VIP Industries is currently benefiting from several favourable factors, including an uptick in both business and leisure travel, a growing trend towards domestic manufacturing, lower raw material costs, and international expansion, said domestic brokerage firm Anand Rathi in a recent note.
VIP Industries is the leading Indian luggage brand with a product range of over 1,500 SKUs in both hard and soft luggage, duffle bags, backpacks, and suitcases. The company has successfully built a strong brand with high brand recall, catering to a wide range of consumers from mass to premium segments, positioning itself as a "masstige" brand.
The company now holds a market share of approximately 43.8% and is a leader in branded luggage. It offers a range of leading brands across the entire price range.
VIP and Skybags cater to the mid-premium category, Carlton caters to the premium category, and Aristocrat caters to the mass category. VIP also sells handbags for women under the brand name Caprese, which is positioned as a mid-premium category product.
Focusing on mass category and e-commerce to regain lost market share
The company's focus on the mid-premium and premium categories prevented the company from recognising notable down-trading in luggage, with consumer preference shifting to mass products over premium brands with a possible shift from the informal segment, because of which in the last 3–4 years the company lost market share to Safari (from 51.5% in FY19 to 43.8% now), said the brokerage firm.
However, in the last 1–1.5 years, the company has been making efforts to regain market share by focusing on its Aristocrat brand, which falls under the mass category. Additionally, it is targeting the e-commerce sector to establish a foothold in the bottom segment after having established itself in the mid- to premium-priced categories.
Anand Rathi notes that Aristocrat brand contribution to the company's overall revenue has increased from approximately 25.1% in FY20 to 36.6% in 9M FY23.
Expanding internationally
As of 9M FY23, international revenue accounted for approximately 4-5% of the total revenues of the company. The company markets its luggage products in 45 countries and intends to focus on expanding its international business as a key growth driver.
This is in response to increasing interest from global companies to de-risk their supply chains from China, presenting a significant opportunity for companies like VIP to capitalize on this trend. With this strategic focus, VIP is well-positioned to capture such opportunities and scale up its international business, the brokerage stated.
In-house manufacturing has risen to 69% since the pandemic
The company has a total of 10 manufacturing units, including two in India and eight in Bangladesh, with a monthly production capacity of approximately 1.02 million units as of 9M FY23.
To support its growth plans, the company is investing ₹1 billion in capex for FY23, with ₹350 million in H1 FY23. The company is expected to increase its capacity for hard and soft luggage to approximately 1.8 million units per month in the coming years, said Anand Rathi.
In order to enhance its position in the soft luggage market, which is currently produced in Bangladesh, the company plans to expand geographically by setting up a new soft luggage unit in India.
Additionally, it plans to expand its production capacity for polypropylene hard luggage in India and Bangladesh due to increasing demand for travel and hard luggage. This will help the company reduce its reliance on raw materials from China, resulting in improved margins and positioning the company for future growth, it added.
Handbags provide a vast growth opportunity
The brokerage has highlighted that there is a growing trend of premiumization among handbag shoppers, which is likely to boost the growth of VIP's Caprese brand. This is due to an increased preference for branded products, a higher number of women participating in the workforce, and rising income levels.
As a result, Caprese has the potential to scale up and achieve prices ranging from Rs. 5,000 to Rs. 7,000 in the long term. The company is optimistic about the brand's future and anticipates significant growth beginning in FY25. It aims to double Caprese's revenue every year after FY25, it said.
Valuation
In light of all growth factors, Anand Rathi initiated coverage on VIP Industries with a 'buy' recommendation and a target price of ₹850 apiece, valuing it at 34x FY25e EPS.
08 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
