India Equity Research Miscellaneous August 11, 2021 V I P INDUSTRIES RESULT UPDATE KEY DATA Strong beneficiary of re-opening Rating BUY Sector relative Outperformer Price (INR) 386 12 month price target (INR) 486 VIP Industries’ (VIP) Q1FY22 sales surged 411% YoY (down 15% QoQ), Market cap (INR bn/USD bn) 55/0.7 40% above estimate, with recovery in domestic travel. Gross margin Free float/Foreign ownership (%) 46.5/7.3 What’s Changed jumped 718bps QoQ to 50.9% led by price increases and lower Target Price Rating/Risk Rating discount. EBITDA increased to INR129mn (50% above estimate). QUICK TAKE Management expects strong revival in demand led by vaccination and Above In line Below recovery to be faster than first wave. With strong operational Profit efficiencies, we revise up FY22/23E EBITDA 73%/11%. We believe the Margins company is well placed led by opening up of the economy with strong Revenue Growth pent-up demand and value the stock at 42x (35x earlier) at historical Overall average for normalised earnings (Mar 2023E EPS), discounted to Dec 2022E EPS. Upgrade to ‘BUY’ with revised TP of INR486. FINANCIALS (INR mn) Strong gross margin improvement Year to March FY21A FY22E FY23E FY24E VIP reported a pick up of 411% YoY in Q1FY22 sales, in line with domestic travel, Revenue 6,186 10,516 16,089 18,502 though at mere 37% of pre-covid level (hit by second wave), but down 15% QoQ. EBITDA (653) 1,371 3,058 3,619 Adjusted profit (975) 499 1,697 2,153 Gross margin was up 866bps YoY and 718bps QoQ to 50.94% due to lower discounts, Diluted EPS (INR) (6.9) 3.5 12.0 15.2 better mix in favour of high-margin products and price increases. Further shift in EPS growth (%) nm nm 239.9 26.8 sourcing from China to low-cost Bangladesh and India is leading to improved margin. RoAE (%) (17.3) 9.4 28.4 29.8 Hence, management expects this gross margin to sustain. EBITDA was up to P/E (x) nm 109.2 32.1 25.3 INR129mn (50% above estimate) versus INR578mn loss in base quarter and up 303% EV/EBITDA (x) (85.4) 40.2 17.9 14.7 Dividend yield (%) 0 0.3 1.0 1.0 QoQ. While second wave led to miss in a seasonally strong Q1, management expects strong revival in demand led by vaccination and recovery faster than first wave. We expect sales to pick up to pre-covid level by end FY23, early FY24. PRICE PERFORMANCE Operational efficiencies and product development across channels 425 55,000 390 51,200 Management is optimistic on demand ahead and recovery to be faster. Further, it is 355 47,400 working on a host of new launches (~20-25) and increased digital marketing. VIP is 320 43,600 also working on operational efficiencies across supply chains and huge development 285 39,800 250 36,000 across channels. This should help manage the demand recovery better and even Aug-20 Nov-20 Feb-21 May-21 Aug-21 wave three, if it comes. Sustained cost reduction measures will structurally improve VIP IN Equity Sensex profit ahead, in our view. Of INR1.8bn cost savings, we believe 50% is sustainable. Outlook and valuations: Strong play on recovery; upgrade to ‘BUY’ Explore: We believe VIP is well placed led by opening up of the economy with strong pent-up demand and value the stock at 42x (35x earlier) at historical average for normalised earnings (Mar 2023E EPS), discounted to Dec 2022E EPS. We upgrade to ‘BUY’ from ‘HOLD’ with revised TP of INR486 (INR366 earlier). Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 2,062 403 411.3 2,430 (15.1) EBITDA 129 ( 578) NM 32 302.8 Adjusted Profit 25 ( 513) NM ( 38) NM Video Corporate access Diluted EPS (INR) 0.2 ( 3.6) (104.9) ( 0.3) NM Shradha Sheth Meera Midha +91 (22) 6623 3308 +91 (22) 4088 5804 [email protected] [email protected] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited V I P INDUSTRIES Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Total operating income 6,186 10,516 16,089 18,502 Share capital 283 283 283 283 Gross profit 2,524 5,430 8,850 10,224 Reserves 4,889 5,185 6,204 7,678 Employee costs 1,376 1,704 2,092 2,350 Shareholders funds 5,172 5,468 6,487 7,961 Other expenses 0 0 0 0 Minority interest 0 0 0 0 EBITDA (653) 1,371 3,058 3,619 Borrowings 3,534 2,934 2,611 2,111 Depreciation 779 789 802 829 Trade payables 1,540 1,115 1,587 1,814 Less: Interest expense 298 194 152 130 Other liabs & prov 226 388 914 971 Add: Other income 484 200 100 100 Total liabilities 10,609 10,053 11,760 13,033 Profit before tax (1,246) 587 2,204 2,760 Net block 2,838 2,198 1,597 1,068 Prov for tax (271) 88 507 607 Intangible assets 47 47 47 47 Less: Other adj 0 0 0 0 Capital WIP 20 100 100 100 Reported profit (975) 499 1,697 2,153 Total fixed assets 2,905 2,346 1,744 1,215 Less: Excp.item (net) 0 0 0 0 Non current inv 9 9 9 9 Adjusted profit (975) 499 1,697 2,153 Cash/cash equivalent 2,305 2,334 2,512 3,283 Diluted shares o/s 141 141 141 141 Sundry debtors 1,485 1,757 2,689 3,092 Adjusted diluted EPS (6.9) 3.5 12.0 15.2 Loans & advances 240 246 253 260 DPS (INR) 0 1.2 4.0 4.0 Other assets 3,665 3,361 4,553 5,173 Tax rate (%) 21.8 15.0 23.0 22.0 Total assets 10,609 10,053 11,760 13,033 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Fixed Costs (% of rev) 51.4 38.6 36.0 35.7 Reported profit (975) 499 1,697 2,153 Net debt (INR mn) 1,229.0 600.3 99.0 (1,172.7) Add: Depreciation 779 789 802 829 Gross margin (%) 40.8 51.6 55.0 55.3 Interest (net of tax) 199 130 102 87 EBITDA margin (%) (10.6) 13.0 19.0 19.6 Others (542) (61) (65) (73) Net profit margin (%) (15.8) 4.7 10.5 11.6 Less: Changes in WC 709 (226) (1,119) (732) Revenue growth (% YoY) (63.9) 70.0 53.0 15.0 Operating cash flow 170 1,131 1,416 2,264 EBITDA growth (% YoY) nm nm 123.1 18.3 Less: Capex (91) (230) (200) (300) Adj. profit growth (%) nm nm 239.9 26.8 Free cash flow 79 901 1,216 1,964 Assumptions (%) Key Ratios Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E GDP (YoY %) (8.0) 0 7.0 7.0 RoE (%) (17.3) 9.4 28.4 29.8 Repo rate (%) 4.0 4.0 4.3 5.3 RoCE (%) (10.8) 9.1 26.9 30.1 USD/INR (average) 75.0 73.0 72.0 71.0 Inventory days 374 203 162 178 % of exports 5.2 5.2 5.2 5.2 Receivable days 123 56 50 57 Domestic (% YoY) (56.0) 50.0 20.0 20.0 Payable days 222 95 68 75 Export (% YoY) (62.0) 50.0 20.0 20.0 Working cap (% sales) 53.3 33.6 29.0 29.2 RM Cost (% of rev) 59.2 48.4 45.0 44.7 Gross debt/equity (x) 0.7 0.5 0.4 0.3 Staff Cost (% of rev) 16.4 16.2 13.0 12.7 Net debt/equity (x) 0.2 0.1 0 (0.1) Selling cost (% of rev) 31.0 22.4 23.0 23.0 Interest coverage (x) (4.8) 3.0 14.8 21.5 Valuation Metrics Valuation Drivers Year to March FY21A FY22E FY23E FY24E Year to March FY21A FY22E FY23E FY24E Diluted P/E (x) nm 109.2 32.1 25.3 EPS growth (%) nm nm 239.9 26.8 Price/BV (x) 10.5 10.0 8.4 6.8 RoE (%) (17.3) 9.4 28.4 29.8 EV/EBITDA (x) (85.4) 40.2 17.9 14.7 EBITDA growth (%) nm nm 123.1 18.3 Dividend yield (%) 0 0.3 1.0 1.0 Payout ratio (%) nm 34.0 33.3 26.3 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited V I P INDUSTRIES Q1FY22 Conference Call: Key highlights Financials Revenue growth: Revenue increased 411% YoY in Q1FY22 inline with domestic travel, though at mere 37% of pre covid levels (hit by second wave), but down mere 15% QoQ. As per management the supply chain was able to meet demand better than the past. Gross margin: Gross margin was up 866bps YoY and 718bps QoQ to 50.94% mainly due to lower discounts and better mix in favor of higher margin products and price increase.