With the economy showing signs of revival, more people are set to travel, on business and pleasure, which is good news for luggage makers such as VIP Industries. The Indian luggage market is expected to grow at an average rate of 18 per cent between 2014 and 2018 says Research and Markets, a market research firm. As Indians adopt more sophisticated modes of travelling, VIP Industries, the only listed player in the luggage space, with about 60 per cent market share in the organised segment, should benefit.
Unorganised players have a little over 46 per cent share in the luggage market. But with the growing preference for branded and fashionable luggage, organised players could see their market share rising.
The size of their slice of the pie has risen from about 25 per cent in 2009 to over 50 per cent now. VIP Industries will benefit from its national presence, strong brands, presence in all price categories, constant innovation and new launches. Over the past few years, consumers in India have preferred wheel, trolley suitcases and lightweight soft luggage.
With changing market preferences, VIP too launched more products in the soft luggage category and today these make up 70 per cent of sales. The company’s sales have grown at an average rate of 12 per cent in the last five years.
The stock discounts its expected earnings for FY16 by 15 times. It has traded in the PE band of 12-35 times in the last three years.
VIP recorded sales growth of 16 per cent in FY14. Profits (before exceptional gains) were up 43 per cent, thanks to improved margins, a lower forex loss and a fall in interest outgo.
The company’s revenues are split between hard and soft luggage in the ratio of 30:70. While hard luggage is manufactured in India, the soft variety is mostly imported from China. This makes the company’s margins vulnerable to currency fluctuations.
In FY13, the rupee’s fall hit the company’s margins severely. From an average of 13-14 per cent, the operating margin fell to 8.4 per cent that year.
Last year, however, despite the rupee falling further, VIP was able to control cost pressures by negotiating prices with suppliers and also partially passing on cost increases. The company reported an operating margin of 8.59 per cent for the year.
However, there has been an improvement in margins of late. In the June quarter this year, the company’s margins rose to 13 per cent. Going ahead, pressure on margins should reduce given the rupee’s stability and with the company’s new soft luggage manufacturing facility in Bangladesh starting production.
The plant commenced operations in January and production will increase significantly only over the next three years.