Vijay Sales 23 November 2016
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Institutional Equities Vijay Sales 23 November 2016 We held a conference call with Mr. Nilesh Gupta, managing partner of Vijay Chirag Muchhala Sales, a leading white goods retail chain, to discuss the impact of [email protected] demonetisation measures of the government. Key takeaways are as follows: +91-22-3926 8092 Current status After the announcement of demonetisation measures, Vijay Sales witnessed a drastic fall in footfalls across its stores in the first three days. Sales are down 50% currently and the downtrend is expected to continue for one or two more months. The management expects the normalcy to return only after sufficient availability and circulation of money in the system. The management believes that sentiment plays a key role in a consumer’s decision to purchase white goods and upgrade his lifestyle. Currently, the sentiment is not in favour of spending money but rather to conserve liquidity call Update (including limits on credit cards) for future contingencies that may arise over - the next few months. On the positive side, in the long run, even if half of the parallel economy comes into the mainstream, it will be a major boost for the white goods sector. Overall, Vijay Sales feels it is only a short-term adjustment period as the ference demonetisation impact is drastic, but does not expect the demand fall to be structural in nature. Con Current payment structure For Vijay Sales, 40%-45% of its sales takes place through consumer financing, 30%-35% sales through debit/credit cards while less than 20% sales takes place via cash. To avail consumer financing offers, 70%-75% down payment is made by debit/credit card, 10%-12% by RTGS/cheque and 15%-20% by cash. For consumer financing firms (like Bajaj Finance), 75% of the interest costs is borne by the product company (the brand) and 25% by retailers (like Vijay Sales). Processing fees may be levied by Bajaj Finance on some schemes depending on customer profile or the company policy. Terms of trade White goods companies generally give a credit period of 7 to 10 days. They can extend the credit period up to 30 days but with much lesser incentives, which Vijay Sales does not prefer. Post demonetisation measures, MNC brands are not offering any relaxation in terms of payment. However, the situation may change if demonetisation effects extend more than anticipated. Vijay Sales typically carries inventory of 40-45 days. The competitive intensity among brands has not worsened yet. None of the brands have offered higher discounts, commissions or trade terms to liquidate their inventory. Neither consumer financing firms nor Vijay Sales are focusing on advertising to stimulate sales as it may be perceived negatively by the customer. In the current scenario, Vijay Sales will refrain from taking on more inventory (even if better discounts are offered) and focus on liquidating the stocks which it currently has. Institutional Equities GST to be a challenge to implement The management is sceptical on the implementation of Goods and Services Tax (GST). Till now, value added tax (VAT) was a State subject and there was fair amount of clarity on the same, but GST will be under the Central government and there is not much clarity yet. In January-March quarter, Vijay Sales will like to reduce its inventory in anticipation of stock clearance ahead of GST implementation. Last time, when sales tax was converted into VAT (seven to eight years ago), it took six months to get the input credit refund and hence the company wants to be cautious this time. Vijay Sales does not perceive taxation of goods to be detrimental for demand as buying habits do not get affected by a minor change in prices. Product category-wise impact Vijay Sales is witnessing lower demand owing to lower footfalls across all product categories and brands as it is a major economic measure. The only product category which has witnessed a lower drop in sales compared with other categories is mobile phone. Replacement cycle for large home appliances (refrigerator, washing machines and air-conditioners) is four to six years, for televisions it is three to five years and for mobile phones it is one to two years. For Vijay Sales, televisions contribute 25% to sales, large home appliances account for 50% of sales, mobile phones constitute 15% of sales whereas 10% comes from laptops and other categories. Geography-wise impact Vijay Sales believes that Tier 1 and Tier 2 cities are likely to be better off as the exposure to credit cards and other banking channels is higher and more prevalent there. Tier 3 cities and rural areas may be worst-affected, but Vijay Sales is not present at these locations. Vijay Sales – company background Vijay Sales was established as a partnership firm by Mr. Nanu Gupta, an entrepreneur with astute business acumen and foresight. From a small television showroom at Mahim in Mumbai in 1967, Vijay Sales evolved into one of Mumbai’s leading chain of electronic superstores, now having expanded to major cities across India. Together with his two sons Mr. Nilesh Gupta and Mr. Ashish Gupta, Mr. Nanu Gupta remains the driving force behind the Vijay Sales enterprise. With aesthetically designed and conveniently located showrooms, Vijay Sales caters to customers of all budgets and preferences. Vijay Sales had around 70 outlets currently. It prefers operating out of standalone stores instead of operating in a mall so as to get footfalls of only dedicated consumer durable buyers. The company has stores in Mumbai, Pune, Ahmedabad, Surat, Vadodara, Delhi, Gurgaon, Faridabad, Ghaziabad and Noida. Vijay Sales – business model Vijay Sales operates through a pure trading model (buys branded products from a white goods manufacturer and sells them to consumers) and does not operate on commission basis. The key focus is on product categories like panel TVs, air-conditioners (ACs), refrigerators, washing machines, mobile phones as well as laptops. Panel TVs contribute 25% to sales, large home appliances like refrigerators, washing machines and ACs contribute 50% to sales, mobile phones make up for 15% of sales whereas 10% comes from laptops and other categories. Vijay Sales launched its own in-house brand called VISE a few years ago. Currently, VISE brand is present in LED TV, air-conditioner and washing machine categories. If VISE brand scales up, then more product categories can be added. The main aim via VISE brand is to generate more footfalls and it has no intention of becoming a manufacturer. 2 Vijay Sales Institutional Equities Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. 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