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Set for robust holiday season; managing RM inflation key monitorable…

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

Company update: We recently interacted with the management to get an insight on the demand scenario and concerns regarding RM inflation.

Despite initial hiccups in January (omicron variant), demand for luggage has been decent in Q4FY22 with the recovery rate expected to be 90%+

Anticipating robust demand during peak travelling season with revenues expected to surpass pre-Covid levels in Q1FY23E

In terms of input cost inflation, the company has raw material/FG inventory, which would suffice till Q1FY23 and support its gross margins (48-50%). It has also taken a price hike of ~5% in mid-March in certain categories

What should investors do? VIP’s share price has grown by ~3.7x over the past five years (from ~| 200 in March 2017 to ~| 730 in March 2022). Luggage being a proxy play to the travel & tourism industry was among the worst impacted sectors owing to the pandemic in FY21/22. With demand greenshoots visible, 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 with a revised target price

Target Price and Valuation: We value VIP at | 850 i.e. 50x FY24E 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

Given its healthy balance sheet (net debt free), we expect VIP to be able to effectively manage in a challenging environment

We expect the company to reach pre-Covid levels by FY23E and model revenue CAGR of 53% in FY21-24E (on a favourable base). Re-engineered fixed overheads and increased proportion of in-house 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 economy unlock theme

BUY with a target price of | 1330/share

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