VIP Industries: Recovery Is on The Cards as Demand Improves

Summary

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• 3Q results should be able to seek support demand recovery and festive season.
• Focus on E-commerce channels should help improve business of VIP Industries. Gross margins will be protected by producing products particularly for this channel.
• Once schools and colleges are fully opened, demand for backpacks should see a fast recovery.

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Overview of VIP Industries Limited

VIP Industries Limited is Asia’s largest and world’s second largest luggage architect, having its headquarters in Mumbai. Its journey started in 1971 when first VIP suitcase was manufactured, and this brand has seen phenomenal growth since. In fact, to date this company sold over 60 million pieces of luggage to travellers and became a leading manufacturer of hard and soft luggage in Asia. It has a goal to make travel simple and convenient. The company’s brands include VIP, Skybags, Carlton, Aristrocrat, Alfa and Caprese.

Growth Enablers of VIP Industries Limited

• Reduction Seen in Expenses in 2Q21: VIP Industries released its 2Q21 results and the company has seen reduction in overall expenses. Overall expenses were down 41% on last year’s 2Q. In 2Q21, expenses were INR62 Cr and in 2Q20 expenses were INR153 Cr. Employee costs were down 49% & other expenses by 66%. It saw reduction in its expenses as there were reductions in rent, store closures, rationalization in manpower cost and elimination of all discretionary spends. VIP Industries has been focusing on controlling costs and rationalizing it. In its conference call, the company made it clear that fixed costs which used to be INR40 crores per month at consolidated level last year will be INR24 crores per month in this year. VIP Industries plans to cut on advertising and marketing spends and the company has shut down 100 non-profitable EBOs. Focus on cost management is mandatory given current state and environment as travel industry has seen brunt of COVID-19 lockdown.

 

• Business Should See Recovery in 3Q: VIP Industries saw its revenues getting impacted in 2Q21 because of COVID-19. Revenues were 26% of previous year’s September quarter at INR108 Cr. Gross margin was at 42% principally because of higher discounts and high mix of India produced goods sale rather than Bangladesh production. Demand recovery should be visible in 3Q21. VIP Industries says that it is still early to decide recovery. UK, Europe and North America have been facing different sort of recovery as compared to China and South East Asian countries. As more and more offices are opened, demand should see some improvement. 3Q has shown good pick-up and results should show benefits of festive season and pent-up demand on account of marriages and schools re-opening. Some revival has also been seen in travel industry in domestic sector.

 

• Focus on International Markets: VIP Industries seems to be positive about getting some international business. It stated that it is not even meeting 50% of requirements from Bangladesh. Markets have now gone down and it will try and get more sales from abroad which are not very much presently. Within a year, VIP Industries plans to start expanding Bangladesh operations for international market. Conference call of 2Q21 highlights that the company seems to be in a position to get some market share from international market.

 

• Recovery Patterns Should Determine Growth: As Indian economy is on a path to recovery, schools and offices should be re-opened which can help business of VIP Industries. There is still uncertainty about revival in travel industry. The company’s conference call highlighted that UK, Europe and North America have been seeing a different sort of recovery in comparison to China and South East Asian countries. At this point in time, it’s quite difficult to determine pace of recovery in India.

 

• Contribution from E-commerce Channel Should See an Improvement: Due to COVID-19, it is undeniable that dependency on E-commerce channels have increased. Commentary from VIP Industries exhibits optimism about this channel. The company started growing in absolute terms in E-commerce from September onwards and it feels that E-commerce should act as a main channel which will stay. E-commerce channel should lend some support to business of VIP industries this year and years to come. Over long-term, the company expects that E-commerce sales should be able to form 20-25% of total revenues. VIP Industries will shield its gross margins by specifically creating products suited to this channel. That is to say that VIP Industries will focus on managing costs to get a desirable gross margin. By doing this, price fall will have a minimal impact because costs are lower.

 

• VIP Industries Can Capitalize on Sectoral Opportunities: India is counted as most digitally advanced traveller nation in terms of digital tools used for planning, booking, and experiencing a journey. Globally, India was 3rd largest in terms of investment in travel and tourism as it saw an inflow of USD45.7 billion in 2018, making up for 5.9% of total investment. In 2019, Indian government reduced GST on hotel rooms with tariffs of INR1,001 to INR7,500 per night to 12% and above INR7,501 to 18% so that India’s competitiveness increases as a tourism destination.

 

Lower Valuations Favour Going for a Buy

Travel and tourism industry of India has huge growth potential. Industry is also looking forward to expansion of e-Visa scheme. This should double tourist inflow in India. Travel and tourism industry is capable to see an expansion by 2.5% principally due to higher budgetary allocation and low-cost healthcare facility. This is as per joint study conducted by Assocham and Yes Bank. VIP Industries hinted that demand for backpacks is supported principally by schools and colleges and there is quite uncertainty as to when schools and colleges will re-open. However, when situation gets normal, demand should see fast recovery. Demand should also improve when offices re-open and domestic travel picks up.

Total market cap of VIP Industries was ~INR4,96,023.78 lakhs and free float market cap was ~INR2,32,765.87 lakhs. With current price of INR351.00, stock trades at ~44.37x of FY20 EPS while sectoral average is ~48.54x. This hints for long position.

 

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Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.