The company has aggressive growth ambitions and envisages to grow at 2x the industry rate and double its revenues over the next 2 years.
The luggage companies appear to be facing some unexpected headwinds with the currency nosediving in recent times. The June to September period was especially challenging with twin headwinds of raw material price rise and a weaker currency. This was evident in the earnings of Safari Industries. An increase in import duty was also effected that stands to impact margins as the entire soft luggage is imported.
While these short-term factors might impact earnings in the near term, we see structural changes in the form of secular demand for luggage as well as the shift from the unorganised to the organised sector post GST. Hence, any weakness is an opportunity to accumulate the stock that has a strong growth outlook.
Safari witnessed strong traction in sales (a growth of 44 percent) in Q2 FY19, although it didn't translate into operating profit due to softness in operating margin.
There was a significant reduction in gross margin year on year on account of raw material price increase and rupee depreciation. The currency depreciated by close to 5.6 percent in the quarter and 16 percent since the beginning of the calendar.
While the EBIDTA margin (earnings before interest depreciation and tax) at 9 percent was maintained at the year-ago quarter’s levels, it declined significantly from previous quarter’s peak of 13.9 percent.
The weakness could just be the right opportunity
Safari is the third-largest player in the organised luggage market and has close to 10 percent market share. In addition to the macro tailwinds, the company has a very exciting road ahead as the unorganised players are getting increasingly marginalised post GST. especially in the value segment which is the forte of this company.
In terms of price hierarchy, Safari’s products fall at the bottom end of the pyramid as it more of a value for money brand. Safari’s offerings compete with American Tourister (AT) of Samsonite and Skybags of VIP. On an average, Safari’s products are at an 8 percent discount to AT and 4 percent discount to Skybags. Thus, Safari is more into a mass category and thus is a preferred choice for customer who wants to upgrade after reduction in price gap between organized and unorganized players post implementation of GST.
Safari’s products are tailored for all customer categories suiting all possible occasions but is currently dominated by soft luggage (close to 77 percent). Safari has realigned the entire product portfolio by eliminating non-performing SKUs. It has also entered into newer categories like polycarbonate luggage, laptop bags, school bags and back packs. Within the soft luggage category, transition towards 4 wheels and rolling duffels will drive growth. In the hard luggage category, there is clear shift from polypropylene to polycarbonate.
The soft luggage products are imported from China while the hard luggage products are manufactured domestically at its plant located in Halol, Gujarat. Safari has increased its hard luggage manufacturing capacity at Halol. To de-risk the business, the company is exploring the possibility to tap some local vendors to manufacture back packs in order to reduce dependency on China.
Safari has more than 100+ SKUs and wide distribution network with 3,000 multi brand outlets, 750 modern trade and 2,200 canteen store departments across India.
The company has aggressive growth ambitions and envisages to grow at 2x the industry rate and double its revenues over the next 2 years. Apart from changes instituted by the management, structural tailwind coming in from gain in market share post introduction of GST, emergence of new product categories and strong demand emanating for back packs is likely to drive growth.
We expect earnings CAGR (compounded annual growth rate) of 54 percent between FY18 and FY20e.
Why should investors still look at the company?
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. Domestic air passenger traffic has been consistently growing at a healthy clip.
Modern retailing and new fashion trends are also expected to drive the sale of casual bags and travel luggage bags category. Back pack is a fast growing category and has a shorter replacement cycle and has huge potential to grow.
In addition, luggage has also become an important part of the wedding trousseau. The shift from the unorganised (close to 60 percent of the market) to the organised players (dominated by three major players) is a trend that is here to stay.
Safari trades at 33.1X FY20e earnings and the current weak phase provides a good accumulation opportunity.
