Jhunjhunwala cut some luggage just in time before a bad patch

Analysts said near-term margin fall could be profound due to heavy discounting due to competition and an increase in raw material cost. Loss of market share in the last two years is another worry, they said.

Kotak said given the ongoing Covid second wave, the probability of the third wave in the second half of the calendar, and pessimism about recovery in the entire FY22, it has sharply lowered VIP’s earnings estimates for FY22 and FY23.

VIP derives only 17 per cent of its sales online.

“With so many uncertainties, we now recommend ‘sell’ from ‘add’ with a revised fair value of Rs 325 from Rs 400 at 35 times P/E FY23 earnings. The high multiple accorded to VIP is of little relevance, as we see high risk to our estimates,” it said.

IDBI Capital said most luggage makers will fail to achieve similar sales in FY22 as FY20. This brokerage has cut FY22 sales estimate for VIP by 32 per cent and Ebitda estimate by 53 per cent, as it sees Covid 2.0 to impact the first half of FY22. Edelweiss said the hit on June quarter, the strongest quarter typically, would mean flat FY22 earnings after a loss of Rs 97.50 crore in FY21.

VIP reported a 22 per cent fall in sales at Rs 243 crore in the March quarter. Loss for the quarter stood at Rs 4 crore.

Gross margins expanded 530 basis points sequentially to 43.8 per cent but were far lower than pre-Covid levels of 52-53 per cent, due to demand for lower-margin products, higher discounting to liquidate the existing inventory, and a significant increase in raw material prices.

Jhunjhunwala held a 5.31 per cent stake in the luggage maker as of December 31, 2020. That shareholding came down by 299 basis points to 2.32 per cent by the end of March, 2021.

Shares of VIP Industries have recovered about 57 per cent from March 2020 lows, but are down 27 per cent from February 2020 highs and about 42 per cent from August 2018 levels.

Covid hit on Q1
VIP saw robust demand in the first three weeks of April, as the second wave impacted the business significantly in a seasonally strong period. The management expects the recovery to be faster this time around, Edelweiss noted.

To negate the increase in raw material prices, the company undertook two price hikes in March and April. In a conference call, the company management said that it would continue to push for its strategic plans during this Covid times, including complete shifting of sourcing of raw material to Bangladesh, which accounts for 55 per cent at present. It aims to bring down ad-spends and other cost considerations to aid margins.

It is trying to bring down rental costs at company stores in malls and even standalone stores. Besides, the management sees the closure of company loss-making stores and is looking to conserve cash.

“There are clear near-term margin headwinds amid aggressive discounting and RM cost inflation. Unless demand environment improves margins will continue to remain under pressure due to inferior sales mix. However, we believe VIP has done well on the cost management front, out of which 50 per cent is sustainable in nature, which is expected to yield long term results,” Prabhudas Lilladher said.

Other risks
The company makes two types of luggage: Hard and soft. Currently 30 per cent of its revenues come from hard luggage that is manufactured in-house and uses typolypropylene and aluminum as raw materials. Any rise in raw material costs here could dent the company’s profitability.

In the case of the soft luggage segment, the company is dependent on China. Any appreciation in Chinese yuan is passed with a lag and is a risk.

Meanwhile, while VIP commands 50 per cent market share in India, analysts said Safari has been strongly focusing on gaining market share. Samsonite, they said, too has been gaining share.

“While VIP has lost market share to Safari Industries in recent times, its Bangladesh facility ramp-up will lead to significant cost advantage compared to its peers once there is a meaningful recovery in sales. VIP’s Bangladesh plant is likely to cater to nearly 60-70 per cent of its Indian raw material requirements once the sales normalise (likely from FY23). This will significantly lower its dependence on China and also improve margins as costs are 15 per cent lower when sourced from Bangladesh,” IDBI Capital said.