Comments
IDBI Capital
Safari Industries (Buy)
CMP: ₹403.5
Target: ₹523
The organised luggage industry is oligopolistic in nature with strong barriers to entry. After implementation of GST, organised players have witnessed strong sales growth led by market share gains from unbranded players. However, FY21 is likely to be weak due to anticipated impact of Covid-19; nevertheless, we believe the impact of Covid-19 will only be for the short term and growth should rebound from FY22E.
We initiate coverage on Safari with a ‘buy’ rating and a target price of ₹523 based on price-to-earning-ratio (PER) of 24x FY22E. Safari is a proxy play on rising spends on travel and tourism in India. While Safari’s two larger peers have focussed on mid and premium segments, it has built its competency in the economy segment of the luggage market where transition from unbranded to branded bags is fastest.
Its peers have better margins and working capital than Safari which we believe leaves scope of improvement for Safari. Its management is now focussed on improving margins and working capital.
We expect Safari’s sales/EBITDA/net profits are to grow at CAGR of 9 per cent/10 per cent/20 per cent over FY20-22E, respectively.
Premium valuation (PER of 18.6x FY22E) is justified given significant growth prospects (exposure to fast-growing economy segment), potential to improve margins and return ratios. We remain positive on the structural story for the luggage industry and believe the impact of Covid-19 will only be for the short term.
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