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Strong revenue recovery for VIP Industries as domestic travel pushes demand for luggage.

News: On the back of improved travel and tourism scenario in India and improving domestic airline passenger traffic, VIP industries witnessed a healthy recovery in Q2FY22 with company reporting its highest revenues in the last seven quarters.  On a favourable base, revenue grew 221% YoY to Rs.330.6 crore (80% of pre-Covid levels). Gross margins for the quarter improved 840 bps YoY to 47.1% but declined 380 bps QoQ on account of sharp inflation on China imports for both RM and finished goods. On the back of significant cost saving measures, the company reported healthy EBITDA margin of 12.1% with absolute EBITDA of Rs.41.8 crore (vs. loss of Rs.22 crore in Q2FY21).

Views: Gradual reopening of economy and higher push towards domestic travel had perked up demand for luggage during Q2FY22. The company expects demand to further accelerate in Q3FY22 on account of healthy festive season buying. However, rising inflation on input cost and abnormal high levels of ocean freight continues to remain the major hindrance for the company, going ahead.  It implemented close to ~ Rs.171 crore fixed cost savings in FY21 of which it believes ~50% is expected to be sustainable in FY22E. It is well placed on the liquidity position as it continues to be net cash positive. In a normalised scenario, VIP expects to source most of its soft luggage requirements from its Bangladesh facility, significantly reducing dependence on China going forward (for finished goods).