Vaibhav Global ~ Vertically integrated value e-tailer of Jewellery and Lifestyle Products

[Sambath]

Hi @Augi I stopped following the company for these reasons:
1.Being a discounted retailer,it has to constantly find/innovate ways to reduce prices than the competition.Here,the problem is costs cannot be cut after a certain level( or indefinitely).However,if you happen to buy a company with pricing power,it can always increase prices to match the inflation atleast.

2.In price sensitive industries like retail,price forms a larger portion of customer’s buying decision.And the stuffs that VGL is selling are non branded items which are like a commodities with no product differentiation.Here,the only way to survive is to sell the items cheaper than your competition.
It does not matter whether I buy the ruby stone or ipad case from VGL or QVC or JTV,all I care about is cheaper price.
World’s best retailers like Walmart,Home Depot are low cost producers because of the scale advantages they are enjoying.

3.A company can reduce costs by 2 ways: 1) Process innovation 2) Scale based cost advantages.
Let us look at the first one: If VGL finds a better process to source and manufacture the goods cheaply,the next logical step for the competition would be to copy or replicate the same process.What prevents competition from coping the same process that VGL follows? Unless VGL follows some proprietary process which cannot be replicated easily by the competition,process based competitive advantages are not very durable.It can certainly gives VGL an edge over others in the shorter term but that cannot last for longer.
In the case of scale based advantages,fixed costs should be greater than the variable cost for the operating leverage to come into play.For VGL,apart from broadcasting costs,there are not many fixed costs.

4.Problem with discounted retailing is the industry dynamics are extremely brutal.Take the case of VGL,first it was doing all it can to reduce the costs by sourcing in China,manufacturing in India,selling in hot retail markets like US,UK.Then one of their competitors introduced stretch pay.Initially Sunil Agarwal mentioned this is a not a long term viable strategy and this player cannot last for long.Now VGL is doing the same thing.

Tomorrow if somebody else comes up with some other ways to lure the customers,VGL has to accommodate that.On one end,there is a constant technology issues,other side competition,then this fashion trends which keep changing every year.
Then on the financial side,if the company starts paying taxes, declaring dividends and the exchange rate fluctuations…just too many variables to track.I decided this is not worth for 20% grower.So,I thought I would focus my energy somewhere better.
Having said all these,this stock may become a multibagger in the future.So,please take my views with a pinch of salt.

Like a great saying,when facts change I change my opinions.So,if you could convince me about its business models,i am always open to change my view.

[bigvig]

@Augi. The presence of FCTR is on a sound basis as described in the extract from AR in your post (see my post http://ri-vi.blogspot.in/ where I mentioned it).

The issue is with the use. Here is a virtual sequence of events

1. Vaibhav started with (-)6.6cr of FCT Reserve on 1-Apr’12
2. Added 16.4 cr to FCTR due to the Operations (Legitimate basis the accounting convention). This nets to 9.8cr on 31-Mar’13
3. If this 9.8 cr was transferred to P&L, that would have been fine. In that way the FCTR would have been reduced to Zero. But they chose to transfer 38.3 cr to P&L, in effect creating 17 cr of phantom earnings in FY’13.

The net of these actions is: Money was borrowed from a negative reserve to inflating earnings and make the reserve further negative.

That’s just brilliant and I don’t know why they stopped at transferring only 38.3cr. Its earnings on demand, why not transfer 100 cr.

[Ishank]

@bigvig, No amount of accounting chikaneri can enable a company to repay debt, pay interest, redeem preference shares, pay dividend. VGL has done all these over the last five years. For the last five years, it has positive free cash flow (just add what it paid to capital providers minus what it took from them). It was 108cr and 64cr for 2013-14 and 2014-15. How many companies convert over 60% of PAT into FCF? only a handful of companies.

[Augi]

VGLs niche is retailing fashion Jewelry at deep discounted price with avg selling price of $23. With advantage of having integrated, large scale, end to end B2C business model in Jewelry business, even at such low price points VGL makes a gross margin in excess of 60%. Whereas direct competitor in US - JTV struggles to make profit at 3X avg selling price of VGL. Other competitor such as QVC, HSN, EVINE are very profitable; however their prime focus isn’t selling jewelry products (QVC is well diversified, HSN, EVINE focus on selling Home/ Consumer electronics). Jewelry account only 10-12% of their revenue – even within jewelry they focus on selling fine/ branded jewelry products with avg selling price between 60-100$. One competitor worth mentioning is TGGC which owns Gems TV UK, Germany, Rocks Tv in US and JewleryMaker.com(niche site that helps to customers to design and make jewlry - they have huge customer base). They grew exponentially in past few years from £3M to £ 100M (162 $) by replicating VGLs integrated model, they also own Jewelry manufacturing base Jaipur. However, even after replicating VGLs integrated business model and with manufacturing base at Jaipur their avg selling price should be ~44$. (TGGC is family owned pvt firm and my calculations based on data available publicly such as CEO interview. With Rev of162M$ and avg shipment per day of 10,000; back of the paper calculation gives avg selling price of (rev/num of pieces =162M/3650k) ~44) so when someone replicate VGLs integrated model and sells double avg selling price you would expect them to make lot of money – however, TGGC made just £3.8 in FY14, with profit margin of 3.8%(FY14) vs 7.8% for VGL in FY15. Isnt this low cost moat which Buffet explained “It might be easy for a competitor to copy our business model. However, it would be next to impossible for them to replicate our economics. This represents our competitive moat.”

Operating leverage
17%(TV carriage+ web marketing cost) of cost is fixed and this will be key source of operating leverage. Also, there are partially fixed items such as employee expense (16%) and SG&A(17%)- this may not be material source of operating leverage; however, on a long run there will be some benefits flowing in.

Financials
VGL paid 19.8% tax in FY15, this may go up to 25-28% in FY16 and after capital restructuring VGL will start paying dividends. Personally I feel investors love a company that pays taxes and dividend and usually rewards with better valuation. 10% dividend payout on FY15 earnings would give a dividend yield of 2%.

Constant change of technology

VGL being deep discounted fashion retailer, VGL may not pioneer in technology/ innovation. Rather VGL is open to changes happening in the industry and is willing to adapt. I just love quote in world is flat, and it makes sense in this context-

“Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn’t matter whether you’re the lion or a gazelle-when the sun comes up, you’d better be running.”

[varadharajanr]

It’s a fair point - I have written to CFO/CS asking them for an explanation - let’s see.

[MSSMurthy]

Perfect . Excellent FCFs. But again what is baffling is , why drawing from negative reserve to inflate profit .I am not an account .Can somebody clarify .
( I hold VGL bought at Rs 808 )

[Augi]

My understanding is VGL had given loans to subsidiary long back when rupee rs was ~ 40 to US$, later when subsidiaries were repaying rupee would have depreciated thus when subsidiary repay VGL makes a gain. eg if VGL had given 1$ to subsidiary when rs was 40( ~20M was outstanding as of FY14 which was booked when $ was equivalent to 40rs- detail from old research report by AXIS cap), out go for VGL is 40rs. However, if subsidiary repays same 1$ back now, VGL receives 63rs thus the gain. Even though its little ambiguous in FY13 AR, its much clearer in later reports. In notes sections and in cash flow statements its mentioned as ‘exchange difference on loans given to subsidiaries’. This amount is coming down and is only 5.4 cr in FY15.

Below is explanation from AR of how exchange difference arise -
Exchange difference arising on translation of Loan and Advances to non – integral wholly owned subsidiaries and forming part of net investment,
are recognized in foreign currency translation reserve. Such accumulated exchange differences are taken to statement of profit and loss account
on liquidation or on proportionate basis on partial liquidation of such loans and advances.

[Augi]

Attaching chart of VGL. its looks like stock is finding good support at 150DMA.

Disc: this is not a recommendation to buy/ hold/ sell.

[Amit009]

Annual Report 2014-15 - I find this a good read!
http://vaibhavglobal.com/vaibhav2/investorsection/Annual-Report-2014-15.pdf

What would it take a probable competitor to create the next Vaibhav Global?
“It might be easy for a competitor to copy our business model. However, it would be next to impossible for them to replicate our economics. This represents our competitive moat.”
Sunil Agarwal, Chairman and Managing Director

Key takeaway’s:

1. Company turning debt free and strong focus on free cash flow
2. Started paying dividends
3. Significant investments in technology (web platform, mobile app), people and facilities
4. Aggressive Time to Market: Vaibhav Global is among a handful of companies in the world with concept-to customer product cycle of 21 days including a five-day product development cycle!
5. Strong customer loyalty - repeat purchase 18 times
6. Manufacturing capacity expansion ~ 100,000 sq.ft to grow manufacturing capacity by 50% to 450,000 pieces per month
7. Augmentation of product basket by adding textiles and beauty products
8. Focus on bringing visibility to unpredictability - risk management

Let’s watch how this story pans out!

• Amit

[dragon_rulz]

I had a couple of questions which I am unable to answer:

1. VGL plans to expand into categories like bed linen and other home decor items in order to grow further. I get that VGL can quote low prices on its jewellery because it is vertically integrated across the value chain. In case of home decor, it will be acting as a distributor: buying from suppliers and selling it without any value addition in between. How will it still be able to quote lower prices on these items(low prices are its main competitive advantage) as compared to peers? Will it compromise on quality; if so, it may lead to customer attrition. If not, what stops its peers from sourcing via the same suppliers?

2. The internet model is highly scalable without need for significant capex. Given this, what stops the company from expanding into newer geographies like China, Japan,India, rest of Europe etc? China and India are the two largest markets for gold in the world. It does not need to set up channels; it can just stream videos online and launch a mobile app. I ask this because the US TV shopping jewellery market is more or less stagnant. There is no new customer addition; incremental growth will come from mining existing customers further.

[MSSMurthy]

The management of the company has clarified your first question in their recent concall .excerpts
" first of all we are not going to garment yet but we are going to home product like home textile home decor or living room bath room etc. About how we do compet with Walmarts of the world? I was in China recently with my team and we compared the prices of towels wit Walmart and Homesead .- they are two major players in the US. This set of 12 towels at Walmart was being sold at $49,And when we are merchandising our price was also comming at $49 giving our gross margins .We could not sell cheaper than them and our proposition is that we should sell cheaper than them .In that case what we do is to differentiate the product like make the product with a bit of satin in there and a bit of bamboo fibre inside the cotton towel so that it is nor head-to-head competition for exactly same product ."

[varadharajanr]

@MSSMurthy

My big worry i exactly that - that VGL is trying to become a trading house without building any brand.

A fact that is proven by mgmt’s thinking of themselves as a low cost sourcer - not as a strong brand, not as a strong customer service platform. Typically low cost sourcing is the weakest of all moats and very few people can sustain over a long period of time in this increasingly global world.

Look at all strong franchisees - they are not lowest cost but charge a premium and deliver good value to customer.

This is my biggest worry on VGL - they seem to be a perpetually jugaad business with no clear focus on what categories they will compete in. If they find out mosquito repellants selll in US, will they trade that too ?

[MSSMurthy]

A very relavent worry. So what shall be our approach to Vaibhav Gems as an investment ? The high ROC , robust cash flow , low cost advantage , still qualify this company as a worthwhile long term investment . Enough indicators like decreasing margins , stagnant sales , decreasing ROC , external competition in the market segment are likely indicators of a melting mote , which should put us on gaurd . I request boarders for alternate views on this .
NOTE : I am invested in Vaibhav at Rs 808 which is not a good entry at all .

[varadharajanr]

@MSSMurthy

I follow Mohnish pabrai and give it at least a year’s time - you won’t know the quality of a human baby in under a year’s time - how can a complex organization with so many evolved adults be adjuged in less than a quarter - give it a year and let’s see.

[jainaj]

@MSMURTHY - Vradharajan has gave u a practical answer. See in annual report I received yesterday and finished reading today - they have stated to increase their capacity by 50%. If business is so bad why r they increasing their capacity.
I own this share in good quantity though after results I sold by half and my contention was that with two difficult quarters ahead - a good entry point could by 450. It seems to reach their pretty early.
1St quarter of next year will help us gauge whether it has started gaining lost ground - if not then as keynes said: If facts change - I change my mind.

[Augi]

VGLs stronghold is fashion jewelery retailing and most products they sell are sold for less than 40$. Typically when a customer buys such low priced items they won’t bother much on brand instead they focus on fashion and quality for that what they pay. VGL position itself as a retailer who provides that and once a girl/ women feels products at VGL are trendy and reasonably priced, customers tend to be sticky – one of the industry best repeat purchase history justifies this point (avg 17 purchases vs 24 @ industry leader QVC).

By expanding product basket to lifestyle products and to beauty in future VGL would be looking to enhance revenue by bundling and cross-selling. It makes sense as all these products are targeted at same women customers.

Personally i feel management of VGL has done tremendous job with their retail business. It must be noted that retail operation begun only in 2007 and just after that VGL ran into economic turmoil and was in huge mess until VGL changed its business model into integrated discounted retailer in 2011. Even then in FY15 VGL had sold ~9.8M pieces to ~4 lac customer and ~48% cutomer retention. as management explained FY15 was year of consolidation they made significant investments to improve its web, mobile and TV platforms, outsourced call center to free up management bandwidth, expanded facilities in US& UK(in FY14) and is also expanding manufacturing facility by 50%(still in progress).

VGL also has home grown brands for products which are above 70$. this may grow faster once VGL introduces stretch pay-- competitors including QVC pushes high value products with help of stretch pay/ easy pay.

Disc: Invested and optimistic. I maybe wrong with my assumptions

[Chaitu_1614]

Update:
Good to see that management is aware of everything and with below announcement management views are clear and our members doubts will be clarified with this.

[jainaj]

no doubts gets clarified for this was known to everybody following the company for last 3 months. Problem is their customers are facing difficulties surfing website, placing orders for so many days which is incomprehensible.

[MSSMurthy]

My entry point in Vaibhav is at Rs 808 which I consider was a big mistake without regard to margin of safety . According to the management next two quarters are going tobe subduced , which time I expect gives very good entry points .

[Yashu]

I have one negative thought regarding Vaibhav Global. They don’t have any return policy for less than 200$. In this world of e-commerce, return is very simple. How can they be stringent in their return policy? Do you guys have any idea about the return policy of JTV. Now, they are increasing their product basket, and they might be competing with other vendors like amazon, I am not sure if they will be able to maintain their stand of no return policy under 200$.

Otherwise, the price of vaibhav global seems to be mouth watering.