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Luggage Industry

The Luggage Industry


- On the cusp of a breakout

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Luggage Industry

Contents
Sr. No. Title Page No.
1 Introduction: 03
 Nature of Industry
 Global luggage Industry
 Factors affecting luggage Industry
 Market Positioning Comparison
 Risks and Concerns
 Porters Five Force Analysis
2 VIP Industries ltd. 10
 Introduction
 Product Categories
 Performance of Various Brands
 Distribution Channels
 Management and BOD
 Moat Analysis
 Financials
 Risks & Concerns
 Valuations
3 Safari Industries (India) ltd. 24
 Introduction
 Product Categories
 Distribution Channels
 Management
 Financials
 Risks & Concerns
 Valuations
4 Samsonite International SA. 35
 Introduction
 Performance of Product Categories
 Acquisitions
 Brand Contribution
 Region-wise Performance
 Management
 Moat Analysis
 Samsonite South Asia Pvt. Ltd.
 Financials
 Risks & Concerns
 Valuations

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Luggage Industry
Since time immemorial, human race has used a plethora of options to carry their possessions viz. bags,
cases, trunks etc. The genesis of luggage industry can be traced since the beginning of the Roman
Empire, From its humble beginnings of carrying tools for primitive humans, to guiding CEOs and
businessman on first class flights, luggage has come a long way, Today, the luggage industry has
undergone tremendous improvisation which has availed travellers with slew of high performance
luggage options that are lighter, more durable and contain modern amenities.

In India, luggage and handbags have, over the recent years, managed to shed their traditional utilitarian
tag and have now evolved as lifestyle products.

Luggage can be categorized into 2 types:-

1. Hard luggage: - Hard luggage is usually made up of aluminum or polycarbonates. Customers


basically choose this type of luggage due to good-strength-to-weight ratio and adaptability under any
conditions.

2. Soft luggage: - The Soft luggage is made up of vinyl, cotton, polyester etc. Soft luggage is preferred
due to its lightweight and moldable nature

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Oligopolistic Nature of Indian Luggage Industry:

The overall luggage market in the country stands between Rs 7000 Cr. to Rs 8,000 Cr., according to
market estimates and approximately 40 per cent of this is dominated by organized players. VIP,
Samsonite and Safari constitute approx. 95% of total organized sector of the luggage industry. Brands
like Delsey, Tommy Hilfiger to name a few constitute the rest.

VIP is the leader with more than 50% market share (in terms of revenue), followed closely by Samsonite
around 35% share and safari account for rest.

The luggage market has been further categorized into travel, business and casual bags.

1. Travel bags in India consist of trolley bags, suitcases and duffel bags and rolling totes. It is the
largest growing category according to industry reports.
2. Business bags are primarily for business use. Special characteristics of a business bag include
convenience for carrying a laptop and documents, and these bags often come in the form of
rolling mobile office, briefcase or computer bags.
3. Casual bags are primarily for daily use, and include different types of backpacks, female and
male shoulder bags and wheeled duffle bags.

Luggage is a not a large industry as the primary product is not bought frequently. People buy a luggage
in two or three years or, maybe, five years, depending on their needs. However, women will not hesitate
to buy three or four handbags every year. The branded women’s handbag market is “maybe 5 percent”
of the total women’s handbag market in India. So the challenge—or the opportunity is to convince
consumers to switch from unbranded to branded bags.

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Global Luggage Industry:


Asian luggage market, excluding Japan is forecast to experience highest growth, primarily driven by
China and India. Growth is being driven by increasing consumer appetite for travel & tourism arising
from a general increase in disposable income.

In North-America & Europe, luggage markets are at more mature stage of development and are
correspondingly growing at lower rate.

Latin America is expected to grow at higher rate but challenging economic market conditions in some
countries like Brazil and ban on export from Argentina might affect overall growth rate.

Per capita expenditure on luggage is significantly lower in the developing regions than it is in the
developed markets of Japan, North America and Europe.

Going forward, consistent rise in per capita expenditure in developing nations augurs well for Indian
Luggage Market.

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Factors Impacting Luggage Industry

1. Increase in Travel & Tourism:

Luggage industry has shown an average growth of 15% over the last 5 years according to industry
estimates. Over the years, the growth in the luggage industry has been attributed to the growth in travel
infrastructure such as airports, railway stations, national highways, etc.

Burgeoning middle class with higher disposable income has ensured double digit growth in both
domestic and international air travel. By 2020, Indian aviation sector is expected to witness meteoric rise
in air traffic with an estimated target of 50 million outbound tourists every year, thereby presenting
promising prospects for the luggage industry.

Travel and tourism’s total contribution to GDP


(USD billion)
450 423,7
400
350
300
250 222,5
208,5
200
147,7
150
103 105 116 122,1 126,8
100 88 82 89

50
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2027F

Source: IBEF

In India, the sector’s direct contribution to GDP is expected to grow by 7.9 percent per annum during
2016–26, according to IBEF. The luxury travel market in India registered a growth rate of 12.8 percent
in 2016, the highest in comparison with any other BRIC country.

Govt. of India is also taking initiatives to improve railway travel and funds amounting to USD 82.5
billion are expected to be spent on projects in next 10 years. There is strong correlation between
passenger traffic and luggage. Growth in passenger traffic has been strong since the new millennium,
especially with rising incomes and low-cost aviation; during FY06-16, passenger traffic grew at a
CAGR of 11.8 per cent in the country.

Aided by macro drivers like GDP growth, rising personal income levels, changing lifestyles, huge
middle class as well as the availability of low-cost air fares and diverse travel packages, India is rapidly
becoming one of the fastest growing outbound travel markets in the world, second only to China.

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GDP of India is expected to grow at 7.7% in FY19 according to IMF forecast. So, we can safely
expect the luggage market to grow at a CAGR of 16%, double of estimated GDP growth rate

2. Rising Income and Urbanization:

GDP growth will increase per capita income and more spending on travel. Millennial, who constitute a
considerable portion of Indian population, travel and like to do so hands free, which in turn has resulted
in the growth for the backpack-duffle bag category.

Also, luggage has also become an important part of the wedding trousseau, with even people in Tier II
and III cities buying branded suitcases and strollers during the wedding season.

While the rural segment was traditionally catered to by the unorganized sector, branded players in recent
times have started launching products at reasonable price points to grab market share in this category as
well.

3. Paradigm Shifts in Industry Trends

Modern retailing and new fashion trends are also expected to drive the sale of casual bags and travel
luggage bags category. As per a Nielsen’s West report, the proportion of consumers who claim to shop
at Modern Trade ‘occasionally’ has grown from 54 percent in 2015 to 66 percent in 2016.

Hypermarkets have become a favorite destination for the urban shoppers and as almost all the luggage
brands are visible there. Apart from hypermarkets, luggage retailers are also tapping online marketplaces
including Flipkart, Amazon and are revamping their own online portal to catch eye balls.

4. Life after GST

While GST prima facie looks like a dampener with a higher rate of 28 percent compared to the current
revenue neutral rate of 18 percent. It may be countered to some extent in the short term, thanks to the
strength of the domestic currency. Strengthening of rupee and softer polymer prices should have a
sobering impact on input prices (largely imported from China).

However, companies may have to take price increase to maintain margins. The gap between organized
and unorganized may not reduce in short term but in long run, it will be beneficial for industry when
unorganized players will understand implication of GST and will not be able to do tax evasion.

5. Products Sourcing:-

Luggage industry of world source soft luggage mainly from china because luggage industry is labor
intensive and labor is cheap in china. Hard luggage is generally manufactured by organized companies
in-house. However, companies are in search of alternative vendors to reduce dependency on China.

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Market Positioning Comparison:

Source: Frost& Sullivan, Maybank Kim Eng

Risk and Concerns:

1. Stiff competition from unorganized sector- Size of the unorganized market is 60%, whereas
the organized market is 40%. The unorganized segment continues to grow at a faster rate as most
of the players import luggage from China, Singapore and Thailand which is aggressively priced
as the quality is substandard.

2. Fluctuation in exchange rates: - Any appreciation in dollar could hit luggage industry. Though
companies import from china but transactions are done in USD. As mostly soft luggage demand
is increasing and constitute major portion of sales, exchange rate affect companies profitability in
a significant manner.

3. Dependence on China: - Labor cost of china is expected to increase as china will become
middle labor country. So cost of luggage is likely to increase as luggage is labor intensive
industry.

4. Seasonality: - Luggage industry depends on two things- travel and marriages. So Q1 and Q3 are
quarters during which luggage is sold more. One bad quarter can impact the entire year growth &
inventory carrying cost is also high as it is working capital intensive business.

5. Increase in raw material prices:- Increase in prices of raw materials like polyester, cotton,
aluminum, crude oil, etc will impact the Gross margins of companies.

6. Economic factors: - Luggage is a discretionary spending which depends on GDP of country. So


any hindrance on economic growth will impact the luggage Industry.

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PORTER’S FIVE FORCES ANALYSIS:-

KEY POINTS DETAILS CONCLUSION


THREAT OF NEW 1. Supply chain management is very important in order LOW THREAT
ENTRANTS to make product available at various touch points which
cannot made overnight.

2. Inventory management is a significant factor as


importance of product availability is paramount owing to
high opportunity cost of lost sales.

3. Some Brand loyalty of customers in branded luggage.


THREAT OF 1. There is no switching cost in luggage as one will buy LOW-MEDIUM
SUBTITUTE from vendors who cater to consumers’ needs and tastes THREAT
like soft luggage more or less replaced hard luggage.

2. The industry is less prone to disruption as there is no


other alternative to luggage. However the trends within
the industry can change quickly. So, the incumbents need
to stay abreast with the latest trends in the industry to
maintain their competitive edge in the market.
COMPETITIVE 1. Luggage Industry is highly fragmented with large HIGH
RIVALRY number of players. However, branded player like COMPETITIVE
BETWEEN Samsonite, VIP, Safari etc. are fiercely competing for INTENSITY.
EXISTING their share of market pie.
PLAYERS
2. Stiffer competition, particularly in the non-luxury,
high-volume, low-price segment.
BARGAINING 1 Organized player has moderate pricing power for their MEDIUM
POWER OF products. BARGAINING
BUYERS POWER.
2. Unorganized market with myriad players experience
stiff competition, hence the players relinquish their
bargaining power to the buyers.
BARGAINING 1. Soft luggage is mostly imported from China & HIGH
POWER OF company stick to particular suppliers as they understand BARGAINING
SUPPLIERS the quality & design required by company. POWER

2. Raw Material for hard luggage for branded companies


is bought from a single vendor in Indi so again not much
control over pricing.

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VIP INDUSTRIES LIMITED

VIP Industries, one of the India’s largest luggage makers, possesses a market share of more than 50 per
cent in the organized luggage space.VIP Industries manufactures hard luggage while soft luggage and
handbags are mainly imported from china. The company also exports its products, across, the UK, and
the US, Germany, Spain, Italy and select African and South-East Asian countries.

Product Sourcing

Company manufactures hard luggage in-house and has three manufacturing plants in India. The raw
materials mainly consist of Polycarbonate, Aluminum Sections, Polypropylene & other materials. The
company purchases raw materials for manufacturing of hard luggage segment. While for soft luggage,
the distribution, design and branding is taken care by VIP Industries, whereas the manufacturing part is
outsourced to China.

Reducing dependence on China

To reduce dependency on China, the company has taken a strategic decision to setup a soft luggage
manufacturing facility in Bangladesh. The company chose Bangladesh over India for two reasons:

i) As raw material is imported from China, setting up a plant in India does not elevate the
problem of currency.
ii) As luggage industry is primarily labor intensive. Surfeit of cheap labor in Bangladesh
compared to India & China may help bolster the company’s margins.

Cap-Ex plan in Bangladesh Plant

Bangladesh manufacturing unit is a wholly owned subsidiary of the company which started its
commercial production in January 2014 currently operating at 90% utilization capacity .They are
investing Rs. 25 Cr. in Bangladesh plant to double the current capacity in FY18 and will be able to do
successful expansion in next 12 months.

Soft Luggage vs. Hard Luggage

Soft luggage 90% is imported from china and


Revenue Contribution (FY 10% comes from Bangladesh plant of company.
17)
While handbag, 75% imported from china and
25% rest 25%, is bought from Indian vendors and they
are planning to make it 50:50.
Soft Luggage
Today 75% of company’s revenue comes from
75% Hard Luggage soft luggage which also includes handbags
category and 25% contribution is of hard luggage

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Company’s export plans in Hard Luggage Segment

The hard luggage segment contributes 25% to the topline and its declining due to changed consumer
preferences. However, company did not want to shut plants and want to utilize their hard luggage
facilities for exports.

“There are only three hard luggage factory in world (including us) and we are thinking that we export
hard luggage to world” says Radhika Piramal (Vice-chairman).

Soft luggage is growing faster than hard luggage, the only category growing in hard luggage is
polycarbonate category because it matches the convenience and features of soft luggage i.e.; lightness
and four-wheeling. So they set up a new plant in Haridwar (Uttarakhand) in 2010 mainly for
manufacturing polycarbonate luggage.

Handbags Market

The market for handbags, office bags and backpacks is much larger than the luggage market as there is
repeat buying by customers and VIP is seen increasingly focused on introducing travel products for the
short haul, viz., business bags, ladies bags, backpacks etc.

Product Categories

Through its multiple brands, VIP Industries has presence across various price points, which is one of its
core strengths.

The positioning of the brands mentioned is given below:

BRANDS YEAR BRANDS POSITIONING


VIP 1971 Mass-mid premium
ALFA 1971 Mass market targeted to convert consumers
purchasing unbranded luggage to VIPs products
CARLTON Bought in 2004 But launched in Premium international brand, targeted towards young
India in 2011. professionals
ARISTOCRAT 2007 Value for money
SKYBAGS 1980s, Re-launched in 2012 Youth oriented, stylish
CAPRESE 2012 Mass premium, targeted towards fashion conscious
urban women’s

Market Position of VIP

Over the past few years, VIP has wrested share from Samsonite across segments, though it has lost share
to Safari, primarily in the value segment. VIP gained large market share in backpacks and has become
the market leader from a nil presence a few years ago.

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PERFORMANCE OF VARIOUS BRANDS

VIP: - The Company is having the most trouble growing VIP, the flagship brand. Youth doesn't identify
with VIP brand so company thought of promoting sky bags as a youth brand and re-launched it in 2011.
Now, the company is making significant efforts to rejuvenate VIP brand by spending more on
advertisements.

Skybags: - Company successfully re-launched Skybags in 2011, a mid-segment brand of backpacks and
duffle-bags that VIP Industries had introduced in the 1980s. With its quirky colours and graphic prints,
Skybags is the best performing brand in VIP’s kitty.

Carlton:-VIP Industries is facing immense competition from Samsonite in Rs 10,000 and above
segment. To counter this, company decided to launch Carlton, the British brand that VIP had acquired in
2004, in India. It has been growing well but premium segment is still dominated by Samsonite. As
Carlton is the highest margin brand for company, they are focusing on Carlton to gain some market
share from Samsonite.

Aristocrat and Alfa: - As competition heats up in the value segment with home grown player Safari
opting for aggressive discounts, Company is turning their focus towards Alfa and Aristocrat—VIP’s
entry-level luggage brands. Samsonite which was earlier not present in value segment also launched its
brand “Kamilian” to target masses. Since Alfa and Aristocrat will be brand seeing the conversion most
from unorganized to organized, company has shifted their focus to these brands now to capitalize the
opportunity.

Caprese: - VIP Industries launched women’s handbags under the brand name Caprese in 2012. The
rationale was simple: Typically a woman might have five or 10 handbags, whereas a whole household
will have only two or three pieces of luggage.
“It’s a huge market and no big national brands were catering toit” says Radhika Piramal (Vice-
chairman).
The bags are priced between Rs.2000 and Rs.4000 and cater to the mass premium segment. Gross
margins are higher in handbags compare to typical luggage product.

DISTRIBUTION CHANNELS
VIP Industries has presence across all channels and its strong distribution along with product mix is the
main reason they are been able to maintain their market share. VIP has 3000 direct dealers, 100
distributors having 7000 point of sales, 250 company owned stores and presence in all hypermarkets like
big bazaar, lifestyle, etc.

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Distribution Channel Current Situation


Canteen store  CSD is a retail store facility extended exclusively to all defense
Department:- personnel and their dependents, where the products are provided at
lower prices than the prevailing market prices.
 20% of company’s revenue comes from Canteen Store Department
(CSD) channel.
 Safari is giving stiff competition to VIP in this segment. They have
been successful in reducing CSD’s contribution to VIP’s revenues
from 25% to 20%.
 VIP has lost share to Safari as they are pricing their product
aggressively.
 To cater that, company launched their Skybags brand in CSD apart
from earlier presence of VIP Brand only.

Rise of Modern Trade:-  Among all the channels, the hypermarket channel continues to witness
the strongest growth which also suggests that Indian consumers prefer
affordable luggage and convenience of modern shopping formats.
 Modern trade is most important channel for company because of high
growth prospects and also because unorganized market does not have
access to these stores.

Direct Dealers:-  Company has been struggling to grow in traditional channels like
direct dealers and retailers because of shift in shopping trend of people
towards modern trade.
 They have been consistently working to train their dealers in order to
increase consumer satisfaction.

E-Commerce:-  Company’s sales through e-commerce channels are currently at its


nascent stage (less than 5% of revenue).
 Initially, the company struggled to increase its sales through e-
commerce as it would’ve created a direct conflict between retailers
and e-commerce channel.
 Company has successfully launched new product mix for Ecommerce
channel and sells their products from their own online portal as well as
from other online market places like Amazon, Snapdeal, etc.

Caprese Distribution  VIP capitalize their distribution channel by selling Caprese directly
from their company run stores as well as from modern trades and
Ecommerce channels.
 Although, Dealers are reluctant to accept Caprese being the new brand
of Company.
 Caprese is now present in 350 direct point of sales.

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MANAGEMENT AND BOARD OF DIRECTORS

Piramal Empire

o The Piramal family acquired Aristo Plast in 1973 and turned it into VIP Industries.
o The three heirs of Piramal empire manage the following businesses:
o Ashok Piramal ( Textile and auto components)
o Dilip Piramal ( VIP Industries acquired in 1982)
o Ajay Piramal (Piramal Healthcare, Finance and Real Estate)
o There are no cross holdings or linkages between the different groups.

Dilip Piramal: Holding the Reins of VIP Industries

o Until 2010, Mr. Sudhir Jatia was the managing director of VIP Industries ltd. The company did
achieve growth under Sudhir’s leadership and industry preferences were shifted towards soft
luggage side.
o However, VIP as a brand was struggling and he wanted to keep VIP away from hypermarkets
and offer Skybags as a discount offering. But chairman Dilip Piramal does not wanted to
compromise on VIP, their flagship brand and wanted to cater the youth segment.
o Dilip ran the business with professional help until his daughter Radhika Piramal took over as
managing director in July 2010, after completing her MBA from Harvard Business School
(HBS) and a stint at consultancy firm “Bain & Company” in New York.

Radhika Piramal understood that and made three important changes during her tenure:

To reduce dependency
Launch Skybags as She also launched a on china for soft
youth brand as VIP as a handbag under the luggage, company
brand was considered name “Caprese” to started manufacturing
old by young cater hand bags market plant in Bangladesh
Generation. She is also which according to her and its running
trying to change image is 7-8 times larger profitable and also
of VIP brand with market then luggage have good supply
advertisements. and is growing quite chain.
. well.

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According to Mr. Dilip Piramal, her daughter Radhika breathed fresh air into the company. “The best
thing was that she was able to attract good managers. People were again willing to work with VIP.

Change of Management’s Roles and Responsibilities

o In Mar’17, Radhika Piramal stepped down as the Managing Director of the company and has
donned the role of Vice Chairman and Executive Director of the company.
o In this capacity, she is going to take care of the international business and keep the company
abreast with the latest trends in international markets.
o Meanwhile, Mr. Dilip Piramal, an industry veteran with over 45 years of experience, will look
after the joint responsibility of Chairman and Managing Director.

Successfully Grappling Samsonite’s Onslaught

o VIP Industries is an owner operated business with not so major poor capital allocation record.
o However, one can point about the judgments that they were not were able to foresee future trends
and lost share to Samsonite, but they reacted & are able to protect their leadership position as of
now.

High Promoter’s holding

o Promoter holdings are 52.5%, suggesting their confidence in business. Dividend payments are in
line with profits and company has not issued any major warrants or stock options to employees.

Management’s aversion to Derivatives

o Luggage industry is impacted by exchange rates because of imports of soft luggage mainly, but
as soft luggage is bought frequently it is not possible to hedge the transaction with supplier.
However, company’s exports are 30-40% of import so they have natural hedge of 40% for
remaining they don't hedge for long run.

o One of the incident which shows the integrity of management is “ when analyst in conference
call asked Mr. Piramal to separately hedge their transaction in derivatives market, his reply was-
derivatives are very risky we don’t want to take that risk and wipe out our capital” Management
is not speculating shareholders money in derivatives by the name of hedging.

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MOAT ANALYSIS

Key point Details Conclusion


Management o Radhika Piramal will be executive director while Narrow moat
promoter Mr. Dilip Piramal will have joint
responsibility of chairman and managing director.
o While they are stating that Radhika will look for
international trends in London and we have good
management team at top level
o But there is definitely a sign of worry as there is no
proper succession planning by company.

Brand o VIP has been successful in establishing a strong brand Wide moat
in the consumer’s mind.
o They are continuously spending on advertisement to
further strengthen their brands in the market.

Distribution o Company is having strong distribution network which Wide moat


has helped them to retain leadership position despite
high competition in industry.

Pricing Power o A company hike price of products twice every year, Wide Moat
generally 5-6% price hikes is expected by them
annually.
o Company has pricing power as they are able to pass
some of their cost to consumers.
o Because of GST’s higher tax slab for luggage, they
might take more price increase to maintain margin and
sales growth.

Technology o Luggage industry is also impacted by technology but Wide Moat


and R&D changes are rather usual than abrupt.
o Company has been successful keeping a pace with
changes in industry and several innovations patented
nationally and internationally.

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VIP Industries Ltd. - Common Size P&L Account

Year / Rs Crore FY11 FY12 FY13 FY14 FY15 FY16 FY17


Expenditure
Cost of Material Consumed 21.6% 19.5% 17.8% 15.7% 15.6% 15.2% 12.2%
Purchase of Traded Goods 28.6% 31.9% 35.0% 42.0% 43.7% 43.8% 40.4%
Change in Inventories -3.7% -3.2% 0.3% -3.1% -4.5% -4.5% 0.4%
Employee Cost 10.0% 9.5% 10.1% 9.6% 10.5% 10.3% 11.1%
Ads, Sales Promotion & Other Expenses 27.8% 28.6% 28.6% 27.5% 27.5% 26.3% 25.6%
Total Operating Expenditure 84.3% 86.2% 91.8% 91.7% 92.6% 91.1% 89.7%
Gross Profit 53.5% 51.9% 46.8% 45.4% 45.3% 45.5% 47.0%
Operating Profit / EBITDA 15.7% 13.8% 8.2% 8.3% 7.4% 8.9% 10.3%
Other Income 0.4% 0.2% 0.2% 0.3% 0.2% 0.2% 0.5%
Depreciation 2.0% 2.0% 2.4% 1.8% 1.7% 1.2% 1.1%
Profit Before Interest & Tax (PBIT) 14.2% 12.0% 6.0% 6.8% 6.0% 7.9% 9.7%
Interest/Finance Costs 0.5% 0.8% 0.6% 0.2% 0.1% 0.1% 0.0%
Profit Before Tax 13.7% 11.1% 5.4% 8.2% 6.3% 7.8% 9.7%
Current Tax 3.0% 2.3% 1.8% 2.3% 1.9% 2.4% 3.2%
Other Taxes -1.1% 1.0% -0.1% -0.1% -0.1% 0.0% -0.1%
Total Tax 1.9% 3.3% 1.7% 2.3% 1.8% 2.4% 3.1%
Profit After Tax (PAT) 11.8% 7.8% 3.8% 6.0% 4.4% 5.5% 6.6%
Source: annual reports

o Gross profit has been going down consistently over the last few years. The primary reason for
this trend is
 Rupee depreciation against the dollars
 Rise in raw material price.
All soft luggage and raw material for hard and soft luggage are bought in US dollars from china.
Gross Margin has been picking up since FY17 owing to a stable rupee dollar exchange rate.

o Employee cost has risen continuously as company is training employees to push products in
hypermarkets, CSD and in company run stores. Company makes sure that they have their
employee at requisite channel with good understanding about product to push sales.

o Operating profit decreased immensely in FY13 almost were half compare to FY12 because of
two reasons:-
1. Canteen store department (25%) which was VIPs biggest customer (accounts for 25% of
overall sales at that time) held new orders for some time due to some internal changes in
department. They again started to buy from FY 14 but company lost some market share
to safari in CSD because of their aggressive pricing.
2. CSD sales decline along with depreciating rupee, increase in raw material price and
increase in employee & advertisement cost lead to decline in operating profit.

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o Revenue has grown at a CAGR of 9.3% from last10 years and at 11% CAGR from last 5 years.

Net Sales
1400
1275,2
1216,45
1200
1047,69
972,82
1000
860,26 837,66
758,43
INR Cr.

800
643,78
573,53 563,38
600

400

200

0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: annual reports


o FY13 was affected because of decline in CSD sales, whereas in FY16 company received one
time institutional order for Hajj Pilgrims for around 50 Cr. for which there was no bidding in
FY17. Company was able to increase sales in FY17 compare to FY16 in spite of demonetization
and no institutional order.
o Company has been maintaining a healthy dividend payout and is more or less in line with the
reported profits.

Dividend Payout
50,00% 45,50%
44,83%
45,00% 41,45% 42,60%
40,00%
35,00% 33,62%
31,60%
30,00% 29,20%
25,00%
20,00%
15,00% 13,51%
10,00%
5,00%
0,00%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: annual report

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Advertisement and Promotions:-


Luggage industry depends on two things: - i) Marriages ii) Travelling. Both these factors suggest that
luggage industry is seasonal. The company clocks majority of its revenues from Q1 (due to summer
vacation and marriages in North Eastern regions of India like UP, Bihar etc,) and Q3 (being the festive
season).
Company’s advertisement campaign is most active during the peak season in order to attract more
customers. Overall VIP spends 5%-7% of sales on Advertising and promotions.

Ads & Sales Promotion Spend (% of sales)

6.02%
80 5.81%
70 6.01%
5.87%
60
5.19% 5.26%
50
INR Cr.

4.91%
40
30
20
10
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Ad and sales promotion Spend 37,21 44,64 44,1 57,06 62,97 70,7 76,78

Source: annual reports

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Luggage Industry

Steps taken to rejuvenate the Brand


o The company is relentlessly working towards making luggage a lifestyle product. They have
signed Bollywood veteran Hrithik Roshan for their flagship brand VIP to depict the strength and
durability of the product.

o Similiarly, the company has meticulously chosen current style icons “Varun Dhawan” for
“Skybags” and “Alia Bhatt” for “Caprese” in order to target youth of the country.

o As company is turning their focus towards Alfa and Aristocrat—VIP’s entry-level luggage
brands, company recently appointed brand ambassadors “Rohit Sharma” for “North Indian
Market” and “R. Ashwin” to reach out customers in South. Aim is to penetrate tier III and tier II
towns primarily through general trade and hypermarkets.

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Balance Sheet Strength:-


o VIP Industries has equity of Rs 28.26 Cr divided in 14.1 Cr. shares of Rs 2 each. The net worth
stands at Rs 408 Cr. as on march’17.
o Company is debt free and holds Rs 11 Cr. in cash & cash equivalents.
o Industry generally keeps inventory of 3 months because opportunity cost of losing sales is way
more than the carrying cost.
o Hypermarkets and CSD channel take more time to pay receivables compare to other channels.
The cash conversion is quite long of 77 days.
o The ROE and ROCE are healthy for FY17. ROE is 20.68% and ROCE is 35.96% and average
ROCE for last 10 years is 25.78%.
o Asset light model helps company to earn high ROCE but because of Industry nature, they are
required to have high working capital needs.
o Company has also implemented “Theory of Constraints” (TOC) as it helps to maintain entire
supply chain by improving availability of products and managing inventory.

Risks & Concerns:-


o VIP Industries is impacted by CSD channel as 20% of revenue contribution comes from CSD
where the Safari is fiercely competing with VIP
o CSD channel is vulnerable to structural changes in govt policies which can severely impact
VIP’s revenues as it did in FY13.
o Even after GST, channel has made a policy decision of not buying luggage until they have sold
pre-GST stock which has impacted company sales.
o Traditional dealers, which constitutes lion’s share of company’s revenues, are struggling to
maintain a healthy growth rate. It would be a challenge for VIP, how they will deal with dealers
in coming years and encourage them to make changes to increase customer experience.
o International business has also de-grown from past few years because of subdued market
condition in UK and Europe & problem with their major dealer. However, in recent conference
call of March’17, management said that they have resolved the issues with the dealers and
expecting growth from FY18.
o There is disputed sales tax liability of Rs 106.89 Cr. upon company for which company has
made no provision. VIP believes that they will resolve the matter as they are been taxed twice for
same products so there is no need for provisions.
o Radhika Piramal will be executive director and she will be in London from now onwards.
Management has maintained that because of advancement in technology, she would be able to
manage from London easily but we have to watch out for the company’s performance in her
absence.

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VALUATIONS
o At Rs 178, VIP Industries ltd trades at a:

Price-earnings ratio 33 Price to Cash Flow 20.23


Price to book value 6.35 Ev/Ebitda 19.15
Source: screener.in
o Company is quoting at high multiples but before making any judgment, let just calculate what
growth rate the market is applying to the current stock price by using reverse discounted cash
flow (DCF).

o Assumptions:-Initial cash flow is 54 (average cash flow of last 3 years), discount rate
(opportunity cost of capital) is 12% and terminal growth rate after 10 years is 0.

o By doing reverse DCF with above assumptions, I found that implied growth rate by the market is
25%. i.e.; Market is expecting that VIP Industries will be able to grow their cash flow at 25% for
next 10 years.

o If we look at the growth rate of cash flow for past 10 years, VIP Industries is able to grow their
cash flow at 28.49%. Free cash flow => Cash from operating activities minus payment for
purchase of fixed assets.
Year / Rs Crore FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 10 YR CAGR
Net cash from operating activities 25.1 33.2 83.9 12.81 84.07 73.71 50.26 13.59 53.38 126.4
Payment for purchase of fixed assets 12.8 16.3 10.9 19.11 20.57 16.42 20.48 10.84 10.26 9.12
Free Cash Flow 12.3 16.9 73 -6.3 63.5 57.29 29.78 2.75 43.12 117.3 28.49%

Source: annual report

o Looking at the above growth rate, the implied growth rate of 25% by market may not be
impossible but it’s certainly on a higher side. It would not be feasible to assume that historic
performance will reflect in future.

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Expected Return model:-

Before we jump to conclusion, let’s try to calculate return by using Expected Return model:-

Expected Return Model - VIP Industries Ltd.


Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 CAGR (10-Yr) CAGR (5-Yr)
Earnings per Share (Rs ) 2.1 (0.2) 4.1 6.3 4.8 2.2 3.0 3.0 4.7 5.9 12% 4%
Net Profit Margin 5% -1% 9% 12% 8% 4% 4% 4% 5% 7%
Return on Equity 23% -3% 45% 51% 30% 13% 16% 14% 21% 22%

Source: annual report

Assumptions:
1. Taking optimistic scenario that EPS will grow at a CAGR of 15% in next 10 years.
2. Using an exit multiple of 20x.

Calculations
Estimated CAGR in EPS over next 10 years 15%
Estimated EPS after 10 years 24
Current P/E (x) 33.0
Exit P/E in the 10th year from now (x, Estimated) 20.0
Estimated Stock Price (10th year from now) 479
CMP (Rs) 178
Estimated CAGR Return in 10 Years 10.4%

o After taking even the optimistic scenario, if we invest today at a price of Rs 178 for ten year
horizon, we will earn a CAGR of 10.4%.

o 10 year government bond yield is around 7.8%, so investing at current price does not adequately
compensate for the market risk.

o Being conservative, when we take a 10% EPS growth rate for 10 years, estimated CAGR Return
is 5.6%, below the 10 year Govt. bond.

Conclusion: - VIP Industries looks good if we consider that business is easy to understand, ethical
management, owner operated with more than 50% of stake, good future prospects with low penetration
of branded luggage having large unorganized market but at current market price, I believe much of the
future growth is already factored in and does not provide adequate margin of safety.

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SAFARI INDUSTRIES (INDIA) LIMITED


Safari Industries is the third-largest luggage maker in India after Samsonite and VIP. The company was
incorporated in year 1974 under the aegis of Mr. Sumatichandra Mehta. Safari started off with
manufacturing of plastic moulded luggage company.

In a span of 6 years, the company transitioned from being a partnership firm to a private company and
finally got listed in the year 1980. Over the last 3 decades, safari has become synonymous with luggage
and has been able to grasp a decent market share in the industry.

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Takeover of Safari:

1. Mr. Sudhir Jatia is a luggage industry veteran with 22 years of experience in the industry.
Earlier he served as the Managing Director of VIP Industries. He acquired Safari Industries,
which was struggling at the time with immense competition from VIP and Samsonite, in the year
2011 for around 29 Cr. He was appointed as the Chairman and Managing Director in April 2012

2. In 2014, an alternative asset management firm “Tano Capital” which invests in rapidly growing
companies in India and China acquired 20% stake for $ 8.5 million.

3. The company utilized the proceeds from the stake sale in corroborating its advertising and
distribution channel along with improvement in their working capital cycle.

Acquisition by Safari:

Genius Leathercraft:-

o In year 2014, Sudhir Jatia led Safari diversified into school bags and backpacks by acquiring
Genius Leathercraft which manufactures and exports multi-utility bags with a special focus on
school bags and backpacks under their flagship brands ‘Genius’ and ‘Genie’ respectively.

o In luggage and executive bags, Genius Leathercraft used to operate under the brand Magnum. Its
other brands are Activa, Orthofit, DBH, Egonauts, and Gscape.

o It has a distribution network across 15 states in India with about 600 dealers, besides selling
through tie-ups with Modern Retail and E-retail.

o Sudhir Jatia, managing director of Safari Industries, has signed an agreement with Genius
Leathercraft to buy trademark and goodwill of these brands. With the acquisition, luggage maker
Safari Industries will mark its entry into the school-bags and backpacks segment.

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Product Sourcing:

Till 2012, most of the company’s revenue used to come from traditional hard luggage which was
manufactured at an in house facility in Halol, Gujarat. Since then the company has aggressively started
importing soft luggage from China to keep them abreast with changing customer preferences.

Revenue Contribution (FY 17) Changing customer preferences has led


to a paradigm shift in product
composition of the company.

20% Today, 80% of company revenue


Soft Luggage contribution is from soft luggage and
20% from hard luggage versus 80%
80% Hard Luggage
from hard luggage in FY06.

Product Portfolio of Safari Industries:


category No. of SKUs Popular categories
Soft luggage >20 SAFARI Primus, Safari Sahara
Hard luggage(PC) >10 Safari Thorium Deluxe
Duffel bags >10 Safari REVV RDFL
Backpack >30 Safari Guitar Reloaded, Safari Boom box
Hard luggage(PP) >15 Olympus Trolleys
School bags >20 Genius Champion, Genius Disney, Genie Disney.
Source: Ambit Research

In the past few years, Safari has been successful in taking away the market share of VIP industries and
other unorganized players by channelizing its focus in the value segment with its aggressive growth
strategy. The company is fiercely competing with “Alfa & Aristocrat” (VIP) and “Kamiliant”
(Samsonite).
The company has aggressively priced its products, compared to VIP and Samsonite, to consolidate their
position in the industry. Although, the strategy has resulted in increasing the market share of the
company but has led to dwindling profit margins.
The company has already planned some serious inroads in the premium segment. They have signed
fresh contracts with new vendors and hired a team of designer to make the products Indo-centric.

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Distribution Agreement with Antler:

Safari also signed distribution agreement for India with Antler, a leading UK brand. Antler is competing
against the Samsonite brand in the Indian market. This will enable company to penetrate into
the premium segment of market.

Antler offer travel goods such as roller cases, trolley, laptop cases, casual bags, totes and messenger
bags from its classic and couture collection.

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DISTRIBUTION CHANNEL

Multi-channel distribution network covering CSD, Hyper market, MBOs, e-commerce and institutional
with 3500 customer touch points:

Distribution Current Situation


Channel
Canteen store CSD is the main contributor of revenue (management suggest 35% revenue
Department:- contribution). However, the company has been successful is reducing its
dependence on the CSD. The contribution of CSD has declined from 65% in
FY14 to 35% FY17, because of growth in other channels.

Rise of Modern Company has significantly improved its product range in the last few years and
Trade:- which has gained acceptance in hypermarket & in departmental stores.

Direct Dealers:- Company has maintained cordial relations with the dealers. They meet them on
regular basis and incorporate their feedbacks for further improvement in their
products. The value segment is a push product hence the role of dealers becomes
paramount. The direct dealer channel is showing robust growth which augurs well
for the company in the future.

E-commerce:- Company has its own web store Safari.in. The web-store has segregated all the
products based on their usability such as four wheel, two wheel, duffel, business
case, suitcase, bag packs etc. In 2015, Safari went online and since then has
amassed significant presence in the online market places like Amazon, Flipkart,
Snapdeal etc.

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MANAGEMENT:

Safari has enviable management pedigree. All top brass management personnel have years of experience
working with VIP Industries which holds numero uno position in the organized market. Following are
the details of senior management team:

Name Designation Experience


SudhirJatia CEO and Chairman 2 decades of experience with luggage Industry, earlier
managing director of VIP Industries.

VineetPoddar CFO 20+years of work experience, earlier CFO in Bombay


Realty at Bombay Dyeing

SatyabrataMitra Sr. VP-CSD Sales 4 decades of experience; worked with VIP Industries

Parmod Agarwal VP-Hyper Sales 3 decades of experience with VIP Industries

Indranil Roy Sr. VP-Trade, Retail, >2 decade of experience with several companies
E-comm., Instl. Sales including Whirlpool, Panasonic India, VIP Industries

Sharad Chaugule VP-Halol(Operations) 3 decades of experience with VIP Industries and


Hitesh Plast.

Anup Kondakundi DGM Marketing >8 years experience with companies like Godrej
(Luggage) Philips, Diageo USL, etc.

Rajiv Kshatriya GM Marketing (School 11 years of experience with companies like Mortein
Bags) equity, Durex & Kohinoor, etc

Paritosh Sinha General Manager- 15 years of experience with companies like Panacea
Genius Sales. Biotech, Berger Paints, VIP Industries, etc.
Source: Ambit Research

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Safari Industries India Ltd. - Common Size P&L Account


Year / Rs Cr. FY11 FY12 FY13 FY14 FY15 FY16
Expenditure
Cost of Material Consumed 40.7% 34.0% 20.7% 15.4% 10.9% 12.6%
Purchase of Traded Goods 26.0% 40.0% 43.9% 49.8% 52.4% 48.6%
Change in Inventories -4.9% -13.2% -8.6% -9.8% -7.1% -5.5%
Employee Cost 11.3% 12.2% 12.9% 10.7% 13.5% 10.5%
Other Expenses 18.4% 23.4% 27.3% 30.1% 26.2% 27.4%
Total Operating Expenditure 91.5% 96.4% 96.2% 96.1% 94.4% 93.6%
Gross Profit 38.2% 39.3% 44.0% 44.7% 42.3% 44.3%
Operating Profit / EBITDA 8.5% 3.6% 3.8% 3.9% 5.6% 6.4%
Other Income 1.6% 0.6% 0.8% 0.4% 0.3% 0.3%
Depreciation 0.5% 0.6% 0.5% 0.8% 1.3% 1.5%
Profit Before Interest & Tax (PBIT) 9.6% 3.5% 4.1% 3.5% 4.5% 5.3%
Interest/Finance Costs 3.8% 4.6% 3.3% 3.0% 1.3% 0.9%
Profit Before Tax 5.8% -1.0% -1.2% 0.3% 2.7% 4.3%
Current Tax 1.7% 0.0% 0.0% 0.0% 0.9% 1.3%
Other Taxes 0.1% 0.1% -0.6% 0.3% -0.2% 0.2%
Total Tax 1.8% 0.1% -0.6% 0.3% 0.7% 1.5%
Profit After Tax (PAT) 4.0% -1.1% -0.7% 0.1% 2.0% 2.8%
Source: annual reports

o Gross profit has increased YOY basis despite rupee depreciation and increase in raw material
cost. Soft luggage’s contribution to Safari’s revenues is increasing which might facilitate the
company to get discounts from Chinese vendors on bulk purchases.
 Steady rise in Gross Margins is expected to continue due to stable rupee and growth in
soft luggage segment.

o Employee cost has remained stable and company is also training employee to push product in
hypermarkets and CSD channels.

o Operating profit has gone down considerably over the last 5 years as the company is offering
generous discounts on their products in a bid to capture market share. Company also operates in
value segment which is not a very high margin segment compare to mass and premium segment.

o Company has been successful in reducing their debt & Finance Cost as a percentage of sales is
decreasing.

o PAT figures are not very impressive but with debt under control & high margins from other
segments like backpacks & premium luggage in future, we can expect the margins to grow
moderately if not rapidly.

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o Mr. Sudhir Jatia played a key role in the turnaround of the company which is clearly evident in
the financial statements. He took over company in 2011, since then the company has increased
sales at a CAGR of 45.39%.

Revenue (Rs Cr.)


300 277

250
216
200
166
150

93
100
62 61 62 66 62
56
50

0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: annual reports

o Company does not spend much on advertisements and is more focused on product development.
They are focusing on distribution channel & opening more stores to increase their presence.

o Company also introduced many SKUs in soft luggage segment along with entry in back packs.
Company’s agenda for now is to increase presence with better & diverse product range which
will help to improve sales.

o Safari is not a dividend paying company and it has potential opportunities to use their reserves
for increasing margins & market share instead of dividend payout.

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Balance Sheet Strength:-


o Safari Industries has equity of Rs 4.15 Cr. divided in 0.42 Cr. shares of Rs 10 each. The net
worth stands at Rs 91 Cr. as on march’16.

o Company has debt of Rs.43.52 Cr. which makes debt to equity ratio to 0.44. Debt to equity ratio
is below one which implies that the company may withstand any economic downturn over the
coming few years.

o Interest coverage ratio of company is also 5.79, suggesting company has approx 6 times high
EBITDA compare to interest payments. So, the company is in a comfortable position to pay off
their interest and principal payments on time.

Efficiency Ratios FY11 FY12 FY13 FY14 FY15 FY16


Receivable Days 158 120 124 69 68 71
Inventory Days 90 138 114 102 101 100
Payable Days 91 93 74 66 23 23
Cash Conversion Cycle 157 165 164 105 145 148
Source: annual report
o There has been a consistent decline in the company’s Receivables days as they have reduced
their dependence on CSD channel which has high receivable days compare to other sales
channels.

o Inventory days are in line with Industry norms of approx three months. It is essential for
company to have products available at time in order to reduce opportunity cost.

o Company has been struggling on payables part, Samsonite and VIP Industries are provided better
terms by Chinese vendors than Safari Industries. It is expected that Jatia is working on that front
& making bulk purchases from vendors to avail discounts and negotiate better payment schedule.

o ROE for company is 10.76% and ROCE is 12.45% and average ROCE for last 10 years is
11.95%. ROE & ROCE are certainly lower than other players in Industry but the company is on
an expansion spree & trying to diversify in other segments of luggage, the numbers might
improve once the expansion plan gets fructified.

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o Shareholders with more than one percent:-

Name Category % Stake


Sudhir Jatia Promoter and Promoter Group 51.02
Safari Investments Private Limited Promoter and Promoter Group 10.96
Tano India Private Equity Fund II Public shareholder 20
Central Park Securities Holding Private Public shareholder 2.01

Risks & Concerns:-


o CSD channel contributes 35% to total revenues of the company. Although they have been
successful in reducing their dependence on CSD channel, but still it contributes lion’s share of
the company.
 The company remains quite vulnerable to any disruption caused by change in Govt
policies which may severely impact the company’s revenues.

o The competition is getting intense in value segment with Samsonite launching their brand
“Kamiliant” in value segment& VIP Industries shifting their focus on Alfa and Aristocrat.

o Safari is trying to focus on premium segment but company does not have that distribution
channel for premium segment. They mostly have dealers which might not prove helpful in
selling their premium products. Company need more company operated stores especially in
Metros which may help in accelerating growth in the premium segment

o Their competitors enjoy substantial brand loyalty especially in the premium segment. In order to
penetrate this segment the company would need to spend on Advertisements & Promotions to
improve their brand value.

o Company has negative operating cash flow because of increase in investments in working
capital. However, improvement in working capital needs in future will result in positive cash
flows.

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VALUATIONS:-
o At Rs 1,378, Safari Industries ltd trades at a:

Price-earnings ratio 50.97 Price to Cash Flow 25.41


Price to book value 5.72 Ev/Ebitda 19.15
Source: screener.in
o Multiple are quite high but before making any judgment, let just calculate return by using
Expected Return model:-

Source: annual report

Assumptions:
1. Taking an optimistic scenario that EPS will grow at a CAGR of 25% in next 10 years.
2. Using an exit multiple of 20x.

Calculations
Estimated CAGR in EPS over next 10 years 25%
Estimated EPS after 10 years 179
Current P/E (x) 51.0
Exit P/E in the 10th year from now (x, Estimated) 20.0
Estimated Stock Price (10th year from now) 3,589
CMP (Rs) 1,378
Estimated CAGR Return in 10 Years 11.2%

o Even after taking the optimistic scenario, if we invest today at a price of Rs 1378 for ten year
horizon, we will earn a CAGR of 11.2%.
o The 10 year government bond yield is around 7.8%, investing at current price does not provide
adequate compensation for the assumed market risk.
o Being conservative, when we take a 15% EPS growth rate for 10 years, estimated CAGR Return
is 1.4%, much lower than T-bills.

Conclusion: - Safari Industries has delivered good results from past few years after Mr. Jatia took over
the company and may continue to do so under his able leadership. Although, I would refrain from
investing at current levels as the company provides low valuation comfort.

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Samsonite International SA

Samsonite International is an American luggage manufacturer and retailer. Its product portfolio ranges
from large suitcases to small toiletries bags and briefcases. The company was incorporated in year 1910
since then the company has created an unparalleled brand loyalty among its customers and has spread
across to more than 100 countries.

Product Sourcing:

The Company adopts an asset light model allowing into outsource a significant proportion of production
to OEMs and sells its products to distributors on a wholesale basis.

The Company’s distribution reach boasts wide geographical reach covering Asia, Europe, North
America and Latin America. Products are sold through wholesale distribution, self-operated retail stores
and e-commerce. Wholesale customers include department stores, specialty luggage stores,
hypermarkets and warehouse clubs.

About 80% of the company’s production is outsourced to OEMs (60% in China and 20% in South-East
Asia countries, such as Vietnam, Thailand and Bangladesh). The other 20% of the products are
manufactured in-house. In order to protect their intellectual property in hard luggage segment, the
patented curve material is produced in house.

Travel

The company generates bulk of its revenues from Travel products such as suitcases and carry-one. The
travel products are sub-categorized by the material from which they are constructed into three
categories:

 Hard Luggage
 Soft Luggage
 Hybrid luggage ( combination of the Hard and Soft Luggage)

The demand for each of these products varies significantly across markets. The hybrid luggage is
gaining popularity as it provides increased lightness along with combination of sturdiness (Hard Side)
and flexibility (Soft Side). The hybrid model although a small part of company’s revenues is surely
picking and can contribute much higher over the next few years.

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The company’s product portfolio caters to demand from varied sections:

 Business: Briefcases, laptop bags, rolling totes for the business traveler.
 Casual: Backpacks, duffle bags and messenger bags as well as smaller handbags and satchels.
 Accessories: Includes a large number of travel accessories, including locks, straps, pillows, plug
adaptors, umbrellas and small leather goods such as wallets and card holders.

Performance of Product Categories

Product wise contribution to sales CY16


2%

10%

11% Travel
Business
Casual
14% Accessories
65% Others

o Samsonite was largely a luggage company from there they have reinvented themselves. The non-
luggage is now contributing to around 35% of the sales.

o Company had expressed their desire that they would like to see the non-travel component of their
business to become 50% by 2020-21.

o Shifting focus to non-travel segment is expected to pay rich dividends to the company as the
buying cycle is much shorter which makes the business far more resilient to any kind of external
shocks.

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Acquisitions by Samsonite International SA

YEAR BRAND AMOUNT SEGMENT


July 2012 High Sierra $110m Cash Casual Outdoor and sports segment

Aug 2012 Hartmann $35m Cash Premium Segment


April 2014 Lipault EUR 20m Cash Youthful, Vibrant and Chic French brand known for
functional and fashionable design
May 2014 Speck US$ 85m Cash Accessories like protection cases for Smartphone,
laptop, tablets and other personal electronic devices.
June 2014 Gregory US$84.1m Cash Outdoor Backpack brand.
Feb 2015 Rolling US$ 23 million Multi-brand platform providing footprint in leading
Luggage Airports of Europe and Asia Pacific Region
Sept 2015 Chic US$ 7.1m Cash Premium Segment for expanding retail store channel in
Accent Italy.
Aug 2016 Tumi US$1.8 billion Premium Segment
Cash
May 2017 eBags US$ 105m Cash Leading online retailer of bags and related accessories
for travel.

TUMI-SAMSONITE ACQUISITION:

Tumi: founded in 1975, Tumi is a leading global brand of premium business, travel and lifestyle
products and accessories. The Key product range of the company includes carry-on luggage, briefcases,
backpacks, and other travel accessories. The company boasts a wide geographical reach with 2000 POS
across 75 countries, majority of which are in US.

Rational for Acquisition:

o Acquisition of Tumi has presented Samsonite with some synergistic opportunities as both the
companies have strong footprints in different markets (Samsonite in Asian and European markets
& Tumi in North America). Thus, providing them with ample opportunities to cross sell their
products.
o Cost synergies and synergies in supply chain could result in margin and EBITDA expansion.
o Two-pronged growth strategy would enable the company to continue gaining market share and
establish itself as the de facto brand for travel luggage, bags and accessories.

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Brands Contribution to Sales

Brands Contribution to Sales (CY16)


70,00% 66,10%

60,00%

50,00%

40,00%

30,00%
18,90%
20,00%
9,80%
10,00% 4,80% 4,20%
2,90% 1,60% 1% 0,90% 0,80%
0,00%
Samsonite American Tumi Speck High Gregory Lipault Hartmann Kamiliant Others
Tourister Sierra

% of Sales

Other includes certain other brands owned by the Group, such as Saxoline, Xtrem and Secret, as well as third party brands sold
through the Rolling Luggage and Chic Accent retail stores.

Source: annual report


o The bulk of the company’s revenue (more than 60%) is contributed by Samsonite brand. They
have made conscious efforts to reduce their dependence on a single product. The company has
been on an acquisition spree to reduce their dependence on a single product. Over the next 5
years, company’s vision is to reduce Samsonite’s contribution to sales to 1/3 and other brands to
contribute 2/3 of its sales.

o Management believes that the acquired brands have lot more potential compared to their recent
performances and company is working towards achieving desired results from acquisitions
.
o In order to increase contribution of Tumi’s brands to sales, the company is planning to invest
more in advertisements and promotions which is currently at an abysmal 0.6% of sales.

o Management is positive that Tumi will not cannibalize Samsonite’s sales as customers adhere to
their trusted brands. Before Tumi’s acquisition, the company made an unsuccessful attempt to
snatch away Tumi’s market share because of existing brand loyalty of its customers.

o Kamiliant, which is a new entry price point brand, has been just recently introduced in quarter
four in Asia in 2016, more particularly in India, Middle East, Korea and China, is off to a good
start. Management thinks that it could become one of their major brands in next handful of years,
especially in emerging markets.

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Region wise Performance.

Region wise Sales Contribution(CY16)


Latin America;
4,60%

Europe; 21,90%

Asia; 36,60%

North America,
36.6%

Source: annual report


o Samsonite is extremely bullish of its growth prospects in Latin America. Latin America market
is expected to grow at a healthy rate of 25% over the next 5 years. They are implementing 3
pillars of growth strategy in Latin America similar to that they had implemented in Asia: -
1. Two category in travel Samsonite and American Tourister,
2. Business category and
3. More focus on retail.

o In Europe, all countries deliver positive growth in year CY2016 except France because of
terrorist attacks which was partly offset by Tumi brand. Europe is very important region for the
company and they are focusing more on the premium segment in this region by making their
presence felt in leading Airports and designer Retail stores.

o Company achieved significant growth in North America primarily because of addition of Tumi.
Tumi has strong shipments toe-commerce retailers and other key customers which has helped the
company to develop a robust distribution channel in North America.

o Asia faced some challenges in 2016 due to adverse retail conditions in Hong Kong, (including
Macau) and South Korea including the impact of lower Chinese tourist arrivals. In India also,
demonetization affected company’s sales.

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Channel-wise Performance:

Channel -wise The company wants to enhance Group’s direct


Sales Contribution(CY16) to consumer channel through e-commerce and
targeted expansion of brick and mortar retail
outlets.

The company has acquired eBags which


26% provides them a strong platform to significantly
Wholesales expand their online presence, not just in North
America but around the world.
Direct-to-
consumers Contribution of wholesale is falling
74% consistently since the acquisition of Tumi
because of its large number of direct to
consumer touch points.

Direct-to-consumer includes bricks-and-mortar retail and direct-to-consumer e-commerce. This channel was previously referred
to as retail , however, the Group believes direct-to-consumer more accurately reflects its evolving business.

Source: annual report

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Senior Executive Management Team:


Name Designation Experience
Ramesh Chief Executive Officer He has served as the Company’s Chief Executive Officer since
Tainwala and Executive Director October 1, 2014. Before his appointment as Chief Operating
Officer, he served as the Company’s President, Asia-Pacific
and Middle East. Mr. Tainwala has been the Chief Operating
Officer of the Group’s Indian operation since June 2000.

Kyle Francis Chief Financial Officer He has served as Chief Financial Officer since January 2009.
Gendreau and Executive Director Mr. Gendreau joined the Company in June 2007 as Vice
President of Corporate Finance and as Assistant Treasurer.

Lynne Berard President of North She began her career in 1993 with American Tourister, Inc.,
America which was acquired by the Group in 1993. Ms. Berard holds a
BS in Business Management from Providence College,
Providence, Rhode Island, USA

Suk Suh Boo President of South Mr. Suh has served in this role since January 2016.
Korea His previous positions with the Company include President,
Asia Pacific and Middle East, Executive Vice President, Asia
and General Manager, Korea.

Arne Borrey President of Europe Mr. Borrey previously worked for the Group for more than 20
years, and then worked at a division of Ascena Retail Inc,
Ethan Allen Global, Inc as Vice-President.

Subrata Dutta President of Asia Pacific Prior to joining the Group, Mr. Dutta worked as Business
and Middle East Head of Himalaya Herbal Healthcare, Vice President Sales
and Marketing of Wimco Limited - Swedish Match Group.

Frank Ma President of Greater Mr. Ma’s previous positions with the Company include
China General Manager of Samsonite China and Operations
Manager of Samsonite China. Prior to joining the Company,
Mr. Ma worked with CP Group, Cargill Corp. & Shandong
Chemical Design Institute.

Juan President of Latin Mr. Guzmán joined the Company in July 2007 when the
GuzmánMartínez America Group formed Samsonite Chile S.A. as a joint venture with
Mr. Guzmán, following the acquisition by the Group of the
Saxoline group of companies from Mr. Guzmán’s family. He
was promoted to his current role in May 2014.

Source: annual report

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Moat Analysis
Key point Details Conclusion
Management Samsonite has an experienced management team with a Wide Moat
proven track record. Ramesh Tainwala, CEO and executive
director is an industry veteran with almost two decades of
experience in luggage market. Company has done exceedingly
well under his able leadership.

Brand Samsonite enjoys high brand awareness in all major markets Wide Moat
for travel products. Samsonite International is one of the
world’s largest luggage company, with over 100 year of
heritage.

Distribution Company is having strong distribution network. Their Wide Moat


products are sold in more than 37000 points of sale in more
than 100 countries.

Significant Company is well positioned in rapidly growing market like Wide Moat
exposure to Asia specially China and India. They are market leader in
high growth Europe and North America which are developed market and
economies. are expecting growth from Latin America in coming years.

Technology The company’s R&D team has secured a patent on “Curv Wide Moat
and R&D Material” which is used to form a unique shell for its well-
received Cosmolite Collection.

Risks and concerns:


Forex Risk: Samsonite operates in more than 100 countries. Samsonite’s revenues are extremely
sensitive to foreign exchange rate risks. It manufactures most of its products in China and South East
Asia. Any fluctuation in respective local currencies can have a severe impact on the company’s
profitability.
Supply Chain Disruptions: Samsonite is heavily dependent on its suppliers as more than 80% of
Samsonite’s production is outsourced to third-party vendors. So, any delays in deliveries may cause
disruptions to its sales.
Regulatory Risk: Samsonite’s sales are subject to various governments’ import policies. For example,
their sale in India is impacted if the Indian Government imposed restrictions on imports. Any trade
protection or trade disputes are likely to affect its sales performance.
Unexpected Decline in Global Travel: Any downturn in the economy can significantly hamper the
company’s progress as majority of the company’s revenues accrue from travel luggage. Travelling is a
consumer discretionary business; falling disposable income may translate to lower purchase of luggage
thus severely lowering their revenues.

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Samsonite South Asia Pvt Ltd.

Samsonite International wanted to make a strong foothold in the rapidly growly Indian market. In order
to put their endeavor into practice, the company tried to woo VIP to enter into a joint venture. VIP
declined the offer. Determined to make their mark in India, Samsonite kept on looking for more options.
The breakthrough came in year 1997, when they entered into a partnership with Mr. Tainwala to
manufacture luggage for Samsonite in India.

Ramesh Tainwala, a postgraduate from BITS Pilani, began his career in 1981 with a plastic trading
company. Five years later, he quit his job to start his own manufacturing unit that supplied plastic sheets
to VIP Industries, which moulded them into suitcases.

Samsonite South Asia Pvt ltd. has a market share of 35% in organized segment in India. Samsonite has
been successful in taking the market share from veteran player VIP Industries which used to hold 80%
market share in 1980s. Samsonite’s relentless pursuit of high quality products forced other players in the
industry to focus more on quality and innovation.

Product Categories:

Brand Year Segment


Samsonite 1997 Premium segment
American Tourister 2007 Mass segment
Kamiliant 2016 Value segment
High Sierra 2014 Backpacks

In India, Samsonite wanted to extend its price points and decided to reposition American Tourister as an
affordable brand and launch it here in 2007.That was the turning point of the company. American
Tourister contribution to sales is highest to Indian revenues because of its high brand recall. Samsonite
is also a market leader in Premium segment and gives tough fight to VIP in mass segment.

While Samsonite has been able to retain its hold in the premium and mid-range luggage segments, it has
been unable to crack the value segment. Samsonite introduced its first offering in value segment- brand
Kamiliant in India in March 2016. Through Kamiliant, Samsonite offers soft and hard luggage in
different sizes and colors which primarily cater to the sub Rs.5000 segment. In India, the company has
just launched High Sierra, a back-to-school backpack which they acquired in 2012.

Distribution: Retail outlets in major tier 2 airports (focus on premium brands) and 2000 touch points
which includes 175 retail stores. Most of the company owned stores are franchise owned, which
demonstrates brand pull of company.

Company also has wide presence in hypermarkets and different e-commerce platforms. Considering
Samsonite as a brand, they prefer EBOs more so that they can control on selling environment.

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Samsonite International SA - Common Size P&L Account


Particulars CY11 CY12 CY13 CY14 CY15 CY16
Cost Of Goods Sold 45.25% 46.32% 46.59% 47.09% 47.42% 45.88%
Gross Profit 54.75% 53.68% 53.41% 52.91% 52.58% 54.12%
Selling General & Admin Expenses, Total 41.36% 39.78% 39.40% 39.23% 39.15% 40.57%
Other Operating Expenses 0.02% 0.25% 0.15% 0.37% 0.37% 0.12%
Operating Income 13.41% 13.64% 13.86% 13.31% 13.06% 13.43%
Net Interest Expense -4.51% -0.96% -0.10% -0.14% -0.09% -1.51%
EBT 8.90% 12.68% 13.32% 12.59% 12.33% 11.35%
Income Tax Expense -2.28% -3.28% 3.58% 3.28% 3.04% -0.08%
Net Income 6.62% 9.40% 8.64% 7.93% 8.12% 9.10%
Source: Bloomberg

o Gross profit margins have been stable and company has consistently maintained above 50
percent margins which indicates their ability to pass on the rising costs without losing market
share.

o Distribution expense and marketing expense has increased over the years in order to achieve
expected performance figures from the acquired brands.

o Tumi acquisition has helped company in increasing operating income and net profit and still
there is further scope for expansion in margins once integration plans of company are completed.

o Company has been able to grow Revenue at a CAGR of 12.42% from last 6 years.

Net Revenue
3000 2811

2351 2433
2500
2038
2000 1772
1565
1500

1000

500

0
CY11 CY12 CY13 CY14 CY15 CY16

Source: Bloomberg

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Balance Sheet:
o Samsonite International has equity of 14.11 US million dollars divided in 1.411B. The net worth
stands at1.467B dollars as on CY16.

o Company has a total debt of 1.85B and debt/equity is 1.278. .Leveraged balance sheet of
company is because of Tumi acquisition. Tumi acquisition was funded by newly committed
senior credit facility consisting of term loans totaling US$1,925 million and a new revolving
credit facility of US$500 million.

CY10 CY11 CY12 CY13 CY14 CY15 CY16


Receivable Days 44 40 44 44 44 43 42
Inventory Days 155 122 118 115 106 111 109
Payable Days 157 110 114 108 100 109 100
Net Working Capital Days 42 52 48 51 50 45 51
Source: Company Presentation

o Receivables days are stable and expected to decrease over the coming years as the company has
been focusing more on direct to consumer segment which has slightly lower receivables days
because of retail sales.

o Inventory days are decreasing but because Tumi has longer inventory turns which impacted
inventory slightly.

o Samsonite has been provided with best terms from Chinese vendors compare to VIP and Safari
Industries because of its scale. Payable days are high compared to its peers; which helps
company in reducing net working capital days.

o The ROE and ROCE are healthy for CY16 ROE is 18.59% and ROCE is 10.19%.

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VALUATIONS:-
o At USD 4.04 , Samsonite International SA trades at a:

Price-earnings ratio 22.3 Price to sales 14.77


Price to book value 28.63 EV/EBITDA 17.51
Source: Bloomberg
Expected Return model:-

Source: annual report


Assumptions:
1. Taking optimistic scenario that EPS will grow at a CAGR of 15% in next 10 years.
2. Using an exit multiple of 20x.

Calculations
Estimated CAGR in EPS over next 10 years 15%
Estimated EPS after 10 years 1
Current P/E (x) 22.3
Exit P/E in the 10th year from now (x, Estimated) 20.0
Estimated Stock Price (10th year from now) 15
CMP (Rs) 4
Estimated CAGR Return in 10 Years 13.7%

o After taking even the optimistic scenario, if we invest today at a price of USD 4.04 for ten year
horizon, we will earn a CAGR of 13.7%.
o It is a decent return for a long term horizon but it is certainly not a grossly undervalued valued
stock.
o Being conservative, when we take a 10% EPS growth rate for 10 years, estimated CAGR Return
is 8.7% almost equal to 10 year Govt. Bond yield.

Conclusion: - Samsonite International SA is world’s largest luggage company and considering the
growth expected in luggage segment in coming years around the world, it is certainly going to the one
reaping maximum benefit.

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Disclaimer: I don’t have any position in either VIP Industries, Safari and Samsonite International. This
is not a recommendation to Buy, Sell or Hold. I am not a SEBI registered analyst. I wrote this document
to organize my thoughts and deepen my understanding about the companies and industry,
Author: Divya Chawla
Twitter: @divyachawla0093
Date: 15th August’17

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