Good quarter from Safari – market weakness could be an opportunity to buy

While the year-on-year revenue performance was in-line, we got to factor in the impact of GST on company financials. While the sales figure excludes GST (hence suppressed), the operating performance gets a boost from the absence of excise in the cost head.

For Safari, going beyond the optical improvement in operating margin, even adjusting for the impact of excise duty, the year on year improvement in margins stands at 280 basis points and the sequential (quarter on quarter) improvement 300 basis points.

In addition to the strong end market performance, the appreciation of the Indian currency (with major part of raw materials being imported) is also aiding the luggage companies in reporting strong margin performance.

Safari has become a serious challenger in the past few years especially in the value segment with its aggressive growth strategy. With the right product offering, the company is trying to cater to the change in consumer preferences towards the convenience of light and wheeled travel products and away from heavier products without wheels.  Being a price competitive player, Safari Industries should be able to wrench market share from the unorganised players in the post GST era.

The company has aggressive growth ambitions and targets to become Rs 1,000 crore company in next three-four years. We have marginally tweaked our estimates upwards in light of the strong performance in the quarter.

One of its large institutional investor has recently hiked stake in the company from 5.9% to 8.55%.

Why should investors still look at the company after the significant run up?

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.

Modern retailing and new fashion trends are also expected to drive the sale of casual bags and travel luggage bags category. In addition to these abovementioned drivers, luggage has also become an important part of the wedding trousseau. The shift from the unorganised (close to 60% of the market) to the organised players (dominated by three major players) is a trend that is here to stay.

Safari trades at 45.3X FY19P earnings at a premium to its closest peer VIP that trades at 32.4X FY19P earnings.

Investors should not expect further multiple re-rating as the same has already played out. However, one should look to accumulate these companies in the current consolidation phase in the market with an eye on secular earnings growth in the medium to long term.