Buy VIP Industries: target of Rs 370: ICICI Direct

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ICICI Direct's research report on VIP Industries

The Covid-19 pandemic continues to have a grievous impact on the global travel industry and retail environment. Revenues in Q2FY21 de-grew 75% YoY to Rs 102.8 crore. However, VIP was able to materially reduce operating overheads by 60% (employee, other expenses down 49%, 66% YoY, respectively), which curtailed EBITDA losses. EBITDA losses narrowed down QoQ to Rs 22.1 crore (Q1FY21: Rs 57.8 crore). It has identified and is implementing close to ~ Rs 180 crore fixed cost savings in FY21E of which it believes ~50% will be sustainable in nature. Q3FY21E performance is expected to be relatively better due to festive season and wedding purchases. Also, with certain green shoots visible in domestic travel industry, demand can pick up pace from H2FY21E onwards. Given the healthy b/s, strong manufacturing capabilities in Bangladesh (soft luggage), we expect VIP will be able to effectively manage through the challenging environment. While revenue recovery may take longer time, structural changes in fixed overheads will lead to faster recovery in profitability terms.

Outlook

The company is well placed in the liquidity position as it has borrowing limits worth Rs 300 crore. While VIP has withdrawn ~Rs 200 crore, the company has not utilised the same (cash & investments: Rs 206 crore as on H1FY21). VIP has, over the years, maintained balance sheet prudence with stringent working capital policy, virtually debt free status and healthy RoCE: 30%+. Owing to its strong balance sheet and being market leader, its business model has the inherent ability to tide over tough market conditions better than peers. Furthermore, strong manufacturing capabilities in Bangladesh (for soft luggage) give VIP an edge over its peers who depend mainly on import. We upgrade the stock from HOLD to BUY with a revised target price of Rs 370 (35x FY23E EPS).

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