Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of VIP Industries Limited (VIP) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA’. Rating on the commercial paper programme is reaffirmed at ‘CRISIL A1+’.

 

The negative outlook reflects the moderation in the business risk profile owing to the sharp contraction in operating margins due to incremental expenses emanating from a high build-up of inventory, elevated advertisement spends and one-time expenses. Operating margins during the fourth quarter of fiscal 2024 declined to around 2% from about 10-12% in the previous three quarters leading to overall reduction in operating margin to 8.6% for fiscal 2024 compared to 15.2% in fiscal 2023. Revenues during fiscal 2024 increased by 8% to Rs. 2,245 crore supported by growth in the value brand category driven by the hard luggage and duffel bag segments. While revenues are expected to grow at current growth rate over the medium term supported by product launches, the operating margin is expected at increase to around 10-11% which would be lower than past average of 14-15%. The steady and sustained revival in operating profitability margins while maintaining the revenue growth will be key monitorable.

 

The financial risk profile for the company is marked by nil long term debt obligations, however with increased working capital intensity owing to elevated inventory levels, working capital debt increased sharply in the last quarter of fiscal 2024, to around Rs. 533 crore as on March 31, 2024 (Rs. 181 crore as on March 31, 2023). As a result, adjusted gearing (excluding lease liabilities) is estimated to have increased to 0.79 times as on March 31, 2024, as against 0.28 time during the previous fiscal. In addition, the high debt levels translated to high interest expenses. This along with the decline in profitability has led to weakening of interest coverage to below 4 times as on March 31, 2024. That said, with the expectation of inventory liquidation over the next two quarters followed by the gradual increase in operating margins, adjusted gearing (excluding lease liabilities) and interest coverage ratios are expected to improve over the medium.

 

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

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of VIP and its subsidiaries due to 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 and a strong distribution network: VIP is the world’s second-largest luggage manufacturer and a dominant player in the Indian luggage market. Its brands cater to the mass and premium segments of the demand pyramid, with products across a wide price range. The company has a diversified product mix with around 52% of fiscal 2024 revenues coming from upright hard luggage, followed by upright soft luggage (24%), backpacks (12%), duffel bags (8%), and ladies’ handbags (4%). In addition, the products offered range from the premium category (Carlton), mass premium category (VIP, Sky bags) to value category (Aristocrat, Alfa), thereby catering to a larger spectrum of the luggage industry. VIP’s value brands i.e. Aristrocrat and Alfa have grown at healthy double digits, registering around 20% 4-year compounded annual revenue growth. In addition, the company, to further its market position apart from the sales through traditional channels, has also forayed into the e-commerce mode of sales in fiscal 2023 which has further augmented the product and revenue profile.

 

Furthermore, VIP has a strong distribution network with approximately 11,430 points of sales in India spread across around 1,300 towns. Currently, exclusive brand outlets (EBOs) network stands at 500 stores and targets to expand the same to 800 (EBOs) by the end of fiscal 2025.

 

• Comfortable financial risk profile: During fiscal 2024, while leverage marked by adjusted gearing (excluding lease liabilities) increased to 0.79 time as on March 31, 2024, as against 0.28 time in the previous fiscal period, owing to the increase in working capital debt (Rs. 533 crore as on March 31, 2024, as against Rs. 181 crore during the previous fiscal) to fund the increased working capital requirements, the financial risk profile continues to remain comfortable on account of the absence of long-term debt obligations. In addition, while interest coverage ratio moderated to 3.73 times during fiscal 2024 (as against 10.57 times during the previous fiscal) due to the decline in operating profitability followed by increase in interest expense, liquidity is not constrained due to the sufficiency of internal cash accruals against yearly capex requirements of Rs. 70-100 crore in the absence of long-term debt obligations.

 

That said, with the expected inventory liquidation over the next two quarters and gradual increase in operating margins, adjusted gearing (excluding lease liabilities) and interest coverage ratios are expected to improve over the medium to around 0.60 time and above 4 times respectively.

 

Weaknesses:

• Increase in competitive intensity from organized and unorganized players within the luggage industry: Despite being among the top players in the organized segment, VIP’s market share has gradually reduced owing to the increase in competitive intensity from the organized and unorganized luggage industry segments. While the company’s revenue contribution from value brands has grown at a healthy pace, the contribution from premium brands has witnessed muted growth. Nevertheless, the company, to further improve its market share has taken numerous initiatives such as moving from traditional mode of sales to e-commerce mode, expansion to different domestic geographies, new product launches, among others.

 

• Large working capital requirement: The luggage industry is working capital-intensive mainly due to higher inventory days on account of the large number of stocks keeping units (SKUs). As a result, VIP’s GCA days net of cash has historically remained above 150 days. That said, the company has been able to prudently align its inventory days with payables, thus limiting the incremental working capital requirements, except during fiscal 2024, which witnessed substantial inventory build-up.

 

During fiscal 2024, the company’s working capital requirements increased substantially due to the increase in GCA days net of cash to over 200 days. The increase was on account of inventory build-up of soft luggage owing to slower than anticipated sales, resulting in the increase of inventory levels to Rs. 916 crore as on March 31, 2024, as against Rs. 587 crore during the previous fiscal. In addition, higher interest expenses emanating from increased working capital borrowing, coupled with the decline in operating profitability resulted in moderation of debt coverage indicators. That said, the reduction in working capital borrowings through liquidation of excess inventory will remain a key monitorable.

Liquidity: Strong

In the absence of debt re-payment obligations, the expected cash accruals of Rs. 130-170 crore per annum, shall be more than sufficient to cover yearly capex spends of Rs. 70-100 crore. While fund-based bank limits are utilized to the tune of 80% as on March 31, 2024, the incremental working capital requirements are expected to be largely met through internal accruals. That said, the reduction in working capital borrowings through liquidation of excess inventory will remain a key monitorable.

 

ESG Profile

CRISIL Ratings believes VIP’s Environment, Social, and Governance (ESG) profile 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 reduced from 11.01 tCO2/ revenue in 2022 to 7.93 tCO2/revenue in 2023. 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 reduced from 1.05 tonnes / revenue in 2022 to 0.35 tonnes / revenue in 2023. The company has started manufacturing hard luggage by using polypropylene and polycarbonate material which is 100% recyclable.
• The attrition rate for the Company has improved from 22% in 2022 to 17% in 2023.
• 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: Negative

The negative outlook reflects the moderation of the business risk profile owing to sharp contraction in operating margins due to elevated expenses emanating from a high build-up of inventory levels and advertisement spends. While the financial risk profile continues to remain comfortable owing to the absence of long-term debt obligations, the improvement of operating margins on the backdrop of the performance witnessed in the fourth quarter of fiscal 2024 and timely liquidation of inventory, shall remain key monitorable.

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 10-11% 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 of 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.

Key Financial Indicators- CRISIL Ratings Adjusted Financials

Particulars	Unit	2024*	2023
Revenue	Rs Cr	2,245	2,082
Profit after tax	Rs Cr	54	152
PAT margin	%	2.4	7.3
Adjusted debt/adjusted networth	Times	0.79	0.28
Interest coverage	Times	3.73	10.57

*Fiscal 2024 financial figures are based on audited abridged financial results published by the company.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Fund-Based Facilities&	NA	NA	NA	50	NA	CRISIL AA/Negative
NA	Fund-Based Facilities^	NA	NA	NA	75	NA	CRISIL AA/Negative
NA	Fund-Based Facilities%	NA	NA	NA	100	NA	CRISIL AA/Negative
NA	Fund-Based Facilities*	NA	NA	NA	39	NA	CRISIL AA/Negative
NA	Fund-Based Facilities#	NA	NA	NA	60	NA	CRISIL AA/Negative
NA	Fund-Based Facilities	NA	NA	NA	50	NA	CRISIL AA/Negative
NA	Commercial Paper@	NA	NA	7-365 days	50	Simple	CRISIL A1+

& - interchangeable with non-fund based limits of Rs 10 crores

^ - interchangeable with non-fund based limits of Rs 75 crores

% - interchangeable with non-fund based limits of Rs 35 crores

# - interchangeable with non-fund based limits of Rs 50 crores

* - interchangeable with non-fund based limits of Rs 39 crores

@ - Yet to be issued