Vaibhav Global : Back from the dead


(Karan Maroo) #1

Company Name

Vaibhav Global Limited

Promoters

Sunil Agrawal

Sector

Online Jewellery Retail

CMP

803

1-year returns

7%

FY14 RoE

77.8% (Should moderate to 40-50% levels)

Market Cap

INR 26,004 Mio

TTM PE

21.3

TTM Price / Book Value

8.2

Background:

VGL is an online retailer of low-cost/discounted fashion jewellery selling primarily through television and the internet. The companyâs primary markets are USA and the UK.

Pluses?:

* Online retail business â Being in the low cost/discount jewellery segment, the company has a secular business model, as the average selling price of its products is around $20.

* The company almost went bust in the 2008 recession (Went through CDR also) but since then has moved on from an expensive jewellery seller to a low cost one. Its past experiences have helped the company shape its current business model

* The companyâs business model can be replicated but economics would not be easy to replicate because of the following reasons : 1) Cheap raw material sourcing from various Asian countries 2) Low cost manufacturing with a large base (Jaipur, India) 3) Expert team of people in its core markets to catch trends and attract customers 4) High fixed costs in the form of airtime/broadcasting costs on TV channels

* It is not easy for new players to enter the discounted jewellery business and make money because of the competitive advantages which VGL has built around itself.

* There is a significant operating leverage in the business; the significant fixed cost being airtime on TV (The company derives >70% of its revenues from TV sales). This will allow higher margins to kick in with better sales

* Strong balance sheet with net debt of INR 250 Mio (Gearing of 0.08) as of 31.12.2014

* Investments from Nalanda Capital, Prof. Sanjay Bakshi into the company.

* Promoter integrity â In spite of the CDR, the promoter paid the interest and principal in full and infused funds to the tune of INR 440 Mio when required.

* If you have the time, do go through http://liquidationchannel.com/ which is a popular channel which VGL runs and sells its products through

What are the risks? :

* Obsolescence of technology

* Threat of other players entering the low cost jewellery segment

* Slowdown in the US and UK markets

Disclaimer : I have taken small positions in this stock. This write-up is not a recommendation to buy/sell, but for discussions purposes only.


(shanid) #2

Dear all,

I got interested in this company after reading Prof.Sanjay bakshi.

As per the AR market size is 20 billiin USD. ( Not clear whether it is only for discounted jewellary or comprising all segments).VGL is focused only in discounted jewellary.Anyhow huge scope of opportunity size.

Company will become debt free and start paying dividends from this fiscal.

But i feel competition is intense 20 % top line growth will be tough going forward.


#3

I started tracking this stock at Rs 20 when Ashish Chugh or somebody recommended on CNBC few yrs back. I was about to buy then somebody pointed me to an incident in which CEO was convicted for 6 months for supplying call g*^$ to a Canadian Visa officer. I was shocked and backed out. After missing 40x, I don’t know I should regret or be happy. I would have become financially independent by now.


(Varadharajan Ragunathan) #4

I have done extensive DD on the company and the promoter. Yes, the company had lots of issues in the past but that is over and done. The promoter has changed for the better - they have got on board veterans like pulak prasad of nalanda, vikram kaushik of tata sky and are revamping their business.

I bought the stock at 550/- when there was a massive selling by someone big. I think it’s a good bunch of guys in what I think is an average, potentially declining business (TV based peddling of inexpensive trinkets to unsuspecting customers) and could potentially get upended by web/mobile and also decline once customers become smarter.

I will buy below Rs. 700 - looking at the video, the guy came across as sincere, professional and wanting to make an impression.


(Karan Maroo) #5

Yeah, an analogy would be of what Warren Buffet says about newspapers - could be a potentially declining business, but still has a lot of steam left in it due to structural reasons. Besides, VGL seems to have winds in its sails now because of the restructuring which the company has done.

The 550 levels were interesting back then - it remained depressed for quite a few days. Unfortunately, I spotted this company only recently and found it very interesting.


(Anil) #6

Hi Karan,

I’m invested in Vaibhav.

Do not really agree with your Warren Buffet analogy. This business is humming with growth, unlike newspapers.Last 2-3 years have seen more than 30% volume growth. F15 is a year of multiple adjustments and headwinds, but I remain confident about the earning power of this franchise. They are trying to do online what Walmart did offline many decades ago. The whole idea of purchasing costume jewellery online is fairly recent, and Vaibhav has cost leadership in this growing segment. Moreover, they continue to add to their repertoire, having launched and stabilised handbags, household decoratives and scarves. Now they are finding initial success with bed linen. So the platform is being successfully leveraged for adjacent products.

Around 24% of volume gets sold through the web, and that percentage is growing strongly. So they are a combo TV + Web retailer, where each channel reinforces the other.

I have personally seen evidence of multiple small payments being made, hence find it hard to sympathize with the skeptics in this regard at least.

Pulak was a director earlier as well. He resigned when things turned nasty, now is back. Even Sunil Agarwal stepped down from the MD position, and has recently returned as MD. Other board members are mostly eminent people from retail and e-commerce or TV.

So I like the stock at current price. Once the adjustment to new call center and new website and new Mobile commerce platform is complete, volume growth should become much stronger.

Would love to hear contrary views.

Anil


(Sambath) #7

Went through VGLâs Annual reports and Chairmanâs address.Unique business model in the Indian listed space.Company has its unique advantages like low-cost producer,end-to-end vertical integration (sourcing,in-house desgining,processing,manufacturing and selling),highly scalable,fixed marketing expenses. It has evolved from Business 2 Business player to Business 2 consumer player.Credits to the company management for the massive transformation.

Last year companyâs sales from each segment:

TV: 70%

Web: 17%

Whole sale: 13%

Companyâs current business model of business to consumer(B2C) has one significant advantage: Reduced working capital since retail customers pay cash to buy the products(no receivables),in case of wholesale,receivables will increase as a function of sales which will extend the cash conversion cycle.This new model would free up lot of cash which will increase the asset turnover and hence,ROE will inch up.

Another major advantage of B2C is when you are in wholesale,you have no pricing power especially when you are a supplier to brutal retailer like Walmart.In the current model,they are free to set the prices on their will.

In developed markets like US and UK,growth of retail industry is directly linked with GDPâs growth.As per the companyâs annual report,total jewellery market size is around $60 billions of which 10%($6 billions) belongs to e-commerce.

Now,we need to check how much value migration from brick and mortar to TV and Web is going to happen for jewellery and lifestyle products.Currently,VGLâs TV sales acocunts for 70% and web is 17%.I think going forward,the ratio will tilt towards web.TV has its own limitations like creating trust and winning customers when you constantly mark down the prices of your products throughout the day.Personally,I have never seen anyone buying stuffs from those TV marketing programmes in my friendâs/colleagus circle.When you constantly offer deal,(I watched their TV for a while,they gave a new deal for every 3 minutes.) that too 90% off on products everyday,people start suspecting it.They started a product with $1200,then marked down to $500,then $300,then finally ended up with $120(may this is the way to engage the customer but I could not understand the rationale behind this.)Atleast ffew times a day is fine,but not all through the day. I am not saying this is not a sustainable model,but how much scalable.We need to understand VGLâs TV sales ,there is no new growth going to happen every year since almost all the households in US and UK have TV already and all are watching these programmes day to day basis. Or,they have to start selling in other developed nations which is not possible since some EU nations like France,Spain,Italy are major sellers of these products.

So,the next leg of growth should come from online for VGL if it has to grow further.However,When I did some google search for online gemstones and jewellery surprisingly VGLâs website did not appear in top 25 websites(changed the keywords as well).All of their competitors website are appearing on the advertisements section.They really need to invest a lot on this front.

Their US facebook page has close to 350,000 likes which came as a surprise to me which is a good number .This shows the reach of the company in its markets.However,on yelp they had 2 reviews and both of them are negative,they did not bother to respond back to the reviewers(no big deal).But in US,people try to look for credible reviews before putting their money on some unknown websites like liquidationchannel.com.

Let us look at the competition real closer and see if there is a room for VGL to grow:

1.QVC: Their annual revenue in 2013 is $6.5 billions of which 17% jewelry and 25% lifestyle products.

That translates into $1.1 billions from jewellery and $1.6 billions from lifestyle products.

2.HSN :Annual revenue $2 billions (18% from jewelry and 25% from lifestyle products).

That translates into $340 millions from jewelry and $500 millions from lifestyle products.

VGLâs last year sales were aroud $200 millions and the overall industry growth is around 2% with ecommerce growing faster than that,how much more VGL can grow? That is the bigger question.

There is clearly no doubt about its proven business model with high return ratios,asset light model,low-cost producer, just that could not get a hang of how they achieve future growth rate of 20%.

And we need to remember,jewelry being a discretionary item and this is the first one to get hit when recession happens.

happy to hear your arguments.


(Karan Maroo) #8

Hi Anil,

The analogy I gave was with respect to TV sales (And as Sambath below your post has pointed out). While VGL has a unique business model of selling through TV channels, this source is one which could turn obsolete in the future. Even today, its mostly retired women, housewives etc who buy from this source; this could actually move to internet based sales in the future.

Hence, the need for them to swtich to an online model (Credit that internet based sales have definitely been increasing).


(Sambath) #9

Some more data points to show how TV watching crowd has been constantly declining over the years:

These days online streaming service has gained its share massively due to their convenience and cheaper than the cost of cable.

1.Netflix ,the biggest streaming service has more than 33 million subscribers currently in US.

2.Amazon which is next to Netflix has a subscriber base of over 20 million in their prime program.Prime subscription allows unlimited TV shows and movies for its members.

3.In US,I have seen many people still using DVR to record their TV shows to watch them later at their convenience.

4.Most people who has internet connection have streaming devices as well like Apple TV,Roku,Amazon Fire to cut down their cable costs and still catch up with their favorite TV shows.

4.Let us see what the competitors of VGL said last year in their con call

HSN: âmobile sales grew 59% with mobile now representing 14% of our total businessâ

QVC: âmobile accounts for 41% of all orders placed on QVC.com and 39% of the companyâs global net revenue.â

All these data points clearly suggests the paradigm shift from TV to online and mobile which should be the focus of VGL going forward.

Let us take a look at the competition:

Name

2010

2011

2012

2013

HSN(Operating since 1982)

3 B

3.2 B

3.3 B

3.4 B

QVC(Operating since 1986)

11 B

9.6 B

10.1 B

11.3 B

Shop HQ (Operating since 1990)

562 M

558 M

586 M

640 M

All of them are operating around 30 years and have well-diversified portfolios to offer their customers.So,it is not a an apple to apple comparison with VGL since it mostly sells jewelry and little-bit of lifestyle products .However,with such a wide product portfolio,all these companies hit a plateau in sales with almost flat growth for the last few years.Since VGL was operating from a low base all these years,they were able to churn out great sales numbers.No doubt about the ability of the management and its vision,but the future growth path is going to be really a tough one.Sunil Agarwal claimed their products are 30% cheaper than the competition,that may be true.But we need to wait and watch how it makes headway into future growth.I really love retail stocks with strong management with great focus but the medium in which it operates is not providing me conviction to invest at these levels.

(Arun) #10

One of the research reports on Vaibhav Global -http://www.slideshare.net/Arunmozhi_Gopalan/vaibhav-global-limited-42103552


(Sambath) #11

Arun,thanks for sharing your presentation,that was a great work.Having gone through your slides,some questions came up in my mind.

1.My assumption about VGLâs success is selling cheaper than in its competiton.I donât have a way to check how cheap they are,but as per Sunil Agarwal they are 30% cheaper.So,that is the biggest selling point.Now comes the question.How did they achieve this cheapness? They source it from Asian countries,manufacture in Jaipur in their own facility and sell it to their customers in US,UK,Canada.This is the main reason their gross margin is higher than their competition.

Now,as per your presentation,future growth will be mostly driven by lifestyle products(currently 90% sales belong to jewelry division) which are produced by third-parties.If that is the case,what is the price difference between its competition and VGL since everybody sources those lifestyle items from China for cheap and sell it in US.Say for example ipad/iphone case,can you sell 30% cheaper than others just like Tanzanite(I donât think VGL will ever make those ipad cases on its own to make it cheaper).If you do that,you will loose your margin,if you donât your customers have no reason to buy from you.So,these lifestyle products are like trading income and not like selling the in-house brands .All these lifestyle products are overcrowded with cut-throat competition.Here,end-to-end vertical integration is not going to add much value.What is your thought on this?

2.When you say,HSN and QVCâs combined revenues are 52X of VGL ,thus indicating huge scope for VGL growth.Are you talking about market size getting expanded or VGL gaining market share from the existing players in a declining industry?

3). Carriage cost:Could you please throw some light on how this gets reduced in the future?

4.VGLâs business model is not under any threat/competition for going out of business,it operates in an oligopoly kind of industry. But the products they are planning to sell are under severe competition.Going forward,the margins and the traction it receives will be the big factors to decide how things pan out in its lifestyle segment.Because in lifestyle retail your margin is very low,around 4% to 6% and not like jewelry retail.


(sri krishna bhutra) #12

Hi Sambath,

Would advice you to take a look at the video of VGL guest lecture shared by Prof. Sanjay Bakshi, that will clarify most of the doubts.


(Karan Maroo) #13

Sambath:

Will try to discuss a few of the points which you’ve raised

  1. Do people really buy from TV? Is that sustainable going forward? -

While its true that people like you and me probably never buy from the television, VGL has aimed at a completely different set of people. There are lots of ladies in the USA including retired women, housewives etc with dollars to spend who get a kick out of the entire auction process and finally seeing the message on screen - “Congratulations, You have won!” The thrill of appearing on TV as a winner is brilliant. The fascination of being able to buy high priced articles at huge discounts is a concept which plays with the human psyche. Free gifts for loyal customers rakes in more loyalty. It is these softer aspects and innovative ideas which makes TLC such a popular medium for its target audience.

  1. Growth from online mediums -

It is pertinent to note here that TLC is medium agnostic - hence the live broadcasts are on TV as well as the internet. So the old ladies can watch their favorite program and make their bids on their laptops. The platform, hence, is there for VGL to also grow through online mediums

  1. Consumer discretionary? -

I’d just point you towards the price points of the jewellery (Average selling price of $20) which really should not affect its sales much during a downturn. It is also for these reasons that you shouldn’t really be comparing it to the QVCs and HSNs of the world. Where VGL operates is a unique space which has not really been encroached by any major players; nor is it an easy space to break into (in the short term) because of VGL’s competitive advantages.


(shanid) #14

Dear Karan,

You have put up all the details,thank you.

What made me buy this company after 3-4 years,if the company can grow 20% at least,it will have lot of cash either they can use this cash for growing to different geographies or else distribute to shareholders as dividend.

Do u have any info.regarding management commentary on dividend policy.A good dividend policy will rerate this stock to 30 PE.

Rz

Shanid VH


(Anil) #15

Hi Shanid,

Company declared interim dividend Rs.2.4 per share in November 2014. After many years, they are back in dividend list. Per my discussions, management is keen to pay reasonable dividend. But the bigger prize is to replicate the model in newer countries. Accordingly, they have started beaming their signal into Canada and Mexico for a few hours everyday. Based on feedback, the number of hours and reach into deeper areas of Canada and Mexico would be attempted.

Anil

Discl- invested


(Karan Maroo) #16

Thanks Anil - this Mexico angle is new, can you throw more light on it?


(Sambath) #17

After going through Prof.Bakshi’s note and the talk given by Sunil Agarwal,l got answers for most of my questions.

1.How will they maintain their marign if they start selling third-party products?

They are not planning to sell third-party branded products because brands are expensive due to their advertisement expenses.They will sell the third-party produtcs on which their margin can be sustained.This will be achieved through the scale in which they source from suppliers.Due to their huge scale of buying,they can buy cheap.They can also buy the components separately and give it to sub-contractors for assembling to reduce the cost.Anyways,VGL is very keen on maintianing the gross margins of 60% even in thrid party products as well.

2.Customer shift from TV medium in the future:

Long-distance shopping in US is not something new,it is happening over 100 years where people will buy over phone or mail ordering without even touching the products /seeing the products.HSN and QVC are in this business for over 3 decades and they are very successful.So,this trend is not going to change anytime soon.Even if it changes,already their platforms are very well integrated with web to make the business medium agnostic.If the shift would have happened,HSN and QVC would have been out of business long ago ever since ecommerce boom started.Current TV home shopping trend is here to stay,how long it will remain has to be seen.

3.Average sellling price(ASP):

This is the single most differentiating factor for VGL with their competitors like HSN and QVC whose average selling price is over $60 whereas VGL is $21.This is something unique in this home shopping jewelry business.None of the competitors addressing this discount retail segment which VGL is operating.Also,it is not selling any branded products thus its ASP is less.Another major advantage to this low cost discount model is it is almost recession proof.Jewelry being a discretionary item,but for VGL model it is almost not.Nobody thinks twice for spending $20 whether you are in recession or in booming economy.This insulates VGL from the looming recession which almost killed it in 2008.Current ASP of around $20 remains the key to stay long and being a recession-proof business.

4.Inventory:

In retail,however solid the business model is it all boils down to inventory management and what will you do with your unsold inventory especially when you are into fashion jewely where the trend gets changed rapidly.Especially when you are operating your business in the highly-competitive western retail environment where you rub your shoulders against big daddies who are very ruthless in killing competition,you need to be extremely vigilant about invenotry management.VGL is again very smart and nimble by selling their unsold TV inventory over web through bidding(reverse Acution).This kind of tight inventory management led to fall in inventory days drastically from over a year in 2010 to 100 days now.Zara has negative working capital because of its scale.

More over,VGL is not a trend setter,rather they are trend spotters.As soon as they identify a new trend in a product,they start with minimal quantity to see how the sales are happening,then based on the sales they increase or decrease that product inventory.Inventory management is exceptional so far.

5.Competitive landscape:

On a high-level,if we think,the competition in the jewlry space in quite intimidating.On the whole we have jewelry specialized brick mortar stores like Kay jewellers,Tiffany,Zale, home shopping players like QVC, and HSN and ecommerce players like amazon,ebay etc.Where does the competitive edge lies for VGL:

Customers that VGL targets,the medium it operates predominantly, the average selling price(non-branded items) at which it sells,if combine all of these,there is not much competition in this space here.It addresses the discount jewelry space where there is negligible competition.If that is the case,can someone copies it model and replicate it? That is where VGL’s low cst producer model along with end-to-end vertical integration comes into play which acts an entry barrier for a new player.

6.Future growth:

How solid a business model is,as an investor we should get a visibility of future growth>Market pays for predictable and consistent growth.If a company’s growth is clearly visible,PE gets expanded and it remains in that high PE band as long as the growth sustains.

Here in the case of VGL,we have a nice story that has been unfolding over the years.Now,we have to convert the story into numbers to check if we can predict its future growth.

1.No of households left in US and Uk to tap into (???)

2.Population of US over 60 years old is around 90 millions out of 300 millions as per latest census which shows lot of old women sitting home and watch TV,shop over internet.Similar percentage in UK.

3.Increase in number of repeat purchase from existing customers.

4.Expansion in other countries like Germany,Japan(not now,may be in 3-4 years down the line)

Need other members(Karan,Anil,Krishna) help in adding as many data points as possible to see if we get some visibility into its future.

Please add your views if you find any holes in my above points.I am here to learn from other valuepickrs in this amazing forum and always ready to accept counter views/opinions.

Disc: No investments,still studying to get a better understanding.


(Anil) #18

Hi guys,

On Mexico - they are experimenting with 6 hour programming directed at Mexico. The idea is to expand into neighbouring geographies where UPS can do the delivery.

On TV versus web versus Mobile - These are just mediums of distribution. As a member pointed out QVC and HSN have large portion of web and mobile sales. Point to note is that both started out with TV and expanded into web / mobile. Vaibhav is doing the same. All these media complement one another. There is nothing uniquely valuable about any of these three distribution channels, it is how the merchant uses them that counts. Vaibhav sold 24% by volume on the web in most recent quarter.

Growth - Vaibhav is adding more product lines in adjacent categories. First jewelry, then handbags, then scarves, then household knickknacks. And now trying out bed sheets. All these collectively go into expanding the addressable market size for VGL. More will follow, and that would lead to revenue growth despite overall slow growth in market as a whole.The pipe should be managed well, then they can push more and more merchandise down that pipe.

Margins - gross margins are quite healthy. As the fixed costs get better spread over larger volumes, a t of that gross margin will start reflecting as higher EBITDA margins. It’s a question of scale.

Cheers,

Anil


(Karan Maroo) #19

Vaibhav Global Ltd has informed BSE that Sonymikeâs Holdings Limited, a Promoter Group Company and GDR Holder, has converted 1,80,000 (One Lac Eighty Thousand) Global Depository Receipts (GDRs) into 18,00,000 (Eighteen Lacs) Equity Shares of Rs. 10 each of the Company on March 17, 2015.After conversion, the outstanding GDRs are 6,95,000 (Six Lacs Ninety Five Thousand) convertible into 69,50,000 (Sixty Nine Lacs Fifty Thousand) Equity Shares of Rs. 10 each.

Source : BSE


(manjushree) #20

Why is the price falling so much? The results do not seem to be that bad.