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Weak Q2; inventory liquidation cut margins

VIP Industries Q2FY25 print was below our estimates; Consolidated Revenue/EBITDA/PAT declined 0.3%/104.1%/375.6% YoY. Despite Q2 being dull with lower wedding/festive days VIP clocked 18% volume growth with flat revenue led by, (1) soft luggage inventory liquidation and weak retail channel, (2) deep discounting on E-com channel during EOSS contributing 45% of sales, (3) lower realization due to brand mix, (4) capacity utilization in Bangladesh, and (5) competitive pressure from D2C players. Hard luggage contributed 78% vs 68% in Q2FY24. VIP cut the old inventory by Rs1.7bn in Q2. Gross margins cut to 45.1% (-1043bp) due to higher discounting in E-com channel and liquidation of soft luggage inventory. With rising ad-spends, others expenses (+3.1%), and lower employee cost (- 12.8%) resulted cut in EBITDA margin to -0.4% (-1008bp). VIP said its market share now improved to 40% in Q2. Management remained buoyant on demand recovery in Q3 led by higher wedding days/festivals to deliver strong growth driven by premium products yet target to deliver +12.5% operating margins. With weak Q2 performance we cut our earnings and downgrade to ADD with a revised TP of Rs508 (implying 35x Avg.FY26E/FY27E EPS).

Deliver 18% volume growth on the back of strong growth in E-com channel

VIP’s Q2FY25 consol. revenue remained flat at Rs5.5bn. Despite Q2 being dull with lower wedding/festive days VIP clocked 18% volume growth with flat revenue led by, (1) soft luggage inventory liquidation and weak retail channel, (2) deep discounting on E-com channel during EOSS contributing 45% of sales, (3) lower realization due to brand mix, (4) capacity utilization in Bangladesh, and (5) competitive pressure from D2C players. Hard luggage contributed 78% vs 68% in Q2FY24. VIP cut the old inventory by Rs1.7bn in Q2. That said, management claimed that its market share now reached ~40%. In fast growing value segment Aristocrat leads, yet Carlton drives premiumization expected to gain market share. Kiara collection by Caprese saw strong traction across platform. Growth in international business remained muted. The company said it has further liquidated old inventory by Rs1.7bn during Q2. With strong growth strategy in place coupled with execution and brand building driving distribution network to support future growth in our view

Gross margins declined to 45.1% (-1043bp) due soft luggage liquidation and discounting

Gross margins declined to 45.1% (-1043p) due to higher discounting in MT/E-com channel, liquidation of soft luggage inventory and under absorption of overhead costs. With rising adspends, others expenses (+3.1%), and lower employee cost (-12.8%) resulted cut in EBITDA margin to -0.4% (-1008bp). Management alluded with focus on reducing soft luggage inventory and higher contribution from hard luggage and tech enabled luxury offering to drive EBITDA margins to ~12.5% exit FY25. Further scale up in institutional business including gifting segment is expected to strengthen premium portfolio and influence margins in our view

Valuation and key risks

We reckon VIP’s growth to be driven by, (1) focusing on development, designing and innovation to cater every segment of the market, (2) increasing ASP by driving contribution from premium NPD, (3) strengthening supply chain, and (4) significant growth in MT/e-com channel. Further with new management team in place we expect improved execution and speed in decision making to lift overall revenue momentum. Despite near team weakness in performance we are optimistic on VIP’s growth story. Though with weak Q2 performance we cut earnings for FY25E/FY26E by 78.9%/22.6% and downgrade to ADD with a revised TP of Rs508 (implying 35x Avg.FY26E/FY27E EPS). Risks: local competition, significant rise in input cost, prolonged disruption in Bangladesh facility.

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