Valuation in Motion: VIP Industries Valuation: Old Dog, New Tricks

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VIP Industries is the market leader of the luggage industry in India. VIP, Aristocrat, Skybags, Carlton, Caprese — these are some of the most recognizable brands for consumers in this segment. Faced with stiff competition from the likes of Safari and Samsonite, dealing with the resignation of Mrs. Radhika Piramal from the active management activities and grappling with rising labor costs, VIP Industries is indeed between a rock and a hard place. However, the rise in the Indian middle class and the growth in airline travel among Indian youth pose a long term tailwind for the company. What Value do these little components offer for the shareholders? Let’s find out.


Before delving further, let me provide due credit to Divya Chawla, who also runs the blog Equity Unraveled. The research document put by her on the Indian Luggage Industry was immensely helpful in performing this Valuation.

The Company

VIP Industries is the market leader in the Indian luggage industry. The company is being lead by Mr. Dilip Piramal of the well known Piramal family. Just a couple of years back, the company’s growth was being spearheaded by Mrs. Radhika Piramal, his Harvard-educated daughter. In 2017-18, she decided to move back to London with her spouse, thereby giving up her post as the Managing Director of the company to Mr. Dilip. She now acts as the Executive Director, in charge of the overseas sales of VIP Industries.

The business strategy of the company relies on producing at a lower cost in China and selling at a good premium in the Indian markets (And a little overseas in UK, US, Germany, Spain, Italy and other EM countries). However, trouble has knocked on the doors of the company, with the Chinese Wage Inflation scaling new heights year by year.

Even scarier articles, such as the one from Business Insider, argue that China has not yet hit the Lewisian Turning Point, after which wage growth will explode. Thankfully, the company has plans to thwart this serious issue. VIP Industries will be investing Rs. 25 Crores in Bangladesh next year, effectively doubling the production at the Bangladesh plant. While this is still a very small percentage (~10%) of the overall Sales of the company, it is good to know that the management has a back up plan. What this means is that the Margins of the company is bound to take a hit in the near future, but can easily be scaled back up by switching to more and more production to low cost locations.

On the Raw Material front, things are not peachy either. Raw Material prices have been increasing a bit and the management has admitted as much:

Reprieve comes in the form of a couple of strategies planned by the management. First, let’s take a look at the product line of VIP Industries:

While the legacy brand, VIP, is struggling to keep pace, the company is tuned towards increasing the Sales of brands like Carlton and Caprese, the high-margin produce. In the latest concall too, this is quite evident from the number of questions circling around these two products.

So, all is not really well for VIP Industries in the short to medium term. At the same time, the systems are in place to receive the positive long term tailwinds from the industry. What are the industry tailwinds?

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The Industry

The Indian luggage industry is pegged at ~Rs. 7,500 Crores. The unorganized sector dominates the market place with a 60% Market Share. However, in the organized sector, VIP Industries clearly comes out ahead with a lion’s share of ~56% of the market (Total Market – 23%).

The products themselves can be sub-divided into three different parts:

  1. Travel Bags: The most produced type of luggage. Travel bags are used for carrying clothes and other items during air or road travel for long distances. These are things like suitcases, duffel bags and the like.
  2. Business Bags: These are similar to travel bags, except they come with additional facilities to enable business usage. For instance, business bags mostly come with compartments for laptop and business documents. Computer bags and briefcases fall under this category.
  3. Others Bags: Consisting of a small percentage of the luggage industry, these are bags used for daily purposes such as backpacks and shoulder bags.

The tailwinds for the industry is present in the form of GST implementation. Like most other industries, the implementation of the new GST regime has enabled the organized players to attract more business easily. A high 28% GST Rate has narrowed the differential cost between the organized and unorganized players. Considering how the value is far superior in the organized space, more revenues are being earned by them.

What more? The emergence of India’s middle class is inevitable, according to several reports. This will allow them to purchase semi-luxurious products like travel bags. Here’s a visual representation of the middle class population will evolve in several countries:

According to reports by the WEF and Deloitte, India’s disposable income is bound to leapfrog in the next decade. Just see how much it has increased during the last several years, when India was decidedly a weaker economy:
Last but not the least, the Indian domestic air traffic numbers have been growing at a robust pace for the past several years. According to IATA, although the growth rates have tapered down a bit during 2019, India recorded the fastest single year growth in the world for domestic air traffic growth. More facts and figures can be found on the DGCA India website.

The Numbers

The long term Risk-free Rate in India is around ~7.71%:

The Company Beta has also been calculated as follows. The price data for VIP Industries and NIFTY 50 were taken from Yahoo! Finance.

Industry-related data has not been filled because of the lack of listed competitors in India (Safari Industries is the only other listed luggage player in India).

The Capital Conversions

It may be endearing to know that VIP Industries has zero debt, very tiny Operating Lease commitments (So little, I decided to ignore it) and has issued no ESOPs to employees. This is quite value additive for the shareholders, because there are on indirect charges on the assets of the company.

The Assumptions

We discussed at length about the company’s and the industry’s prospects. This is how I think those statements can be turned into numbers:

High Growth Period

VIP Industries commands a massive share of the organized market. Couple this with the fact that the GST implementation is moving more business to them and you’ve got a massive Competitive Advantage Period (CAP) on your hands. So, I have chosen VIP’s High Growth Period to be 20 years, the highest in my model.

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Sales Growth

The recent spurt in the Sales of the company can be attributed to GST implementation. Over the next half a decade, however, I think it may slow down. More so, because the company’s Sustainable Growth Rate, which measures how much a company can grow without resorting to external financing, stands at 16% (Calculated using long term average Dividend Payout Ratio and Return on Equity). I have assumed that it will start there, before dropping to 13.38%, the long term average growth in Sales and then gradually decreasing due to sheer size of the company and the limited market space in the luggage industry.

Operating Margin

As discussed, I expect the Margins of the company to reduce just a little over the next half a decade, before picking up pace due to focus on reducing labor costs and shift in mix towards more premium products. In the Terminal Period, the Margins will settle down on the company’s own long term average of 10.89% or so.

Tax Rate

The Corporate Tax Rate of VIP Industries will slowly converge towards India’s Corporate Tax Rate and then towards the Global Average Tax Rate.

Capital Turnover

Capital Turnover has also shot up for the company in the recent years, thanks to GST (Essentially, more business without any investments). This will eventually taper down to the long term average of 2.97 and then settle at a lower place.


Depreciation will remain fairly stable and converge towards the long term average levels.

Cost of Capital

There are not enough listed competitors in India. So, instead of the Bottom-up Beta method, I have simply used the Company’s Beta to calculate the Cost of Capital, which is 12.68% for VIP Industries.

Return on Capital (Calculated)

In my model, both the Reinvestment Rate and the Return on Capital are automatically calculated based on the inputs. They are like litmus tests for good assumptions, with the latter being more relevant than the former. It is economic reality that as a company grows older, its Return on Capital will converge towards the Cost of Capital. Here, VIP Industries starts with a high 26-27% RoIC, increases to ~30%, before falling back down to ~21%, much closer to the Cost of Capital of ~13%.

The Diagnostics

There are no red flags to note here. Let’s move on.

The Cash Flows

Here’s how VIP Industries’ Cash Flows will evolve based on our assumptions:

In other words, this is how VIP Industries’ Business Life Cycle will evolve over the years:

More on Business Life Cycle here.

The Value

In essence, this is how I think VIP Industries is valued:

At the CMP of Rs. 444, a fair value of Rs. 244 is indicative of a 45% overvaluation. Like the D-Mart Valuation I did some time back, this should not come as a surprise. Over the last 3 years, the company’s Profits have compounded at 42% and the stock at ~63% and change:

As we discussed earlier, the Profit growth is bound to taper down. So, the other end of scale, where the stock quadrupled over 3 years, is bound to be heavy.

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The Sensitivity of Value

‘The Sensitivity of Value’ tool allows us to look at the different values of VIP Industries for different assumptions of Terminal Growth Rate and Cost of Capital:

But as always, the true test of a company’s worth lies in performing a Monte Carlo Simulation and figuring out a probability weighted range of values.

The Monte Carlo Simulation

I will now attempt to simulate all the Assumptions I have made for VIP Industries’ future and see what kind of probability weighted values it produces.

Sales (Simulation)

Although it is ill-advised to exceed the Sustainable Growth Rate for the Sales Growth figure, I can assume that the management can keep the growth momentum for more numbers of years. So, I will assume that the Sales Growth figures from Years 6-15 can be a minimum of the figures we have already assumed, but also be up to a maximum of 16%, the SGR.

Operating Margin (Simulation)

There isn’t much room for changes in Operating Margin estimates. But I can assume that instead of the short term drop in Margins, the management can have the option of maintaining the short term average of 13% and then proceed from there.

Capital Turnover (Simulation)

Changes in Capital Turnover estimates won’t change the final value by a lot. However, I can assume that it can be any value ranging from the lowest ever (1.94) to the highest ever (3.84).

Cost of Capital (Simulation)

Since I’m making these variable assumptions, it is only logical that I simulate the Cost of Capital between the earlier assumption (12.68%) and a higher value in the 50th percentile Cost of Capital for Indian firms (12.82%).

These are the initial results of the simulation:

The results can be better interpreted this way:

This paints a grim picture too, as far as the value is concerned. The CMP isn’t even seen in this table, meaning it is off-the-charts overvalued. If you’d like my personal opinion, I always like to purchase stocks at a minimum confidence level of 90% i.e. a 90% probability of undervaluation, which would be Rs. 258 in this case.

Of course, just because I think the stock is overvalued does not indicate that the stock will correct a lot or anything of the sort, really. Valuation models do not have predictive powers. It simply means that I can find better bargains than VIP Industries in the market.

The Model

I can already sense the angry comments coming. You are free to disagree with my assumptions. In fact, I welcome you to. If you’d like to do that, download the model from Dropbox and try entering your own assumptions.

If you have better stories or numbers for the assumptions, please comment down below. A constructive discussion can do wonders.

Value Investing Framework: Curreen Capital

I recently watched the entire series of ‘Value Investing Framework’ uploaded by Curreen Capital on YouTube. I highly suggest that you do too. Don’t worry. The videos are crisp.

I think VIP Industries ticks every box, except the valuation one. What do you think?

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Dinesh Sairam

Dinesh Sairam

Dinesh: Investor | Risk Consultant | Finance Geek | Writer @Quora | Blogger | Poet | MBA from XIME
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