Published on 21/05/2019 10:23:05 AM | Source: Equirus Securities Ltd

Update On VIP Industries Ltd By Equirus Securities

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Volume growth remains strong; expect solid profit growth in 2HFY20 — revise to LONG

VIP’s 4QFY19 revenues grew 20% yoy to ~Rs 4.35bn, slightly below EE, with strong volume growth of 25% yoy. Consolidated EBIDTA slid 27% yoy to Rs 396mn, sharply below EE, while EBIDTA margins plunged 588bps yoy to 9.1% (-144bps vs. EE) on higher-priced inventory and product mix changes. We believe profit growth in 1HFY20 would be muted as the 1QFY18 base effect plays out and higher-priced inventory hurts margins. We however expect strong profit growth in 2HFY20 as recent currency appreciation benefits kick in and the Bangladesh facility yields further gains. We broadly maintain FY20/FY21 EBITDA estimates. Despite expectations of muted profitability for the next 1- 2 quarters, we revise VIP to LONG (from ADD) on strong profit growth likely from 2HFY20. Our Mar’20 TP of Rs 500 (Rs 523 earlier) is set at a 40x TTM EPS of Rs 12.5.


Volume growth remains strong, esp. in lower priced products:

Sales grew 20% yoy to Rs 4.35bn, 2% below EE on 25% yoy volume growth. Healthy growth was seen across brands and trade channels. Aristocrat continued to see the highest growth across brands as the lower-priced segment remains the fastest growing in the industry. The VIP brand is being relaunched during the current quarter with strong advertising support; the brand is expected to do well during FY20. Besides, backpacks continue to see strong growth while sales of hard luggage, especially polycarbonate bags, have been picking up. We expect VIP to post strong sales growth in FY20E led by preference for branded products and higher number of wedding days vis-à-vis FY19; hence, we broadly maintain our sales estimates for the year.


Gross margins lower, working capital increases sharply:

Consolidated gross margins stood at 47.5%, down 713bps yoy and 22bps qoq. Gross margins were hit by higher prices of imported products due to INR depreciation and import duty hikes. We believe gross margins would improve in 2HFY20 as higher-priced inventory is phased out and price hikes come into play. EBIDTA margins slid 588bps yoy to 9.1%, 144bps below EE. Working capital increased significantly on account of (a) VIP being stuck with inventory of soft luggage and (b) higher receivables due to payment delays from CSD. Inventory increased from Rs 3.2bn to Rs 5.3bn while debtors from Rs 1.8bn to Rs 3bn. Debtor days are likely to improve during 1QFY20 while inventory will take 4-5 months for normalization.


Bangladesh capacity to be further scaled up to reduce currency risks:

During FY19, VIP doubled its Bangladesh capacity (~10% of volumes). The company is looking to further double the capacity during FY20. We believe that increasing capacity in Bangladesh is a good move and would aid margins going into FY21E. Key risks: RM cost inflation, lower demand and currency volatility.


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