While the green shoots are visible, analysts believe revenue and margin normalisation for the baggage maker are still five-six quarters away, and the stock may underperform the market after nearly doubling the price from the lows of March, 2020.
What does the management say?
Chairman Dilip Piramal minced no words in accepting that luggage was among the sectors worst-affected by Covid. Piramal told ETNOW that VIP’s sales were only 7 per cent of pre-Covid levels in Q1 and 25 per cent in Q2, which reached 54 per cent in Q3. “The trend is continuing and that is a good sign,” he said.
“Cheaper goods are selling much more, and our margins also are lower not only because of that, but also because we are selling at a lower price and giving more discounts. We will adapt to what is required. In June quarter next year, not only will travel increase, but we will also have the marriage season. I am told that even if people got married earlier in the Covid regime, they might celebrate weddings in a bigger and better manner,” Piramal said.
The company believes overall fixed cost will remain at Rs 25 crore per month compared with Rs 40 crore in the pre‐Covid period. It lowered fixed costs by Rs 180 crore in FY21, out of which 50 per cent will come back in FY22.
Recent developments positive
January 2021 unlock guidelines in states like Orissa and Tamil Nadu have allowed social, religious and cultural functions and gatherings with a ceiling of 500 persons. This is a positive development to create demand for luggage bags and hand bags.
Besides, shopping malls, retail outlets and cinema halls have reopened, which is likely to impact VIP’s hypermarket channel positively.
The company does not foresee any risk to receivables apart from Big Bazaar, where Rs 35 crore is outstanding, YES Securities said, adding that the company is carrying a Rs 8 crore provision for the receivables and inventory.
Raw material cost has risen sharply by 60‐70 per cent. For now, the company is sourcing around 55 per cent of the raw material from Bangladesh and is looking to increase it to 100 per cent in the near term, which it believes should aid margins.
The company said the pricing action will depend on the competitive intensity and suggests it would try maintaining gross margins in the 45‐50 per cent range for FY22.
What do brokerages say?
Edelweiss said the company’s Ebitda turned positive at Rs 8.1 crore (down 88 per cent YoY) after two quarters of losses. It, however, came in 25 per cent below Edelweiss’ estimates.
“We expect a gradual recovery, led by reopening of schools, traction in marriages and pickup in leisure travel. Overheads reduction and low-cost sourcing from Bangladesh continue to be encouraging. However, delayed recovery of margins to Q4FY22 prompts a cut of 30 per cent in FY22 EPS. Factoring in reduced Covid-19 uncertainty and a late-cycle recovery, we are raising the PE to 47 times of June 2023 earnings,” Edelweiss said and pegged its price target at Rs 351.
The stock traded at Rs 348 on Wednesday. Jhunjhunwala’s 5.31 per cent stake in the company is worth Rs 266 crore.
YES Securities said the company has done a good job in bringing down inventory and managing cash flows, but a sharp rise in input costs and high competitive intensity can lead to further delay in revenue and Ebitda normalisation.
“With Bangladesh production back on track, VIP should see gradual improvement in gross margins, which however can be offset by an increase in costs. The stock can underperform in the near term, given the current valuations at 33 times FY23 earnings,” it said.
IDBI Capital has cut VIP’s sales, Ebitda and EPS estimates for FY21 to factor in weaker-than-expected December quarter margins. It has broadly maintained its FY22 and FY23 estimates. It values the stock at 34 times FY23 EPS compared with 28 times earlier to arrive at a price target of Rs 344 against Rs 279 earlier.
Kotak, however, is positive on the luggage maker. Based on a credible growth story in the last three years, a likely correction in raw material prices and full recovery in performance in FY23, it feels the prevailing stock price offers a good opportunity to invest, as the stock has the potential to bounce back strongly post normalisation. This brokerage has a price target of Rs 400.
