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VIP Industries: Skirting many corners - Outside View by Luke Verghese

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VIP Industries: Skirting many corners
Nov 22, 2011

The management of VIP Industries should make an attempt to present a more palatable annual report and accounts.

A lesson in adroitness

This company is a lesson in adroitness. Its sales are derived from two primary segments-luggage and accessories, and furniture. But its principal focus is the luggage segment. The luggage industry (hard luggage and soft luggage) is characterised by overkill, with competition from both the organised and unorganised sector. Consequently, the big mammas have to constantly strive for innovation in an effort to stay ahead of the pack. Such is the intense competition that the unsaid practise among the organised players is to offer big discounts on the listed price to garner sales. This is in addition to the fact that all the players are constantly seeking to introduce new 'brands' to try and get the better of the competition. Marketing of new brands in turn calls for more advertising spends. For some time now the mantra has been to import finished soft luggage from China in an effort to contain costs. The bigger and more insurmountable issue facing the hard luggage industry is that it is petro based and thus the manufacturers have no control over raw material input costs.

Financial performance details

Whatever, the company was able to rustle up a gross turnover including export incentives of Rs 7.5 bn against Rs 6.2 bn previously. That is a 21% increase over that of the preceding year. This was on the back of a production of 3.9 million tonnes of plastic moulded luggage and a massive 63% increase in the value of purchase of finished goods which rocketed to Rs 2.1 bn from Rs 1.3 bn previously. The manner in which the company has shown the production of plastic luggage is intriguing to say the least. It possesses a licensed capacity to make 34,000 tonnes of plastic goods, and has an installed capacity to produce 15,000 tonnes of the same. But the production of plastic moulded goods during the year as stated earlier was 3.9 million tonnes. At least this is my understanding of the figures which have been published in the annual report. How the company was able to produce such a gargantuan quantity of plastic moulded goods on such a low manufacturing base is more than a tale of mystery. (Besides, what does this production figure translate into in volume terms?) Moreover, the production of plastic goods in both the years was of an identical quantity. It also has a capacity to manufacture flexible luggage. But this capacity remains idle, apparently given the cost considerations. For the matter of record the company makes do with six manufacturing facilities, five of which are located in Maharashtra. One wonders how many of these production facilities are still humming.

Some intriguing asides

There are other intriguing asides to this company. As one of the foot notes to the accounts states, 'the Balances of sundry creditors, sundry debtors, loans and advances are subject to confirmation and consequential adjustment if any'. Now this note is not as innocuous as it reads. Confirmation of year-end balance out-standings on revenue and capital account are one of the more important requirements of any audit, and which external auditors are expected to give sanctity to. But this company would appear to have casually swept it under the table. Another note states that the promoters had inadvertently omitted to disclose their correct promoter group share holding in the company 'due to various amalgamations' that had taken place. The present group holding is a shade under 52%.

The company has been exempted from the disclosure of the breakup of the volume and value of production and sale of what it doles out in the market. (So a more detailed analysis of what it makes and sells is well nigh not possible). The disclosure exemption was possibly because of the level of export sales that it is able to drum up during the year. Export sales amounted to Rs 749 m or 10% of all rupees sales. The point is also that the outflow of forex at Rs 1.9 bn was substantially higher than the inflow of forex at Rs 756 m. In other words the company was out of pocket on the forex front. But, apparently, if export sales exceed a particular quantum then the disclosure exemption kicks in or some such. Such then are the vagaries of our disclosure laws.

The expenditure side of the equation

Besides the cost of material inputs, the principal items of expenditure in addition to salaries, were discounts and rebates at Rs 544 m (Rs 495 m), freight and handling at Rs 377 m (Rs 324 m) advertising and brand marketing at Rs 367 m (Rs 293 m) and provision for doubtful debts at Rs 275 m (Rs 1.7 m).Helping to give a boost to the bottom-line was interest outgo on debt which dipped to Rs 30 m from Rs 80 m previously. (The interest expense is net of the interest receipt of Rs 11 m against Rs 16 m previously). The reduction in interest expenditure or the quantum of interest expenditure for that matter does not on the face of it make for much sense. The year-end borrowings at Rs 1.06 bn, was higher than the previous year end figure of Rs 873 m. On a 'rough' estimate the gross interest payout would work out to 4% against 11% in the preceding year. On the face of it this is a very 'commendable' exercise. The low percentage interest payout has also to be seen in the light of the adverse changes in the working capital figures during the year. The accretion to inventories and trade receivables amounted to a neat Rs 1.14 bn, which had to be funded. Besides, it is unlikely to have got much leverage on the import of finished goods which accelerated by more than 60% over the preceding year to Rs 2.1 bn. Further, there was also capital expenditure of Rs 194 m. What then was the mantra in its ability to control of interest payout?

The company could also well have made an effort to control the level of borrowings if only it could exercise better working capital management. The net current assets of Rs 2.2 bn at year end appear excessive relative to the gross current assets of Rs 3.2 bn at year end. The two big ticket items in the current assets portfolio are inventories and trade debtors. One may not have much control over the management of trade debtors (roughly averaging 19% of sales against 15% previously) given the business that the company is in, but inventory control could have been better harnessed.

As stated earlier there was also a large provision for bad and doubtful debts. This relates to the working of its wholly owned subsidiary Carlton Travel Goods which hawks its luggage ware in Europe under the Carlton brand. By the company's own admission it has been a disastrous exercise so far with so sign that the tide is turning in its favour. But the company intends to persevere by changing its marketing strategy or so one is informed. The company informs 'that then new initiatives will not only grow sales and ensure strong presence of brand Carlton, but will stem any further losses and minimise cross currency exposures.'

The subsidiary capers

In 2010-11 the parent billed the subsidiary Rs 56 m for goods to be sold. The subsidiary on its part toted up sales of Rs 234 m according to the brief statement of financials furnished by the subsidiary. (From the looks of it Carlton is also apparently sourcing materials from other sources for sale). And, it apparently recorded a profit of Rs 250 m on this exercise. If so this is definitely a feat to be featured in the Guinness Book of World records. (In the preceding year it produced revenues of Rs 467 m and a loss before tax of Rs 16.6 m). The point is that it is simply not possible for the pre-tax profit to be more than the gross revenues by any yardstick. And, the directors' report says that the company is actually haemorrhaging since 2008-09. It even possesses a capital base of Rs 14.3 m and positive reserves of RS 25.8 m. If the company's net worth is also positive why then is the parent writing of its trade debtor dues from the sibling, and providing for the diminution in the value of its investment in its subsidiary to the extent of Rs 17 m? Obviously there appears to be a severe goof up somewhere. Even the auditors appear to have gotten round the problem. In the audit report of the consolidated statements they state that Carlton Travel Goods has total assets of Rs 21 m, and total revenues of RS 234 m. The report is silent on the profit/loss aspect. That's not all. Amazingly enough, in the midst of this mishmash, the parent was able to retrieve a loan of Rs 157 m that it had advanced to a subsidiary - in all possibility the company is referring to its subsidiary Carlton.

Carlton Travel Goods is one of the two wholly owned subsidiaries that it possesses. The investment of the parent in Carlton is valued at Rs 16.5 m at a forex exchange rate of Rs 82.8 per share (face value of GBP 1). The capital base of Carlton as stated earlier is Rs 14.3 m at an exchange rate of Rs 71.7 per share. Probably both figures are right. The other investment is in Blow Plast Retail Ltd valued at a half a million bucks. But this company appears to be a non entity or some such. Then there is a joint venture going by the name of VIP Nitol Ltd with investments valued at Rs 21 m. But this too is supposedly terminally ill and is on the auction block.

Its investment portfolio

The parent has investments in quoted companies too. The book value of its quoted investments is Rs 164 m. The book value of all its investments cumulatively tote up to Rs 202 m. The company has made a provision for diminution in the value of its investments to the tune of Rs 198 m. That is to say the net book value of its investments after provisioning is a mere Rs 3.5 m. But the foot note to the investment schedule has a whacko revelation. It says that the market value of its quoted investments at year end is Rs 172 m. Now, the book value of its quoted investments at year end as stated earlier is Rs 164 m, on which it has provided a substantial diminution in value. In this context, which quoted investment does it have which has a market value of Rs 173 m please? Adding to the mystery is the point that VIP Industries also received dividends to the tune of Rs 6,000 (that's right six thousand bucks if you please) from its long term non-trade investments. What type of a mockable dividend return is this please?

All in all this is not a company which induces much of a comfort factor in an investor.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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3 Responses to "VIP Industries: Skirting many corners"

CDGuy

Dec 16, 2011

Hi,
I think the # 3853 given against the production figure in the annual report-2011 is "numbers" and not "tonnes". This will be clear if you see the annual report for 2010 where they have clearly stated that 3853 is a number and not tonne.
So the company has a licensed capacity of 34000 tonnes, installed capacity of 15000 tonnes but produced only 3853number of moulded plastic goods.So there is no tale of mystery!. Now it is for us to do the math as to how many tonnes this will translate into.
This is what i understood, but correct me if im wrong.

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Srinivasan M

Nov 26, 2011

Dear Mr.Luke Varghese,

Thanks for your esteemed views. This stock was a darling among institutional investors(till a month back) and our own investor guru Rakesh Jhunjunwala. I believe the stock gathered popularity and confidence of small retail investors on Rakesh Jhunjunwala factor alone. But to see some starting revelations in your analysis like (i)production of more than installed capacity, (ii) unconfirmed or unaudited sundry debtors, creditors, loans on the books (iii) profit before tax more than gross revenues in its subsidiary (iv)discrepancy in book value of quoted investments goes on to say a lot about the analytic capabilities of institutional investors. To be fair RJ got on to it long before any body thought of this investment and made money.In fact I was thinking of VIP Industries as an investment, but heard corporate governance issues and backed off. Thanks for your as usual top notch analysis.

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Maulik Suthar

Nov 22, 2011

Mr. Verghese,..what are your views on current valuation of 3M India?

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