Safari Industries Research Report By Angel Broking

It's time for #MidcapMania & @Nigel__DSouza is here to tell you why he's picked Safari Industries today https://t.co/JJMfXS7QBD

— CNBC-TV18 (@CNBCTV18Live) April 16, 2018

Safari Industries Ltd (Safari ) is the third largest branded player in the Indian luggage industry. Post the management change in 2012, it has witnessed complete restructuring in business and product portfolio. This restructuring has helped it in posting a CAGR of 42% in revenue and 46% in PAT over 2012-17. It has also now captured ~14% market share in a ~`2600 cr branded luggage market.

SAFARI INDUSTRIES (INDIA)
*Has 10% of D Organised Luggage mkt
*Sales have moved from 60cr to 360cr in past 5 yrs
*Headed by Sudhir Jatia who has mastered D Luggage industry
*Trades at lofty valuations but big potential#midcapmania https://t.co/EVZ5LY4sab

— Nigel D'Souza (@Nigel__DSouza) April 16, 2018

Favourable Industry dynamics for organized players post GST:

The Indian luggage industry is valued at `9000cr+ and is largely dominated by the unorganized sector. The top three branded players namely- VIP Industries, Samsonite and Safari forms only ~28% of this market. Owing to improving economy and travel, the luggage industry has posted a 13%+ CAGR in the past decade and is expected to maintain this momentum for next few years. With GST implementation in 2017, the new cost dynamics has led to industry shifting towards organized players.

Alpha Moguls | Sumeet Nagar on Safari Industries & why size of the product leads to the top 3 companies dominating the luggage industry in every country worldwide. @_nirajshah https://t.co/SdBeHQMQL3 pic.twitter.com/f9cwyaLzU9

— BloombergQuint (@BloombergQuint) March 10, 2018

On a strong growth trajectory since 2012:

Post the management change in 2012, Safari has grown its revenue by 6x in the last 7 years. This has been achieved by foraying in many new categories like back pack, school bags ( via acquisition of Genius and Genie) and improvement in distribution networks. Also, it adopted product rationalization & strategy realignment where non performing SKUs were eliminated. Currently, its product are available in major 25+ cities via 3,500+ outlets.

Margins have doubled and likely to stay at 9%+ level:

Its margins have more than doubled from 4.1% in FY2014 to 9.1% in M9FY2018, driven by launch of new product categories and business restructuring. This was also led by better negotiation with Chinese suppliers (with increasing scale of Safari’s operations) and relatively stable ` exchange rate. We expect it to maintain 9%+ margins from FY2018 onwards led by regular price hikes, shift towards organised player and favourable industry dynamics.

Outlook and Valuation:

We expect its revenue to grow by 23% CAGR over FY2017-20E on the back of growth in its recently introduced new products. We expect its earnings to grow by ~59% CAGR, owing to stable operating margins and its asset light model. Safari currently trades at a P/E of 40x FY2019E and 30x its FY2020E EPS which looks attractive looking at its strong brand play story emerging in the luggage industry. We initiate coverage on the stock with a Buy recommendation and Target Price of `650 (36x FY2020E EPS), indicating an upside of 18%.

BULK DEAL ALERT:
Safari Industries (India) Ltd . Deal Price Rs. 520
Buyer:
MALABAR INDIA FUND LIMITED – 589,218 shares
ROHINTON SCREWVALA – 279,001 shares
Seller:
TANO INDIA PVT EQUITY FD II FDI – TANO – 984,000 shares

— Rohan Gala (@RohanG90) February 14, 2018

Robust Q4FY2018 results

– For Q4FY2018, Safari Industries (Safari ) posted a growth of 26%/150% yoy growth in revenue/ PAT amid ~543 bps yoy expansion in operating margin expansion. The company is gaining market share especially from the unorganized players and seeing good demand in its backpacks and new categories which is driving such strong growth in its financials.

Key takeaways from the management meet

-Safari expects to double its revenue in next 2-2.5 years (~2x of industry growth rate) by gaining market share in the value retailing segment and better product mix. It is also improving its distribution network across all channels.

-It has set up a 30 designers team in China which helps in procuring latest designs in luggage from China. -Operating leverage would boost its overall margins in coming years while 3-6% price hike by Chinese vendors may put some short-term pressure amid falling rupee rate, unless price hike is taken.

-It provides free replacement warranty up to 10 years for any manufacturing defect which is garnering very good response from dealers and customers.

-It wants to build up sizable volume base before foraying into premium category.

-Its Indian capacities (~20-25% of revenue) is increased by 50% in FY2018 and would further be increased due to massive demand for Poly Carbonate products.

-It sold ~ 3.1 mn pieces in FY2018 and expects to cross 4 mn in FY2019.

Outlook and Valuation:

We came convinced about its long term growth story as the company is in a sweet spot in the fast growing luggage industry. We are expecting a CAGR of ~25%/40% in revenue/ earnings over FY18-20E.

The stock has given 15% return since our initiation in April.

It is currently trading at 33x FY2020 earnings which still looks attractive in view of its strong growth trajectory. Hence, we recommend BUY with a target price of `720 (38x FY2020E EPS).