The festival season is almost here and Indians are set to crisscross the country to spend time with family or take a holiday. Over the next 90 days, New Delhi is expected to see a 17 percent increase in arrivals (international and domestic) compared to the same period in 2019. Similarly, Mumbai is expected to see a 4 percent rise in arrivals, according to a report by Rategain.
A proxy play riding on this travel theme is VIP Industries, a leading brand in the manufacture and marketing of hard/soft luggage, duffel bags, backpacks and accessories.
VIP Industries’ share price has surged close to 17 percent in the last month. It is trading near the Rs 685 mark.
So, what’s fuelling this rally?
Well-established brands
The company has eight manufacturing facilities across India and Bangladesh, producing brands such as Aristocrat, VIP, Skybags, Carlton and Caprese, which target different price points.
According to the company’s FY22 annual report, Skybags contributes 33 percent to its overall revenue, while Aristocrat contributes 32 percent and the flagship VIP brand, 21 percent.
With these top brands, the company commands close to 45 percent market share in the organised luggage industry. The company has a strong pan-India distribution network with 10,500 Points of Sale across 800 towns in India, notes SBI Securities.
In-house manufacturing capacity
The company has strengthened its manufacturing capabilities and has reduced sourcing from China to only 8 percent.
According to ICICI Securities, the contribution from the company’s own manufacturing has increased significantly over the last two years. It contributed nearly 64 percent of revenue in Q1FY23 (against 35 percent in Q1FY20, the pre-pandemic level).
The company aspires to achieve 75-80 percent of revenue from its India and Bangladesh plants in FY23. This de-risks the business from supply disruptions and forex fluctuations, plus it also gives the company an edge over its peers, who depend on imports, believe analysts.
Blockbuster Q1FY23
For the quarter ended June 2022, the company registered a consolidated profit of Rs 69 crore. Revenue came in at Rs 590.61 crore, which was 5 percent higher than the pre-pandemic level. Volumes were up 8 percent over Q1FY20.
“This was driven by the increased proportion of in-house manufactured products, favourable product mix, lower contribution of discounted sales, and reversion of higher contribution from physical channels,” the company’s annual report said.
Key risks and growth drivers
According to SBI Securities, raw material inflationary pressure, volatility in forex and the demand slowdown on account of any restrictions, remain key risks for the company.
The return of corporate travel is also expected to be slow with continued use of video conferencing in place of some travel for work. However, the company is confident about its long-term growth drivers.
“The shift towards branded goods with rising income and rapid urbanisation augurs well for the industry. Indulgence in frequent holidays instead of it being a once-a-year activity, increasing spends on weddings and travel for education are some trends that will expand the market,” the company has said.
ICICI Securities has a “buy” rating on the stock, with a target price of Rs 697. Stabilising raw material prices and the increase in the level of in-house manufacturing will translate into better margins going forward, according to the brokerage.
SBI Securities has a “buy” rating with a target price of Rs 724 on the stock. “The focus on the mass/value segment with a string of new launches will help VIP compete better with peers,” it said.