About the Company

VIP Industries Ltd is an Indian luggage maker which is the world’s second-largest and Asia’s largest luggage maker. The company has more than 8,000 retail outlets across India and a network of retailers in 50 countries. VIP’s products are imported in numerous other countries. It acquired the United Kingdom luggage brand Carlton in 2004. It also owns the Aristocrat and Skybags brands which are very popular in India.

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Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 433.94 432.69 0.29% 414.15 4.78% 1424.76 1357.58 4.95%
PBT 34.31 30.56 12.27% 36.07 -4.88% 126.67* 167.8 -24.51%
PAT 26.55 19.56 35.74% 30.21 -12.12% 94.29 110.45 -14.63%

 

Consolidated Financials (In Crs)
  Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 434.12 432.83 0.30% 414.9 4.63% 1415.76 1356.09 4.40%
PBT 42.5 35.42 19.99% 40.78 4.22% 137.96* 178.75 -22.82%
PAT 34.21 23.83 43.56% 32.92 3.92% 102.21 119.99 -14.82%

*Contains an exceptional item of loss of Rs 48.5 Cr

 


Detailed Results

  1. The results for the quarter were flat with only 0.3% YoY growth in standalone and consolidated revenues respectively.
  2. The profits for the quarter grew 44% YoY mainly due to reduced tax expenses from the new corporate tax regime.
  3. 9M profits were down mainly due to the exceptional item of Rs 48.5 Cr which is the loss from a fire in one of the company’s warehouses earlier this year. This amount is expected to be recovered from fire insurance by the company in the near future.
  4. The 9M PBT before exceptional items grew 4.3% YoY in consolidated terms.

Investor Conference Call Highlights

  1. The management has mentioned that the company has ceded some market share but has gained 500 bps in margins in a YoY basis.
  2. EBITDA margin has gone up to 16.1% from 9.4% in 9M period.
  3. The company lost market share in a few large orders where the company did not compromise on its bottom-line. The management also acknowledges that e-commerce sales have not developed as well as expected.
  4. The management also aims to improve its e-commerce channel as it is the fastest-growing channel and the company does not want to cede dominance in this growing channel to its competitors.
  5. The management has stated that employee costs have gone up mainly due to an increase in internal manufacturing. This has also helped the company increase margins.
  6. The management has stated that the whole luggage industry is dependent on China for raw materials. The company has already procured around 60% of Q1FY21 raw material requirements. The February production will have to be shut due to a shortage of the rest of the requirements.
  7. The company reassures that the company is in the best position in the industry to weather this disruption.
  8. The company is secure enough for sales up to April and the supply disruption will affect May and June sales if it persists.
  9. The company will not undertake price increases in the case that industry stock levels fall.
  10. The volume growth for the quarter is somewhat larger than the value growth which has been flat for the quarter.
  11. The large orders that the company lost have been in the institutional sales channels.
  12. The company has acknowledged that its competitor has a higher proportion of e-commerce sales to total sales as compared to VIP.
  13. The management has identified channel conflicts as the big issue to address for the company and it will try its best to balance both the modern trade and e-commerce channels to spur growth in both.
  14. The company has launched women-specific luggage under the Caprese brand. The market feedback has been good and the company is optimistic about this new product line going forward.
  15. The % of sourcing from Bangladesh is still below 20% and this figure is expected to rise going forward.
  16. The management is not sure on how the entry of private labels like Amazon Basics will affect overall sales for the company. It is definitely expected to affect e-commerce sales growth but the exact competitive pressure coming from this is still to be determined.
  17. The management is confident of increasing market share in e-commerce while maintaining the current margin profile.
  18. Carlton and Aristocrat grew faster than the flagship brands of VIP and Skybags. This is mainly due to the lower bases in Carlton and Aristocrat.
  19. In the luggage market, 12% is sold through e-commerce while around 30% of backpacks are expected to be sold via the e-commerce channel.
  20. The management has clarified that the component of plastic as raw material is very little in the company’s products and thus the company is not affected by oil price volatility.
  21. The CAPEX for the next year is expected to be at levels of Rs 30-50 Cr as it has been for the past few years.
  22. The company has clarified that it cannot use the Bangladesh facility output to mitigate the impact of China disruption due to the installed capacity being too small and utilization running at full capacity.
  23. Most of the sales for Caprese is driven through ecommerce. General distribution is the smallest channel for this brand with the majority of physical sales coming from departmental stores like Shoppers Stop, Pantaloons, etc.
  24. The management has guided flat sales growth for the rest of the year.

Analyst’s View

VIP has been the market leader in the soft and hard luggage segment in India for a long time now. The company is one of the biggest luggage manufacturers in the world by volume. Due to headwinds in the air travel and tourism sector, and the slowdown in general economic conditions has seen the company sales stay flat. Even in such situations, the company has managed to maintain and even improve upon its margins which is commendable. The management has time and again stated that the company will not pursue the strategy of sacrificing margins for market share that its competitors are doing. The company has an uphill task ahead with channel balancing and the risk of disruption from coronavirus. It remains to be seen how the coming quarters will pan out for the company and the industry and how the company will be able to weather any unexpected disruptions if they appear. Also, the most important thing to note for the company is how it will cover up its lost market share in the last quarter. Nonetheless, given the company’s strong market position and its enduring brands, VIP remains an important stock to watch for any investor interested in the travel and luggage market.


Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 414.25 404.85 2.32% 576.67 -28.17% 990.92 924.9 7.14%
PBT 36.07 46.94 -23.16% 56.29* -35.92% 92.36* 137.24 -32.70%
PAT 30.21 31.04 -2.67% 37.53 -19.50% 67.74 90.89 -25.47%

 

Consolidated Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 414.97 403.82 2.76% 566.77 -26.78% 981.74 923.26 6.33%
PBT 40.78 49.18 -17.08% 54.68* -25.42% 95.46* 143.33 -33.40%
PAT 32.92 32.81 0.34% 35.08 -6.16% 68 96.16 -29.28%

*Contains an exceptional item of loss of Rs 48.5 Cr

 


Detailed Results

  1. The results for the quarter were flat with 2.3% YoY and 2.8% YoY growth in standalone and consolidated revenues respectively.
  2. The profits for the quarter were flat mainly due to reduced tax expenses from the new corporate tax regime.

Investor Conference Call Highlights

  1. The management has stated that since luggage is a discretionary item, it has been hurt much more during times of slowdown and broad industry decline.
  2. The management expects the current sales trends to persist and they expect revenue growth to be muted at <10% at most for the year.
  3. In terms of market share, the company remains stable at current levels.
  4. The margin profile for the company improved in Q2 mainly because the company was able to negotiate better terms for imported products.
  5. The management expects the current margin profile to stay stable at current levels.
  6. The employee expenses have increased YoY because in the Bangladesh units the minimum wages rose 40% which caused the employee expenses to double. This is a onetime thing in Bangladesh which repeats in 5 years  during elections.  So the company does not expect any abrupt rises in employee expenses for a while.
  7. The finance costs have increased due to the new accounting treatment of leases. Taking out the accounting standard change, most of the costs remain at similar levels.
  8. The main focus for the year is to maintain margins and try to increase sales but not at the expense of overloading inventory at dealers and distributors level.
  9. The quarter revenues from Bangladesh have doubled as compared to the same period last year.
  10. The company has restrained itself from aggressive discounting to maintain their margins.
  11. Both the short-haul luggage (for short trips like backpacks and soft luggage) and long haul luggage (hard and soft luggage for long-duration journeys) has been impacted by the demand slowdown in Q2.
  12. The company saw volume growth of 6% in the quarter.
  13. The PAT from Bangladesh entity is Rs 5.7 Cr.
  14. The Capex expectations for FY21 would be broadly similar to FY20 Capex.
  15. The capacity utilization levels at the company’s facilities were around 75% in Q2.

Analyst’s View

VIP has been the market leader in the soft and hard luggage segment in India for a long time now. The company is one of the biggest luggage manufacturers in the world by volume. Due to headwinds in the air travel and tourism sector, and the slowdown of the economy, the sales for the company have stayed flat and profits have fallen. The management has further guided that it expects a muted growth of <10% in FY20 and it will be focusing on maintaining their margins and not indulge in aggressive discounting to gain temporary market share. It seems to be good communication on the part of the management that they have made their guidance and expectations clear to the investors. The big win for the company was the improved negotiated terms with Chinese suppliers which should help maintain margins at current levels despite demand slowdown. Nonetheless, given its industry position, general brand strength and operational history, VIP remains a good company to watch out for.

 


 

 

Notes from Annual Report FY18-19

Management Discussion Analysis

Industry Overview

The Indian economy has seen growth decelerate a bit in FY19 and the outlook for the current year remains stable. Due to global oil prices, inflation is expected to remain range-bound, which should see the current monetary policy stance of the RBI last for a while. Furthermore, due to the demand slowdown in key sectors like Automobiles, etc; the RBI is generally expected to keep an accommodative stance with rate cuts at specific times to boost lending and general demand. This should help drive demand, consumer confidence and discretionary spends in 2019-20. This augurs well for the domestic travel and tourism industry.

 

There was good growth in the luggage and bags industry during the year 2018-19 due to strong consumer demand but a depreciating US$ affected the profitability. Stabilization of the GST rate at 18% helped in fueling consumer demand. The rate of growth on account of air travel has slowed down in the last six months, as compared to the past few years due to the operational shut down of some airlines. This has affected the demand-led by air travel commuters.

 

Due to the reduced gap between organized and unorganized players on account of GST implementation, the consumer up-gradation from un-branded to branded luggage has been going on good. The reasons for shifting to branded luggage are:

  • due to a reduction in the price gap between branded and unbranded luggage
  • peace of mind with the warranty offered by the branded luggage

 

Personalization of luggage is mostly observed and every member of the family is keen on traveling with his/her own luggage instead of common luggage. Luggage need has also become occasion led. For instance, business travel luggage is generally different than the long holiday travel or short weekend trips.

Categories

New luggage categories like Polycarbonate uprights and backpacks have registered very good growth whereas traditional categories like PP hard luggage suitcases continue to decline. This was witnessed everywhere in the country. The shift is due to a change in consumer preferences towards the convenience of light and wheeled travel products as compared to heavier luggage.

The introduction of Duffels at competitive price points led to very strong growth in the duffel segment. Polycarbonate luggage and duffel/duffel trolleys were important growth drivers during the year.

Soft luggage uprights continue to be the major contributor for sales growth along with backpacks. Daily usage mainly by students and bike commuting office-goers is increasing and thus leading to strong growth in Backpacks. Consumer preference for trendier backpacks which suit their persona has led to an increase in purchase frequency of backpacks.

Channels

E-commerce channel saw significant sales growth in the year. This was on account of a number of initiatives taken by e-commerce organizations to increase consumer demand throughout the year. VIP was able to take advantage of these initiatives by tactical activations and ensuring an adequate supply of stocks.

The Hypermarket channel continues to show the strongest growth amongst channels suggesting that Indian consumers are showing a preference towards affordable luggage and convenience of modern shopping formats which are clean and air-conditioned. VIP enjoys market leadership in modern trade channel, which is expected to increase further.

General Trade channel has registered very good sales growth during the year. The Company-owned stores and exclusive franchise stores also continue to do well.

 

Brands

 

Skybags is now the largest luggage and backpack brand in the country for the second year in a row.

New product introductions in brand V.I.P were widely accepted by consumers for their contemporary designs and faith of consumers on the brand for its quality led to very high growth in the brand.

Aristocrat saw a very good year and was the fastest-growing brand for the Company. Awareness levels for Aristocrat were at an all-time high due to advertisement of the brand with leading cricketers Rohit Sharma and R Ashwin. The brand was the key beneficiary of the consumer shift from unbranded to branded luggage and is expected to maintain its status as one of the fastest-growing brands for the company in the near future.

 

Carlton Edge was launched with a lifetime warranty including airline damage in Q1FY19. This launch was supported by an advertising and outdoor campaign. The company has positioned the Carlton brand for the new-age business traveler. They are tapping the high-end market where customers are discerning and willing to pay a premium for good bags. This segment is expected to do well in the near future.

 

In Ladies Handbags, Caprese has shown very good growth. Robust advertising campaigns, along with differentiated and relevantly priced products tailored for each distribution channel have fueled the growth during the year.

The company has launched an exclusive Alia X Caprese line with the actress Alia Bhatt to bring the focus back to premium handbags. The company has utilized its association with the prestigious Lakme Fashion Week and various fashion influencers to achieve wider acceptability of the brand. The focus for VIP now is to expand distribution for this brand and its products in more locations and channels.

 

Future Outlook

The company sees the weakening of INR vs USD to put pressure on margins and profitability as most of the raw materials for the company need to be imported. VIP is taking measures to mitigate these challenges by way of cost optimization and an increase in consumer price. The overall macroeconomic slowdown and the reduction in aviation supply have resulted in some slowdown in demand for luggage, which is expected to be a short term affair.

 

Financial performance in 2018-19

  • FY19 Revenues grew almost 26% YoY respectively both on a standalone and consolidated basis.
  • The company has provided modest returns for the year with consolidated profits rising 14.6% YoY while standalone profits rose 8.6% YoY.
  • The main reason for the drop in profitability seems to be the sharp rise in raw material prices coupled with the company passing on the increased costs in a phased manner so as to preserve market share in lower margin products.
  • The Q4 sales growth was mainly driven by entry-level products which has adversely affected the product mix and has lowered profits for the company.
  • In Bangladesh, Q4FY19 revenues have nearly doubled as compared to Q4FY18 while profits have grown 47% YoY.
  • FY19 revenues for Bangladesh have grown 127% YoY with profits growing 84% YoY. The company is expecting this growth trend to persist as operations in the country expand.
  • The advertising spending on the new promotional campaign for the VIP brand has come at 5% to 7% of sales.

 

Operational Performance in 2018-19

  • The company registered a volume-driven sales growth of 25% and a decline of 5% in per piece realization due to the change in the product mix.
  • The company’s days of inventory have risen as the sales for soft luggage were not as prolific in H2FY19 as in H1FY19 leading to inventory levels rising to current levels. The company expects to remedy this by the end of Q2FY20.
  • The entry-level products under the Aristocrat brand have risen the most in FY19. Other than these, backpacks are another segment that has seen higher volume growth than the company average.
  • The company expects institutional sales to rise in the future as more and more companies view luggage as a good consumer item that can be used in sales and other promotional schemes. Also, luggage has become a good neutral gifting option for organizations leading to higher expectations of institutional sales for the company’s products.
  • The company will introduce price hikes from 5% to 8% across all of its brands and channels by July this year.
  • The backpacks segment is expected to continue to grow at the current pace of 30% to 35%.
  • The company still holds a dominant market share of more than 60% in almost all of its categories.
  • There has been a slight slowdown in profit growth in Bangladesh operations in FY19 as compared to FY18. This is a direct result of a 40% hike in workers’ wages which has led to a rise in higher rise in expenses. The management expects to bring back previous profit margins in the near future.
  • In terms of capacity, Bangladesh operations yield around 10% of overall volumes.
  • The company is looking to reduce dependence on buying from China and increase dependence on sourcing soft luggage from Bangladesh as they will not need to pay import duties on imports from Bangladesh. Going forward, the management expects the volume contribution of Bangladesh operations to rise to 25% at the max.

Analyst’s View

VIP has been the market leader in the soft and hard luggage segment in India for a long time now. The company is one of the biggest luggage manufacturers in the world by volume. Even while enjoying these advantages, the company has gone through the same problems of rising costs and dipping profits as the rest of the industry. But even then the management of the company is confident in its brand’s resilience and has identified raising gross profit margins as their number one priority. They are even ready to take some dip in volume growth if necessary to achieve their goal of driving profits. They are not chasing short terms gains of maximizing revenues and instead focussing on maintaining company reputation and delivering long term value generation by focussing on making their business more profitable. In their pursuit of minimizing expenses and increasing profits, they have started reducing their dependence on China for sourcing raw materials. Their Bangladesh unit is seeing a lot of traction now. In the years ahead, it is expected that dependency on China will further reduce, thereby making margins sustainable for the company. Thus, VIP presents itself as a decent investment option for anyone willing to take exposure in the growing luggage industry of India. However, valuation at the current level is not cheap.

 


 

Q1 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 576.67 519.43 11.02% 436.75 32.04%
PBT 56.29* 90.3 -37.66% 28.8 95.45%
PAT 37.53 59.85 -37.29% 18.36 104.41%

 

Consolidated Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 566.77 519.4 9.12% 436.95 29.71%
PBT 54.68* 94.15 -41.92% 36.19 51.09%
PAT 35.08 63.35 -44.63% 25.28 38.77%

 

Detailed Results

  1. The results for the quarter were decent with 11% YoY and 9% YoY growth in standalone and consolidated revenues respectively.
  2. The profits for the quarter were down mainly due to the loss of Rs 48.5 Cr. This was the loss to PPE due to the fire at their Ghaziabad warehouse. The company has initiated its insurance claim process and they expect this loss to be adequately covered.
  3. Thus taking this exceptional loss out of the picture, the PBT before exceptional items has risen 16.05% YoY showing good profit recovery for the company.

Investor Conference Call Highlights

  1. The management is comfortable with the current performance given the slowdown in the air travel and tourism sectors.
  2. The company believes that its was due to the healthy mix of sales channels that they were able to maintain revenue growth despite trying industry conditions.
  3. The management expects the current slowdown to persist and thus they will refrain from providing any growth guidance.
  4. The company saw volume growth of 7% YoY and margins stabilizing.
  5. The management believes that the VIP brand has performed well post relaunch and has helped a lot in keeping up the revenue growth.
  6. The company expects the market share of the company to stay stable at current levels.
  7. The margins have improved considerably compared to the past 2 quarters. This was due to a few factors like a new product launch and hiking prices for existing products where raw material price increases were not reflected in.
  8. The company was also able to negotiate FOB cost reduction with Chinese raw material suppliers which also contributed to margin improvement.
  9. The company expects the current margins to persist for the foreseeable future.
  10. The company’s employee benefit expenses grew 24% YoY which is higher than what the company expected and management is focusing on combating this.
  11. The company stayed their ad spending in their range of 5-7% of revenues and they will continue to do so.
  12. Without exceptional loss, profits have grown at the same pace as revenues at almost 9% YoY.
  13. The management sees the Bangladesh plant adding 2-3% of profitability to the company and this is expected to be seen by H2FY20.
  14. The company sees pricing pressures to continue and they see more growth in the entry levels than the mid or high range segments.
  15. The entry-level segment growth has slowed in the current quarter to some extent but the company sees this as a one-off thing which should get back on track.
  16. The company still has higher inventory levels than the yearly average and the company will phase out the older high-cost inventory while maintaining margins at current levels.
  17. The company is not threatened by the entry of online players in the backpack space.
  18. The main cause for the slowdown in the branded luggage space is due to demand slowdown which is very difficult to predict.
  19. The company does not feel threatened by private labels who have entered the luggage and handbags space.

Analyst’s View

VIP has been the market leader in the soft and hard luggage segment in India for a long time now. The company is one of the biggest luggage manufacturers in the world by volume. Despite headwinds in the air travel and tourism sector, the company has stayed resilient and achieved 9% revenue growth. The company was adversely affected by the exceptional loss from a fire at their North India warehouse. The management feels confident about recovering this loss from the insurance company in due course. The management has admitted that they do not have much idea about how long this slowdown in the industry shall persist. Nonetheless, despite trying industry and demand conditions, VIP has stayed stable and maintained their market and revenue growth position. Going forward, it would be interesting to see how VIP tackles the competition, both on the offline and online turf and maintain its strong position in the industry.

 


 

Q4 2019 Updates

Financial Results & Highlights

                                                                Standalone Financials (In Crs)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ % FY19 FY18 %  Change
Sales 436.75 364.93 19.68% 432.77 0.92% 1793.96 1426.77 25.74%
PBT 28.8 50 -42.40% 30.56 -5.76% 196.6 179.5 9.53%
PAT 18.36 32.44 -43.40% 19.56 -6.13% 128.8 118.57 8.63%

 

                                                                Consolidated Financials (In Cr)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ % FY19 FY18 %  Change
Sales 436.95 364.91 19.74% 432.92 0.93% 1793 1425.65 25.77%
PBT 36.2 53.05 -31.76% 35.42 2.20% 214.94 189.53 13.41%
PAT 25.28 35.05 -27.87% 23.83 6.08% 145.27 126.75 14.61%

 

Detailed Results

  1. Revenues have been on the rise for VIP with Q4 and FY19 figures growing almost 20% and 26% YoY respectively both in standalone and consolidated basis.
  2. PBT and PAT have fallen drastically for the quarter with a YoY decline of 42% and 43% YoY respectively on a standalone basis. These declines are lower in consolidated terms at 32% and 28% respectively.
  3. The company has earned modest profits for the year with consolidated profits rising 14.6% YoY while standalone profits rose 8.6% YoY.
  4. The main reason for the drop in profitability seems to be the sharp rise in raw material prices coupled with the company passing on the increased costs in a phased manner so as to preserve market share in lower margin products.
  5. The Q4 sales growth was mainly driven by entry-level products which have adversely affected the product mix and have lowered profits for the company.

Investor Conference Call Highlights

  1. The company registered a volume-driven sales growth of 25% and a decline of 5% in per piece realization due to the change in the product as mentioned above.
  2. Adding on to this, the depreciation of the rupee and rise in basic custom duty has adversely affected the company as most of the raw materials have to be imported from abroad.
  3. Due to competitive pressures, the company has refrained from any price hikes, resulting in lower profit margins for the quarter.
  4. To combat the above changes, the management will be undertaking price increases in the new financial year. They will also introduce changes in their product offerings to improve the brand mix and enter into negotiations with vendors to reduce costs.
  5. In Bangladesh, Q4FY19 revenues have nearly doubled as compared to Q4FY18 while profits have grown 47% YoY.
  6. FY19 revenues for Bangladesh have grown 127% YoY with profits growing 84% YoY. The company is expecting this growth trend to persist as operations in the country expand.
  7. The company’s days of inventory have risen as the sales for soft luggage were not as prolific in H2FY19 as in H1FY19 leading to inventory levels rising to current levels. The company expects to remedy this by the end of Q2FY20.
  8. The entry level products under the Aristocrat brand have risen the most in FY19. Other than these, backpacks are another segment which has seen higher volume growth than the company average.
  9. The management of the company feel that the growth shown in FY19 has been in line with the industry growth.
  10. The management see sales growth slowing down in FY20 as they try to bring profit margins up to reasonable levels.
  11. The company sees institutional sales to rise in the future as more and more companies view luggage as a good consumer item that can be used in sales and other promotional schemes. Also luggage has become a good neutral gifting option for organizations leading to higher expectations of institutional sales for the company’s products.
  12. The price increases will take place across all portfolios and they will be done in such a way to ensure that gross contribution from each brand remains roughly the same.
  13. The company is expected to introduce price hikes from 5% to 8% across all of its brands and channels by July this year.
  14. The backpacks segment is expected to continue to grow at the current pace of 30% to 35%.
  15. The advertising spending on the new promotional campaign for the VIP brand has come at 5% to 7% of sales.
  16. The company is aiming for brand repositioning with the above campaign. They are specifically targeting holiday travel as it has not been targeted by any other such product line before.
  17. The company still holds a dominant market share of more than 60% in almost in all of its categories.
  18. The company expects better margins in Q1FY20 as compared to Q4FY19 as negotiations with Chinese suppliers concludes.
  19. There has been a slight slowdown in profit growth in Bangladesh operations in FY19 as compared to FY18. This is a direct result of a 40% hike in workers’ wages which has led to a higher rise in expenses. The management expects to bring back previous profit margins in the near future.
  20. The management insists that their primary focus shall remain on driving profit growth rather just sales volume growth.
  21. In terms of capacity, Bangladesh operations yield around 10% of overall volumes.
  22. The company is looking to reduce dependence on buying from China and increase dependence on sourcing soft luggage from Bangladesh as they will not need to pay import duties on imports from Bangladesh. Going forward, in the next couple of years, the management expects the volume contribution of Bangladesh operations to rise to 25%.
  23. In closing comments, the management reiterated their desire to bring back gross margins up to strong and sustainable levels. They are fairly confident of the brand strength of VIP and are prepared for a small dip in sales volumes in their quest for higher gross margins.

Analyst’s View

VIP has been the market leader in the soft and hard luggage segment in India for a long time now. The company is one of the biggest luggage manufacturers in the world by volume. Even while enjoying these advantages, the company has gone through the same problems of rising costs and dipping profits as the rest of the industry. But even then the management of the company is confident in it’s brand’s resilience and have identified raising gross profit margins as their number one priority. They are even ready to take some dip in volume growth if necessary to achieve their goal of driving profits. This is a hallmark of a good company where they are not chasing short terms gains of maximizing revenues and instead focussing on maintaining company reputation and delivering long term value generation by focussing on making their business more profitable. Thus, VIP presents itself as a decent investment option for anyone willing to put money on the luggage segment and indirectly the travel theme.

 


Q3 2019 Updates

Financial Results & Highlights

Standalone Financials (In Crs)

Q3FY19 Q3FY18 YoY % Q2FY19 QoQ % 9M FY19 9M FY18 9M% Change
Sales 432.69 339.91 27.30% 404.85 6.88% 1357.58 1061.85 27.85%
PBT 30.56 36.02 -15.16% 46.94 -34.90% 1189.78 932.41 27.60%
PAT 19.56 24.08 -18.77% 31.04 -36.98% 110 86.16 27.67%

Consolidated Financials (In Crs)

Q3FY19 Q3FY18 YoY % Q2FY19 QoQ % 9M FY19 9M FY18 9M% Change
Sales 432.83 339.91 27.34% 403.32 7.32% 1356.09 1060.76 27.84%
PBT 35.42 39.59 -10.53% 49.18 -27.98% 178.75 136.46 30.99%
PAT 23.83 26.89 -11.38% 32.81 -27.37% 119.99 91.7 30.85%


Detailed Results

  1. VIP has seen revenues stay on a rising path with a growth of 27% YoY.
  2. The PBT and PAT have been down 15 and 18% YoY and almost 35% down QoQ.
  3. This mainly due to increase in raw material costs and increase in purchase of stock in trade.
  4. But overall 9MFY19 numbers were very good with Sales, PBT and PAT all growing more than 27% YoY signalling they are still on the right track as far as the performance in the current year is concerned.

Investor Conference Call Highlights

  1. Sales mix has been mainly volume based.
  2. EBITDA margin gone down as against last year. Mainly forex losses and increased import duty is the reason for the margin to go down.
  3. Bangladesh subsidiary has grown phenomenally for Q3 and 9MFY19. Sales have doubled but profit has not grown by the similar amount because investment in capacity and higher operating expenses.
  4. Limited price increase, brand mix towards economy ranges and forex led to dip in the margin.
  5. Higher price increases and better negotiation with Chinese suppliers would lead to better margins going forward.
  6. Volume growth was higher because more backpacks and aristocrats were sold compared to high-end VIP and Carlton brands.
  7. Management is working towards improving the margins in the lower end products as they see a lot of traction in both backpacks and aristocrats.
  8. The company maintains the policy of not hedging the foreign exchange as cost of hedging is too high. They plan to take periodic price hikes to compensate for the rupee depreciation.
  9. Margins will be under pressure for Q4 as well, but from Q1FY20 margins should start inching upwards.
  10. Other expenses, which include freight and warehouse rents, has grown significantly as volumes gone up.
  11. VIP is a late entrant in the lady’s bag segment, but are among the top two fastest growing brand and have a much wider distribution network, as compared to competitors like Lave & Expeda.
  12. Ecommerce sales have been disappointing at less than 10% of total sales.
  13. Revenues from in-house production stand at 25%, the rest 75%is outsoiurced.
  14. There is high cost inventory present in Q3 which may still remain in Q4, which would put pressure on the margin.
  15. Sales growth rate of 20-25% in FY20 is achievable even at this high base.
  16. Price negotiation with China is fairly robust according to management.

Analyst’s View

VIP has been the industry leader in its segment in India for a long time. They have a big range of offerings to cater to almost all segments of customers. But despite the phenomenal revenue growth seen in the past, the company failed to maintain its margins, leading to fall in profits in the current quarter. Its competitors are in the same position of increasing revenues with declining profits. Thus at the end of the day, the key to success comes down to its brand loyalty which shall determine what reaction they will get when introducing price hikes to conserve margins. Given VIP’s strong brand power and their wide range of well-known products, it would be interesting to see how they fare against their competitors when introducing price hikes. However, despite current headwinds of rising material costs and forex, VIP stand in pole position to address the growing demand for all kinds of bags that a growing country like India can generate. Thus VIP stands as a reasonable bet for investors looking to tap into the themes of rising disposable income, rising middle class and rising travellers for many years to come.

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