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VIP Industries Q1FY25 print was below our estimates; Consolidated revenue grew 0.4%, yet EBITDA/PAT declined by 38.8%/87.4% YoY. Despite subdued demand (lower wedding days/ severe heatwave), VIP clocked healthy volume growth of 11% led by, (1) muted Apr, volumes for May/Jun grew 31%/36%, (2) faster growth in E-com channel value/volume grew 66%/73%, (3) 16% growth in ASP, (4) rising share of hard luggage at 56%, and (5) strategic price adjustments to cut soft luggage inventory. VIP cut the inventory by Rs1.2bn in Q1. VIP said it is watching events in Bangladesh and its factory is based in EPZ zone which saw normalcy. Gross margins cut to 44.3% (-515bp) due to higher discounting in E-com channel and liquidation of soft luggage inventory. With rising ad-spends, others expenses grew +4.3%, though employee cost cut by 11.2% YoY. EBITDA margin fell to 7.7% (-495bp). Management remained buoyant on demand recovery in Q3 led by higher wedding days and festivals to deliver +15% growth strengthening its premium product contribution yet deliver +15% operating margins. With weak Q1 performance we cut our earnings and retain BUY with a revised TP of Rs559 (implying 37x FY26 EPS).

Deliver 11% volume growth on back of 73%/66% volume /value growth in E-com channel

VIP’s Q1FY25 consol. revenue remained flat at Rs6.4bn. Despite subdued demand (lower wedding days/ severe heatwave), VIP clocked healthy volume growth of 11% led by, (1) muted Apr, volumes for May/Jun grew 31%/36% MOM, (2) faster growth in E-com channel value/ volume grew 66%/73%, (3) 16% growth in ASP, (4) rising share of hard luggage at 56%, and (5) strategic price adjustments to cut old inventory. That said, management claimed that it has now reached ~40% market share. In fast growing value segment Aristocrat leads, yet Carlton drives premiumization expected to gain market share. Kiara collection by Caprese saw strong traction across platform. Growth in international business was led by Asia. VIP liquidate inventory by Rs1.2bn (Rs0.8/0.4bn soft/hard luggage) during Q1. Management said it is watching events in Bangladesh closely as the factory is based in EPZ zone it saw normalcy now. Bangladesh capacity is fungible for manufacturing soft and hard luggage contributing ~20% of sales. With strong growth strategy in place coupled with execution and brand building driving distribution network to support future growth indicating structural story

Gross margins declined to 44.3% (-515bp) due soft luggage liquidation issue and discounting

Gross margins declined to 44.3% (-515p) due to higher discounting in MT/E-com channel, liquidation of soft luggage inventory and under absorption of overhead costs. With lower employee cost (-11.2%), higher ad-spend driving others expenses (+4.3%) cut EBITDA margin to 7.7% (-495bp). Management alluded with focus on reducing soft luggage inventory and higher contribution from hard luggage and tech enabled luxury offering to drive EBITDA margins to ~15% exit FY25. Further scale up in institutional business including gifting segment is expected to strengthen premium portfolio and influence margins in our view.

Valuation and key risks

We reckon VIP’s growth to be driven by, (1) focusing on development, designing and innovation to cater every segment of the market, (2) increasing ASP by driving contribution from premium NPD, (3) strengthening supply chain, and (4) significant growth in MT/e-com channel. Further with new management team in place we expect improved execution and speed in decision making to lift overall revenue momentum. Despite near team weakness in performance we are optimistic on VIP’s growth story, yet given weak Q1 performance we cut earnings for FY25E/FY26E by 15.0%/7.8% and retain BUY with a revised TP of Rs559 (implying 37x FY26E EPS). Risks: local competition, significant rise in input cost, prolonged disruption in Bangladesh facility.

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