VIP Industries stock rebounds 14.5% in 3 weeks after 40% drop over 20 months: Is it time to buy?

Shares of VIP Industries, a leading player in the Indian luggage market, have surged 14.5 percent in the past three weeks, marking a notable rebound after a lengthy decline. The stock, which which lost 40 percent of its value between November 2022 and July 2024, recently crossed the ₹500 mark for the first time since early June.

The stock's earlier underperformance stemmed from weak financial results over the last few quarters, which led to a loss in market share to new-age startups and international brands. Along with external pressures, internal challenges also contributed to the company's struggles.

After meeting with the company's senior management, domestic brokerage firm Centrum Broking has affirmed a positive outlook for VIP Industries. 

The management indicated they anticipate a meaningful recovery post-Q2FY25, driven by several strategic initiatives. These include innovations in lightweight and sustainable designs, the addition of 50 exclusive brand outlets (EBOs) for the Carlton franchise to drive premiumization, and strengthening the supply chain.

Additionally, the management said it plans to concentrate on the high-growth backpack and handbag segments, capitalise on major wedding occasions, and leverage its robust distribution network.

The brokerage emphasised VIP’s expansion of its hard luggage production capacity through both brownfield and greenfield facilities in India. The company aims to meet a growing demand with a total capacity of approximately 20 lakh units per month, with 13 lakh allocated for hard luggage and 7 lakh for soft luggage.

It noted management's focus on product development and design innovation to cater to a broad market with a varied and competitively priced product range. VIP has enlisted BCG to streamline operations and refresh its Skybags and VIP brands with new products and transparent pricing. 

According to the brokerage, the company has increased its market share by 2 percent over the last two quarters, rising from 36 percent to 40 percent as of June 2024. Lightweight, luxury and sustainable products now contribute 60 percent to the company’s top line.

Despite pricing cuts due to intense competition, the brokerage said the company continues to strengthen its premium product offerings, particularly in the VIP and Skybags brands.

The company’s factory in Bangladesh’s EPZ remains stable, contributing 20 percent of sales. The management is also working to reduce reliance on China (which currently accounts for 6 percent to 7 percent of its revenue), seeking at least two supply sources for each product to mitigate risk and enhance operating margins.

VIP expects to increase gross margins to 55 percent and EBITDA margins to reach 15 percent by the end of FY25, with a goal of 18 percent by FY26. These improvements will be driven by deflationary raw material costs, cost optimisation, in-house manufacturing, and the stabilisation of its new warehouse. 

Target price at ₹592

Centrum Broking has noted that despite VIP’s weaker performance in recent quarters, the company's management changes and strategic adjustments show potential. It highlighted that consumer recognition of the VIP brand remains strong, positioning the company for its next phase of growth.

According to the brokerage, this growth will be driven by a focus on product development, design, and innovation to cater to all market segments. Additionally, VIP aims to increase its average selling price by enhancing contributions from premium new product developments (NPD) and strengthening its supply chain.

Furthermore, VIP is expected to see significant growth in modern trade and e-commerce channels. Although the company may face short-term challenges, Centrum remains optimistic about its long-term growth trajectory and has introduced financial estimates for FY27, reflecting confidence in its future prospects.

As a result, Centrum Broking has maintained its 'buy' rating on the stock, with a target price of ₹592. However, the firm also flagged potential risks, including rising local competition and fluctuations in raw material costs.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.