Vaibhav Global Ltd Research Report By Nirmal Bang

Vaibhav Global Ltd (VGL) shows early signs of recovery in Q2FY17 which got further reiterated in Q3FY17 results wherein the company showed volume growth in both TV as well as Web sales. As we have keep highlighting that the company’s business model involves high fixed cost (cost of channel, employees, inventory etc) hence the leverage of higher growth directly translates to EBITDA level which is evident from the improvement seen in margins during current quarter. EBITDA margins for Q3FY17 improved to 8.6% vs 4.6%/6.5% in Q2FY17/Q3FY16, despite steady gross margins. Net sales grew by 14.7% to Rs 406 cr from Rs 354 cr in Q3FY16. The company has undertaken various steps like including introduction of Budget pay (EMI), allowed return of goods, launch of mobile app, to streamline its business and to become a level field player with the competition. We believe the company has now completed its transition phase and poised for healthy volume growth and strong margins. Management has maintained its low double digit volume growth for Q4FY17 as well which we believe will directly translate to profitability.

Key highlights

– TV sales witnessed volume growth of 15% vs 5% seen in Q2FY17. Web sales saw positive volume growth of 10% after eight quarters of decline.

– Gross margins were marginally lower sequentially to 58.7% from 59.5% in Q2FY17. However it was at par with Q3FY16 levels of 60.5% adjusting for 2% currency impact due to Brexit. For our projections we have forecasted similar level gross margins.

– The company has launched mobile app in US and will soon launch mobile app for UK market too.

– The company undertakes auction during Christmas time which benefits the margins in Q3. Hence margins see 2-3% decline sequentially in Q4. We believe the trend to continue however we are not expecting much decline this time as the base is low.

– During auction, the company doesn’t undertake returns which explain the low return ratio during the quarter at 14% vs average rate of 16-18%. We expect return ratios to come to normal levels from Q4 onwards

Valuations and Recommendations

We continue to like the asset light business model of VGL and we believe that company has reached an inflection point. We expect the company to report muted volumes in FY17 however show improvement from FY18. Due to fixed cost heavy business model, we expect EBITDA margins to increase higher. Our first target of Rs 353 (given in 26 Dec 16 company update) has been achieved. VGL is trading at a PE of 12.8x on our FY19E earnings which we believe gives an attractive opportunity. We recommend HOLD on the stock with a target price of Rs 553 (15x FY19E).