Stock looks interesting as a mean reversion play.
My analyst is also visiting their plant on 12th Jan , will share notes
Disclaimer
Can anyone please throw some light on how to comprehend the valuation of the company. I understand that the seasonality angle, the deleveraging part and the growth. I also had the opportunity to visit the plant and meet the management recently and found the management quite clear in where they aspire the company to be. I also have no doubt in their execution capabilities looking at their post GFC revival story. Itâs just that I am not able to understand how to value a company with this current valuation. Assumption: With a topline growth of 25% growth and 12% ebitda margins. Would the company still be just to be valued at this valuation. Kindly share your thoughts.
some notes posted on twitter from plant visit:
https://x.com/abhishekcjain/status/1746581934707499344?s=20
Model the FY25 revenue + margin. Model the EBITDA. The PAT. The acquisitions.
Disc: Invested, biased, might sell out if i can find a better opportunity.
Margins mentioned are PAT margins or operation margins?
So Japan and UK are Into theoretical Recession, since Vaibhav Global Operates In UK on The Retail Side, and from my knowledge if economies Fall into recession Govt Increases Rate of Lending that leads To less money in Hands of People, Hence less spending By People, Specially on Fashion Items People cut more of their Spending , so can anyone guide me how much will this Impact Vaibhav Global. If not Then also, please explain Why you feel that vaibhav will be resilient to this??
earlier management has said that due to such economic situation, people tend to move from brands to low cost value provider like Vaibhav.
As gold reaches top⌠I think vaibhav global products has huge potential even in India going forward as gold is touching all time highâŚ
Please comment / correct if this is not correct assumption
Itâs a really good approach. Gold price is going to go more high. But it will take 2-3 years more for Vaibhav global to get into India.
Vaibhav global is a jewelry business but it is unlike any other business. It has a fully vertical supply chain and produces and sources products and sells them in US,UK and Germany through digital media and TV. It follows the Zara model and has a strong focus on Gross margins being 60%+
Anyways
Letâs get to the thesis
Thesis
The management is really good and I remember them mentioning they take pride in meeting and succeeding their guidance every single time except post covid. The management has guided for 14-17% growth for the next FY25 with strong operating leverage I have assumed the higher side to see the best possible scenario, I would suggest taking the lower end too in a different model to know the full spectrum of possibilities. However, they acquired two new companies and are hopeful of getting 40-45 million(which is 17 million rn) If that happens, they can surely go past their guidance
EBITDA
EBITDA and sales are all there is to track here. EBITDA was 12% (ended up as 9.5% adding other incomes)
barring the losses of Germany. Germany is expected to break even H2FY25 and hence that drag will go away!
I have been conservative with the margins and only factored in 1.5% reduction of drag from Germany and no improvement in environment of UK and US and acquisition margins to stay the same(highly unlikely)
Management said 15-18% margins are possible in the long term so there is huge growth ahead!
Other income
Other incomes is 0.5% of revenue to factor a 1.5% increase in margins each year
Interest and depreciation shouldnât move much except a new acquisition. But that should boost revenue as well!
Antithesis
Fragile state of western economy, especially the UK has caused a lot of problems before and the business is prone to deleverage as well!
Failure of expected break even of Germany will spoil the improvement of margin
Final thoughts
I think the business is really good and is quite unique. The ROCE is to improve which can increase the bandwidth of exit multiples
Moreover, the TAM of the business is really high as they havenât penetrated much in their countries(for example US is 15 billion dollars and Vaibhav has 3% share)
And they are open to stating business in Japan and India after Germany is steady and profitable
Going by numbers shown in screener.in, here is what I see:
10 year Compounded Sales Growth: 9 %
10 year Compounded Profit Growth: -1 % (negative)
10 year Stock Price CAGR: 6 %
10 year is a good time to evaluate a business.
Considering Sales and profit numbers, Why are we (including me) hoping this company can turn around ? Or is this pure potential business on the cusp of capturing newer geography or newer segments of business ? Geography-wise yes, I know VGL has plans to get into Japan, India. But what potential if it is not able to perform in US and UK markets ? Newer segments, yes, they are trying to get percentage of non-jewellery business significantly, but again, I doubt if it is anything game changer. I would love to get it wrong, but does not look so at the outset.
Also we keep hearing from Management that their priority is about High margins. Here again we see OPM numbers for last 2 fy as 7% and 9%. Maximum OPM number is seen during FY2021 at 15%.
Again am I reading something different ? What margins Management is referring to ? If the subscription costs are very high, which company cannot control, then what is the point ?
Also, with these sales and profit numbers, how come we see 10 year Return on Equity as 19% ?
I think the profitability since 2021 is skewed because of higher CAPEX and acquisitions in Germany and UK. If you ignore those, the underlying core business of UK and US are actually growing in revenue and profits. Once the new acquisitions become fully scaled in a few yearsâ time, I think the margins will go back to what they were earlier (around 10% free cash flow margin)
Requesting you to please verify its cashflow. Cashflow from Operation has mutiplied more than 3X in same 10 years period.Its an internet company ,large amount spend on Softwear and Broadcasting Right acquisition .Same comes back as depriciation line item in Screener P&L and in FY24 its around 93 cr and increasing rapidly YoY basis.This line item is increasing as management is keen to build new studio , want to reach more home on TV-Home basis , investment in germany , upgrading channel position on various TV network, investment on OTA home reach. Having said that, Operating Margin surely has got weak over the years though Gross Margin consistently kept above 60% but content creation/broadcasting charges,freight charges and Packaging charges is increasing at rapid rate.
Vaibhav Global Q1 FY25 Concall notes (posting only key takeaways from my POV)
Maintains guidance for 14-17% revenue growth in FY25. The range is due to uncertainties due to US elections, else theyâd have been confident guiding for 17%
Content and broadcasting cost was 20% of topline in Q1, expects to finish the year at 18% of topline. This is a 1.5% YoY growth for the line item. Investments here being made for ramping up their newly acquired online businesses of Ideal World and Mindful Souls as well as the new territory of Germany. They have also spent some amount in improving TV positioning in USA. This line item as % topline has increased from 12.5% in FY20 to around 18% in FY25E. One hopes that a lot of this is leverage and the ratio was settle below 15% once the new businesses reach steady-state. Looks like they are targeting higher growth (mid teens guidance for medium term) via higher investments in content and broadcasting with some leverage.
Overall expect to deliver 150-200bps of operating leverage in FY25. Expects 200bps GM expansion due to better product mix, 100bps expansion from employee costs line item and possibly another 50bps from other line items such as travel expenses and freight. There will be a 150bps negative leverage due to B&C costs as discussed above, so net/net thereâs a possibility of 150-200bps EBITDAM expansion YoY
If management indeed is able to deliver 15% revenue growth and 200bps EBITDAM improvement over the year, PAT here can comfortably cross 200Cr. Hereâs how I see PAT playing out for various combinations of growth and leverage. I have assumed 20cr Other Income and 25% tax rate.
Depending on which scenario plays out, there could be a 50-75% YoY PAT growth and the stock is likely trading between 24-29x FY25 PAT. If the upper end of the PAT assumptions plays out, I wonât be surprised to see the stock trading at 8000Cr MCap.
Chart wise, 273 seems like a strong support zone. I donât expect the stock to test that support unless there is panic about a US recession. From what I know, recessionary conditions on ground normally top out well before a recession officially shows up in GDP nos. So the worst in terms of consumer sentiment for the business may actually be behind them and that seems to be what management is also indicating. However, Western economies arenât in the best of health and adverse risks remain which need to be monitored.
Disc: Invested.
Thanks for detailed and valuable note. Would love to hear your view, which is much appreciated, on the below point:
Expected max. PE 30x of FY25 PAT: How market cap might be ~8K Cr. for a max profit of ~220 Cr.?
The 24-29x PE is on current MCap if you consider the FY25 PAT range of 187-221Cr. At FY25 exit, market may value this at 35-36x PE on 220Cr earnings leading to an ~8000Cr MCap. Alternatively, on Price to sales, the stock has traded at 2.2x median multiples over the last 5Ys. On an FY25 expected revenue of ~3500Cr, a 2.2x multiple is again close to 8000Cr MCap.
The expected MCap is completely speculative from my side, it depends on market conditions prevailing at the time and many other factors. We can just track earnings and hope to project them with some accuracy.
Vaibhav Global Q1 FY25 Earnings Analysis: Key takeaways!!
Business Outlook:
Strategic Initiatives:
Trends and Themes:
Industry Tailwinds:
Industry Headwinds:
Analyst Concerns and Management Response:
Competitive Landscape:
The company positions itself as vertically integrated with quick turnaround times
Guidance and Outlook:
Capital Allocation Strategy:
Opportunities & Risks:
Opportunities:
Risks:
Customer Sentiment:
Top 3 Takeaways:
Consumer sentiment and GDP growth (in US at least) has actually been robust going by news reports so why is VGL unable to capitalise on that sentiment? If mgmt couldnât deliver results in such a robust macro economic scenario where GDP grew despite all time high rates, how will the mgmt deliver results when Fed starts cutting rates or a recession hits US ? Price might be right to enter at this point but canât trust the mgmt which doesnât deliver results in good times too! That might be indicative of a flawed business model.
Can someone explain me how is US consumer different from Indian consumer, like I never see TV channels like Naaptol ⌠Also what is the cost of having channel in US ?
Their website might have some organic traffic but do we know the ration of website vs tv-channel traffic. Like what traffic will remain on Website if no users sees TV channel?
