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

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.

25 Likes

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.

2 Likes