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Revenue growth healthy, but margins remain under pressure
VIP Industries (VIP) reported mix set of numbers for Q4FY19. While the net revenue growth stood healthy at 20% YoY, the company disappointed on profit front. EBITDA declined by 27.1% YoY, while EBITDA margins contracted by 588bps YoY, impacted by a sharp rise in material cost and higher employee expenses. Going forward, we remain positive on VIP’s growth prospects. With healthy demand outlook and company’s initiatives towards product innovation, distribution expansion and brand building, revenue growth is likely to remain healthy. Further, after a muted show in H2FY19, margin trajectory should improve going ahead, led by price hikes across select brands, stability in INR, company’s continued focus on premiumization and its plans to increase sourcing of soft luggage from Bangladesh. Hence, we maintain a Buy on the stock with revised target price of Rs 534.
Q4FY19 Result Update:
* VIP’s net revenue growth stood healthy at 20% YoY at Rs 435cr, driven by strong volume growth of ~25%. However, blended realizations were lower due to change in product mix in favour of low end products. The quarter saw higher sales contribution from lower ticket size brands. The mass brand ‘Aristocrat’, premium brand Caprese and backpacks reported strong growth. For FY19, net revenue grew by 26.6%. Further, Bangladesh operations registered strong growth of 127% & 84% in net sales & PAT in FY19.
* Gross margins declined by 618bps YoY to 47.5%, impacted by adverse product mix, INR depreciation, increase in import duty on sourcing soft luggage from China and absence of price hikes. This, along with higher employee cost (+102bps YoY due to increased hiring and higher incentives) resulted in 27.1% decline in EBITDA and 588bps YoY contraction in EBITDA margins, which stood at 9.1%. Further, PAT fell by 27.9%, while PAT margins declined by 386bps YoY, impacted by higher depreciation and lower other income.
* Other Key Highlights: i) The company has re-launched brand VIP with a new logo and has roped in new brand ambassadors; ii) The quarter saw significant rise in inventory level of soft luggage, as hard luggage reported faster growth, contrary to management’s anticipation of higher growth in soft luggage; iii) The company has already taken average price hike of 2% in March and is looking for another blended hike of ~5% in June / July across select brands; iv) Key focus would remain on improving margins by making entry level products profitable through cost efficiency measures.
Outlook & Valuation:
India’s organised luggage industry is estimated to grow at a healthy pace going forward, led by rising disposable income, increasing women workforce, growing interest of people in tourism and rising preference for branded products. With market leadership, widening reach and constant focus on innovation & brand building, VIP is well placed to leverage its strength and sustain its dominant position in the organized luggage space. We estimate the company’s net revenue & PAT to grow by 16% & 22% CAGR respectively over FY19-21E. Volume offtake is likely to remain healthy across brands and product lines. Further, after a muted show in H2FY19, margin trajectory should improve going ahead led by price hikes across select brands, company’s continued focus on premiumization and its plans to increase sourcing of soft luggage from Bangladesh. We have maintained our revenue estimates but have downgraded EBITDA and PAT projections by 3-6% for FY20E & FY21E to factor in lower than expected margins. Nonetheless, we maintain a Buy on the stock with revised target price of Rs 534.
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