Prabhudas Lilladher has revised its rating for VIP Industries from "Hold" to "Buy", setting a target price of Rs 463, representing a potential upside of 24% from the current market price of Rs 374. The rating upgrade is attributed to operational improvements, particularly a significant reduction in warehousing and freight costs. While Q3FY25 revenue declined due to weaker sales and discounted pricing, VIP Industries achieved better-than-expected EBITDA margins of 5.7%, bolstered by cost controls. Future profitability is expected to strengthen as inventory liquidation efforts conclude and capacity utilization at its Bangladesh unit improves.

Q3FY25 Financial Performance Overview

VIP Industries reported a 8.3% YoY decline in revenue to Rs 5,011 million, underperforming market expectations of Rs 5,492 million. However, operating performance showed resilience due to effective cost management.

Revenue Performance:

Sales were impacted by lower realization, driven by discounting strategies to clear slow-moving inventory.
Backpacks contributed 11% and handbags 3% of total sales, indicating subdued demand in these categories.
Cost and Margin Improvements:

Gross margin was 46.5%, surpassing expectations of 44.5%, despite a 23.6% YoY decline in gross profit to Rs 2,331 million.
EBITDA decreased by 45.2% YoY to Rs 286 million, but margins outperformed estimates of 2.8%, reaching 5.7%, supported by reduced warehousing and freight expenses.
Adjusted PAT: The company reported an adjusted net loss of Rs 124 million, better than the expected loss of Rs 220 million. This compares to a profit of Rs 72 million in Q3FY24.

Key Operational Developments

1. Inventory Liquidation and Cost Savings:
VIP Industries has embarked on an inventory clearance drive, reducing slow-moving stock worth Rs 2.2 billion over the first nine months of FY25. The liquidation is expected to conclude within the next two quarters, leading to:

Lower warehousing space requirements, with a 5 lakh sq. ft. reduction already achieved.
Improved working capital efficiency, easing the company's debt burden.
2. Bangladesh Unit Expansion:
The Bangladesh plant operated at 60% capacity utilization in Q3FY25, with plans to ramp up to 85% utilization once the production of high-demand items resumes. Break-even capacity is currently estimated at 50%.

3. Store Expansion Strategy:
The company plans to open 25 new Carlton stores over the next six months and 50 exclusive brand outlets (EBOs) within a year, focusing on premium product visibility and higher-margin sales.

Future Outlook and Guidance

Prabhudas Lilladher projects a sales CAGR of 12% over the next two years, driven by:

A return to top-line growth as inventory levels normalize.
An anticipated EBITDA margin recovery to 15.6% and 15.7% in FY26E and FY27E, respectively.
Management Expectations:

Gross margins are forecast to improve to 52-53% in FY26E.
EBITDA margins for Q4FY25E are expected to reach 12%, reflecting better cost controls and operational efficiencies.
The company expects to maintain an operating cash flow of approximately Rs 2 billion, supporting further debt repayments.

Segment Analysis

VIP Industries operates across various product categories, with significant exposure to luggage, backpacks, handbags, and international markets.

1. Luggage and Accessories:

The luggage segment, including hard and soft uprights, faced demand pressure due to price-sensitive consumers. However, recovery is expected as travel activity continues to normalize.
2. International Sales:

Bangladesh's operations contributed 14.6% of total sales in Q3FY25, with sales of Rs 731 million. The plant’s performance has been volatile due to currency fluctuations and raw material price shifts but is poised for stabilization as production scales.
3. Premium Segment:

Carlton and Caprese continue to drive higher-margin sales. Management aims to strengthen the Carlton brand presence globally through new store openings.

Financial Metrics and Valuation

The company’s key financial indicators suggest a turnaround in profitability over the next two years.

Valuation Metrics:

Target Price: Rs 463
P/E Multiple: 30x FY27E EPS
Market Cap: Rs 53 billion

Bottomline for Investors

VIP Industries is on the path to operational recovery, driven by inventory optimization, reduced costs, and strategic expansion. While the top-line performance remains a concern, the company's improving margins and financial discipline are promising signs. Prabhudas Lilladher’s upgraded "Buy" rating reflects confidence in VIP's ability to capitalize on emerging opportunities, making it a compelling investment for long-term growth. Investors should watch for Q4FY25 results, which could provide further insights into the company’s turnaround trajectory.