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Ready to ‘pack’ a punch

We retain our positive stance on VIP Industries with a fair value in the range of Rs.660- 700. The stock has corrected close to ~25% from its high due to the emergence of the new Omicron variant. While that remains an important imponderable, we believe that the structural story, which is noteworthy, remains very strong. Further, we expect the company to be better prepared given its learnings from the recent past, should the new variant cause further disruption. What we also gather despite the severity of the second wave, the demand was pushed back only by around 45days, which further gives us confidence should such a scenario play out VIP would be well placed and come out of this stronger. Additionally, the company is working to streamline its supply chain by focusing on in-house manufacturing (expected to go up to ~60% from ~40%), providing a platform for future growth.

* Capacity expansion to allay any supply chain constraints - The Company has recently announced a capacity expansion plan for its Nashik and Bangladesh unit. It has envisaged a CAPEX of ~Rs.400mn-500mn out of which ~Rs.200mn will be spent on Bangladesh for its hard luggage capacity (80% CAPEX would be used for it, remaining for soft luggage) given that manufacturing in Bangladesh is ~10% cheaper than India. The Nashik plant will be used to increase its capacity for hard luggage, where the focus could be towards PolyPropylene for the faster-growing mass segment. The CAPEX is likely to be completed by April/May.

* Prudent pricing action- the company has taken a 4 -5% price hike to counter the increase in raw material cost. The new launches would be priced according to the trending RM prices. The company expects to reach ~50% gross margins levels in the next two quarters.

* Retail checks paint optimism- Ground reality appears very encouraging indeed. During our channels checks, the buoyancy was quite evident, with unmanageably huge crowds at outlets. Store managers indicated that demand for luggage has been better than before, with a lot of consumers looking for upgrades. The festive season has been very encouraging and the upcoming wedding season (~north of 20%) is more than likely to make up for previous years. Further, consumers’ strong desire to travel after almost two years was palpable. They also look at luggage as more as apparel nowadays with a need for change every 24 months. What further gives us confidence is strong commentary from Samsonite which acts as a leading indicator.

* Valuation and view: We have valued VIP at 40x on Sept 23 earnings to arrive at our estimated fair value. The company’s last quarter performance was just 20% below pre covid levels indicating a return to normalcy. With a focus on in-house manufacturing, we expect the company margins to recover to historical levels. With strong demand drivers as indicated by channel checks and strong margins drivers, we believe VIP Industries is well-positioned to capture incremental market share.

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