VIP Industries reported weak September Quarter 2023. While revenue growth came in at 6% YoY, operating margins fell four percentage points YoY and net profit declined 69% YoY in Q2FY24. The company’s internal problems visible through frequent change in top management has led to underperformance over the past 2-3 quarters. With the new managing director in charge, hopefully VIP Industries should claw back to growth.
Weak Q2FY24- high carrying cost of inventory impacts margins
VIP Industries offers products under the categories of luggage, backpacks and homebags. VIP, Carlton, Skybags, Caprese handbags, Alfa and Aristocrat are its popular brands. The company reported volume growth of 10% YoY and revenue growth of 6% in Q2FY24.
Revenue from operations increased to Rs 546 crore in September Quarter 2023 compared to Rs 503 crore in the same period previous year. Operating margins stood at 9.68% in Q2FY24 against 13.91% in the same period previous year. More than four percentage points margin contraction was mainly due to higher spend on e-commerce channels, freight & handling charges, advertising and promotional expenses (up 87% YoY) and high cost of inventory.
According to the management, high demand expected in Q1 and Q2FY24 did not materialize leading to high inventories. Net profit fell 70% YoY to Rs 13.3 crore in September Quarter 2023 compared to Rs 43.4 crore in the same period previous year.
Shift of manufacturing base to Bangladesh hits premium segment
Fundamental demand indicators for a luggage company such as passenger traffic, hotel occupancy are positive. Samsonite and Safari Industries reported sales growth of 38.4% YoY and 31% in the first half of 2023. So, why is VIP Industries underperforming and is unable to capture growth after Covid pandemic unlike its close peers, Samsonite and Safari. “I would attribute this to our own internal problems and nothing else. 80% of the problems are internal and I’m looking forward to solving them in the next 3 to 4 months”, said Neetu Kashiramka, Managing Director Designate & CFO at VIP Industries. Frequent top-level management has adversely impacted long term strategy, execution and morale in VIP Industries. In addition to this, VIP Industries shifted its premium product manufacturing from China to Bangladesh in 2021. Bangladesh’s inability to match up to China’s excellence in manufacturing premium products led to adverse product mix impacting VIP’s performance compared to its peer group. India and Bangladesh together account for about nearly 70% of revenue mix and less than 10% revenue dependency is on China in the present scenario. Thus, VIP Industries has underperformed over the past two years in the premium segment compared to premium segment market leader, Samsonite. In the mass segment, Safari is giving strong competition along with the unorganized segment which constitutes 60-65% of the overall Indian luggage industry.
New launches lined up, focus on hard luggage capacity expansion
Moving with strong positivity, the management is ready to make a string of new premium product launches. Six lightweight luggage launches are lined up between February and March next year. In addition to this, luxury products are expected to be launched along with innovative products under Skype Bag, VIP and Carlton brands. Overall, 26 new product launches are lined up in the next 3-4 months. VIP Industries is focussing more on hard luggage than soft luggage. The company has high soft luggage inventory and has shelved capital expenditure (capex) of Rs 200 crore for soft luggage manufacturing. Alternatively, capex of Rs 25-30 crore has been spent on hard luggage capacity expansion in H1FY24 and another Rs 50 crore is lined up for H2FY24. But foremost, VIP Industries needs to contain its top-level exits. Ajit Kolhe, Head- IT & Systems, Suhas Kshirsagar, Vice President Corporate Quality & CRM resigned in November 2023 and Vikas Anand, Vice-President Human Resources resigned on December 1st 2023.
