I am sharing a recent write up (a very brief and high level) to tell you how I viewed this stock then. I had written this to a small group of friends a few days before the results as an exercise in shared learning on how to spot mispriced opportunities engulfed in uncertainity and not as a recommendation: (pls ignore the typos as it was penned on a mobile platform)
There are many reasons why I like this company but for the moment I think it looks mispriced as the market doesnât seem to be believing in its turnaround whereas I see very clear signals that it is going to.
The company was growing well till Dec-14 since when it started facing competition from a new competitor in the US.
The growth till Dec-14 had given mgmt the confidence to do more capex in fixed assets ie new factory as well in new technology and that growth if continued would have taken care of the new capex without hurting return ratios which looked unbelievably good at that time at around 30-40 ROE.
But the competitor gave a very tough fight and Vaibhav was caught on the wrong foot. This led to some fall in sales and a major fall in profits due to operational leverage in itâs business.
For those who donât know the biz of the company - it procures raw materials from low cost locations like china, makes fashion jewellery mostly using precious stones at its SEZ at Jaipur and sells thru itâs 24-hrs TV channels - one in US and one in UK apart from selling on the web and now on mobile as well.
It positions itself as a Walmart of this biz - selling decent products at discounted prices. It has huge focus on repeat purchase. It also has its own studios in US and UK. It tracks latest fashion trends in US/UK and designs itâs jewellery based on those trends. And the customer is told on its TV shopping channels that e.g. - you can buy this piece of earrings at 25 dollars compared to the same design being sold at premium showrooms for 150-200 dollars.
You can read more about its biz on VP and there are some reports as well
http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=8173321&num=0
I think this is the recent one
So the investment argument is that itâs sales which were falling for 5-Qtrs have started growing for last two qtrs
But since the profits are still subdued the market is still not enthused and its share price which had fallen from 800 to 250 is till at around 300 only
So at this price or at around 260-270 it looks like a good bet ie you wonât lose much but can gain big
Now there are many reasons why profits hv fallen and why they shud look up
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The competitor started offering EMI as well as returns on delivery as convenience to lure customers away from Vaibhav. Initially Vaibhav dismissed these as gimmicks but soon realised that it will need to match these offers which it did but that led to increased working capital therefore increasing costs at the time of slowing sales thereby squeezing margins/profits
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The competitor offered better web interface offering ease of use to customers. To match this Vaibhav had to invest in new technology and this took more time than planned leading to project cost overruns and lower sales again squeezing profits
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The company had planned investments in new SEZ at Jaipur which it went ahead with and even though it was completed ahead of schedule it led to some addl expenses as well as higher depreciation, again hurting PAT
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The company also invested more in its senior management team as it needed more web sales savvy and experienced people and also as some senior people left (which might hv been viewed negatively by mkt) so this meant increased variable expenses again squeezing margins
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It also invested more in buying additional coverage for this tv channels in US giving it additional viewership but this also led to more addl expenses which are fixed in nature
So overall the play here is that the worst seems to be behind as company has taken various corrective actions and made almost all major investments in revamping and improving its businesses
The competitive intensity seems to be ebbing as is borne out by 15% sales increase on both of last two quarters which even on the low base of last yr is quite impressive
As most costs are fixed in nature, from hereon any additional increase in sales would add much more to bottomline and therefore profits should be on growth trajectory from q3 onwards which is also their best qtr due to festive season in US & UK
Also they are launching mobile Apps in h2 which would add to customer convenience and to use a not so good word but relevant here - stickiness
The company has also started selling other fashion accessories like bags, watches, etc earlier but that focus was paused due to pains in the main jewellery biz. Now with stable growth expected it is only a matter of time when they will start focusing on accessories again
With the company focusing more on web and mobile it is addressing the long term trajectory of this biz where customers are likely to shift from tv shopping to web and mobile shopping in the long run
In the overall tv shopping space the companyâs size is a fraction of the market size offering huge runway for growth
The promoter appears to be very good and this can be discussed separately for those interested but there are just too many pts which would tell anyone that the promoter would pass the test on most parameters of integrity, intelligence and energy
Also a mgmt which isnât capable cannot be expected to compete in the hugely competitive retail space in US
The biggest moat of the company is its low cost procurement, and its low cost operations in India, a combination which isnât easy to replicate
The company had stated giving good dividends which will likely be restarted once growth stabilised
On the valuation front the current profitability at around 40cr (on 1300cr sales) appears to be an incorrect way to value the company given the operational leverage inherent in the business
At 1000 cr mktcap it is valued at 25 pe at 300 a share
So if the company continues to grow sales at a very pessimistic 10% p.a for next 2 yrs reaching say 1650cr then given the operational leverage it is not unlikely that the current profitability of less than 3% can easily improve to at least 5% giving it 80 cr PAT in 2019 which valued at 20 pe for a growing, 20 plus ROE, eCommerce biz should ideally have a market cap of 1500-1600 cr (offering 25% cagr from a price of 260-270).
Rgds
RR
