Murphy’s Law says “Anything that can go wrong will go wrong“.
Today, the management of VIP Industries would probably agree to it more than anyone.
We have extensively covered (here and here) the progress of VIP Industries over the last seven quarters.
Recently, COVID-19 has led to many ugly surprises for VIP that no one could have envisaged.
And that reminds me of this quote by Robert Rubin:
Condoms aren’t completely safe. My friend was wearing one and he got hit by a bus.
Risks often play out in the most unanticipated ways.
So, what has gone wrong for VIP Industries?
Many things at once.
- Air travel came to a halt in March 2020. Normalcy in air traffic is still some distance away.
- Work from Home became the norm for office goers and school students.
- Weddings got postponed or were done in a very small setting.
- Modern Trade Channel (the strongest of all sales channels for VIP), like shopping centers and malls, was completely shut.
- Imports from China got disrupted.
- Management lost its cool on the Q1FY21 result conference call, due to which investors’ confidence was lost.
The best quarter for the company (April to June) was this time(Q1FY21) a complete washout.
Revenues dropped 90% YoY.
The company declared a loss for the quarter even at operating level.
So indeed, anything that could go wrong for VIP did go wrong.
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But things were completely different a few quarters ago.
This is what Mr. Dilip Piramal, Chairman of VIP Industries, said in January 2019:
At the end of our last year’s results, for the first time, I made a forecast for five years. I had said that in the last five years, our compounded annual growth rate (CAGR) for profit after tax was 31%. That means in five years, we have increased four times and I said we will maintain the same thing for the next five years.
Now I do not want to change my guidance at all and the guidance remains the same. Our PAT for the next five years starting this fiscal year will be 31% and that means in five years we will increase by four times. I am quite confident that we will do it and maybe after the second year, I can even increase on that target but it is too early to say anything. Only the third quarter out of the 20 quarters has just finished.
The end of FY21 will be three years from the date of that ambitious guidance.
That brings us back to Murphy’s Law. When we think about Murphy’s Law, we say, “whatever can go wrong will go wrong.” However, another important fact is that Murphy was an over-optimist and that led to his downfall. The lack of preparation and planning on Murphy’s part made him go wrong.
A similar trait could be found in Mr. Dilip Piramal’s above quote.
You may say that nobody can prepare for COVID-19.
However, a few things could have been done even in a no-COVID world like:
- More focus could have been given to the fastest growing e-commerce channel. COVID or No-COVID, that is going to be the future anyways.
- The above would have ensured lesser dependency on owned stores, 100 of which had to be closed during COVID-19 as a cash conservation exercise.
- Over-dependency on China for sourcing raw materials was always a risk. The management was aware of it. They could have been more pro-active in ramping up the Bangladesh facility rather than reacting after a COVID-19 like incident.
- Over-optimism visible as late as February 2020 when COVID had already started hitting China and other parts of the world and was on the verge of entering India.Mr. Piramal said this at that time:
I am very confident that the problems we are facing in the sales management will get sorted in the next three-six months. Our sales will go up, our margins are very good and that is why in spite of absolutely flat sales I am very optimistic. It is not acceptable that we do not grow at all when our competition is growing. But why I am not worried is because we are taking remedial steps. The margins are good and once the sales go up and the margins remain, then the profitability will definitely go higher.
Six months have passed since the above statement of Mr. Piramal.
No visible signs of sales picking up for VIP.
In fact, in the 2019-20 Annual Report, this is what the management has said about the outlook of the business for the FY20-21.
So now that whatever could have gone wrong has already gone wrong, let us take a step back.
Forget about what is happening just now.
And go back to the drawing board.
Start again with the business characteristics of VIP and how it can be beneficiary of some of the major Megatrends in India:
- IT Revolution: No direct impact. However, more multi-country and multi-city travel for onsite opportunities in the IT sector can propel demand.
- Urbanization: More urbanization, more travel. More travel, greater demand for travel products.
- Demographic evolution: Younger population, more demand for branded products in luggage.
- Consumption boom: Higher-income per capita, more spending on discretionary items like travel products.
- Women in the workforce: More women in the workforce, higher demand for women-focused products like handbags.
- Financial deepening: No direct impact.
- Digital transformation: No direct impact.
- Unorganized to organized shift: Biggest player in the industry, a big beneficiary from rising demand for branded products.
- Culling of ‘Dwarfs’: Biggest player in the industry, a big beneficiary from industry consolidation.
You can see above that VIP industries is a direct beneficiary of at least 7 out of the 9 megatrends.
And these megatrends are:
- Structural shifts that are long term (30-40 years) and have irreversible consequences for the world.
- They cause disruption, create new opportunities and threats which lead to new winners and losers.
- They transcend geographies, generations, and governments.
- Identifying megatrends requires a very broad perspective to see the scope of the trend and narrow focus to identify the specific trend from the rest of the noise.
COVID-19 has surely disrupted the current scenario of business.
However, if VIP continues to be a beneficiary of some of these Megatrends,
COVID can very well delay its journey.
It cannot stop it.
The market is always forward-looking.
What has happened has happened.
As an investor, we have to look beyond the current scenario and try to gauge how much time it will take for VIP’s business to come back to normalcy.
And is the current valuation offering a margin of safety?
And that’s not an easy thing to do.
This brings us to Murphy’s Second Law:
Nothing is as easy as it looks.
P.S. If you are interested to know more about Megatrends, watch this video: https://www.youtube.com/watch?v=G1d-42_hZ0E&t=30s
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