VIP rides high on margin recovery

Share price doubles in under three months on hopes of better earnings in FY15

VIP Industries’ share price has doubled in a little less than three months, from about Rs 55 in January to Rs 106 currently. The growing interest of investors follows expectations of better earnings in FY15, aided by the benefits of rupee appreciation, growth in core business and stake sale in non-core assets.

The company, in a recent filing to the stock exchanges, said, “Since a majority of supplies are imported, appreciation of the rupee compared to the dollar directly impacts financial performance in a positive manner.”The rupee, it noted, had risen from 62.28 to the dollar on February 20 to Rs 60.49 as on March 25.

In FY13, revenue expenses in foreign exchange accounted for 52 per cent of the total raw material cost of Rs 443 crore (or 29 per cent of total expenditure of Rs 802 crore). Since its intra-day low of 68.85 in August 2013, the rupee has gained about 13 per cent.

Earlier, to deal with the rupee’s depreciation, the company had taken three price increases. Higher prices, along with appreciation of the rupee, can help boost margins. Earlier, the key worry for the Street was falling operating margins, as a result of higher raw material cost. In FY13, the operating margins fell to about six per cent, as compared to 12 per cent in FY12. Though margins regained some lost ground in the first nine months of FY14, the current financial year should be much better, as the company expects to achieve 12-15 per cent operating margins.

Edelweiss Securities’ analyst in a research note said for the first nine months of FY14, there was a 9.1 per cent Ebitda (earnings before interest, taxes, depreciation and amortisation) margin versus our full”-year estimate of 8.7 per cent. The company is clearly showing earnings momentum, with sales trajectory trending back in business.”The note said, based on sales momentum and operating leverage, the company expects a 100-150 basis points margin expansion in FY15.

Higher margins and operating leverage should reflect positively on profits. Earlier, the Street was expecting a net profit of Rs 65-70 crore in FY15. This could be higher at Rs 78-97 crore if one accounts for 12-15 per cent operating margins. Revenue is expected to increase by 10 per cent FY15.

Apart from the improving fundamentals, positive news flow has attracted investors. On Friday, the company sold about seven per cent stake or 4.6 million shares in another listed company, Windsor Machines, for Rs 21.3 each, worth Rs 9.7 crore. The interest of long term investors such as Manulife Global Fund Asian Small Cap Equity Fund, which recently brought about one million shares of VIP at about Rs 98 each, also improved the sentiment.

However, valuations have turned a bit expensive. Assuming higher margins and the expected growth in FY15, at Rs 106, the stock’s price to earnings valuations are 15-19 times. Given the steep run-up in the recent past, investors should await a correction before considering the stock.