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Buy VIP Industries Ltd For Target Rs.525

Spurt in gross margins a key positive surprise

About the stock: VIP Industries is one of Asia’s leading seller/manufacturer of various type of luggage’s, backpacks and handbags. VIP has a range of leading brands, positioned across entire price range, catering to value (Aristocrat) mid (VIP, Skybags) and premium (Carlton, Caprese) price points.

* Market leader in the organised luggage space (oligopoly market)

* VIP has, over the years, maintained balance sheet prudence with stringent working capital policy, virtually debt free status and healthy RoCE: 30%+.

Q1FY22 Results: Second wave significantly disrupted a seasonally strong quarter for VIP. The silver lining was reverting to its ~50% gross margins levels.

* On a significantly low base, revenue for Q1FY22 grew 411% YoY to | 206.2 crore, with revenue recovery rate coming in at ~37% (Q4FY21: 56%)

* Gross margins came in healthy at 51% vs. 42% in Q1FY21. Lower discounting, better product mix and higher proportion of in-house manufacturing goods (~90%) aided margins

* Posted a marginal net profit of | 1.9 crore after four consecutive quarters of losses.

What should investors do?

VIP’s share price has grown by ~3.5x over the past five years (from ~| 127 in August 2016 to ~| 450 levels in August 2021).

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value VIP at | 525 i.e.42x FY23E EPS (earlier | 420)

Key triggers for future price performance:

* Strong manufacturing capabilities in Bangladesh (for soft luggage) gives VIP an edge over its peers who depend mainly on imports

* Given the company’s healthy balance sheet (net debt free), we expect VIP to be able to effectively manage through the challenging environment

* Structural changes in fixed overheads (~50% sustainable in nature) will lead to faster recovery in profitability terms

* Luggage being the proxy to travel and tourism industry is well placed to benefit from recovery post relaxation on travel restrictions

Alternate Stock Idea: Apart from VIP, we also like Trent.

* Inherent strength of brands (Westside, Zudio, Zara) and proven business model position Trent as a key beneficiary of economy unlock theme

* BUY with a target price of | 1100/share

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