Brokerage Recommends Buy This Multibagger Small-Cap Stock, Shares Can Surge 54%

Stock Outlook & Returns on investment

The current market price (CMP) of VIP Industries stood at Rs 665.55 on NSE. On Friday, it gained 2.55% from its previous close of Rs 649.49 apiece. Its 52-week low is Rs 484, which was recorded on 29 September 2021, and the 52-week high is Rs 774.60, recorded on 31 March 2022, respectively.

The stock has given 1.52% negative return in the past 1 week. It has given 12.15% positive return in the past 1 month and 6.23% in the past 3 months, respectively. The stock over the past 1 year has given 31.38% positive return. It has given 38.84% positive returns in the past 3 years, whereas, in the past 5 years, it gave 166.27% multibagger returns.

Aims to scale Caprese by 5x over next 3 years

VIP aims to scale its handbags business by 5x over the next 3 years. Brand Caprese, was launched in 2013 but VIP was unable to achieve desired scale (~Rs900mn of top-line with 7% sales contribution in FY22) given 1) fragmented nature of the market (largely unorganized) 2) stiff competition and 3) challenges in distribution. However, in order to scale the business from here on:

• A new business head has been hired.
• Tara Sutaria has been roped in as brand ambassador.
• A new collection in collaboration with Manish Malhotra will be launched around Diwali to woo customers.
• Alternative marketing channels will be explored (currently >60% of the business is online).
• Premium products will be launched (price point is set to expand with upper end of the range being as high as Rs10K).

Nonetheless, we remain conservative and expect 30% sales CAGR in Caprese over FY23-25E, as market is not only highly fragmented but also characterized with stiff competition.

Export share to rise to 15% in 3 years

Exports/international business hold a strong potential, as post pandemic most countries are looking to de-risk supply chain from China. Leveraging on this opportunity, management is targeting 15% revenue contribution from exports in next 3 years (~6% contribution in 1QFY23) with a view to expand its geographical reach. Additionally, VIP is also evaluating white label B2B exports for certain large retailers in international markets.

Plans to end FY23E with 500 EBOs

VIP had 376 EBOs as of FY22 and intends to reach the 500 mark in FY23E with plans of doubling the count over next 3 years. Most of new EBOs will be opened on franchise model targeting smaller towns. Strategy to expand via franchise route not only results in NIL rental commitments but also brings in higher throughput, as owner has active involvement in the franchise model.

Multiple levers in place for margin expansion

GMs have been under pressure over last few quarters due to persistent rise in RMs and freight cost. However, key RMs like PP, PC, and nylon have declined by ~20% odd on sequential basis. Similarly, freight cost is also down by >75% from peak levels. Consequently, we expect GM of 53.2% in FY24E and 53.7% in FY25E, as full benefits of owning the manufacturing value chain will start getting reflected over next few months.

All Future Group stores to be operational by December/March

Future Group (now to be operated by Reliance) accounts for ~15% of revenues and out of 430 stores across banners, 44 were operational in 1QFY23. All stores are expected to open by Dec-Mar which is likely to aid revenue contribution from modern trade segment.

Other key takeaways

• Subsidy given to Chinese luggage players has been withdrawn and the dragon nation is now moving towards manufacturing other value-added products beyond luggage. This presents opportunity for other players to capture export demand share of China.
• Capacity utilization in Bangladesh is ~85-90% and VIP employs ~4,700 people in the country.
• GM of mass brand Aristocrat is roughly 10% lower than VIP/Skybags.
• PP is roughly 40% cheaper than PC, but is fully recyclable.
• A&P spends will remain in the range of 5-5.5%. However, the plan is to adopt influencer marketing strategies rather than rope in brand ambassadors as was the case in past.
• Roughly 10% of sales is from EBOs.
• GM on handbags is higher than luggage/backpacks.
• SL sales that happens through CSD channel is typically outsourced.
• VIP now has an in-house design (40 people) and quality control team.
• Out of HL sales, ~40% is PP and ~60% PC.
• Balance insurance money (Rs150mn received in 1QFY23) is expected to be received in 4QFY23E

Multiple growth levers at play, Buy for 1,020 target price

Commenting on the stock, Prabhudas Lilladher said, "Recently, we hosted VIP Industries for a roadshow wherein management highlighted plans to 1) scale brand Caprese by 5x 2) increase exports share to 15% and 3) double the number of EBOs to ~1,000 over next 3 years. The upstream transformational journey continues with plans to further backward integrate into manufacturing of trolleys, wheels and locks (forms ~35-50% of the cost). We believe benefits of owning the value chain (share of in-house manufacturing to be at ~75-80% in FY23E) will start reflecting soon, as input cost pressure has started stabilizing. On the demand front, outlook continues to remain robust and VIP is on track to achieve Rs20bn in top-line with an EBITDA margin of ~18-19% in FY23E. We increase our FY23E/FY24E EPS estimates by 1%/5% and introduce FY25E EPS of Rs25. Amid emergence of new twin levers (handbags and exports) we expect sales/PAT CAGR of 15%/26% over FY23-25E. Retain BUY with a revised Target Price of Rs1,020 (45x Sep24 EPS; no change in target multiple but we roll forward)."

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.