The Hindu Business Line : V.I.P. Industries: Book profits

INVESTORS can consider divesting from the VIP Industries stock, which trades at about Rs 140. The company's modest revenue growth and a low operating margin do not justify the current valuation. Though exports have more than doubled, buoyed by the acquisition of the `Carlton' brand, domestic offtake of its moulded products has fallen sharply.

VIP Industries is among the larger moulded luggage manufacturers in Asia. It also brands soft luggage, whose manufacturing is entirely outsourced. Besides, its luggage business that contributes 90 per cent of revenues, VIP Industries manufactures moulded furniture, selling under the `Moderna' brand.

VIP's domestic sales are routed through its promoter company, Blow Plast. Marking up of prices by Blow Plast and minuscule exports, which account for about 10 per cent of revenues, leave VIP with little scope for higher margins.

In the domestic market, VIP faces stiff competition in both its business segments — luggage and furniture — from regional players, who have the advantage of lower transportation and distribution costs. Unable to pass on the rising costs of polymers used in moulded luggage and moulded furniture, VIP's operating margins have fallen to 10 per cent from 15 per cent during FY99.

Its focus on soft luggage targeting children and the youth has turned the flexible luggage line of business, which accounts for about 25 per cent of VIP's revenues, intoa star performer.

Soft luggage registered a 30 per cent revenue growth during the past three years; it was higher, at 45 per cent, in FY05. This business is expected to contribute substantially to earnings growth, as branding of soft luggage has provided VIP a consistent margin.

Despite the sharp revenue growth in this product line, the luggage division's growth has been modest as the larger moulded luggage segment reported sluggish growth. Capacity was expanded in the second half of FY05 but the desired revenue growth did not happen.

The soft luggage segment's good performance is offset by the furniture division's lacklustre showingperformance. Concentration of operations appears to have affected its performance compared to other organised players which have a diversified presence.

The revenue growth in the first half of FY 06 was modest at 8 per cent; the poor performance of the furniture division continued, it reporting a 20 per cent decline in revenues. Lower interest expenditure helped VIP report an earnings growth of 31 per cent during the same period.

Possibility of a merger of Blow Plast with VIP industries and Universal Luggage exists, as these entities are in the same line of business.

A merger would bring brand ownership, manufacturing and marketing under a common entity. An upside to profitability may be marginal as operations of the entities appear integrated.

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