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Healthy demand boosts topline

About the stock: VIP Industries is one of Asia’s leading seller/manufacturer of various types of luggage, 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%+

Q2FY22 Results: Gradual reopening of economy and higher push towards domestic travel had perked up demand for luggage during Q2FY22.

* On a favourable base, revenue grew 221% YoY to | 330.6 crore (80% of preCovid levels). Reported its highest revenues in the last seven quarters

* Gross margins for the quarter improved 840 bps YoY to 47.1% but declined 380 bps QoQ due to sharp inflation on China imports for both RM and finished goods

* On the back of significant cost saving measures, VIP reported healthy EBITDA margin of 12.1% with absolute EBITDA of | 41.8 crore (vs. loss of | 22 crore in Q2FY21)

What should investors do? VIP’s share price has grown by ~4.1x over the past five years (from ~| 132 in November 2016 to ~| 545 levels in November 2021).

* We maintain BUY recommendation on the stock with a revised target price

Target Price, Valuation: We value VIP at | 635 i.e.43x FY24E EPS (earlier TP: | 525)

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 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 (of | 180 crore cost savings in FY21E, ~50% expected to sustain in FY22E) 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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