VIP Industries Ltd – Weak Yuan positive for VIP

Dated : 4th Sept 2019

Update on Indian market:

Domestic equity indices BSE Sensex and NSE Nifty fell over 2 percent on Tuesday. NSE Nifty ended at 10,798, down 225 points or 2.04 %. Market sentiment got impacted due to subdued auto numbers and a set of macroeconomic data like GDP data showing the country’s growth rate slumped for the fifth straight quarter to hit an over six-year low of 5 %. Growth of eight core industries dropped to 2.1 percent in July, mainly due to a contraction in coal, crude oil, and natural gas production. PMI data showed the country’s manufacturing sector activity declined to its 15-month low in August. The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) declined to 51.4 in August, its lowest mark since May 2018, from 52.5 in July. The Indian Rupee fell by 64 paise to reach 72 mark against the US dollar and sustained outflows by foreign portfolio investors (FPI). Gainers among Nifty50 stocks were Tech M (1.4%) and HCL Tech (0.5%) while the losers were Tata Steel (-4.5%), Ultratech and ICICI Bank(-4.4%).  

 
VIP Industries Ltd – Weak Yuan positive for VIP

Key highlights of the Interview by Mr. Dilip G Piramal, Chairman of VIP Industries on CNBC TV18

VIP Industries is into manufacturing of luggage and travel accessories and imports less than 50% of the raw material from China. The Chairman of the company in the recent interview stated that a weakening yuan helps.

He also mentioned that:

1.    August and September traditionally weakest months of the year.

2.    Luggage is a narrow segment with limited players, so they don’t see contract manufacturing or single-brand retail having a significant impact on competition.

3.    Weakening of Rupee will benefit as VIP is also getting into exports gradually.

4.      Demand has not picked up yet, VIP Ind is in wait & watch mode. No plans for price cuts to propel demand.

5.      Due to China-US trade war Chinese manufacturers have become more dependent on India which benefits the company to get better schemes and offers from them.

6.      100% Foreign Direct Investment in contract manufacturing will improve the Indian economy gradually and in 5-10 years a lot of the low-end manufacturing from China will move to India because India is a country with a very large population. A lot of the manufacturing is moving already from China to Vietnam, Cambodia but these countries do not have so much of the population. There are so many large industries at the lower-end, readymade garments being the largest and all other consumer goods industries like shoes, toys, everything else will move out of China gradually.

Consensus estimates (Marketscreener website):

·       The stock price was Rs 422/- as of close price of 3^rd September 2019 and trades at P/E multiple of 36x / 29x the consensus EPS of Rs 12.2/ 15.0 for FY20E /21E respectively. 

·       Consensus target price is Rs 500/- implying P/E of 33x for FY21E EPS of Rs 15.0/-