VIP Industries: Up on benefits of operating leverage

The Street is expecting a net profit of about Rs 65-70 cr in FY15

VIP Industries has doubled in last three months from about Rs 55 in January 2014 to currently around Rs 102.5 per share. The growing interest of long term investors, benefit of rupee appreciation and stake sale in non core assets has led to more optimism as earnings are expected to be better in financial year 2015.

Company in its filing to the stock exchanges has said that "since majority of company's supplies are imported, appreciation of Indian Rupee compared to US Dollar directly impacts the financial performance of the Company in a positive manner. In the recent past, the Indian Rupee has appreciated compared to the US Dollar from Rs 62.28 per USD on February 20, 2014 to Rs 60.49 per USD as on March 25, 2014"

Apparently to deal with the situation earlier the company earlier has taken three price hikes. This, along with appreciation of the rupee can help the company in terms of better margins as the Street was worried about the falling operating margins as a result of the higher raw material cost. In FY13, the company's operating margins fell to about 6% as compared to 12% in FY12. However in FY15, the company expect to achieve 12-15% operating margins which could be a huge trigger in terms of the earnings.

"For 9MFY14, the company logged 9.1% EBITDA margin versus our full year estimate of 8.7%. The company is clearly showing earnings momentum with sales trajectory trending back in business. Going forward, based on sales momentum and operating leverage in business, the company has guided for 100-150 basis points margin expansion in FY15" said a analyst, Edelweiss Securities in a research note.

For instance the Street is expecting a net profit of about Rs 65-70 crore in FY15, which could be higher at Rs 78-97 crore if one accounts for 12-15% operating margins. This is also a reason that at current market price of Rs 106, though the stock is looking expensive at 33 times its FY14 estimated earnings, but if one incorporate and believe in higher margins than the valuations will be about 14-18 times FY15 earnings.

Apart from the fundamentals, lot of news flows have also helped the company to attract investors interest. On 28 March 2014, the sold about 7% stake or 4559760 shares in another listed company Windsor Machines at Rs 21.3. This was worth Rs 9.71 crore. That apart, the interest of long term investors like Manulife Global Fund Asian Small Cap Equity Fund, which recently brought about 10 lakh shares at about Rs 98 per share, has led to renewed interest.