PL Stock Report: V.I.P. Industries (VIP IN) - Q2FY24 Result Update – Higher opex dents EBITDA margin - Downgrade to 'HOLD'

V.I.P. Industries (VIP IN) - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs613 | TP: Rs689

Q2FY24 Result Update – Higher opex dents EBITDA margin

Quick Pointers:

§ GM rises to 55.5% amid improvement in product mix and accrual of full benefits arising from falling crude price in earlier quarters.

§ EBITDA margin falters to 9.7% amid rise in A&P spends to Rs560mn.

We cut our EPS estimates by 21%/7%/2% for FY24E/FY25E/FY26E and downgrade the stock to a HOLD as we re-align our indirect cost assumptions in light of weak performance in 2QFY24 which was marred by 1) higher A&P spends of Rs560mn 2) additional outgo of Rs150mn pertaining to freight & warehousing and 3) one-time expense of Rs60mn relating to a payment made to BCG to fast track growth in e-com channel. Nonetheless, GM improvement to 55.5% was noteworthy but we believe sustainability can prove to be a challenge given rising crude prices. VIP has been facing considerable growth challenges over the last 2 quarters (top-line growth of 7.0% YoY in 1HFY24) and it remains to be seen whether a change of guard at top-level can bring an end to concerns surrounding erosion in market share. We expect sales/EBITDA CAGR of 10%/15% over FY23-FY26E and downgrade the stock to a HOLD with a TP of Rs689 (earlier Rs721) valuing it at 38x Sep-25 EPS (no change in target multiple).

Revenue increased 6.1% YoY: Top-line increased 6.1% YoY to Rs5,461mn (PLe of Rs5,508mn). In 1HFY24, backpacks/handbags contributed 13%/4% to the top-line.

GM bounces back to 55.5%: Gross profit increased 22.4% YoY to Rs3,031mn (PLe of Rs2,699mn) with margin of 55.5% (PLe of 49.0%). GM improvement was due to better product mix and accrual of full benefits arising from falling crude price in earlier quarters.

EBITDA margin falters to 9.7%: EBITDA decreased 26.1% YoY to Rs529mn (PLe of Rs700mn) with a margin of 9.7% (PLe 12.7%). EBITDA margin was below our estimates due to higher than expected other expenses of Rs1,841mn (PLe Rs1,322mn) largely led by higher A&P spends.

Adjusted PAT at Rs133mn: Adjusted PAT decreased 69.4% YoY to Rs133mn (PLe of Rs344mn) with a margin of 2.4% (PLe 6.2%) as compared to margins of 8.4%/5.0% in Q2FY23/Q1FY24 respectively.

Con-call highlights: 1) 26 new launches are scheduled in the next three to four months. 2) A&P spends stood at Rs560mn in 2QFY24 (of which Rs230mn was spent on performance marketing). 3) Rs60mn was paid to BCG for an e-commerce project, while Rs150mn was incurred for additional freight & handling charges. 4) Majority of the inventory worth Rs7,635mn, consists of backpacks. 5) In 2QFY24, VIP opened 37 EBOs, and has signed up stores at 6 airports exclusively for Carlton. 6) Capex plan of Rs2bn has been put on hold, and additional sum of Rs500mn will be incurred to expand HL capacity, of which Rs250-300mn has already been spent. Overall capex guidance for FY24E is pegged at Rs800-850mn. 7) VIP targets to open ~100 EBO’s in FY24E, with 63 stores already opened in 1HFY24. 8) Current capacity stands at 17 lakh pieces and will be increased to 20 lakh pieces.

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