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With the June quarter weaving a tale of ups and downs, VIP Industries posted somber earnings, driving brokerage firms to slash their target price on the luggage maker’s stock.
VIP Industries houses brands such as Carlton, Skybags, Aristocrat, Caprese, and Alfa, and is the second-largest player in the world and largest in Asia, commanding about 50 percent market share in the luggage market in India, followed by Samsonite and Safari.
On August 2, the company that makes luggage, backpacks, and home bags, reported a 16 percent YoY fall in consolidated net profit to Rs 57.75 crore for the quarter that ended in June 2023, whereas total revenue rose nearly 8 percent on the year to Rs 636.13 crore.
EBITDA margin for the quarter under review shrunk by 470 basis points to 12.7 percent.
Despite the ongoing growth in air travel, demand was affected by the wedding season and a longer replacement cycle for luggage, resulting from significant purchases last year when travel restrictions eased. Additionally, the interior regions experienced subdued growth, as stated by VIP Industries in a conference call with the media.
Analysts’ reaction
In light of a weak Q1 performance, Prabhudas Lilladher cut its Earnings Per Share (EPS) estimate for FY24 and FY25 by 19 percent and 12 percent, respectively, and also downgraded its rating on the stock to ‘accumulate’ from ‘buy’.
On August 4, the stock closed 2.3 percent lower at Rs 583.85 on the BSE.
Though, the decline in demand should be considered in the context of fewer wedding days in the first quarter and the lack of institutional orders in April-June last year, Prabhudas Lilladher predicts that increasing competitive intensity may pose growth challenges. Moreover, the decision to defer Rs 200 crore in capital expenditure suggests that revival of growth might take some time, it added.
For now, Nuvama Institutional Equities has maintained its target at 40 times (higher than its three-year average of 35 times), believing that the June quarter performance is an aberration. Though the brokerage firm added that “If this points to structural market share loss, valuations shall be impacted”.
Even Axis Securities believes it would be an uphill task for the company to maintain its growth trajectory in the coming quarters.
Read more | Revenge travel, formalisation to boost luggage sector; Should investors look at VIP, Safari Industries?
Supply constraints
The company’s oldest manufacturing plant, which crafts VIP and Skybag design lines catering to the premium segment, faced a major setback due to a significant fire incident. The outbreak during the fourth quarter of FY23 in Bangladesh severely impacted the supply of their high-end products in both VIP and Skybags.
These particular product lines were difficult to outsource, making the situation even more challenging.
Additionally, the incident also had a negative effect on the company’s gross margins by creating an unfavorable product mix, shifting more towards the mass segment.
“Despite its efforts, VIP was unable to mitigate its production in a crucial quarter and will require 3 more months for the same (post the Bangladesh Plant Fire),” according to Axis Securities.
Historically (pre-COVID) Q1 has been the strongest quarter contributing 29-32 percent to annual sales and 35-40 percent to annual Profit Before Tax, highlighted Centrum Broking. Keeping this in mind, the brokerage firm has trimmed its EPS estimate by 10 percent for FY24 and by 14 percent for FY25.
Read more | Safari Industries — Can the stock continue to fly?
Management commentary
The company has slashed its topline growth guidance to 10-12 percent and target gross margin at 50-52 percent and EBITDA margin in the range of 15-17 percent for FY24 as it expects demand to pick up from Q3 of FY24.
VIP Industries said in the conference call that the demand environment remains muted in the immediate. Nonetheless, the outlook for festive remains robust.
In 1QFY24, the company expanded its presence in 70 towns, and the target is to reach additional 250 towns by the year-end, resulting in a presence amongst more than 1500 towns.
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