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

Stock Opportunities Untested - but worth a good look
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As I have mentioned above, 10% revenue growth is enough for them to deliver handsome operating leverage. PE multiple is not in our hands, but sustained 25-30% PAT growth over several quarters should mean a 30x+ PE should sustain IMO. The real question is about their ability to deliver this double digit revenue growth via volume growth and not ASP increases.

A few thoughts on Q3 results and concall commentary

  1. Drop in revenue guidance for FY25 and FY26 after holding on to mid teens guidance till Q2 concall, was a bit of a bummer. Wasn’t expecting a change in guidance in the span of 1Q. However, even if they achieve this guidance, there is enough scope of leverage to play out. Management mentioned in the call today that operating losses from IW + Germany amounted to 250 bps in 9M FY25. From FY26, most of this delta should flow straight to EBITDA as both operations have broken even.

  2. Reduction in gross margins in Q3 was another surprise. Without the drop in gross margins, this would have been a 13% EBITDAM quarter and we would be having a completely different conversion with all kinds of bullish takes flowing in from all corners. The fact that gross margins dropped 200 bps due to higher sales of LGD and other high-value items needs to be tracked closely for future quarters. This low a gross margin print last happened in FY23 when inflation was running rampant and people were buying high value jewellery as an inflation hedge. If this drop in GMs is transient then there are no issues, but if this is structural then some of the operating leverage gains in EBITDAM will be reversed due to lower GMs. Hope VGL can optimise the LGD supply chain and squeeze back the lost gross margin in subsequent quarters. On gross margins they have time and again proven their mettle so its possible that they claw back gross margins on LGD as a category.

  3. Management is guiding for double digit volume growth. I feel that’s overambitious guidance - their history suggests this happens rarely. However, with INR depreciation and slight ASP increases, even a 6% YoY volume growth can enable a 12-13% revenue growth. Their volume growth print this Q was only 1.7%. This was the first full Q with MS and IW in the base. Management said the muted volume growth was due to a spike in high value sales items due to consumer demand pull. Have to see how this plays out over the next few quarters. Higher sales volumes of lower value items will drive volumes as well as higher gross margins

I was expecting Q3 FY25 to be the moving quarter where finally the company was able to deliver 11-12% revenue growth and 12.5-13% EBITDA margins. But those numbers now seem to have gotten pushed out by a couple of quarters more. The broad investor skepticism around VGL is understandable. Since Covid they have struggled to meet their guidance a few times and due to a heavy investment cycle over the last 3Ys (Germany entry + MS/IW acquisitions + better channel positioning in USA) their return ratios have been depressed for a while.

However its absolutely evident that if double digit revenue growth happens on a sustained basis then operating leverage will keep playing out here. So volume led topline growth is the most important thing to track here. Q4 should be very good on a YoY basis. I will be very surprised if 100% YoY PAT growth in Q4 does not happen because of the low base.

Disc: I had a very aggressive position size here anticipating the start of the turnaround from this Q. Have moderated position size post results. Remain invested as I believe the thesis can still play out as envisaged. May exit or increase position size without informing. Please do your own due diligence.

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Dec is the best quarter for them, I think investors will wait for one more quarter to see growth is real, last year after a good Dec qtr, next two three quarters were not so good.

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Next quarter can be good seeing US economy booming, germany economy might get bump up with elections due there and UK economy seems to be getting better. I also expect decent growth in bottom line as base is low, UK & Germany operations breaking even.
Disc: Biased and invested

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If we see the revenue trend for Q3, Q4 and Q1…it is Q3>Q4>Q1. This has happened for 3 yrs as can be seen from screener. Further, the mgmt’s comment in Q3 call was…“Looking ahead, we remain mindful of macroeconomic trends, particularly the muted consumer sentiments in UK and Europe”…Germany continues to be in recession and when would it come out is difficult to predict. My sense is the business continues to face competitive headwinds and growth could be slow and small. Valuations seems to be reasonable, but not very very cheap, so margin of safety is not too high.
Disc: Invested

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Vijay Kedia Is A Marquee Investor In This Company: All You Need To Know About Its KYC Rating

Not sure if this is how your introduce a company - that Vijay Kedia has invested

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What is impact of tarrifs on company ? Anyone has some knowledge about it?

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Hi @Dhiren_Barvadiya

I was searching whether the management has addressed this question. In the Q2FY25 earnings call, the management said that they are not worried about tariffs since the company is the lowest cost producer. You can read the exact statement below from the company. We would have to wait for a couple of quarters to see how does the company actually perform as these tariffs are implemented.

We believe that we are the lowest cost producer and the tariffs would impact equally everybody. So, we don’t foresee us getting impacted any adverse. In fact, with our gross margin of 62% plus our cost will be lower than other competitors because their gross margins are lower. So, it will be at advantage if at all the tariff across the board comes into picture.

In fact they were asked a similar question in the earnings call for Q2FY19. And you can read their response below, it was pretty much the same.

This may be seen as a threat by other retailers, but we look it as an opportunity, because if the tariffs will go up the cost will increase for all retailers. For us our gross margins are much higher than anyone else so for us the impact will be lower than anybody else. And secondly, we are pretty agile in terms of sourcing the product from China or Thailand or Indonesia or India. We have our own operations in all these four countries whereas other retailers do not have their own operation they depend on vendors. So, for them to be agile will not be as easy as it is for us. So, competitively it will be better for us.

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VAIBHAV GLOBAL (Market Cap- 3700cr) - Opportunity for some vs Opportunity cost for some !!!

Let’s put it straight, while market conditions may not be highly lucrative right now, the opportunity remains decent for long-term. This business is not suited for short-term, YOY analysis due to the inherent volatility in profitability. However, over a 3–4 year period, profitability swings.( Same like Hatsun Agro over long period profitability grows expanding regions, gaining little market share etc.. )

Little Brief on Evolution and Market Focus

The company’s evolution since 2008—from B2B to B2C. Expanding first into the US, then the UK, and now Germany, the focus has been on markets with high per capita income and next is Japan. Majority of the revenues comes from TV as of now but moving towards digital 50% over coming years is a necessary step for future growth.

Main Trigger - Germany Profitability going forward

The losses from Germany are now behind them, with operations there reaching break-even. This could directly add ₹25 crore to PBT next year, improving the outlook (base case PAT: ₹180-200 crore FY26). RISK: Remains slowdown in US consumer spending and tariff impacts on India and other economies, which is a real concern for the business.

Slowdown and How will Vaibhav overcome this?

Difficult to overcome macro consumer slowdown, there will be pain. If anybody thinks it’s not there, they are in for a ride here. But some little factors like below:

1] High gross margins and
2] Low price point i,e 30$ ASP**
3] Zero Debt

In this, competitors may find more difficult to navigate than for Vaibhav, just a thought. Anyways, these are the times, best of the management are tested, some bounce back very strong some don’t. That’s the part of probabilistic investing !!!

To Conclude, In uncertain times, strong companies often emerge more resilient. If one can have conviction in the business and management, aligning on asset allocation will help navigate the volatility. Without that conviction, however, it’s best to avoid random bets thinking of short term and QOQ analysis

  • For Management to comment its very difficult for them to predict consumer demand for YoY !! So Only Patience and Long term horizon will help. (Global slowdown is the risk, How long term is the question, you want hold this business, you need to assess yourself.)

Hope it adds little perspective. I can be wrong, so DYOD.

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