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Cost optimisation, strong b/s to tide over tough demand scenario…

The Covid-19 pandemic continues to have a grievous impact on the global travel industry and retail environment. Revenues in Q2FY21 de-grew 75% YoY to | 102.8 crore. However, VIP was able to materially reduce operating overheads by 60% (employee, other expenses down 49%, 66% YoY, respectively), which curtailed EBITDA losses. EBITDA losses narrowed down QoQ to | 22.1 crore (Q1FY21: | 57.8 crore). It has identified and is implementing close to ~ | 180 crore fixed cost savings in FY21E of which it believes ~50% will be sustainable in nature. Q3FY21E performance is expected to be relatively better due to festive season and wedding purchases. Also, with certain green shoots visible in domestic travel industry, demand can pick up pace from H2FY21E onwards. Given the healthy b/s, strong manufacturing capabilities in Bangladesh (soft luggage), we expect VIP will be able to effectively manage through the challenging environment. While revenue recovery may take longer time, structural changes in fixed overheads will lead to faster recovery in profitability terms.

Key conference call takeaways i) The management indicated that pandemic has the hit travel industry the hardest and may have pushed the luggage industry two to three years back (luggage being proxy play), ii) to minimise cash burn, VIP has significantly rationalised fixed overheads from | 40 crore/month to | 24 core/ month, iii) it will be cutting on advertising and marketing spends and has already shut down 100 (out of 250) non-profitable EBOs, iv) liquidation of existing inventory putting pressure on gross margins, v) Bangladesh manufacturing currently utilised for manufacturing masks (run rate: | 3 crore/month) to absorb fixed overheads, vi) expects manufacturing operations to resume from Q3FY21 onwards, vii) it is planning to manufacture handbags in its Bangladesh facility (earlier used to be imported from China), viii) share of ecommerce increased from 7% to ~27. Gross margins are generally lower for e-commerce channel. To address this, the company will engineer products specifically for the channel, ix) to consolidate its manufacturing operations, VIP has transferred its capacities from Haridwar plant to its Nashik plant. Profit on sale of land and building would be ~ | 12 crore.

Valuation & Outlook

The company is well placed in the liquidity position as it has borrowing limits worth | 300 crore. While VIP has withdrawn ~| 200 crore, the company has not utilised the same (cash & investments: | 206 crore as on H1FY21). VIP has, over the years, maintained balance sheet prudence with stringent working capital policy, virtually debt free status and healthy RoCE: 30%+. Owing to its strong balance sheet and being market leader, its business model has the inherent ability to tide over tough market conditions better than peers. Furthermore, strong manufacturing capabilities in Bangladesh (for soft luggage) give VIP an edge over its peers who depend mainly on import. We upgrade the stock from HOLD to BUY with a revised target price of | 370 (35x FY23E EPS).

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