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‘BAG’ It Now!

We present an Investment Idea on VIP Industries (VIP) with a fair value in the range of Rs.550-600. The company is the undisputed market leader in the organized luggage industry with a market share of ~46%. Given the company’s presence across different product categories, pricing points and wide distribution platform, we believe the company is in a sweet spot to capitalize on the growth with economies opening up. Further, adding to our enthusiasm are strong cost-cutting initiatives and an increase in sourcing from Bangladesh. These initiatives coupled with strong FCF generation and improving return ratios are likely to be the catalyst for growth going ahead.

Cost rationalization to aid during tough times:

With the onset of the pandemic, the company started placing more emphasis on cost reduction initiatives like shutting down of close to 100 stores, resulting in lesser manpower cost coupled with rent waivers and rationalizing of ad spends which helped the company in reducing its overall fixed cost. This has led to a total saving of close to Rs1.8bn, the company expects close to 50% cost saving to be sustainable over the next couple of years.

Bangladesh operation to propel margins expansion:

The Company’s Bangladesh manufacturing facility provides it with the first-mover advantage in terms of cost rationalizing, which is likely to help it stay clear of the competition. VIP anticipates 60- 70% of its requirement to be fulfilled from Bangladesh, which substantially would reduce the overall dependency on China. This is also likely to improve margins as costs are ~15% lower compared to the products when sourced from China.

VIP is in a sweet spot in a largely oligopoly market:

The overall luggage industry is valued at close to Rs9,500cr, which has been largely dominated by unorganized players (~58% of the market), however with the onset of GST, the share of organized players has increased from 30% to ~40%. Within the organized players we believe VIP is the market leader with close to 46% market share. We believe the company's position across the value chain gives it an advantage over its peers. Further, the widespread distribution network is likely to keep VIP's ahead of the competition.

Outlook-

With normalcy returning by FY24E, we expect revenue growth of ~12% CAGR between FY20-24E. Focus on higher growth categories, cost optimization, better sourcing and operating leverage are likely to result in OPM improvement by close to 230bps to 19.5%, implying EBITDA growth of ~16% and net profit growth of ~34% during this period. ROE and ROCE should improve from ~19% and 30% in FY20 to ~30% and 36% in FY24E. Stock is trading at ~24.7x FY23E and ~15.8x FY24E; we believe the current valuation is quite compelling as it had seen a similar strong re-rating during FY18- 20 when GST, improvement in demand, increasing return ratios played out. We estimate fair value of the stock in the range of Rs.550-600.

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