Prabhudas Lilladher has issued a Buy rating on Safari Industries, setting a target price of Rs 2,989, indicating a substantial upside from the current market price of Rs 2,235. Despite short-term margin pressures and intensified competition in the luggage sector, Safari’s strategic moves and upcoming manufacturing enhancements offer promising growth potential. Here’s a detailed analysis of the key factors driving Prabhudas Lilladher’s investment recommendation.

Summary of Safari’s Recent Financial Performance and Outlook

Revenue Growth and Market Resilience: Safari reported a 23.7% year-over-year (YoY) increase in revenue for Q2FY25, reaching Rs 4,578 million. The company’s ability to grow its top-line despite competitive pressures underscores its resilience in the luggage market, especially as it expands its presence in the e-commerce segment, which now accounts for around 50% of total sales.

Short-Term Margin Challenges: Safari’s EBITDA margin fell to 10.5% in Q2FY25 from an anticipated 15.1%, primarily due to elevated advertising and promotional (A&P) expenses. While this has impacted profitability, the company’s focus on brand-building initiatives, particularly for its Urban Jungle line, positions it for sustained brand visibility and customer engagement.

Investment Rationale: Expansion and Cost Efficiency Gains

Upcoming Jaipur Plant to Boost Cost Efficiency: Safari’s new greenfield plant in Jaipur is nearing operational status, expected to commence commercial production soon. This facility is anticipated to drive down freight and power costs, providing Safari with a competitive edge in the mass-market segment. Cost efficiencies from this plant are expected to enhance Safari’s margins and offset some of the impacts from the recent promotional spending surge.

Increased Focus on E-commerce and Brand Building: A&P expenses rose significantly in Q2FY25, with Rs 150 million allocated to e-commerce promotions and an additional Rs 50 million dedicated to Urban Jungle brand building. While these expenditures weigh on margins, Safari’s heightened focus on digital channels and a diverse product range could foster long-term brand loyalty and market share growth.

Management Insights and Operational Highlights

Volume Growth and Expansion of Retail Footprint: Safari saw a strong 40% YoY volume growth in Q2FY25, driven by higher demand in both digital and offline channels. The company’s current exclusive brand outlet (EBO) count stands at approximately 155, reflecting its strategy to expand retail presence.

Significant Share of E-commerce in Sales Mix: E-commerce now comprises 50% of Safari’s channel mix, marking an important shift toward online retail. This pivot not only broadens Safari’s market reach but also enables it to capture demand among digitally-savvy consumers, particularly in metropolitan areas.

Financial Adjustments and Future Earnings Potential

EPS and EBITDA Revisions: Given the margin pressure from increased A&P spending, Prabhudas Lilladher has revised Safari’s earnings per share (EPS) estimates, lowering FY25E, FY26E, and FY27E forecasts by 10.0%, 6.4%, and 0.5%, respectively. Despite these adjustments, Prabhudas Lilladher expects robust compound annual growth rates (CAGR) of 22% for revenue and 36% for profit after tax (PAT) from FY25E to FY27E.

Expected Margin Recovery: As Safari completes the transition to its new Jaipur plant, the company’s EBITDA margin is projected to recover, reaching 16.3% by FY26E and 17.4% by FY27E. The anticipated margin improvement underscores Prabhudas Lilladher’s confidence in Safari’s long-term profitability trajectory.

Competitive Landscape and Key Risks

Intensified Price Competition: The luggage sector is experiencing aggressive discounting from leading players, which poses a near-term challenge to Safari’s pricing strategy. Prabhudas Lilladher expects Safari to navigate these pressures effectively once the cost benefits of the Jaipur plant materialize, enhancing its ability to compete in price-sensitive segments.

Volatility in Gross and EBITDA Margins: Gross margin for Q2FY25 was 43.8%, slightly below the previous quarter’s 44.5%. The fluctuation reflects raw material price volatility and promotional spending increases. These variances may impact profitability, and sustained margin stability will depend on the successful implementation of Safari’s cost-reduction strategies.

Valuation and Target Price Justification

Target Price of Rs 2,989 Reflects Growth Potential: Prabhudas Lilladher’s target price of Rs 2,989 is based on a multiple of 45 times FY27E EPS, reflecting confidence in Safari’s growth outlook. This valuation takes into account Safari’s expansion into cost-effective production and its efforts to build a strong brand identity in a competitive landscape.

Anticipated Return for Investors: With a potential upside from the current price of Rs 2,235 to Rs 2,989, Safari presents an appealing investment for those seeking exposure to the consumer durables sector. Prabhudas Lilladher’s Buy recommendation is supported by Safari’s expected market expansion and margin recovery in the coming years.