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

Stock Opportunities Untested - but worth a good look
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Wanted to share a short summary of the company:

Core Business

Vaibhav Global is a vertically integrated company that sells fashion jewellery and lifestyle products, manufacturing them at their India and China factories and also sourcing them from over 20+ countries. Their primary business modelis to manufacture or outsource many deep discounted products, launch them as “experiments” on their several sales/marketing media (their own websites, Apps, TV channels, OTT channels (TV channel on the web), Other web platforms (Amazon, eBay). Those products which have highest demand are scaled up in production and sold in larger quantities. When production moves beyond a certain threshold, they move production in-house, thus leading to larger vertical integration. At Each product category and also overall business level, they maintain 60% gross profit margins. For this reason, they do not sell other brands’ items on their platforms. They have an interesting inventory (including returns that they cannot resell) clearing mechanism known as ‘Rising Auction’.Rising auction has a mechanism of starting everything at $1, and at whatever price it clears, it clears. Their Web business is growing much faster than the TV business. They still retain the TV business because they follow an Omnichannel sales strategy.They have also observed that the lifetime value of a customer (defined as total purchases they make over their life of being a customer at Vaibhav) is x when it is a web-only customer, 3x when it is a TV-only customer, and 9x when the customer makes purchases on web and TV platforms.

Size of opportunity

Vaibhav global works to identify trends in what customers want and then work to either outsource or manufacture those products (50% each in FY20 revenues). Understanding customers is a key part of the business model. For this reason, they do not scale mindlessly to all markets or all countries. Right now, they only operate in US and UK. In fact in an earlier avatar they did try to scale to multiple countries simultaneously, Realized it is not possible to do so, profitably, and hence scaled down (during 2008-2010) to only these 2 markets. They are open to scaling to new markets as and when the size of operations grows more and they see slowdown of growth in their key markets (US, UK.

In the US, their key competitor is QVC which has a market share of 93%. In the last 3 years, VGL has grown their market share from 1.5% to 3% (counting only television/e-commerce and not counting brick and mortar). As we can see, they have a huge runway, if they do manage to bring some of these customers over to VGL. We can see this in revenue growth as well. While VGL revenue growth has been ~11-12% in the last 3 years, QVC’s has been flat, meaning that VGL is gaining market share from QVC. VGL’s revenue per household in the US is 3$ while QVC’s revenue per household is 60$. This is another way to understand opportunity size.

Why now?

There are a few tail-winds working for Vaibhav Global. These have been sped up due to Covid19 Pandemic. To what extent they prove to be secular tailwinds, only time will tell. Latest Q4FY21 concall management has revealed that they are continuing to see elevated levels of revenue growth in the 6W of Q1FY22 even over the higher base of Q1FY21.

VGL’s unique customers per year have been growing at around 4-5% per year in the last few years. Due to Covid19, a lot of offline retail buyers migrated to online retail and thus to VGL. on a TTM basis, VGL’s unique customers were 342000 in FY19, 363000 in FY20 and 425000 in Q1-FY21 TTM and 5,00,000 in FY21.
All these tailwinds are visible in FY21 results: Revenues increased by a strong 28% year-on-year to INR 550 crores. Gross margin came in at 62.3%, even as they expanded portfolio of products to essential items. FY21 EBITDA margin expanded by 1.4% year-on-year to 15.3%. And profit after tax grew by 46% year-on-year to 344cr. Due to good growth, management has guided for 16-18% constant currency growth in US and UK geographies. Management is generally very conservative
The business model has proven to be antifragile against the covid-19 pandemic. When there were total lockdowns in China, they were able to ramp up production in India and sourcing from Thailand and other countries, and when there was a Lockdown in India, China production went up along with sourcing from Thailand.

In the latest Q4FY21 concall, company has also declared intention to expand into the Germany markets in H1FY22 and will do 2M$ capex in FY22 with opex losses in first year. This will open up an additional avenue for growth and expand the opportunity size even larger since germany is largest home shopping european market. Germany has similar competitive landscape like US and UK geographies with QVC and HVC each doing 1B$ revenues.

Financials

VGL has significant operating leverage due to relatively lower fixed costs versus variable costs. This is visible in their Sales, EBITDA and PAT CAGR in last 4 years. I take this screenshot from FY20 Annual Report for making the point:

1236×1248

Sales became 1.5x, EBITDA became 3.7x and PAT became 4.8x in 4 years.

Their gross margins are fairly stable at ~60%. This is a core part of the business model. They discontinue products/SKUs where gross margins are significantly below 60%. In fact in Q1FY21 they introduced some essentials on their website like masks, rice, pasta. Even in Essentials as a category, their Gross margins were 60%. Due to very high ROCEs of 61% they do not need much incremental capex. This is a very asset light business. Hence, they have very healthy Free Cash Flows and also have a stated policy of giving back 20-30% of FCF to shareholders via Dividends + BuyBacks.

Accounting

This is probably my weakest part in analysis. I could not find many red flags. A couple of observations I made is that their internal auditors are Deloitte and their Auditors are KPMG (for 5 years since 2017-18). This leads some credence to their accounting books.

Valuation

Given the growth metrics, I do think they are fairly to overvalued right now (EV/Sales and P/E). However, given the size of the opportunity, I have a decent investment in VGL. If the growth rates revert back to 17% topline 25-30% bottomline, then current valuations could potentially crash. However, for now, the valuations seem justified given the current growth trajectory.

Q4FY21 Concall Notes

  1. Unique customers grow 38%. Crossed 0.5M mark. Business model is integrated vertically, flexibility in the supply chain.
  2. Introduced adjacent product categories. Our products earn gross margins higher than largest peers.
  3. Will expand to the German market. Largest home shopping market in Europe. In FY22, 2M$ capex. Operating loss of 3-5M$ in germany operations in FY22. Expect it to become profitable in 3 years.
  4. For 2-4 years we expect 15-17% topline growth from older geographies.
  5. 28% growth for ShopLC and 34% growth for TJC.
  6. Retail revenues grew by 31%.
  7. TV revenues 28% growth. Web revenues 43% growth.
  8. TV contributes 64% and 36% from Web channels.
  9. Non jewellery products 31% contribution
  10. Operating leverage lower than before due to investments into germany. 13.1% EBITDA margins if we exclude the expenditure done for Germany expansion.
  11. Separate channel will be launched for beauty products. Separate channel to give us additional screen time with our customers. Will only live for 4 hours a day. We will expand the channel airtime only if we see traction.
  12. Germany Updates: We expect to invest 3M$ in capex. We already launched digitally. On TV side, we will launch on H1FY22. Sales revenue point, 16-18% for older geographies. We have launched in Germany already through our own website.
  13. We have made some investments in social commerce in last Q and will continue to do so. Do not want to dilute our operating leverage too much.
  14. UK we have significantly reduce delivery in UK with TJC+ it is 24 hours. It is like Amazon prime. Bottlenecks in US with covid pandemic. Aim to bring it down from 4.8 days to 3.4 days in FY22. In texas and oklahoma it is 1.5 days down from 5 days due to better logistics.
  15. Continuing to see elevated growth in 6 weeks of Q1 on the elevated base in Q1FY21.
  16. Competitive space in Germany is similar to the US and UK. 2 major players of 1B$ each QVC and HVC. Market size is at least 2B$.
  17. In Japan we are already showing in the local markets. We are still trying to understand the market. We don’t want to grow in Japan until Germany fully stabilizes.
  18. 1 for 1 (VGL’s CSR program to feed hungry children 1 meal for each purchase) run rate is 54000. meals per day We want to grow to 1M meals per day by 2031. We have to grow 22% (was a bit inaudible) YoY every year for a very long time. We take this goal with lot of courage and ambition.
  19. Lifestyle will be 50% of our mix in 2-3 years.
  20. We have experience in Germany since 2007. Have transferred a UK manager who has lived in germany to germany business. Our success probability is much higher this time around due to our success in US and UK.
  21. Want to bring TJC+ to US when we have our shipping under control (shipping costs and delivery time) then we will launch TJC+
  22. 12M$ from marketplace (Amazon etc) in FY21. We did 3.5M$ in FY20. So we have huge growth despite large competition. We expect to grow higher next year though no guidance.
  23. In FY21, 501k unique customers. 321k in US , 179k costumers in UK. Last year 362k total, 225k in US, 136k in UK.
  24. 65L opex gone for Germany in Q4FY21.

Disc: Have a large investment here. Full PF here. This is not investment advice.

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