We do a VIP Industries Stock Analysis as we have received multiple queries from our readers on this stock. Earlier the stock was in our Momentum Portfolio. We exited the stock at a 8% profit in August 2018. The stock was not a long term recommendation from us due to valuation concerns. The stock is down ~ 41% from it’s 52 week highs.
Company Overview
VIP Industries is the market leader in the luggage industry in India. Infact, the company is Asia’s leading manufacturer and seller of luggage (both hard and soft). It ranks second globally in the luggage market. Soft luggage makes up 76% of the revenues of the company while the hard luggage segment is in decline and now makes up 24% of the revenues. The company has different brands catering to different segments. Alfa, Aristocrat, Caprese, Carlton, Skybags and VIP are well recognized brands of VIP Industries. The company was established in 1971 and the promoter of the company is Dilip Piramal, who runs the company with his daughter.
Business Overview
The luggage industry is primarily unorganized (55% market share). The organized players make up a near oligopoly. VIP Industries enjoys a 55% market share while Safari and Samsonite take the remaining 45% of the organized segment. The industry earlier was seen as a utility segment but the trend has slowly shifted to an “accessorized” segment. The segments range from premium to value. Backpack is the fastest growing segment and it also has a higher replacement rate than the luggage segment. The industry depends on China for raw materials and semi-finished luggages. The industry stands to benefit immensely from the rise in air passengers. Every family member now carries their own luggage while earlier the family would carry a single big trunk for all members.
Xiaomi’s Entry is the latest disruption in the industry. The Chinese smartphone maker has recently entered the luggage industry in India.
A simple check of the product prices online show that Xiaomi’s luggage is cheaper by atleast 20%. The airline industry is booming but airline stocks won’t make you money. The luggage sector offers a good proxy to ride on the air passenger growth in India.
Financials
VIP Industries has averaged a ~ 10% CAGR over the 3 years and 5 years period. FY18 has been a standout year for the company in terms of margins, which have been improving consistently on a year-on-year basis. The company has demonstrated efficiency in deploying capital as it’s ROCE and ROE have improved significantly between FY12 and FY18. It has remained debt-free, gained market share and has grown its revenues on the back of growth in volumes. Also, VIP Industries has a strong track-record of converting profits to cash.
VIP Industries Stock Analysis
The luggage industry saw a period of healthy growth in margins and profitability over the last few years. The revenue growth remained in high single digits for players like Safari and VIP (at par with industry growth). However, the entry of Xiaomi will dent the growth and margins of existing players.
Also, the annual report shows a board resolution (ordinary) to pay Radhika Piramal a salary of GBP 240,000. Further more, the company will bear the relocation expenses too. But VIP Industries has no operations in London!
This is a corporate governance red-flag for a company that has it’s business interests in India.
Valuations
PE Ratio: 37.36
PB Ratio: 11.39
The PE Ratio of VIP Industries has fallen from 59 to 37 in 40 days. The stock had been commanding a PE Ratio of 40+ for a long time now. We believe that the current valuation is very expensive for the stock. If VIP starts losing market share to MI and it’s margins go low then the premium that VIP commands will go down. Add to the threats the increase in duties on imported luggage. This makes raw materials and other inputs expensive.
Between FY13 and FY18, the profits went up by 400% but the revenues did not even double! There is a high chance of profit growth decreasing and pressure on margins increasing. Although the stock is down 41%, our VIP Industries Stock Analysis shows no reason to invest in the stock at current valuations. We may re-visit the stock later if valuations cool off.
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