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

[sahil_vi]

Corruption Charges

@MSSMurthy

Please read this link below where there are serious charges on the promoter Mr Jain related to paying bribes and soliciting through ‘ excotic dancers “.

Indian jeweller faces bribe charge in US

I found this interesting video which contains the promoters rebuttal in his own words:

Indictment

PS: entire playlist contains a good story of how the business has evolved in last 40 or so years. Quite a good resource for all investors and potential investors to consume to learn more about the company.

The tldr is that the promoter used help from a friend who worked in Canadian visa department in order to fast-track his visa appointment (not the grant of the visa).
The promoter, being friends with the person also regularly gifts the person products of his company on Christmas. This was misunderstood as bribing by the state department.

Few observations from me :

1. If I were running a small company, I would have done that as well. I blame more the legal councel for the company and the promoter rather than the promoter himself.
2. Kudos to the state department for being able to catch this. Quite amazing.
3. The transaction did not come across as being nefarious or I’ll intentioned, but more like a mistake.
4. It is up to the individual investor whether they choose to believe the promoter or not.

Operating Leverage

In a lot of recent management commentary, we have heard about the operating leverage of VGL:

From Q1-FY21 Concall:

So you are right. Our model is unique, and we operate on a very stable kind of a fixed cost, which will not go up commensurately as the revenue goes up. So we have been able to drive operating leverage for the last many years, and we expect to continue doing the same. In this quarter also, like the same as reflected in the expansion of EBITDA margin to 14.1% and even PAT margin coming closer to 10% now. So we do not give any guidance on our profit margin expansion. But yes, cost being largely stable except shipping cost, which will continue to go up in terms of volume growth. The other costs are more or less stable. So we’ll see operating leverage going forward as well.

From Q4-FY20 Concall:

Given the company’s resilient operating structure and agility, in the medium term and short term (2-3 years), we expect revenue growth to grow by 15% to 17% on constant currency basis for our B2C business with consummate operating margin leverage owing to a relatively fixed cost base.

From Q3-FY20 Concall:

We’ll continue to see the leverage coming in as we continue to increase our top line at approximately 60%-plus gross margin because our – some part – a major part of our costs are fixed largely in nature.

In this post, we will analyze VGL’s operating leverage analyzing the cost structure. This analysis is very similar to an analysis done for Transpek by @spatel here:

Transpek Industry limited

Understanding operating leverage properly is perhaps the easiest step with the largest payoff. Does Transpek have Operating Leverage? Let’s analyze. This requires looking at cost-structure. [Capture] Fy17: For 328 Cr sales, co spent 45% in COGS (materials), 11% in salary and 28% in manufacturing expense (electricity, logistics, etc). Co earned 16% OPM. Fy19: For 595 Cr sales, co spent 51% in COGS, 8% in salary (300bps improvement) and 22% in manufacturing expense (big 600bps improvement).…

Attribute / Year	2020	2019	2018	2017	2016	4 year CAGR
Revenue from Operations (cr)	1986	1814	1575	1439	1275	0.1171648553
Cost of Materials Consumed (cr)	276	302	309	310	227	0.05007617805
Purchases of stock-in-trade (cr)	423	351	283	226	191	0.2199070749
Raw Material (cr)	699	653	592	536	418	0.1371695537
Employee Benefits Expense (cr)	358	337	271	250	234	0.1121587737
Depreciation and Ammortization (cr)	31	25	25	29	24	0.06607464158
Other (Administrative, Manufacturing & Selling) Expenses (cr)	669	669	591	600	593	0.0306064499
Net Profit (cr)	190	154	112	65	40	0.4762958619

Some observations:

1. Administrative, Manufacturing and Selling expenses and Depreciation and Amortization have grown Fairly slowly. Since this is the largest part of the expenses, it is the slow growth of this relatively ‘fixed cost’ that provides the company the operating leverage.
2. Since the company derives part revenue from self-manufacturing and some from contract manufacturing, I look at Cost of material consumed and Purchase of stock in trade together as Raw material cost. This has grown largely in line with the revenues, which makes sense since they maintain a 60% type of gross margin.
3. Employee expenses have also grown largely in line with revenue.
4. Due to largely fixed costs, the Net profit has grown ~47% CAGR in last 4 years, compared to ~11-12% CAGR for revenue.
5. Please take this with a big bucket of Salt. All projections are wrong. This is only to understand the size/quantum of opportunity. If we assume similar growth rates in future for revenues and same expense heads (similar cost structure), then we can expect the 190cr net profit in 2020 to become 500 cr net profit after 4 years.