Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ rating on the bank facilities of VIP Industries Limited (VIP). The rating on the NCDs of the company amounting to Rs.100 crore have been withdrawn following request from the company on account of redemption of the same in line with CRISIL ratings policy on withdrawal of ratings. The ratings on the existing Non-Convertible Debentures (NCD) programme amounting to Rs 50 crore has been reaffirmed at ‘CRISIL AA/Stable’.

 

Performance in fiscal 2021 was impacted due to the outbreak of COVID-19, which severely affected the luggage industry across product categories and sub-segments due to the nation-wide lockdown, restrictions on travel, closure of malls, hypermarkets and schools for major portion of the year. Although the company undertook various cost cutting measures and discounting to limit the impact on its performance, revenue declined by 64%. The company made operating losses during fiscal 2021 mainly due to the volume impact as well as high competitive intensity resulting in pricing pressure.

 

While business started picking up from Q2FY21 onwards, the recovery was again impaired by the second wave of COVID-19 in Q1FY22. With vaccination rate rising, rebound of domestic and international air traffic and easing up of economies, revenue recovery is expected to be strong in 2H of fiscal 2022. The rebound was already visible in Q2FY22 wherein the company made EBIDTA of Rs.42 crore compared to Rs 13 crore in Q1FY22. For FHFY22, the company made an EBITDA of Rs 55 crore compared to EBITDA loss of Rs 79 crore in FHFY21.

 

CRISIL Ratings expects sales to pick up from SHFY22 driven by pent up demand on account of postponement of marriages, reopening of educational institutions, and healthy recovery in travel and tourism. Operating profitability, which has been impacted on account of lower utilisation as well as higher discounts offered by the company, should benefit from higher volumes and partial sustenance of various cost cutting initiatives, including reduction in management staff, deferment and reduction on lease rentals as well as closure of some company owned stores. Additionally, given no import duty from Bangladesh and the lower labour costs , ramp up in Bangladesh operations is expected to benefit profitability (besides reducing direct imports from China into India).

 

Medium to long term demand outlook however remain sanguine for VIP. The oligopolistic nature of the industry, favourable long term macro-economic factors like rising income, and shift in consumer preference for branded luggage augurs well for VIP given its market leadership position and strong brand name.

 

Additionally, over the years VIP has significantly strengthened its balance sheet providing adequate cushion to absorb the slowdown in fiscal 2021. Company has also been pro-active and successfully built a liquidity buffer to mitigate impact on cash flows in the near term by raising NCD’s amounting to Rs.150 crore (out of which company already repaid Rs.100 crore in July 2021). VIP had Rs. 106 crore of cash surplus as of September 2021. This coupled with the unutilized bank lines and NCD issuance provide further comfort on liquidity.

 

The ratings of VIP Industries Limited (VIP) continue to reflect VIP's market leadership position and strong brand in the domestic luggage industry and healthy financial risk profile. These strengths are partially offset by dependence on Chinese imports, competition from unorganised segment and highly working capital intensive operations.

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:

• Market leadership and strong brand in the domestic luggage industry: VIP is the world’s fifth-largest luggage manufacturer and a leader in the Indian luggage market. Its brands cater to the lower and upper segments of the demand pyramid, with products across a wide price range. The company entered the women’s handbags segment and relaunched its ‘Skybags’ brand, which has gained significant traction in the market. VIP has a strong distribution network across the country. The company has about 1,000 dealers and 100 distributors (reaching 1,000 retailers), with 150 exclusive brand outlets, 250 franchisees, and 1,000 modern trade outlets and total point of sales at about 11,000.

 

• Healthy financial risk profile: Over the years VIP has strengthened its financial risk profile, backed by a conservative capital structure, healthy cash accrual and debt protection metrics. As on September 30, 2021, capital structure remained healthy, marked by large networth of Rs. 543 crore and minimal debt. Credit metrics also remained healthy. Company’s unleveraged balance sheet provides adequate cushion to tide any uncertainty as well as raise additional debt if required without significantly impacting credit metrics.

 

Weaknesses:

• Dependence on Chinese imports and exposure to competition from unorganised sector: The soft luggage segment, which accounts for a major part of VIP’s revenue, used to be sourced predominantly from China, thus exposing the company to geographical concentration risk and forex risk of sharp rupee depreciation. However, VIP in order to reduce the dependence on Chinese imports, aims to reduce the supplier exposure from China to about 20% from 88% in the past mainly through backward integration, increasing production at Bangladesh and by rationalizing other supplier options. Also, despite being a market leader in the organised segment, VIP is able to pass on increase in material prices only partially and with a lag, mainly because of intense competition from the large, unorganised segment; hence, ability to charge premium is restricted.

 

• Large working capital requirement: The luggage industry is working capital-intensive in mature. VIP’s receivables stood at about 88 days as on March 31, 2021. The company has been able to prudently align its inventory level with payables, thus limiting the incremental net working capital. Further, any significant economic downturn can impact the working capital requirement especially stretch in receivables.

Liquidity: Strong

VIP has strong liquidity despite the moderation in cash accruals in fiscals 2021. Fund based bank limits of Rs. 194 crore remained moderately utilised. VIP also had Rs. 106 crore of cash surplus as of September 30, 2021. This coupled with the bank lines and NCD issuances further aid liquidity. Further, with a gearing of 0.30 times as on March 31, 2020, the company has sufficient gearing headroom, to raise additional debt if required.

Outlook: Stable

CRISIL Ratings believes VIP's business risk profile will continue to be supported by its strong brand and entrenched distribution network even as demand is expected to rebound in fiscal 2022. VIP is also well placed to take advantage of the long term structural tailwinds in the industry given its healthy market position. Furthermore, the company’s strong balance sheet and healthy liquidity should help offset impact of stressed business conditions.

Rating Sensitivity factors

Upward factors

• Significant and sustained growth in revenues driven by improvement in business conditions, and operating margins recovering to ~17-18%, supported by ramp up in volumes and cost control initiatives
• Sustained strong financial risk profile and steady increase in liquid surplus, supported by healthy cash accrual and continued moderate capex

 

Downward factors

• Slower than expected improvement in revenue and operating profitability, most likely due to delayed demand recovery, also impacting cash generation (less than Rs. 120-130 crore by fiscal 2022)
• Sustained increase in debt due to large debt-funded capex, sizeable acquisition, or stretched working capital cycle, leading to material weakening of the credit metrics, for instance, adjusted gearing above 0.8-1.0 times

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 and markets soft luggage imported from Bangladesh and China. VIP is the largest player in the luggage industry in India.

 

For the half year period (April to September) ended September 2021, company reported net profit of Rs 25 crore on revenue of Rs 536 crore, compared to net loss of Rs 86 crore on revenue of Rs 143 crore during the corresponding period of previous fiscal

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs Cr	619	1721
Profit after tax	Rs Cr	-97	112
PAT margin	%	-15.8	6.5
Adjusted debt/adjusted networth	Times	0.30	0.05
Interest coverage	Times	NM	13.21

NM: Not meaningful

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 level	Rating Assigned with Outlook
NA	Working Capital Demand Loan*	NA	NA	NA	69	NA	CRISIL A1+
NA	Working Capital Demand Loan	NA	NA	NA	40	NA	CRISIL A1+
NA	Cash Credit**	NA	NA	NA	46	NA	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	20	NA	CRISIL AA/Stable
NA	Fund-Based Facilities	NA	NA	NA	10	NA	CRISIL AA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	19	NA	CRISIL A1+
NA	Proposed Working Capital Facility^^	NA	NA	NA	76	NA	CRISIL AA/Stable
INE054A07024	Non-Convertible Debentures&	07-Sep-20	7.25%	06-Sep-22	50.00	Simple	CRISIL AA/Stable

* Interchangeable with Packing Credit in Foreign Currency, Bills Purchase / Discounting / Negotiation, Pre shipment / Post shipment finance, letter of Credit, Bank Guarantee, Standby letter of Credit, Buyer Credit

** Interchangeable with Working Capital Demand Loan

^^ NCD of Rs 50 Crs carved out from existing bank lines.

& carved out from proposed working capital facility of Rs. 76 crore

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Complexity of instrument	Issue size (Rs.Cr)
INE054A07016	Non-Convertible Debentures	30-Jul-20	7.45%	29-Jul-22	Simple	100.00

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of consolidation	Rationale
Blow Plast Retail Limited	Full	Wholly owned subsidiary
V.I.P Industries Bangladesh Private Limited	Full	Wholly owned subsidiary
V.I.P Industries BD Manufacturing Private Limited	Full	Wholly owned subsidiary
V.I.P Luggage BD Private Limited	Full	Wholly owned subsidiary
V.I.P Accessories BD Private Limited	Full	Wholly owned subsidiary