Amid the headwinds faced by the industry i.e. Elections, Drop in air passenger growth, deep economic slowdown, postponing of marriages and vacations, etc, it was heartening to see both VIP Industries Ltd & Safari Industries Ltd improving their performance. Certain circumstances lead to quite opposite impact on both of them. Safari had higher revenue growth but margin expanded more for VIP. I will explain them here in the blog ‘VIP Industries Vs Safari Industries- Q1FY20 result analysis’.
VIP Industries Vs Safari Industries- Q1FY20 result analysis
Key trends for Indian Luggage Industry- FY19
Key trends for Indian Luggage Industry- FY19
Supply side dynamics- Indian Luggage Industry
Chinese luggage suppliers are struggling given the high tariffs(45%) imposed by the US for supplying to the US market(their largest), hence, they are ready to accept even lower prices to get an order.
Both of these companies faced cost pressure(Higher crude oil prices & steep rupee depreciation) in the second half of FY19 leading to drop in margins. Now things have eased.
Given the lower raw material cost(Crude oil used for Hard luggage production) and Chinese manufacturer agreeing to provide products at a lower cost, the Gross margin should have increased. But the higher cost inventory of the Sept’18 & Dec’18 quarter has eaten into the gross profits.
While Safari Industries Ltd is totally dependent on China for the purchase of Soft luggage(75% of revenue), VIP Industries Ltd sources part of its Soft Luggage requirement from China and partly manufacture from their own plants in Bangladesh, thus having better control over supply risks as well as leading to lower cost. Safari Ind. in their latest annual report have mentioned that they are in process of sourcing part of soft luggage from India as well as renegotiate prices from Chinese suppliers.
Both the companies manufacture hard luggage in India.
In my view, given the high labor cost in China; India & specially Bangladesh offers excellent opportunity to diversify procurement. The problem lies with scale and if the demand comes to India, I suppose there would be many to leap over it.
To add to that, GST is now bringing unorganized players on even playing fields.
VIP Industries Vs Safari Industries- Q1FY20 result analysis
Factors driving the margin expansion at 'VIP Industries Ltd'
Factors driving the margin expansion at 'VIP Industries Ltd'
VIP Industries Ltd- Q1FY20 financial analysis
VIP Industries Ltd- Q1FY20 financial analysis
Due to the change in accounting rules for leases, the depreciation figure has multiplied, that is what has lead to 6 fold increase in depreciation & simultaneously reduction in ‘Other expenses’ for VIP Industries. Adding to the jump in EBITDA Margin.
Coming to the gross margin, the drop was 1.8% compared to 4% drop YoY in Safari industries numbers. The management has mentioned in the concall that in this quarter the company sold only a small part of their high cost inventory and plans to sell the remaining gradually by Dec’19.
The reason for the tepid sales growth for VIP Industries ltd was the fire at their Ghaziabad warehouse. On 3rd April 2019, the company had a fire at their Ghaziabad regional warehouse leading to a loss of ₹48.5cr worth of inventory. But, it is fully insured. This amount has been deducted from P&L statement. Of the total revenue growth of 9%, 7% was due to volume and 2% was due to price hikes.
The decline in PBT & PAT margin can be explained because of exceptional loss due to the fire at their warehouse which otherwise would have lead to revenue growth and higher margins. Also, the Bangladesh facilities are incrementally adding to the margins of the company.
Listening to the concall and reading more about VIP, what I felt is the VIP management gives a lot of thought to every small decision.
VIP Industries Vs Safari Industries- Q1FY20 result analysis
Safari Industries Ltd- Q1FY20 financial analysis
Safari Industries Ltd- Q1FY20 financial analysis
I am sure Safari Industries Ltd would also have tried some of the strategies used by VIP. But VIP has the advantage of scale & brand power. The gross margin contraction was more in Safari.
Similar to VIP, there was more than 2 fold increase in depreciation for Safari.
Comparing the operating profit margin, VIP industries more than doubled it at 22.7% compared to 10.5% at Safari.
In terms of other business details, Safari Industries Ltd has only one wholly owned subsidiary Safari Lifestyles Limited(Latest turnover of ₹14.6 cr for FY19). The company has set up 2 modern regional distribution center at Mumbai & Gurgaon during last year. Also, planning to expand the hard luggage manufacturing at Halol, Gujarat. One of the company’s brand Magnum was strengthened with a larger product portfolio and wider channel availability. So, they are trying to push for creating awareness for other brands other than that of Safari.
VIP Industries Vs Safari Industries- Q1FY20 result analysis
Few Pointers
Given the problems faced by the economy, the strong performance by both these companies provide a relief that things might not be that gloomy or there is very strong demand favoring the Indian luggage industry that outweighs the slowdown. Even if the reason is either of the two, we can expect a much robust performance when the economy comes back on track.
Also, one should watch out for an unlisted and global peer ‘Samsonite’. Given the slowdown in developed market, their key market now they are pursuing their growth ambition in India. American Tourister, their brand focus in India can now be seen almost everywhere.
Further Reading: