Vaibhav Global Ltd’s profitability got impacted during FY07 to FY10 as the company incurred losses on account of acquisitions at higher value and launch of TV Channels. This was further impacted by the global economic turmoil, resulting in global economic slowdown/ recession. To combat the crisis, the company downsized its operation and changed its business model to full year discount retailing of artificial jewellery and fashion accessories through TV channel in US and UK. The discount model has differentiated VGL from giant global players like QVC and HSN and brought its recognition in the market. VGL is the only company operating in full year discount model. This has helped company to turnaround its operation in last two years.
Retailing through home TV shopping business model is highly scalable with limited investment. Company can expand customer base by reaching additional home with adding up more cable/satellite service provider. Company can mine the existing customer with different products and can get higher share of its customer’s wallet. Apart from this the investment required in the expansion of business is also limited as company does not need much capex on account of outsourcing of product and smaller working capital cycle. (Source: Nirmal Bang’s Initiating coverage report dated 17.01.2013).
In Q1FY15, Vaibhav Global reported sales growth of 20.3% yoy to Rs 301 cr, on account of sluggish TV Sales, which posted volume growth of 3.3% (vs 24.5% in Q4FY14 and 25.1% in Q1FY14). Sales was down because of (1) Change in call center from in-house to third party (2) Build up of inventory at studio – as indicated by the company before the start of the quarter (3) Installation of new software. EBITDA has declined 24.5% yoy to Rs 26.3 cr. Consequently margins have also come down to 8.7% as against 13.9% in Q1FY14.
Nirmal Bang have advised that Q1 is a temporary blip and that growth is expected to be normalized from Q3 onwards (Q2 is seasonally weak quarter for the company). (Source: Nirmal Bang’s update report dated 01.08.2014).
This has been confirmed by Vaibhav Global’s management in the conference call where it was said:
“Operational performance was influenced by some teething issues during the transition to an outsource call center and also due to inventory compression in previous quarter.
The television volumes were specially impacted because of the call center movement. We also installed a new software in our US operation. There is operating software for all our TV auctions for our scheduling for customer service which was a bit disruptive as it was the change of operating software after 6 years of original software.
Also in the inventory compression, as you would see in last quarter, we had continued to keep the inventory at Rs. 200 crore, so while our volume grew substantially and we felt that we went a bit too far in inventory compression that we are building up now. So because of these reasons the volume did not grow as we expected. But we expect in Q3 FY15 and Q4 FY15; the volume would grow over last year as per our trajectory.
We have successfully overcome most of these issues and are confident of maintaining our growth trajectory during the course of the year. Recently we have undertaken several initiatives; like enhancing our manufacturing and sourcing capabilities, expanding our US facility and moving to a new indicative state of the art facility in UK. We also expanded our management team with multiple senior level appointments and recently implemented and upgraded SAP based ERP platform for improved customer experience.”
Nirmal Bang had earlier issued an update where it said:
“Q1 result will be impacted on account of lower volume and higher carriage cost of channel. volume is lower on account of company has outsourced Call center during the quarter and transition impacted volume and company inventory level at studio level reduced sharply in Q4. Both the things has corrected and Q2 will show normal growth. Higher carriage cost is for increasing the channel reach which is more of an Investment. We feel lower volume in Q1 will be made up in next 3 qtr and maintain of EPS expectation of Rs.45 for FY15 and Rs.58 for FY16. We recommend to Hold the stock and Buy on decline with Target price of Rs.925.”
Axis Capital has issued a report dated 21.08.2014 in which it says:
(i) The potential of Vaibhav Global – a TV shopping and e-commerce retailer of fashion jewelry in the US and UK – lies in simple business economics … profitability led by significant volume ramp up and operating leverage
(ii) Customer base can ramp up ~10x: A combination of product development competency (VGL has 65,000 SKUs of fashion jewelry and creates 100 new SKUs every day) and attractive price point (~USD 20, making it non-discretionary purchase) are necessary and sufficient conditions for significant ramp up in customer base
(iii) Icing on the cake – no significant competition who are primarily focused on deep discount fashion jewelry
(iv) Significant operating leverage as 35% of cost is fixed: Increasing penetration will trigger operating leverage (expect an average improvement of 100 bps/ year from FY15 onwards)
(v) Vision 2020: We estimate VGL to post 20%/ 30% revenue/ PAT CAGR with sustainable RoE of ~30%. Initiate coverage with BUY and TP of Rs 1,140 (27x FY16E EPS of Rs 42); implies 34% upside from CMP of Rs 850”
Investment by major investors:
Nalanda Capital holds 41,10,600 shares constituting 12.74% of the equity. Mathews India Fund has bought 500,000 shares constituting 1.55% of the equity in the Q1FY15 quarter. Panyaek Jainkijmanee holds 4,21,137 shares constituting 1.31% of the equity.
Disclosure + Disclaimer: I do not have Vaibhav Global in my portfolio but may buy it either at current price or on correction. This is not a recommendation to buy or sell the stock. It is only a presentation of publicly available material