Packing Profits On The Way - VIP Industries

VIP Industries has hit the bull’s eye as the scrip has surged by 1,298 per cent from its level of Rs 36 in January 2009 to Rs 503 as of now. But what has excited us more is the company’s June quarterly result wherein it has reported the highest-ever quarterly profit in its history. We dispatched an email to its newly appointed managing director, Radhika Piramal (second daughter of Dilip Piramal), to derive information about the company’s future plans and understand how much of this financial growth will be sustainable going forward. In return, we got a call from the office of Dilip Piramal, Chairman, VIP for fixing up an appointment.

On meeting Dilip Piramal, we find him to be quite gung-ho about the prospects of the company. He took us through the history of VIP and how he had managed to transform the company into a modern luggage player, gradually covering both the hard and soft luggage segments. In the process of transforming the company, VIP had to reduce its workforce. “We spent Rs 80 crore in the last one decade on VRS,” declared Piramal. “We reached a new equilibrium last year,” Piramal said.

Even though the company’s balance sheet continues to show six factories, only three of these are functional and that too for the production of hard luggage while soft luggage mainly gets imported from China, the sourcing hub for the entire world. The company’s Jalgaon and Paithan factories are closed and according to Piramal, even if these were sold, the gains would not be substantial. The Nagpur factory has been engaged in third-party job work. Speaking about why has the company refrained from disclosing the revenue and profitability of its modular furniture segment separately, Piramal indicated that it was less than 10 per cent of the turnover (Rs 36 crore last year) and hence did not call for disclosure as per the listing requirements. He is, however, keen on doing so next year to improve information flow to investors.

VIP Industries’ travel luggage business encompasses five brands viz. VIP, Alfa, Aristocrat, Delsey, and Skybags of which VIP is the largest brand contributing almost 70 per cent of the turnover. But Alfa seems to be more close to Piramal. “I am proud of Alfa,” he subsequently revealed. Alfa is a low-priced hard luggage that provides value for money. The company has, in the last few years, made some transitions to realign its product range to meet the new trend wherein the margins for soft luggage are better than those for the hard variety.

At present, the company’s revenue is almost equally shared by soft and hard luggage. Due to the improving share of soft luggage the margin of the company has improved substantially. The operating margin which used to be in single digit before has now improved to almost 16 per cent for FY 2010. Going by the first quarter of the current year it would further get expanded (it was 19.53 per cent but the subsequent quarters may not show this much healthy number with September historically being subdued amongst all the four quarters).

The luggage industry can be classified into the organised and unorganised markets wherein the unorganised market continues to enjoy a leadership position with a market share of 69 per cent with a figure of Rs 2,150 crore. In the organised market, VIP is the largest player with a market share of 67 per cent. Samsonite is another leading player in this segment with a good market share. As per Piramal, in India the price range of Rs 2,000-3,000 comprises the biggest market (in the organised segment) with almost 50 per cent revenue derived from this segment while the price range of less than Rs 2,000 accounts for 20 per cent, and the rest 10 per cent comes from the premium segment with prices above Rs 3,000. As per the company’s latest annual report, luggage priced above Rs 3,000 is growing at 14 per cent while that below Rs 3,000 is growing at a faster rate of 23 per cent.[PAGE BREAK]

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This could be one reason why the company is pushing more into products having a lower price range, such as duffel bags and so on. “Even though this year we would see our sales figure increasing, our realisation per bag would be on the lower side,” admitted Piramal. Another problem that the Indian luggage industry is now facing is the onslaught of cheap imports from China and other markets. The company, in an attempt to expand its geographical reach, acquired Carlton’s operations in the UK in 2004. Carlton had filed for bankruptcy in London.

However, the acquisition has not added any value. Carlton, in the last one year, had scaled down its operations because of the bad economic environment in Europe due to which its sales took a beating and slipped down to Rs 46.70 crore as against Rs 65.98 crore in 2009. But Carlton could reduce its losses from Rs 23.21 crore of 2009 to Rs 1.67 crore in 2010. One of the reasons for doing so is that it closed down all its mono retail stores in high-end malls across Europe. Piramal is keen on continuing with Carlton’s operations in the UK, terming it an ‘okay’ brand. There are plans to introduce it in India too. We are not sure how much this would be of help as VIP’s Delsey brand has not been much of a success story, contributing a mere 2 per cent to total sales. Also, Carlton would be positioned as a premium brand in the country at a time when premium luggage has not been reflecting any remarkable growth.

Now the moot question is whether one should invest in the counter at the present moment. Further, what about those who already have taken exposure in this scrip? We are of the opinion that the scrip needs to take a breather before moving on the upside and hence our suggestion is that investors should book profits in case the scrip has been bought at a lower level. Those who have not yet taken exposure should refrain from taking a fresh position. This conclusion is based on the valuations that the scrip has been commanding. The company reported net profit of Rs 32.20 crore (as per Piramal, these numbers are not a flash in the pan) for the first quarter of the current year.

Normally the first quarter is considered the company’s best quarter since it has a strong presence in the eastern parts of the country, especially in Bihar, where VIP sells a good number of hard luggage during the marriage season. “We have a unique position in Bihar and Uttar Pradesh where there is insistence on buying the VIP brand only. This has happened over the last 30 years and it is all hard luggage,” Piramal said. For the full year, the company is expecting net profit of Rs 75 crore as compared to last year’s figure of Rs 50 crore. At present the company’s market cap is of Rs 1,400 crore, providing a P/E of 19 times which we feel is fair for a company like VIP. This does not leave much scope for the scrip to appreciate from the present level.