Feel VIP With VIP Industries For A Long-Term

LUGGAGE INDUSTRY

The luggage industry is one of the fastest growing industries in India. The industry is expected to clock 18 per cent CAGR growth in the coming years backed by continued increase in travel, new luggage and backpacks advertising campaigns, new distribution schemes and strong new product launches.

The steady rise in travel expenditure among households has fuelled growth for the luggage industry. There is growing preference globally and in India for branded bags and luggage. The increasing fashion consciousness and aspiration levels along with higher disposable incomes are amongst the key growth drivers for the industry even as the bags and luggage are considered lifestyle products. Among all the channels, the hypermarket channel continues to witness the strongest growth which also suggests that Indian consumers prefer affordable luggage and convenience of modern shopping formats. Increase in e-commerce business also augurs well for the luggage industry in India even as affordable luxury brands continue to grow well in India.

THE COMPANY

VIP Industries, one of the leading manufacturers of both hard and soft luggage and also hand bags, possesses a market share of more than 50 per cent in the organised luggage space.

Through its multiple brands, VIP Industries has presence across various price points, which is one of its core strengths. The polycarbonate category within the hard luggage is one of the fastest growing in the hard luggage category. However, it is the soft luggage that continues to grow faster for VIP Industries, contributing over 70% to the company’s sales.

With a presence in 27 countries, VIP Industries also boasts of product range including injection-moulded PP cases and furniture, vacuum-formed PC and ABS cases and soft-sided luggage in nylon, polyster and EVA material. The range in moulded furniture includes suitcases, backpacks, strolleys, executive cases, overnight travel solutions and school bags. The market for handbags, office bags and backpacks is much larger than the luggage market as there is repeat buying by customers and VIP is seen increasingly focused on introducing travel products for the short haul, viz., business bags, ladies bags, backpacks etc. Traditionally, VIP has been strong in travel products for the long haul.

GROWING INDIAN ECONOMY 

With the Indian economy expected to continue its growth momentum post demonetisation, the increase in business people travelling across the country is expected to be on the rise. Growing economy logically would lead to business expansion activity and with the advent of low cost airlines, it is expected that more and more people will travel by air which, in turn, would create demand for branded luggage. The domestic airline has grown by nearly EquityAnalysis 20 per cent in last couple of years. With air traffic expected to increase in the coming years, VIP Industries can be expected to gain market share as it has established distribution network and has a right mix of brand to tap the business travellers. 

BRANDED PRODUCTS

Presence of branded products in the Indian luggage market is the unique strength of VIP Industries. Even as “Skybags” brand continues to gain strength and is the fastest growing brand for the luggage manufacturer, it is the “VIP” brand that continues to dominate Indian luggage market. VIP enjoys the largest market share of all luggage brands in India. “Carlton” is one brand that has shown decent growth in the premium retail channel. With a shift in strategy where the premium brands such as Carlton is being promoted, VIP Industries is seen tapping into the wider customer base with differentiated and premium product offerings. Carlton, a British brand, targets premium business travellers. 

SHIFTING TREND 

The unorganised sector in the luggage segment comprises of nearly 60-65 per cent of the total luggage market in India, whereas the organised sector in the luggage segment currently constitutes nearly 40 per cent of the total market. With GST expected to be implemented in FY18, the shift in trend towards organised players could gain momentum and the shift augurs well for VIP Industries.

Within the organised sector, VIP industries has nearly 60% market share and the market share can increase due to new product launches in the growing luggage market. The growth in luggage Key industry can see acceleration with increased travel activity across the globe. Due to preference for branded products it is expected that the customers will prefer premium branded products even if the branded products are 20-30 per cent costlier. Customers are willing to pay a premium for good quality and long lasting products and this trend will help companies like VIP Industries gain market share. 

KEY TRIGGERS FOR THE STOCK 

Lower commodity prices : With lower commodity prices, the margins are expected to remain intact. The prices of polypropylene, which is a derivative of crude oil, have declined and will help boost margins for the company. Crude oil prices are expected to remain benign. Hard luggage roughly contributes to 25 per cent of the company’s revenues and polypropylene is a key raw material used in the manufacture of hard luggage. In case there is further fall in crude oil prices from the current levels, it will further support the margin expansion as polypropylene prices may also come down. 

Asset-light model :- VIP industries has a unique business model which allows the company to outsource a significant portion of its products from China and Bangladesh. China is the global sourcing hub for soft luggage. China also supplies in large quantities to the unorganised sector in India. The distribution, design and branding is taken care of by VIP Industries, whereas the manufacturing part is outsourced to China. The outsourcing of significant portion of its products allows the company to run its operations maintaining an asset-light model. This also helps VIP Industries maintain a low debt-equity ratio. Efficient working capital :- VIP Industries, thanks to its efficient working capital and lower interest burden, boasts of healthy financials. The receivables and inventory position is comfortable for VIP Industries and the working capital needs for the company are minimal. 

CONCLUSION 

With increased spend on A&P, it is likely that it will result in higher brand recognition that may help improve sales volume and maintain healthy margins. VIP Industries is clearly a play on semi-urban and urban consumption story in India. Investors looking to play the consumption story can look at VIP Industries with a long-term view. With expected growth in tourism sector and expanding economy, the demand for quality products provided by organised players in the luggage industry is expected to improve. The management expects that there will be volume growth of almost 15 per cent in the coming year, which is healthy. The key risks for the company remain the rise in raw material prices and foreign exchange rates which may impact the margins negatively.