggage) and polycarbonate. Other raw material like polyester, canvas, denim, PU leather, copper, aluminum, zipper head and hardware accessories have also shown an inflationary trend.

    VIP sources more than 70% of its soft luggage from China and its sourcing cost increases if Yuan appreciates against the rupee. YTD the Chinese Yuan has appreciated by 7% vs. the INR which has also contributed to cost inflation for VIP. VIP is trying to contain its margins under these adverse circumstance by increasing prices and also by reducing other cost.


    Further depreciation of rupee, increase in raw material prices and increase in operational expenditure in china have the potential to impact the margins for VIP over FY18-FY20E. However, we believe this would be off-setted by strong volume growth leading to operating leverage and economies of scale. We expect the sustainable EBIDTA of ~14% in a strong volume growth and high cost inflation environment.



    Due to increasing labour costs and other reasons such as strengthening of the Yuan vs. INR, the company is gradually reducing its dependency on China and increasing its sourcing from Bangladesh through its wholly owned subsidiaries (total 3 subsidiaries) in Bangladesh set-up with an investment of Rs 150 mn. VIP has flexibility in increasing the capacities with minimum capex and within a short time-frame.

    Going forward by FY20, we expect the sourcing of soft luggage to fall from China to 90% and with share of Bangladesh increasing to 10% (currently negligible) which would aid margins going forward. It is important to note that, revenues from Bangladesh has increased to Rs 250 mn (from Rs 128 mn YoY) with PAT of Rs 40 mn (from Rs 32 mn YoY) in Q1FY19.


    Management of VIP indicated that each of its 5 brand have done well in FY18/Q1FY19 and share the same margins at net level.
    Skybags continues to do very well for the company and is now the largest luggage and backpack brand in the country. VIP claims to have more than 50% market-share in the backpack market with Skybags.

    Aristocrat: Aristocrat is the value brand of the company which saw an extremely good year and was the fastest growing brand. As per the management, there is a huge scope in the value segment of the market and the company is well poised to capture the same in value segment. VIP is also focusing on Aristocrat to face competition.

    VIP brand still enjoys a healthy market share and is on top of the mind brand when it comes to family travel. 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.



    The Hypermarket channel continues to witness the strongest growth amongst all channels suggesting that Indian consumers are showing preference towards affordable luggage and convenience of modern shopping formats which are clean and air conditioned. Management indicated that VIP enjoys market leadership in modern trade. E-commerce is another channel which is slowly picking-up for the company with Indian consumers not only in metros but also in tier 2 and 3 towns hooking on to e-com. General Trade channel has registered very good sales growth during the year due to focused efforts on each segment including distribution and direct dealers. The Company-owned stores and exclusive franchise stores also continue to do well. Canteen Stores Department (CSD) channel remain stable for the company.


    In recent years in India, luggage and handbags have managed to shed their traditional utilitarian tag and have now evolved as lifestyle products. Increasing business and leisure travels coupled with rising disposable income and organized retailing have led to increased demand for luggage. Within this category, the demand for brand names has grown, as consumers aspire for goods that are branded, durable and count as status symbol. We expect VIP to be one of the largest beneficiaries of this change in the country. However, the macro-economic variables can play spoilsport for the company.

    Under current circumstances, for VIP, we estimate a revenue CAGR of 18% and earnings CAGR of 21% over FY18 to FY20E with strong operating margins and return ratios.

    After recent correction in the stock price, VIP is now trading at ~31.1X FY20E earnings, down from 42X previously. We cut our FY19/20E earnings by 4.1% and 7% respectively, to account for lower volume growth and margins and upgrade the stock to BUY (from Accumulate earlier) with a price target of Rs 515 (versus Rs 570 earlier), valuing the stock at 39X FY20E earnings (versus 40x earlier)..


    VIP Industries, established in the year 1971, is a leading luggage maker in India offering a wide range of products in hard luggage and soft luggage segments including school bags, trolleys, backpacks, suitcases, executive cases, duffels and overnight travel solutions. Some of its brands include VIP, Caprese, Alfa, Aristocrat, Buddy and Carlton. The company is Asia’s No.1 luggage manufacturer and transforming its business strategy from time to time. The company has manufacturing facilities located at Haridwar in Uttarakhand, Jalgaon, Nagpur and Nashik in Maharashtra. The company has set up a subsidiary in Bangladesh to manufacture and market luggage and bags. The company is maintaining its market share of 50% in the organized luggage industry by offering wide range of product mix like Carlton and VIP catering to high-end segment, Aristocrat caters to mid-segment, Skybags cater to mid and sub-mid segment and Alfa for lower-end price segment.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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