Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities of VIP Industries Ltd (VIL) to ‘CRISIL AA-/Stable’ from ‘CRISIL AA/Negative’. The short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The downgrade reflects moderation in the business risk profile, owing to sharp contraction in profitability. Realisations have dropped owing to a steep fall in realisations, caused by intense competition, aggressive pricing in ecommerce platforms, and rise in warehouse-related expenses, emanating from the large inventory. Hence, operating margin has declined to around 4% during the first half of fiscal 2025, from about 11.3% in the corresponding period of the previous fiscal.

 

Revenue was largely stable at Rs 1,183 crore in the first half of fiscal 2025 (as against Rs 1,182 crore in the first half of fiscal 2024), aided by growth in volume (by 14.4%), though offset by the drop in realisations. The value segment (46% of revenue) recorded 6% year-on-year growth in revenue, while the premium and mid-premium segments (54% share) saw revenue decline by 6%. The hard luggage segment saw revenue grow 16% y-o-y to Rs 684 crore in the first half of fiscal 2025, while soft luggage de-grew 28% to Rs 214 crore.

 

Segments such as duffel bags, bag packs, etc showed modest growth while the ladies handbag segment witnessed some degrowth. Performance should improve in the second half of this fiscal, supported by higher demand owing to the festive and wedding seasons and price hikes likely to be taken by the company.

 

Hence, revenue is expected to grow by 8-10% over the medium term, supported by demand for existing products and new product launches. Operating margin is likely to increase, but will remain stable at 9-10%, mainly aided by better gross margin, post liquidation of the balance slow-moving inventory, lower warehousing cost and restructuring of employee cost. Steady revival in operating margin along with growth in revenue will be a key monitorable.

 

The financial risk profile remains comfortable, though impacted during fiscals 2024 and 2025.  VIP has no term debt obligation. With reduction in inventory, working capital debt has also reduced to Rs 500 crore as on September 30, 2024, from Rs 533 crore as on March 31, 2024.  As a result, adjusted gearing (excluding lease liabilities) decreased to 0.77 time as on September 30, 2024 (March 31, 2024: 0.79 time). Owing to increase in interest expenses and decline in profitability, adjusted interest coverage has moderated to 1.4 times in the first half of fiscal 2025, from 6.05 times in the first half of fiscal 2024.  That said, with the expectation of a gradual increase in operating margin, interest coverage ratios are expected to improve to 4-6 times over the medium term.

 

The ratings continue to reflect the established VIP brand in the luggage industry, which is underpinned by a diversified product and revenue profile. The ratings also reflect the comfortable financial risk profile of the company and the absence of any long-term debt. These strengths are partially offset by exposure to intense competition from organised and unorganised players and the large working capital requirement.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of VIP and its subsidiaries, given the common nature of business.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established brand in the luggage industry, supported by a diversified product range and strong distribution network

VIP is the world’s second-largest luggage manufacturer and holds a dominant position in the Indian luggage industry. Its brands cater to the mass and premium segments of the demand pyramid. The company has a diversified range of products, priced across a wide range. It derived around 58% of revenue in first half of fiscal 2025 from upright hard luggage, followed by upright soft luggage (18%), backpacks (13%), duffel bags (7%), and ladies’ handbags (3%). In addition, it has products ranging across the premium (Carlton), mass premium (VIP, Sky bags) and value (Aristocrat, Alfa) categories, and thus caters to a larger spectrum of the luggage industry. Value brands i.e. Aristrocrat and Alfa have grown at healthy double digits, registering around 20% compound annual growth over the past four years. In addition, the company has seen significant sales through the e-commerce route, which has also helped augment the product and revenue profile and improve its market share Furthermore, VIP has a strong distribution network with nearly 11,430 points of sale in India, across 1,300 towns. Currently, it has 500 exclusive brand outlets (EBOs) and plans to add more over the near to medium term.

 

• Comfortable financial risk profile

The financial risk profile remains comfortable, though it has been impacted adversely during the fiscals 2024 and 2025. With lower inventory, working capital debt has come down to Rs 500 crore as on September 30, 2024, from Rs 533 crore as on March 31, 2024.  Adjusted gearing (excluding lease liabilities) also improved to 0.77 time as on September 30, 2024 (from 0.79 time as on March 31, 2024). With reduction in debt, gearing should improve further to less than 0.7 time over the medium term. With higher interest expenses and lower margin, adjusted interest coverage has weakened to around 1.4 times in the first half of fiscal 2025, from 6.05 times in the first half of fiscal 2024. With increase in profitability and drop in debt, interest cover is expected to improve going forward. 

 

Weaknesses

• Exposure to intense competition from organised and unorganised players in the luggage industry:

Realization and therefore value growth has been a key concern due to intense competition from the existing and new entrants. While revenue contribution from value brands growing at a healthy pace, that from premium brands has seen muted growth. Nevertheless, the focus on the e-commerce channel, launch of new products and widening of the geographical reach has helped VIP improve its market share in current year.  Share of revenue from the e-commerce channel increased sharply to around 32% in the first half of fiscal 2025, from 21% in the first half of fiscal 2024 supporting increase in overall market share on a year on year basis.

 

• Large working capital requirement

The luggage industry is working capital-intensive mainly due to large inventory maintained via several stocks keeping units (SKUs). As a result, gross current assets (net of cash) have been historically high at over 150 days. However, the company has been able to prudently align its inventory with payables, so as to limit incremental working capital expenses. As an exception, it did witness substantial inventory build-up during fiscal 2024.

 

The company has taken significant efforts to bring down inventory levels, from Rs 916 crore as on March 31, 2024 to Rs 725 crore as on September 30, 2024, and plans to bring down stocks further. That said, reduction in working capital debt via liquidation of excess inventory is a key monitorable.

Liquidity: Strong

In the absence of debt obligations, expected cash accrual of Rs 150-180 crore per annum, shall be more than sufficient to cover yearly capex of Rs 50-70 crore. While fund-based bank limit has been utilised to the tune of 73% as on September 30, 2024, incremental working capital expenses are likely to be met largely via internal accrual. That said, reduction in working capital borrowings via liquidation of excess inventory remains a key monitorable.

 

Environment, Social, and Governance (ESG) profile

CRISIL Ratings believes the ESG profile of VIP supports its already strong credit risk profile.

This sector can have a significant impact on the environment owing to high water consumption, waste generation and green house gas (GHG) emissions. The sector’s social impact is characterized by health hazards leading to higher focus on employee safety and well-being and the impact on local community given the nature of its operation.

VIP has continuously focused on mitigating its environmental and social risks.

Key ESG highlights

• The greenhouse gas (GHG) emissions intensity has increased slightly from 7.93 tCO2/revenue to 8.17 in 2024. However it is still lower than previous high levels of 11.01 tCO2/ revenue in 2022. The Company has taken up various steps like localization of zipper, replacement of high-pressure sodium vapor street light by low power LED lights, etc to reduce GHG emissions.
• The total waste generation has increased from 0.35 tonnes / revenue in 2023 to 1.31 tonnes / revenue in 2024. The company has started manufacturing hard luggage by using polypropylene and polycarbonate material which is 100% recyclable.
• The attrition rate for the Company has declined slightly from 17% in 2023 to 18% in 2024.
• VIP’s governance profile is marked by 50% of its board comprising independent directors, split in chairman and CEO position and presence of robust internal control systems and processes. It also has extensive disclosures.
• There is growing importance of ESG among investors and lenders. The commitment of VIP to ESG principles will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook Stable

The outlook reflects expectation of stable demand and recovery in profitability, with several cost-reduction measures such as liquidation of soft luggage inventory to curb warehouse related expenses, restructuring of employee cost, etc being undertaken by the company. While the financial risk profile remains comfortable in the absence of any long-term debt obligation, improvement in operating margin and timely liquidation of inventory remain key monitorables.

Rating sensitivity factors

Upward factors

• Significant and sustained growth in revenues driven by an increase in market share and operating margins recovering to around 13-15% on a sustained basis, supported by a ramp up in volumes and cost control initiatives.
• Improvement in financial risk profile with adjusted gearing (excluding lease liabilities) around 0.50 time leading to further improvement in key debt protection metrics.

 

Downward factors

• Significant moderation in business performance, or further decline in market share with operating margins remaining below 8-9% resulting in weakening of key debt protection metrics.
• Debt levels remaining high due to continuing stretch in working capital cycle or large debt-funded capex limiting the improvement in adjusted gearing.

About the Company

VIP, a Dilip Piramal group company, was incorporated as a wholly owned subsidiary of Blow Plast Ltd (BPL) in January 1968. In fiscal 2007, BPL was merged with VIP, following restructuring within the group. The company manufactures hard luggage in India and markets hard and soft luggage sourced from India, China and its Bangladesh subsidiaries. VIP is the largest player in the luggage industry in India.

Any other information: Not applicable