Expect Revenues to go up due to easing travel restrictions – VIP Industries

Update on the Indian Equity Market:

On Monday, NIFTY closed at 18,068 (+0.9%) led by PSU BANK (+2.2%), CONSUMER DURABLES (+2.1%), and OIL&GAS (+1.8%). Those in red were PRIVATE BANK (-1.0%), PHARMA (-0.7%) and HEALTHCARE (-0.6%). Top gainers in NIFTY50 were TITAN (+4.5%), IOC (+4.5%), and BAJAJFINS (+4.2%). The top losers were INDUSIND BANK (-10.5%), DIVIS LAB (-5.2%), and M&M (-1.4%).

Excerpts of an interview with Mr. Dilip Piramal, Chairman, VIP Industries with CNBC-TV18 on 02^nd November 2021:

• The company had a sales budget of Rs 5000 mn in the 1QFY22. However, 1QFY22 performed poorly due to the second wave of the covid-19 pandemic but things improved in September due to the opening up of restrictions.
• During the first 15 months of the pandemic, there were hardly any sales, hence the company did not import from China. In 1QFY21 company had more inventory than what they sold in FY20.
• Supply has been disrupted very badly, till pre covid levels the company was dependant on China heavily. The Chinese supply has become very uncertain and expensive and hence the company is facing a lot of issues concerning supply in the market. It intends to reduce its dependence on China for raw materials.
• There is a lot of turbulence in the market from the supply side due to higher freight costs and inflation, problems with imports of, both, raw materials and finished goods from China.
• Freight costs have gone up, which affects the company significantly as luggage being a voluminous product, freight is a considerable cost.
• Usually, the 3^rd quarter is the best quarter for the company with the wedding and travel season in full swing. With the gradual opening up of economies and travel, the company expects good revenues going forward.
• The company is positive and expects 3QFY22E will be better than the 3QFY21. The company expects revenue to be in the range of -10% to +10% from the 3QFY19 levels which is Rs 4,300mn.
• The company hasn’t taken any price hikes as of now but they would be looking at taking price hikes very shortly. Revenues on an MoM basis should be better than in earlier months.
• All the manufacturing of the hard luggage which accounts for 47% of the 2QFY22 revenue is done in India. Not too much manufacturing in India for soft luggage.
• Mass and premium segment bags were affected since a majority of sales occurred in the malls and malls were badly affected in the pandemic.

Asset Multiplier Comments

• The Ministry of Civil Aviation removed restrictions on domestic flight capacity and allowed to operate flights at full capacity. Luggage being the proxy to the travel and tourism industry we think VIP Industries is well placed to meet the increasing demand.
• Looking at the capex plans of expanding the capacity of Bangladesh and Nashik plants, price hikes, margins delivery, and product launches we expect VIP Industries to perform well going ahead.

Consensus Estimate (Source: market screener website)  

• The closing price of VIP Industries was ₹ 634/- as of 08-November-21. It traded at 111x/50x/37x the eps estimate of ₹ 5.7/12.6/17.1 for FY22E/ FY23E/FY24E respectively.
• The consensus target price of ₹ 646/- implies a Price/earnings multiple of 33x on FY24E EPS of ₹ 19.6/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”