VIP, Safari Industries: Luggage stocks will take a long time to get going

Market analysts hope the industry would recoup from the Covid-19 slump by FY22. Historical trends, they say, suggest that luggage industry sales witness strong rebound after two consecutive weak years

The coronavirus (Covid-19) pandemic has forced the luggage industry to pack its bags for now and stay low as nations across the globe stay locked down. With leisurely travel expected to remain suspended, outlook for players back home, such as V.I.P Industries and Safari Industries, appears bleak albeit only in the near-term, analysts say.

At the bourses, the stock price of VIP Industries has tanked 56.6 per cent from its recent high of Rs 506.95 hit on February 11, 2020. As for Safari Industries, it has corrected 49.2 per cent from its recent peak of Rs 732.95, also hit on February 11.

Market analysts, however, hope the industry would recoup from the Covid-19 slump by financial year 2021-22 (FY22). Historical trends, they say, suggest that luggage industry sales have a strong year after two consecutive weak years due to pent up demand.

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“The luggage sector is directly dependent on the performance and growth of the travel and tourism sector.  After a stupendous growth, the Covid-19 pandemic has resulted in this sector coming to a grinding halt. Though business and important personal travel may revive to some extent once the government lifts the ban on travel, it would be at least 12-18 months before we witness any worthwhile revival in the tourism segment, which is considered a discretionary spend,” opines Ambareesh Baliga, an independent market analyst.

According to Suvarna Joshi, research analyst at Axis Securities, change consumer preferences towards travel, dependence on China for soft luggage sourcing, unfavourable impact of rupee depreciation, uncertainty over return of migrant workers on time (labor intensive industry), and reduced consumer budgets on discretionary spend could impact the earnings growth over the near to medium term.

Owing to the nationwide lockdown, the government has suspended rail and air travel indefinitely in India. On April 20, aviation minister Hardeep Singh Puri said in a tweet the government would open its skies only when the dangers posed by the virus have been curtailed. In this backdrop, the Rs 8,500 crore luggage industry is likely to have a bleak FY21 despite having long-term growth drivers intact.

Investment strategy

VIP Industries, Samsonite and Safari Industries form nearly 90 per cent of the organised luggage industry – which is only 40 per cent of the entire sector -- in terms of market share.

“With increase in per capita income, upgradation from unbranded to branded products is imminent. Moreover, organised players have been proactive and continue to introduce newer products, offer lifetime guarantees, offer better after-sales services keeping the long-term growth prospects intact,” notes Bhavesh Chauhan, research analyst at IDBI Capital. He has ‘buy’ call on, both, Safari Industries and VIP Industries with target prices of Rs 523 and Rs 345, respectively.

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“Safari has consistently gained market share due to its presence in fast growing mass / economy segments. Its market share (among organised players) has increased from 9 per cent in FY14 to 16 per cent in FY19. Going ahead, we expect Safari’s sales growth to continue to be better than its peers,” he says, adding, “Safari’s margins and return ratios to improve over FY20-22E. Its stock is also trading at valuation of 18.6x FY22E P/E indicating strong growth prospect”.

Those at Prabhudas Lilladher, have ‘hold’ rating for V.I.P Industries. “We cut our top-line estimates by 19.3 per cent for FY21E and 13.6 per cent for FY22E as supply disruptions from China can result in shortfall risk. Besides, production schedule of hard luggage could be disrupted due to lockdown in India; regaining lost market share will be challenging in post Covid-19 era; and travel and tourism spends will take time to revive as it is discretionary in nature,” says Jinesh Joshi, sector analyst at the brokerage.

Axis Securities, too, backs VIP Industries with a 'buy' rating at a target price of Rs 289. 

"Although, near term has been impacted owing to the pandemic, the long term structural growth story remains intact given huge scope for growth aided by shift from unorganized to organized, rise in outbound tourists, and growing millennial population," they wrote in their latest sector report.

As for Safari Industries, the brokerage has downgraded its FY20E/FY21EFY22E EPS by 17 per cent/56 per cent/47 per cent, respectively and now values the stock at 25xFY22E EPS vs earlier (27x FY22E EPS). It has cut its target price to Rs 363 from Rs 775 with 'hold' rating (from 'buy' earlier).

Those already holding VIP Industries in their portfolio could continue to stay put, while those holding Safari Industries could switch to VIP, suggests Baliga.

“Valuation wise, VIP is cheaper than Safari Industries. Nonetheless, it is better to concentrate on those sectors which will revive earlier at this point in time,” he cautions.