Arjun Badola

My take on vip industries

Disclaimer: I am not a SEBI registered adviser. All the information provided by me are for educational/informational purposes only.

About

Company was founded in 1971 and was first into the business of footwear. Soon they realized they are not making profits there and shifted their focus to luggage industry. Today, VIP industries deals in three segments of luggage: Mass/Value, Economy & Premium. Moat

  1. Management: Sundip Gose was earlier in Samsonite and Dilip Piramal is famous for his management qualities. If you refer to the conference calls of the company you see the management clearly accepting what they could not achieve, any mistakes they made or what choices lead to any result. Also Radhika Piramal who is currently Vice Chairperson of the company, had also served the Executive Director.
  2. Regarding network effect they have around 8,000 retail outlets in India and a network in 50 countries.
  3. Brand value: VIP old and best price offering compared to Samsonite and VIP’s quality is better than Safari’s(as per my own experience).
  4. Company has good ROCE & ROE.
  5. VIP’s market share in India is around 52%, ahead of Samsonite at 35%, and Safari at 10%.
  6. Good advertising as for Displaying themselves as a Family brand they have Kareena Kapoor, Saif Ali Khan & Taimur. For getting young crowd they have Varun Dhawan as brand ambassador for Skybags. For Caprese which is a ladies bag brand they have Alia Bhatt.
  7. Well this is not a moat but definitely a good signal that Rakesh Jhunjhunwala has recently increased his stake in VIP Industries.8. 50% of the expenses is related to raw material cost, so if there is no demand company could cut on this expense and survive through this period of crisis. Employee Cost is just 11-12% of expenses, so this is manageable and could be further curtailed by cost cutting. Also, company has reserves of around 580 cr which very good for handling such crisis situation.

Opportunities:

  1. Huge scope for Caprese brand to grow.
  2. Aristocrat Brand is also growing currently.
  3. 60% of sector consist of unorganized players.
  4. Switching their manufacturing from China to Bangladesh. Production in Bangladesh is more cost efficient which means in future their margin can improve.
  5. 25% revenue is from Hard Luggage but there is less threat in this segment as there are no unbranded players in this segment.

Threats:

  1. Soft luggage is imported from china and import from Bangladesh is very small amount.
  2. Gaining market share from unorganized sector will take a lot of time.
  3. Revenues used to increase during the season of marriage but as COVID crisis has occurred revenues from such source has decreased.
  4. Luggage Industry is one of the industries which got severely hit by COVID-19. As, people stopped travelling. This led to Standalone March 2020 down 29.17% yoy.
  5. Safari is the market leader in the mass segment, to counter this VIP industries has acquired ALFA and Aristocrat Brands. Samsonite leads in Premium segment and to counter them they have acquired CARLTON brand and launched Caprese brand.

Opinion

VIP industries seems a good stock to buy at current valuation but as Warren Buffett says focus on business instead of the stock.

So, looking at the business even though VIP is the market leader in the organized sector the thing I fear is the intense competition. I could not find any material which could convince me that VIP will still remain market leader for next 10-15 years.

By the launch of American Tourister by Samsonite they had entered the economy sector. As we know VIP and Skybags broadly compete against the American Tourister in terms of both price point and channel mix. I do not find any moat which could protect VIP’s market share. Samsonite being a huge company has more resource than VIP to advertise and also they have their manufacturing plant in Nashik whereas VIP is still struggling to shift to Bangladesh plant from China. So, there is high probability that Samsonite could take away huge amount of market share from economy segment(Samsonite already a market leader in premium sector). VIP industries also has tough competition from Safari, as they are the leaders in Value segment. Recently, VIP industries has also lost some of their market share in CSD market to Safari.

In short, even though VIP industries would seem as a good stock but not a good business to have stake in. As there is no moat which could protect the company.