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Weakness in sales growth & margins continues

VIP Industries clocked sales of Rs5.5bn (+6% YoY), EBITDA of Rs0.53bn (-26% YoY) and PBT (before exceptional) of Rs0.19bn (-63%). Volumes grew by 10% for 2Q/1H. Sales growth remained subdued on account of weakness in CSD and Export sales (13% of sales in 1HFY24). Trade channel (online and offline) grew by 15% in 1H with ecommerce growing by 50%. Gross margins improved by 740bps on a YoY basis to 55.5%. Improved GM profile was on account of better product mix (+2%) and favorable polymer prices. Decline in EBITDA margins (-422bps) was largely on account of higher performance marketing expenses (Rs260mn in 2Q) related to e-commerce channel. Historically (pre-COVID) 1H is strong led by 1Q. Keeping weak 1H in context, we have cut our FY24/25 estimates by 27/18% respectively. We expect VIP to grow its sales/EBITDA/PAT at CAGR of 12/11/17% over FY23-26E. We downgrade to ADD valuing at 40x (earlier 43x) 1HFY26E EPS to arrive at target price of Rs638.

Weakness in growth and operating performance persists

Weakness in sales growth persisted led by CSD channel and international business. Sales contribution from these two declined from 17 to 13% in 1HFY24. CSD sales were impacted due to a largescale range refreshment while International business suffered with demand slowdown in middle east and increase in global China supplies. Slower secondary sales in Q1 impacted Q2 performance for primary driven offline trade channels like GT & MT. Growth was largely led by e-commerce channel, which grew by 50% and salience increasing from 15% in 1HFY23 to 21% in 1HFY24. OPM remained subdued (despite favourable mix by 2%) at 9.7% led by higher performance marketing spends (Rs260mn) for e-com. Growth rates will pick up in 2H due to strong marriage & festive season while margins are expected to improve by 500bps in 2H over 1H.

Improvement in premiumization trend in 2Q

Continued shift from unorganized to organized segment has led value segment to grow at a faster clip since the onset of pandemic. Contribution from mass premium (Aristocrat and Alfa brands) has increased sharply from 27% in 4QFY20 to 39% in 1HFY24. However, in 2Q premiumization trend picked up a bit wherein Skybags (premium range) grew by 10% while Aristocrat & Alfa by 8%. Management has guided that in coming quarters focus will be towards driving the premiumization trend.

Industry growth rate better compared to VIP

As per the management estimates, luggage industry grew its sales by 20-25% in 2Q vs. 6% growth for VIP. Management has alluded subpar growth (FY20-1HFY24) is on account of internal issues of past including frequent top leadership changes and weakness in premiumization trend due to shift in supply chain from China to Bangladesh. We believe the course correction exercise will take time and hence cut our earnings estimates.

Valuation and key risks

We expect VIP to grow its sales/EBITDA/PAT at CAGR of 12/11/17% over FY23-26E. We downgrade to ADD valuing at 40x (earlier 43x) 1HFY26E EPS to arrive at target price of Rs638

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