ICICI Direct's research report on VIP Industries
The Covid-19 pandemic has had a grievous impact on the global travel industry and retail environment. Revenues for Q4FY20 fell 28% YoY to Rs 311.3 crore. While sales in January-February fell 7% YoY to Rs 279.0 crore, March was a complete washout with revenues down 76% YoY to Rs 32.0 crore. The company’s procurement from own facility in Bangladesh increased substantially from 10-15% to 55% in Q4FY20. This translated into gross margin expansion of ~1000 bps to 57.6%. Owing to negative operating leverage, EBITDA margins (adjusting for Ind-AS 116) contracted 370 bps YoY to 5.4%. PAT fell 62% YoY to Rs 9.5 crore. In a bid to mitigate the impact to a certain extent, the company is aggressively reducing fixed expenses (reduction ~33%) for FY21E. Furthermore, VIP is planning to source majority of its soft luggage from its facility in Bangladesh to aid gross margins. Since luggage is a proxy play to travel & tourism, the outlook for VIP appears bleak in the near term.
VIP Industries has, over the years, maintained balance sheet prudence with stringent working capital policy (25% of sales), virtually debt free status and healthy RoCE: 30%+. While debt on the books is currently at ~Rs 32.0 crore, the company has withdrawn ~Rs 100 crore from its sanctioned credit limits (can extend it to Rs 200 crore) to navigate through challenging liquidity conditions. Owing to its strong balance sheet and being market leader, VIP’s business model has the inherent ability to tide over tough market conditions better than small peers. We remain cautious on the near term outlook, amid headwinds faced by the luggage industry. We maintain HOLD rating on the stock with a revised target price of Rs 220 (30x FY22E EPS).
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