Prabhudas Lilladher
VIP Industries (Accumulate)
Target: ₹376
CMP: ₹354.20
Recently, we conducted some channel checks (interacted with few distributors and an MD of one unlisted company) in the luggage space to get a pulse of current demand trends.
Our checks reveal: 1) demand in Q4-FY21 benefitted from gradual reopening of schools in Jan/Feb (augured well for backpack sales) coupled with shift in market share from unorganised to organised players; 2) cost inflation still persists, but situation is better than Q3-FY21 (input cost was up nearly 60-70 per cent on q-o-q basis); and 3) VIP has taken a price hike of nearly 6 per cent from March 1 to counter inflationary pressures.
Overall, while sales momentum was good in Jan/Feb, March witnessed slowdown due to rising Covid cases. Considering that Q1 is typically strongest quarter for luggage companies, if the current Covid situation does not improve in near term, we do not rule out spill-over of sales due to cancellation/postponement of weddings/leisure travel.
While sales may take 12-18 months to revert back to pre-Covid levels, VIP has reported strong sequential recovery (sales for Q1/Q2/Q3 stood at 7 per cent/25 per cent/56 per cent of the pre-Covid levels) indicating improvement in demand environment.
As a result, we maintain our Accumulate rating with a TP of ₹376.