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Higher gross margins surprise positively…

About the stock: VIP Industries is one of Asia’s leading seller/manufacturer of various type 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: 44% share)

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

Q4FY23 Results: VIP Industries reported a moderate operational performance as the company faced challenges pertaining to a major fire at its Bangladesh subsidiary (contributes ~10% of consolidated revenues).

* On a favourable base, revenue grew 27% YoY to | 450.7 crore but down 14% QoQ (revenue run rate was | 500+ crore in FY23)

* On the positive side, the company recorded one of its highest ever gross margins of 57.9% (last six quarter’s average: ~50%) mainly owing to softness in crude prices and constant efforts in enhancing share of in-house manufacturing (~70% currently)

* Hence, despite negative operating leverage, higher gross margins resulted in EBITDA margins improving 40 bps QoQ to 14.3%

What should investors do? VIP’s share price has grown by ~70% over the past five years (from ~| 400 in May 2018 to ~| 630 levels in May 2023). Luggage being a proxy play to the travel & tourism industry was among the worst impacted sectors owing to pandemic in FY21, FY22. VIP recorded a healthy recovery in FY23 with revenues crossing the | 2000 crore mark for the first time. We expect VIP Industries to be a key beneficiary of increased movement of leisure and business tourist both domestically and internationally.

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value VIP at | 750 i.e. 40x FY25E EPS

Key triggers for future price performance:

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

* Enhanced focus on ladies’ hand bag (Caprese brand, 5% of sales) and increase in market share in e-commerce channels are key focus areas

* Stabilising RM prices (crude derivative) and increased proportion of inhouse manufacturing both from India and Bangladesh to translate into better margins, going forward

Alternate Stock Idea: Apart from VIP, in our retail coverage, we also like Trent.

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

* BUY with a target price of | 1730/share

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