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We present an investment idea on Safari Industries with a fair value in the range of Rs 980-1,100. The company has undergone a paradigm shift after Mr Jatia acquired a majority stake and revamped the company’s strategy and business operations.

Over the years this has led to the company’s turnover increasing ~10x and market share improving from a dismal 2% to 18%. Currently, Safari Industries is the single largest brand in terms of sales volume. We believe the company is in a sweet spot to capitalize on growth with economies opening up and massive shift from unbranded/unorganized to branded luggage especially in the mass segment.

* Fastest growing luggage player: Safari has been the fastest growing company in the luggage industry with Sales/EBITDA CAGR of ~26%/~47% over FY14-20, respectively. The company is likely to remain the biggest beneficiary of the transition from unbranded/unorganised to branded/organized luggage and a faster growing mass market segment. Further, foray into high growth categories along with ramp-up of the distribution network (reducing dependency on CSD) will help the company in sustaining the growth momentum.

* Focus on profitable channels: The Company has a multi-channel distribution network covering CSD, Modern Trade, MBO, EBO, E‐Commerce, Institutional, Original Equipment (OE) and Exports with close to 9,300 points. With moderating real estate prices in metros, the company will be setting up EBOs going forward. Moreover, the company will continue to focus on e-commerce channels whose share in the revenue mix is likely to increase going forward. The Canteen Stores Department (CSD) segment has remained muted for the last five-six years owing to alleged pilferages in the channel.

* Sourcing improvement to counter margin concerns: While the luggage industry was reeling under pressure due to the pandemic, it was also hit by supply chain disruption. Prices of Polycarbonate (key raw material) had increased multifold and freight rates from China had almost increased 2x making it unviable. To counter this, the company is now expanding and focusing on Polypropylene as the main RMAT (cost ratio is 1:3, favoring Polypropylene). The company is doubling its capacity at Halol plant, which is likely to help the growth in hard luggage. For soft luggage, the company expects to move away from China and increase sourcing from vendors in Bangladesh and India. We believe these steps could act as a lever for margin expansion.

* Channel check reports encouraging: To understand the ground reality we visited Safari’s showrooms. Demand conditions are better than pre-covid levels and travel is up almost 2x. Consumers prefer products with good quality and affordable pricing. Notably, 60% of buyers had previously used Safari products and had come back looking for an upgrade in sub-Rs5,000 categories.

* Outlook: At CMP of Rs803, the stock is trading at 40x FY23E and 33x FY24E estimates. Safari has been growing faster than industry, driving superior valuations. Over the last three years (2018-20), the stock has traded at a mean PE multiple of 55x. We believe the company will continue its superior growth rate driven by higher growth in mass segment, market share gain from unbranded/unorganised players and efforts towards brand premiumization. We value the stock on 42x Sept 23 and arrive at fair value in the range of Rs980- 1,100.

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