Hold V.I.P. Industries; target of Rs 229: Prabhudas Lilladher

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Prabhudas Lilladher's research report on V.I.P. Industries

We cut our EPS estimates by 48%/32% for FY21E/FY22E as 1) discretionary spending post-COVID is expected to be weak resulting in a prolonged demand slump 2) aggressive discounting by players to gain market share can result in heightened competitive intensity and 3) sales in 1Q (strongest quarter for VIP) is expected to be negligible due to lockdown. Further, we expect working capital issues to emerge (cash conversion cycle to be at 130 days in FY21 versus 91 days in FY20) as inventory liquidation (advance orders placed to vendors during Oct/Nov 2019) and receivable collection (recoverability issue can emerge due to tight liquidity situation) can prove to be a challenge. While VIP has undertaken cost optimization exercise to reduce fixed cost outgo (30% reduction envisaged) and margin performance has been commendable (best ever GM of 57.6%), we believe COVID-19 has structurally derailed the growth momentum.

Outlook

We thus maintain our HOLD rating and revise our TP to Rs229 (earlier Rs334) effectively valuing the stock at 25x (no change in target multiple) FY22 EPS of Rs9.2.

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