Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of VIP Industries Limited (VIP).

 

The ratings continue to reflect VIP's market leadership position and strong brand in the domestic luggage industry and healthy financial risk profile. These strengths are partially offset by dependence on Chinese imports, albeit reducing, competition from organised and unorganised segment and highly working capital intensive operations.

 

Operating revenue grew by of 61% at Rs.2082 crore in fiscal 2023 on a low base, on the back of resumption of travel, rebound of domestic and international air traffic, festive season spending and reopening of educational institution post pandemic. Company registered 47% increase in volumes sales in fiscal 2023 over previous fiscal.  Despite tepid demand due to lesser wedding dates during first quarter of fiscal 2024 and supply issues due to fire incident at one of the Bangladesh unit, revenue grew by 8% year-on-year to Rs.636 crore from Rs.591 crore in corresponding quarter of previous fiscal supported by volume growth of 10.5%.

 

CRISIL Ratings expects sales to be strong in balance three quarters of fiscal 2024 driven by wedding season in third quarter of fiscal 2024 and continued healthy momentum in travel and tourism. Revenue growth over the medium term would be supported by rising tourism and disposable income along with change in consumer preference to hard luggage and premiumisation.

 

Operating margins improved to 15.2% in fiscal 2023 vis-à-vis 11.4% in fiscal 2022 due to softening key input prices, increasing in-house manufacturing, implementation of cost optimization techniques and benefits of operating leverage. EBIDTA margins were lower at 12.7% in Q1FY24 as compared to 17.4% in Q1FY23 mainly on account of increased investment in brand & channel strengthening and increased cost towards additional warehouses. Operating margins is estimated to remain stable at around 15% over the medium term.

 

Medium to long term demand outlook however remain sanguine for VIP. The oligopolistic nature of the industry, favourable long term macro-economic factors like rising income, and shift in consumer preference for branded luggage augurs well for VIP given its market leadership position and strong brand name.

 

Additionally, over the years VIP has significantly strengthened its balance sheet with networth at Rs.640 crore and gearing at 0.28 times as on March 31, 2023. Company plans on additional capex for addition of soft luggage capacity . Cash accruals of Rs.185 crore and above will be sufficient to fund annual capex requirement of Rs.85-150 crore over the medium term. Debt protection metrics are comfortable with interest cover expected to remain above 10 times and net cash accruals to adjusted debt to remain above 1x times over the medium term.

 

The company plans to utilise Bank lines for meeting short term working capital requirements. This apart, liquidity derives comfort from cushion available in the form of unutilised bank limits to an extent of 59% for past 12 months ended June 2023 and cash surplus of Rs.59 crore as on March 31, 2023.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of VIP and its subsidiaries due to common nature of business.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Market leadership and strong brand in the domestic luggage industry: VIP is the world’s second-largest luggage manufacturer and a leader in the Indian luggage market. Its brands cater to the mass and premium segments of the demand pyramid, with products across a wide price range. The company is also into the women’s handbags and backpack segment having healthy market share.  VIP has a strong distribution network with ~11,430 point of sales in India spread across ~1200 towns. Currently, exclusive brand outlets (EBOs) network stands at 500 stores and targets to expand the same to 800 (EBOs) by the end of fiscal 2025.

 

Healthy financial risk profile: Over the years VIP has strengthened its financial risk profile, backed by a conservative capital structure, healthy cash accrual and debt protection metrics. Company has not availed any long term during fiscal 2023. As on March 31, 2023, capital structure remained healthy, marked by healthy networth of Rs.640 crore and low gearing. Credit metrics also remained healthy.

 

Weaknesses:

Dependence on Chinese imports and exposure to competition from unorganised sector: The soft luggage segment (including duffel bags, backpacks and ladies handbags), which accounted for 51% of VIP’s revenue during fiscal 2023, used to be sourced predominantly from China, thus exposing the company to geographical concentration risk and forex risk of sharp rupee depreciation. However, VIP in order to reduce the dependence on Chinese imports, has reduced the supplier exposure from China to about 7% in fiscal 2023 from 34% in fiscal 2020 mainly through backward integration, increasing production at Bangladesh and by rationalizing other supplier options. Also, despite being a market leader in the organised segment, VIP is able to pass on increase in material prices only partially and with a lag, mainly because of intense competition from the large, unorganised and organized segment; hence, ability to charge premium is restricted.

 

Large working capital requirement: The luggage industry is working capital-intensive in nature mainly due to higher inventory days on account of large number of stock keeping units (SKUs). The company has been able to prudently align its inventory level with payables, thus limiting the incremental net working capital.

Liquidity: Strong

VIP has strong liquidity with cash accruals of about Rs.162 crore in fiscal 2023. Fund based bank limits remained moderately utilised at 41% for past twelve months ended June 2023. VIP also had Rs. 59 crore of cash surplus as of March 31, 2023. This coupled with the unutilised bank lines and further aid liquidity. Further, with a gearing of 0.28 times as on March 31, 2023, the company has sufficient gearing headroom, to raise additional debt if required.

 

ESG Profile

CRISIL Ratings believes VIP’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

This sector can have a significant impact on the environment owing to high water consumption, waste generation and Green House Gas (GHG) emissions. The sector’s social impact is characterized by health hazards leading to higher focus on employee safety and well-being and the impact on local community given the nature of its operation.

 

VIP has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• The greenhouse gas (GHG) emissions intensity has reduced from 11.01 tCO2/ revenue in 2022 to 7.93 tCO2/revenue in 2023. The Company has been taken up various steps like localization of zipper, replacement of high-pressure sodium vapor street light by low power LED lights, etc to reduce GHG emissions.
• The total waste generation has reduced from 1.05 tonnes/ revenue in 2022 to 0.35 tonnes/revenue in 2023. Company has started manufacturing hard luggage by using polypropylene and polycarbonate material which is 100% recyclable.
• Attrition rate for the Company has improved from 22% in 2022 to 17% in 2023.
• VIP’s governance profile is marked by 50% of its board comprising independent directors, split in chairman and CEO position and presence of robust internal control systems and processes. It also has extensive disclosures.

There is growing importance of ESG among investors and lenders. The commitment of VIP to ESG principles will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

CRISIL Ratings believes VIP's business risk profile will continue to be supported by its strong brand and entrenched distribution network even as demand is expected to sustain in fiscal 2024. VIP is also well placed to take advantage of the long term structural tailwinds in the industry given its healthy market position. Furthermore, the company’s strong balance sheet and healthy liquidity should help offset impact of stressed business conditions.

Rating Sensitivity factors

Upward factors

* Significant and sustained growth in revenues driven by improvement in business conditions, increase in market share and operating margins recovering to ~17-18%, supported by ramp up in volumes and cost control initiatives

* Sustained strong financial risk profile and steady increase in liquid surplus, supported by healthy cash accrual and continued moderate capex

 

Downward factors

* Slower than expected improvement in revenue and operating profitability, most likely due to delayed demand recovery, also impacting cash generation

* Sustained increase in debt due to large debt-funded capex, sizeable acquisition, or stretched working capital cycle, leading to material weakening of the credit metrics, for instance, adjusted gearing above 0.8-1.0 times

About the Company

VIP, a Dilip Piramal group company, was incorporated as a wholly owned subsidiary of Blow Plast Ltd (BPL) in January 1968. In fiscal 2007, BPL was merged with VIP following restructuring of the group. The company manufactures hard luggage in India and markets hard and soft luggage sourced from India, China and its Bangladesh subsidiaries. VIP is the largest player in the luggage industry in India.

 

For the quarter ended June 2023, company reported net profit of Rs.58 crore on revenue of Rs.636 crore, compared to PAT of Rs.69 crore on revenue of Rs.591 crore during the corresponding period of previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Fund-Based Facilities&	NA	NA	NA	50	NA	CRISIL AA/Stable
NA	Fund-Based Facilities^	NA	NA	NA	75	NA	CRISIL AA/Stable
NA	Fund-Based Facilities%	NA	NA	NA	100	NA	CRISIL AA/Stable
NA	Fund-Based Facilities@	NA	NA	NA	39	NA	CRISIL AA/Stable
NA	Fund-Based Facilities$	NA	NA	NA	60	NA	CRISIL AA/Stable
NA	Fund-Based Facilities	NA	NA	NA	50	NA	CRISIL AA/Stable
NA	Commercial Paper*	NA	NA	7-365 days	50	Simple	CRISIL A1+

& - interchangeable with non-fund based limits of Rs 10 crores

^ - interchangeable with non-fund based limits of Rs 75 crores

% - interchangeable with non-fund based limits of Rs 35 crores

$ - interchangeable with non-fund based limits of Rs 50 crores

@ - interchangeable with non-fund based limits of Rs 39 crores

* - Yet to be issued