VIP Industries - All my bags are packed and I am ready to go

What does the company do?

VIP Industry is a household name in India when it comes to luggage and travel accessories. It is India's largest luggage company (46% market share) and world's second largest company just behind Samsonite. The company has been in the business since 1971 and operates across categories of hard luggage (the ones with rigid exteriors) and soft luggage ( ones with fabric exterior) along with travel accessories (a toiletry bag for example). During recent times, company has transformed itself from a sleepy briefcase/suitcase, buy once and forget brand to a strong, flexible, trendy and more youthful brand.

How does company earn its money?

VIP has a formidable presence across all price ranges. It sells its luggage under Alfa brand in mass market segment in <Rs. 3000 range, Carlton in premium range > Rs. 6000 and other brands such as entry level Aristocrat, trendy backpack brand Skybags and most popular VIP brand in mid Rs. 3000 - 6000 segment. They also added a ladies handbag brand Caprese in their portfolio which is gaining good traction in the market achieving Rs. 100 crores sales target in 2018.

Company sources its products from China, third party vendors in India and manufactures own products in India and Bangladesh. It has recently started reducing its dependence on China as wage inflation there was hurting its gross margins. Moreover, VIP has less inventory control as they sourced finished goods from China. Move to Bangladesh although was started earlier, however, it has accelerated with the spread of coronavirus and govt. imposition on Chinese imports.

Imposition of GST has also been of great help as business is shifting from unorganised (~60% of total market) to organised retail and also presents a massive room for company to grow and gain market share.   

Industry

The Indian luggage industry is pegged at more than Rs. 8000 crores and has grown at CAGR of 13% in FY14-19. The organized market is oligopolistic in nature and is dominated by VIP, Samsonite and Safari Industries. Marriages and travelling are main drivers of its sales and rising trends in tourism and Indians travelling abroad has given a major thrust to the industry. With leisure travel taking a backseat, FY21 is going to be a challenge for the industry, although some signs of revival are seen in European countries.

The industry is slowly moving away from a utility based product to a lifestyle product which is leading to growth towards fashionable, premium products which are leading to better realizations. Many market surveys have indicated that customers are becoming brand conscious and are willing to spend few extra bucks to carry a brand and luggage design which suits their taste. Recent trends are also pointing towards increase in number of luggages per family as members travel with their individual luggage and also carry different luggage as per occassion (business travel vs. casual travel).

Competition

As GST implementation has reduced the cost advantage of unorganized players, the market share gains of organised players is inevitable. Among the organized players, leaving aside new entrants like Wildcraft, Da Milano etc, almost 90% of the market is split among VIP, Samsonite and Safari. These brands compete in almost all segments, with Safari having stronger presence in mass market segment and Samsonite in premium segment. VIP earns better margins than Safari (the only other listed player in the industry), which is only going to increase as cost base move from China to Bangladesh. The return profile of VIP (5y RoE avg of 23% and 5y RoCE avg of 34%) is also better than Safari (5y RoE avg of 6% and 5y RoCE avg of 10%). 

Past Performance and Look ahead

VIP Industries has shown decent revenue growth of 12% during FY11-19 period (10% CAGR in FY11-20) due to its established brands, strong distribution network and more than 1500 SKUs. Covid induced lockdown has hampered sales everywhere with 1Q21 sales being only 5% of what company budgeted and company shutting down stores, the current FY looks challenging for the company and it is expected that FY21 sales maybe 20 - 30% of FY19 sales.

Company is expected to improve its margin profile as sourcing from China was mostly of finished goods which generated lower margins than manufactured goods from Bangladesh and India.  Govt policy, rising wage inflation in China and Covid situation has compelled the company to reduce its dependence on China. In current year, due to reduced demand, the company has to hardly import anything from China. Once the demand side recover, VIP would be able to earn better margins from its products.

To overcome this reduced demand scenario, the firm has plans to borrow around Rs.300 Crores to have a war chest for these tough times. Although company is zero net debt till the end of July 2020, it has prepared for the scenario where it honours its commitments to its creditors and debtors and sustain for few months without revenue in worst case scenario.

Conclusion - Accumulate. Current Market Cap: ~Rs. 4000 crores.

As Morgan Housel pointed out that Jeff Bezos' success lies not in predicting what will change in next 10 years, but what will remain the same (like fast delivery of better products at lower costs). Same principle applies to travel industry and everything that goes and grows with it. Traveling and exploring new places is a basic human need and sooner than later, people are going to move out and travel at the first opportunity they will get. 

As the market bounces back, so will the aspiration of people. India, with its young population, rising living standards, many first time travelers and brand consciousness provides a huge growth opportunity to luggage players. Replacement frequency for luggage bags has also dropped from 4-5 years to 2-3 years now. 

Organised players like VIP Industries have been constantly upgrading their offerings and improving better after-sales services which will help them wrest market share from unorganized players. With unorganized players still holding ~80% share in volume terms, the opportunity size for VIP is huge.

As the world slowly starts emerging out of Covid 19 induces lockdown, VIP industry is a good proxy play on recovery of travel and tourism industry in India. With its better distribution network, strong brand and ability to earn better returns on capital, VIP is a long term buy. 

Risks related to travel bans, second wave of Covid 19 and inability of the company to gain market share when market recovers can create headwinds for the company. It is prudent for investors to closely monitor the travel related announcements, any commentary on operating performance from the company or any other industry development that can affect the growth prospects.