Have read through the conference call transcripts and tried answering some interesting questions.
Why was Caprese not a big hit? What does management think about this brand? What actions are they taking to scale it up?
Caprese reached 100 crores sales in five years. Caprese brand break evens and has higher margins. However, managementâs initial goal was to reach 500 crores or something of that sort. Currently the organized ladies handbag market is very small and management is finding it difficult to scale it up. Some steps they have taken is reduce the price of the bags from Rs 4000-5000 range to Rs 2000. Radhika has acknowledged that at this price point, she is seeing the growth âproperlyâ. They have launched value segment bags in Caprese as well. Management is also trying to push Caprese even into Hypermarkets. They are not in hypermarkets as the company does not have a product at a price point which would be suitable for the hypermarket consumer and same for dealers. Probably, they are going to push the value segment of Caprese here. Currently they sell handbags only in Department Stores, Online and Company outlets and management thinks it is not sufficient.
Good thing is lots of employees who started with Caprese brand at VIP Industries are still working on the same, as per LinkedIn search. This brings some confidence that the employees believe in their work and see the potential. Another point worth mentioning is that Radhika herself mentions that she is not happy with Capreseâs performance and wants to be more aggressive and doesnât wait for some analyst to press on the same.
What are managementâs plans for the Bangladeshi plant?
Management says it is very tough to operate in a country like Bangladesh with poor infrastructure. The company couldnât find appropriate land to setup its factory in top two cities Dhaka and Chittagong and hence settled with a relatively remote area.
Having said that, they still plan to double the capacity as they believe this is very margin accretive since we also benefit from the manufacturing value-add. For FY19, Bangladesh businessâ PAT margins are 13.5%. The scope for this PAT margin number is much higher as in Q1 management said they had a lot of opex. I think another reason for such high margins are they have tax holiday for seven years. Even after doubling this capacity, the proportion of Bangladesh to VIPâs soft luggage sales will still be very low as the overall company is growing at 20%+ numbers.
What are the sales numbers for each of the brands / distribution?
Though management never gave proper breakup, they sometimes slip their tongue and gave some partial info. So I have come up with some âBALLPARKâ distribution of sales 
VIP: 700 crores
Skybags: 500 crores
Alfa + Aristocrat: 400 crores
Caprese: >100 crores
Carlton: <100 crores
CSD: 400 crores
E-commerce: 200 crores
Modern Trade: 600 crores
General Trade: 600 crores
Why is Carlton Edge having good prospects against premium player Samsonite?
Carlton Edgeâs lifetime warranty has no competitor. It is difficult for Samsonite to enter this segment because Samsonite is an international company with most of its sales in premium segment. If they introduce a product with lifetime warranty, they will have to introduce it across the whole globe and not just India which comes with more logistics / bureaucracy. Well, large companies have their own problems! However in terms of our investment, we canât expect this to drive our returns too much as it is still a small part of the company.
How is the backpacks business?
Backpacks is growing super-fast. It forms around 20% of the companyâs sales. Management believes this is a much under-penetrated market compared to the luggage market and hence sees higher growth in this segment compared to luggage. They also say âAs many motorbikes in India, we should sell that many backpacks. There is a long way to goâ
What is human procurement expense in other expenses section? It forms 2.5% of sales!
Human procurement expense is for the large number of store associates or in-store merchandisers. Services of them are outsourced.
Why is VIP brand stagnant? Any triggers to revive its growth?
VIP has become an old brand and the company is finding it difficult to change the perception of the brand among consumers. Ad with Hrithik Roshan was not successful. Moreover VIP was mostly selling in the general trade segment and CSD segment which again were kind of stagnant until GST. VIP started growing a bit (not much) after they started introducing it in the modern trade. But post GST, general trade segment for organised brands started growing as well and hence VIP brandâs growth is reviving. Hopefully, the new âHello Holidaysâ campaign with Saif, Kareena and family will provide further growth.
VIP brand also had the traditional polypropylene suitcase segment which is declining fast. Though Polycarbonate hard luggage is replacing these sales, they are replacing across multiple brands and not VIP alone. Another reason why the growth rate of the VIP brand looks dampened.
Do we supply our bags from a single factory / company in China?
Chinese supply is not a contract-based business. It is more of a relationship-based business. The company is working with most of the suppliers for years. They have complete flexibility to change from one vendor to another and using that they maintain the competitive pressure. Company currently works with 15 suppliers out of which 7 players supply the most, as of 2016.
What needs to be tracked in the next few quarters?
Revenue growth is already prosperous with GST effect kicking off and rising air-traffic. However, margins are a huge concern. With the unorganized moving to organized, most of the business is going to happen at the value-end. So Aristocrat and Alfa will be driving the growth for the company in the coming years. Management has acknowledged that these brands have lower margins and their âtop priority is to increase their margins in the value-endâ. Previously management said they will bring Skybags margins in line with VIP and have done it. So this will be a key monitorable for FY20. If the ad on VIP brand with Saif, Kareena and family plays out well and VIP brandâs product grow a lot, that would be margin accretive too. Personally I believe their targeting was very good in the campaign.
Some other reasons management gave is rupee depreciation for poor margins in Q4FY19. However I expect this factor to normalize if you take few years of horizon. You can see that rupee is already coming back strong with respect to both USD and CNY.
Another reason is increase in customs duty from 10% to 15%. Donât think we can do much about it.
Management also alerted on the consumption slowdown for Q1 which almost every other management is talking about now.
Disclosure: No holdings but Bullish from a long-term perspective. Might start buying. Not a buy / sell recommendation. Not a SEBI registered advisor.
