Stock Review: VIP Industries

 

THE stock of VIP Industries has nearly doubled in the past three months. The company had reported impressive numbers in the June 2010 quarter and analysts expect the good performance to continue in the coming quarters as well. The company's stock performance reflects this optimism.

   VIP Industries is the biggest organized player in the luggage segment in Asia. The company has benefited from the demand for soft luggage with products like Skybag and Footloose. The company sources these products from China and sells them under its own brands.

   In its report, Edelweiss Securities estimates that the soft luggage industry is growing at 35% per year.

   "The margin in the soft-luggage segment is around 35%, which is much higher than the hard-luggage segment. Also, the risk of volatility in raw material prices such as plastic and aluminium is less in the soft-luggage segment," says Edelweiss' analyst Niket Shah. Hence, the increasing contribution of the soft-luggage segment to the company's revenues will improve the overall operating margin.

   In FY09, the company had suffered a loss due to its sluggish business in Europe. The company had tried to expand in Europe through its 100% subsidiary, Carlton.

But, due to the global financial turmoil, it did not receive a good response.

   To cut down the losses, the company has restructured its operations by taking various steps, such as scaling down expansion plans and shutting down stores in premium locations. Since then, the subsidiary's loss has been reducing.

   VIP also plans to bring some of its businesses under the parent company. This would reduce the risk of forex translation loss in future and also allow VIP to include the losses in its books rather than in the books of the subsidiary. This would give the company some tax benefit.

   The strong cash flow in the first half of FY11 has enabled the company to reduce its debt of 136 crore in FY10 to about 35 crore. The company is expecting to become almost debt free by the end of this fiscal.

   As per the historical trend, the company's performance in a financial year has been the weakest in the second quarter. However, the company expects a 50% profit growth for the September 2010 quarter.

   Its stock is currently traded at a P/E of 29.5. Considering the management forecast for the September quarter, its P/E works out to be 21.5.