Prabhudas Lilladher Is Positive On This Small Cap Plastic Product Stock, Suggests Buy For 29% Gains

Prabhudas Lilladher, a leading brokerage firm has given a buy rating to VIP Industries, a small cap Plastic product company for a target price of Rs 817 apiece. If the investors buy the stocks of the company at the Current Market Price, they could expect potential gains of 29% in 12 months. The gains are estimated considering the estimated target price by the brokerage.

Stock Outlook

On July 15, Friday, the stock of VIP Industries closed at Rs 634.50 apiece, it was opened at Rs 629 apiece, while the previous close was 629.55 apiece. The stock hit the 52-week low on 11 August 2021 at Rs 374 apiece. The 52-week high was recorded at Rs 774.60 apiece on 31 March 2022.

The stock this week slid 0.32%, however, it gained in the last 1 month, nearly 12.65%. In the last 1 year, it has given positive returns of 54.76%. In the past 3 years, it has given positive returns of 52.71%, and a multibagger return of 248.24% in 5 years, respectively.

 

Share of in-house manufacturing to remain at ~75-80% level in FY23E

The contribution of in-house manufacturing to the overall product mix has increased from 53% in FY20 to 85% in FY22. Overall share will likely remain in the range of 75- 80% in FY23E. Rising share of in-house manufacturing vis-à-vis outsourcing is expected to structurally elevate GM profile as 1) manufacturing profit will now accrue within the company in addition to trading profit and 2) freight cost & currency volatility will decline amid reduced dependency on China.

Plans to open 120-150 EBOs in FY23E

VIP opened 32 EBOs in FY22 and plans to open 120-150 EBOs on an asset light franchise model in FY23E. Total EBO count was 376 as of FY22 and is expected to surpass 500 mark in FY23E. Strategy to expand via franchise route is likely to result in NIL fixed rental commitments, which helps during downturn.

Finished goods and stock-in-trade inventory at pre-COVID levels

Finished goods & stock-in-trade inventory in FY22 is similar to pre-COVID levels. Sufficient stocking as at end of FY22 is an indication of strong 1Q, which is seasonally the best quarter for luggage companies. Consequently, we expect VIP's top-line to breach the pre-COVID base in 1QFY23.

Capex of ~Rs648mn lined up for FY23E

As of FY22, VIP has HL capacity of 5.1mn units and SL capacity of 7.2mn units. For FY23E, capex of Rs 648mn has been ear-marked, of which ~Rs 33mn will be utilized to expand capacity in India & Bangladesh for manufacturing PolyPropylene (PP) based HL (majority of expansion has already happened earlier). Rising in-house production capacity is likely to reduce reliance on China, which amounted to just 9% of sourcing mix in FY22.

Disclosures improve substantially

In a complete revamp, disclosures in the FY22 AR have witnessed stark improvement. Data on HL/SL manufacturing capacity, brand wise sales mix (volume & value) and touch points information has been clearly articulated in the AR (see tables/chart on page 4 for complete details). Better disclosures have increased transparency to a large extent.

Broekrage suggests buy for target price of Rs 817 apiece

Prabhudas Lilladher in its report stated, "VIP's FY22 annual report highlights plans to 1) maintain in-house manufacturing share at 75-80% 2) open 120-150 EBOs and 3) incur capex of Rs648mn in FY23E. Additionally, finished goods (FG) and stock-in-trade inventory in FY22 is similar to pre-COVID levels (refer to exhibit 1) indicating a strong 1Q, which is seasonally the best quarter for luggage companies."

It added, "In terms of new launches, the performance was noteworthy with introduction of 59/43 new products in premium/value segment respectively. Also, opportunity from exports (~3% of revenue in FY22) can turn out to be substantial, as most countries are looking to de-risk their supply chain from China post-pandemic. However, one of the major highlight was meaningful improvement in disclosure levels (refer to exhibit 2 and tables/charts on page 4 for more details). Overall, our EPS estimates are broadly intact, but we realign our capex assumptions and maintain 'BUY' on the stock with a TP of Rs 817 (45x FY24 EPS)."

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.