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Jhunjhunwala Q4 pick: A play on tourism, this stock has many ‘buy’ ratings even in times of coronavirus

Analysts have already cut FY21 EPS estimates for the stock by up to 50 per cent.

, ETMarkets.com|
Last Updated: Jun 03, 2020, 08.22 AM IST
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Kotak maintained its ‘buy’ call on the stock due to strong brands of VIP, credible growth story in last three years and a correction in raw material prices.
NEW DELHI: No tourism, no demand for luggage. That’s a no-brainer.

Yet analysts are gung-ho on this luggage maker, where ace investor Rakesh Jhunjhunwala and his better half Rekha Jhunjhunwala own 5.31 per cent.

Analysts have already cut FY21 EPS estimates for the stock by up to 50 per cent, but they still remain upbeat on it, and how!

March quarter shareholding data showed the billionaire investor bought 2,85,000 additional shares in VIP Industries to increase his stake to 1.62 per cent from 1.42 per cent at the end of December quarter. His wife Rekha Jhunjhunwala’s stake in it remained unchanged at 3.69 per cent.

Look beyond FY21
So what has made analysts put their faith in this stock.

Says IDBI Capital: “Historically, the luggage industry has had a strong year after two consecutive weak years due to pent-up demand. Hence, we expect a strong recovery in FY22.”

FY20 sales growth was weak for most luggage players due to an economic slowdown, muted air traffic growth and loss of market share to competitors. During this period, VIP's sales declined 3.7 per cent.

Even FY21 is likely to be very weak for most of the luggage companies due to the adverse impact of coronavirus on the tourism industry, analysts said.

IDBI Capital is forecasting FY22 sales and Ebitda growth at 35 per cent and 52 per cent, respectively. It has a price target of Rs 275 on the stock, which suggests a 25 per cent upside potential.

Kotak Securities has a bigger target price at Rs 295 (though down from Rs 320 earlier).

“Even though it is tricky to predict the direct and indirect impact of Covid-19 on FY21-22E demand, we expect VIP to race ahead of competition, resort to cost savings to help margin expansion, push for e-commerce and modern trade channels for sales and prepare for structural changes in the industry,” it said.

Near-term pain
ICICI Securities noted that June quarter is a critical period for the company, as it historically account for 30 per cent of its overall revenue and 45 per cent of profitability in a given year.

To curb the spread of pandemic, most states have closed malls indefinitely. Many retailers with standalone locations have announced reduced hours.

The April-May loss has been substantial, as sales have been just 5 per cent of normal, which will have a material impact on FY21E performance.

Meanwhile, while tourism is affected, postponement of marriages is also a major concern. Marriage season sales constitute around 30 per cent of VIP’s revenue.

Q4 show
The company reported a 28.4 per cent year-on-year drop in consolidated net sales at Rs 311.30 crore from Rs 435 crore in the year-ago quarter. Profit for the quarter fell 72.2 per cent to Rs 9.5 crore from Rs 26 crore in the year-ago quarter. Ebitda margin came in at 10.2 per cent against 9.1 per cent YoY and 15.7 per cent QoQ.

What is VIP up to?
The company has manufacturing facilities at Haridwar in Uttarakhand, Jalgaon, Nagpur and Nashik in Maharashtra. It also has a subsidiary in Bangladesh to manufacture and market luggage and bags.

The company plans to shift sourcing of raw material entirely to Bangladesh against 55 per cent at present. As schools start reopening from September onwards, the management expects demand revival for backpacks to a certain extent.

The company is trying to bring down rental cost at company’s stores in malls and looking to cut ad spends. Net-net, it is looking to conserve cash.

Valuations
Kotak maintained its ‘buy’ call on the stock due to strong brands of VIP, credible growth story in last three years and a correction in raw material prices.

“The current market price offers a good opportunity to buy a stock, which has the potential to bounce back strongly post normalisation,” the brokerage said.

IDBI Capital is betting on FY22 earnings with a price target of Rs 275. Axis Capital has a ‘buy’ rating on the stock with a lower price target of Rs 238.

ICICI Securities said VIP Industries has, over the years, maintained balance sheet prudence with stringent working capital policy, virtually debt-free status and a healthy 30 per cent-plus RoCE. The brokerage said the company has the ability to tide over tough market conditions better than its small peers.

Brokerage Prabhudas Lilladher feels lower discretionary spend post-Covid may result in a prolonged demand slump and aggressive discounting by players to gain market shares and this can result in heightened competitive intensity.

“Further, we expect working capital issues to emerge (cash conversion cycle to be at 130 days in FY21 versus 91 days in FY20), as inventory liquidation (advance orders placed to vendors during October and November 2019) and receivable collection (recoverability issue can emerge due to tight liquidity situation) can prove to be a challenge,” it says.

The brokerage has a price target of Rs 229 on the stock compared with Rs 334 earlier
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