Stock Review: VIP

A dominant position in the fast-growing domestic industry and improving profitability are drawing big investors to the counter

The purchase of a two per cent stake in VIP Industries by global private equity (PE) firm Blackstone saw the stock jump nearly 20 per cent last week to over Rs 650. The stock has since then held on to these levels, as reports indicate that Blackstone plans to raise its stake to around 5 per cent. While Blackstone's move has strengthened confidence over VIP's future prospects, it also adds to the list of renowned investors that own the stock. Rakesh Jhunjhunwala, for instance, currently holds about 6.4 per cent stake in VIP.

Apart from the domestic consumption story, VIP's dominant position in the growing domestic luggage market, turnaround in its financial performance, aided by large reduction in debt and improving margins, and attractive return on equity are key factors that have helped attract these investors. Analysts, however, say that given the recent surge in the stock, which now trades at 13.5 times the 2011-12 estimated earnings, is fairly priced and, hence, investors may consider buying it on dips.

Improving profitability

VIP Industries is Asias largest and the world's second-largest luggage company. In India, too, the company commands a market share of 58 per cent. This could be attributed to its wide network of over 9,000 outlets. Additionally, its well-known brands, such as Alfa, VIP, Carlton, Aristocrat, and a wide range of products (both in the soft and hard luggage segments) across the premium, regular and economy categories, have helped the company maintain its leadership.

The company turned around last financial year, with a net profit of Rs 56 crore, compared to a loss of Rs 10 crore in 200809. The loss in 2009-09 can be attributed to its fully-owned UKbased subsidiary Carlton's losses on account of the global economic slowdown and currency fluctuations. The good part is that its performance is improving, helped by a restructuring exercise that saw the introduction of new products and delivery channels. Return to profitability is expected in 201112. VIP has now also started selling in India Carlton-branded products, which cater to the premium segment, where it did not have a presence.

More importantly, its domestic operations, too, have seen a sharp improvement in sales and margins. A nearly 70 per cent rise in cash flow from operations to Rs 96 crore last financial year has helped VIP bring down its consolidated debt from Rs 136 crore in 200809 to Rs 87 crore in 2009-10. With 2010-11 even better, its debt is estimated to come down to Rs 10 crore by the end of this month. Thus, interest expenses, at about Rs 17 crore in 200809, are estimated to come down to Rs 4 crore for 2010-11 and to zero next year.

VIP's ability to improve cash flow from operations has meant that it needed very little money to grow its business, which had helped boost its return on shareholders' funds. It also indicates that future requirements to fund organic growth will be negligible.

Travelling to the next level

On the business front, analysts expect its revenue to grow by over 20 per cent annually over the next two years, on the back of strong domestic demand, which accounts for over 85 per cent of revenues. Also, revenues from new products, including the ladies handbag space (where it forayed recently), and expansion of its retail network should help drive growth. For instance, during the first nine months of 2010-11, the company opened 80 exclusive stores and is aiming to open 120-150 new stores every year, apart from franchises.

As a result of growth in sales, improving margins and lower interest cost, analysts expect VIP's net profit to grow by over 70 per cent in 2010-11 and by 40 per cent next year. For the first nine months of 2010-11, its consolidated net profit has already risen 64 per cent to Rs 72.6 crore.

Margins will rise as a result of improving contribution from the high-margin soft luggage business. Soft luggage contributed 47 per cent of revenue in 2009-10, which has improved to 55 per cent in the first half of the current financial year, and its share is likely to improve further. However, analysts say, given that VIP imports a large part of its soft luggage requirement from China, strengthening of the Yuan (or weakening of the rupee) could have some impact on its margins. Additionally, its multi-brand approach and plans to promote its new brand (Skybags) could see an increase in selling costs. These could restrict margin expansion in the near term.