Luggage companies had a stellar run – what should you do now?

Q4 FY18 – impressive on all counts
Both the companies left no room for complain in the final quarter of FY18 as well.

VIP saw good traction in all its four brands – Skybag, VIP, Aristocrat and Carlton as well as in its ladies handbag Caprese. This quarter saw very strong growth in backpack and the company believes that despite competition, this category has huge potential. The management mentioned the market potential is as high as the number of two-wheelers sold in the country. For VIP, all the channels, namely modern trade, general as well as e-commerce did well. Canteen Store Department (CSD) that got severely impacted post the implementation of GST is also stabilising.

Confluence of several positives like the impact of price hike fully playing out, reduction in GST rate from 28% to 18% and normalisation of channels as well as rupee appreciation had a positive impact on the reported financials of Safari as well. Although a much smaller player, Safari is an aggressive competitor to the market leader, especially in the value segment.

Are the tailwinds here to stay?
In the overall luggage market, according to market estimate, approximately 40 per cent is controlled by organised players. The oligopolistic nature of the industry (dominated by VIP, Samsonite and Safari) and gradual shift in consumer preference for branded luggage (also triggered by the implementation of Goods & Service Tax) augurs well for the organised players.

The growth of travel infrastructure such as roads, airports and railway stations have contributed significantly to the development of the travel industry in India. Over the years, both domestic and international air travel has shown consistent double digit growth.

Aided by macro drivers like GDP growth, rising personal income levels, changing lifestyles, huge middle class as well as the availability of low-cost air fares and diverse travel packages, India is rapidly becoming one of the fastest growing outbound travel markets in the world. These trends have a significant positive impact on the long-term fortunes of the luggage industry.

In addition to these abovementioned drivers, luggage has also become an important part of the wedding trousseau, with even people in Tier II and III cities buying branded suitcases and strollers during the wedding season.

The penetration of luggage as a category is much lower than other consumer products.

Probable headwinds in the horizon?
A significant portion of the raw material (especially for soft luggage which is close to 75% of the market) is imported from China. Appreciation of the rupee in the past therefore had a positive rub off on margin.

However, in recent times, the sector is faced with twin headwinds of firming up of input prices and a depreciation of the rupee that might result in pressure on gross margin unless the companies are able to pass on the increase to the consumers. Since last year, companies like VIP did close to double-digit price hike, hence the ability to pass on the cost pressure in FY19 might not be easy. Near-term pressure on margin, therefore, cannot be ruled out.

While the soft luggage dominates the markets now, a new trend worth noting is the growing popularity of polycarbonate hard luggage which is lighter and reduces the import dependence.

How should investors be positioned?
Although the medium to long-term outlook is extremely positive and the companies do not really see a problem in growing their revenue, investors got to keep in mind the pressure to near-term earnings especially in the context of the valuation.

Given our long-term conviction on the business, we perceive any weakness as an opportunity.

Investors should therefore keep these stocks in their radar for accumulation.