While the sector is dominated by unorganised players, the outlook for the organised players looks promising. Despite the run up in stock prices, investors should keep an eye on this sector for steady earnings growth.
We had initiated coverage on the luggage sector six months ago and the stock performance of the two focus companies namely VIP Industries and Safari at 88 percent and 82 percent, respectively has been spectacular. The financial performance of these companies have been steady and the reduction in the GST rate from 28 percent to 18 percent is an added sweetener. While the sector is dominated by unorganised players, the outlook for the organised players looks promising. Despite the run-up in stock prices, investors should keep an eye on this sector for steady earnings growth.
VIP’s home-grown competitor, Safari Industries (India) Limited recently reported steady growth for the September quarter.
While the year-on-year revenue performance was in-line, one has to account for the impact of GST on company financials. While the sales figure excludes GST (hence supressed), the operating performance gets a boost from the absence of excise in the cost head.
For Safari, the operating margin optically shows a significant improvement. But adjusting for the impact of excise duty, the sequential increase stands at 20 basis points.
In addition to the strong end market performance, the strength in the rupee (with a major part of raw materials being imported) is also helping luggage makers report 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 wrest market share from unorganised players in the post GST era.
The company has aggressive growth ambitions and targets to become a Rs 1,000 crore company in the next three-four years. We have marginally tweaked our estimates upwards in light of the strong performance in the first half of the fiscal.
Why should investors still look at the segment 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 percent of the market) to the organised players (dominated by three major players) is a trend that is here to stay.
Hence, we are reasonably confident of a secular double-digit earnings growth from the listed players like VIP and Safari. While the earnings multiple optically looks steep, it has still not reached the average FMCG multiple for FY19 which is at 43x.
Investors should not expect further multiple re-rating as the same has already played out. However, one should look to accumulate these companies with an eye on secular double-digit earnings growth in the medium to long term.For more research articles, visit our Moneycontrol Research Page.