Vaibhav Global Ltd

Market Capitalization: 6,300 Cr	Current Price:  387 (26 Oct 2020)
Stock P/E: 30	Debt to equity: 0.09
Sales Growth (3Yrs): 11.3%	Profit Growth (3Yrs): 43%
ROCE: 49%	ROE: 26.9%
Promoter holding: 58.3%	Cash Cycle: 69 days
Asset Turnover: 2.23	Net Profit Margin: 9.9%

Overview of the Company

Vaibhav Global Limited (VGL) was established in 1980 by Mr. Sunil Agarwal. The Company is a global retailer of fashion jewellery, accessories, and lifestyle products. The Company owns and operates the Liquidation Channel in the United States, and Jewellery Channel in the United Kingdom. It operates through wholesale business-as a downstream manufacturing facility segment. The Company offers a range of jewellery and non-jewellery products. The Company manufactures and exports various kinds of jewellery, coloured gems stones, precious and semi-precious stones. It offers fashion jewellery, including bracelets, bangles, earrings, and studded jewellery. Its fashion accessories and lifestyle products include watches, handbags, scarves, home decor, bed linen, pillow covers and towels. Its products are marketed through home shopping TV, e-commerce platforms, marketplaces, and social media. VGL’s Manufacturing locations are in India and China and sources materials from around 22 countries around the world.

Business Analysis

Transforming into a Butterfly

VGL started off as a B2B player and has transformed to now generate 95% of its revenues from retail buyers as of today.

From TV to Web-based revenues – TV Revenues are at risk due to cord cutting owing to free/cheaper streaming alternatives, high quality content available on streaming and the rising cost of Pay TV subscription. Hence, it is reassuring to see the sharp increase in web sales share over the last few years.

TV Revenue can witness steady growth – Despite challenges, TV revenues is witnessing healthy growth. Although TV customers are reducing, it is still an exceptionally large market and VGL’s average revenue from each viewer is only $3 in comparison to other competitors like QVC who command $30 plus per viewer. Web revenues is witnessing healthy growth thus giving confidence VGL can grow its revenues at 15-20% on consolidated basis despite sagging TV revenues.

Diversifying into Non-Jewellery Segment – VGL was historically termed as a Jewellery retailer. However, the company now has 36% of its revenues coming Non-jewellery products like fashion accessories, essential products, lifestyle products like watches, handbags, scarves, home decor, bed linen, pillow covers and towels.

Budget Pay Option Attracting Customers – Offering Flexible payment options to attract customers. This helps to attract customers and retain loyalty.

Vertically Integrated E-Commerce Player – VGL has transformed its business model into a completely vertically integrated e-commerce player engaged in sourcing, manufacturing, merchandising, showcasing, content creation, digital and TV Platform ownership along with delivery fulfilment responsibility.

Omni-Channel Presence and Expanded Product Portfolio

VGL has an omni-channel presence with home shopping TV, OTT Platforms, self-operated e-commerce platforms, mobile apps, marketplaces through amazon and ebay as well as tapping into social media through Instagram and Facebook.

Increasing omni-channel presence can expand its client base and tremendously increase the revenue per active customer. VGL is targeting to augment its customer acquisition through Influencer and Loyalty programs. It is looking to onboard influencers with 2-30k followers by offering 5% commission on sales generated through their referrals.

VGL is looking to increase the unique customer base through compelling combination of product, price, and content. It has enriched its product portfolio with designs from different ethnicities, cultures, and countries in line with US and UK consumer preferences. VGL has a strong product development team that keeps adding 150 products on daily basis and churns out low selling products through auctions and clearance sales. The company is looking to add new products in the segments of kitchen products, shoes, and other private label brands.

VGL also ensures it markets its products using engrossing content presented by familiar hosts translating into strong consumer pull. The Covid-19 pandemic has resulted in increased demand for essential items products and enhanced e-commerce adoption resulting in customer base expanding by about 23% YoY.

VGL is looking to retain its customer base using various features like competent call centre support, convenience features like Budget Pay and Easy Returns, lower average selling price items, and expanded product portfolio.

Significant Investments to Become a Full-Service Ecommerce Player

VGL has invested in digitization, including investments in Artificial Intelligence which enable it to mine customer preference, evolve its merchandise, strengthen inventory turnover, and improve its financial efficiency.

VGL introduced ‘Innov8 programme’ that encouraged employees to participate in process and product improvements with profit sharing programme making employees direct beneficiaries of product success.

The company has automated its warehousing operations in the last few years by installing new conveyor systems along with replacing old ways of packing, sorting, routing to respective couriers and shipping – increasing the dispatch volume capacity per day.

VGL has created a robust supply chain with manufacturing from low-cost countries and sourcing directly without intervention of external agents leading to gross margins of 60%+. The company plans to open more warehouses in the west and east coasts of USA to reduce delivery time and is also investing in order picking function to improve picking productivity.

Over the years, VGL has made significant investments to improve customer experience, improve channel positioning, increase broadcasting hours, studio upgrades, expanded product offering, warehouse process improvements, and ERP Microsoft Dynamics 365 implementation across the organisation. As the company’s costs are largely fixed in nature and most of the investments are front ended, it would be reasonable to expect operating leverage to increase further as evinced by the increasing operating margins over the last few years.

Key Risks

• Possibility of US and UK consumers disconnecting their cable connections at higher velocity affecting the relevance of Company’s TV-driven revenue model.
• This space requires customer service to keep improving to stay ahead of the curve.
• The trade war between US and China creating a product sourcing disruption and impacting business.
• Budget Pay Options can result in increase in bad debts although the company has managed it well until now as it usually collects the payments in 5-6 monthly instalments following the sale.
• Increasing product portfolio in lifestyle products like apparel and shoes can increase the SKU’s and lead to obsolete inventory. Managing the increase in product portfolio or inventory turnover will be the key.
• VGL is a small player competing with the likes of QVC and Amazon in the E-Commerce space. Predatory pricing could impact the bottom-line of the company

Key Positives

• Free cash flow generating company as it is not a capital-intensive business. Operating cash flow for Q1 FY20 was INR87 crore while free cash flows was around INR 82 crore.
• VGL’s gross margins are high and the company will source and sell products only if it meets the criteria of 60% plus gross margins.
• Being an e-commerce player, the company has managed its inventory days well at around 84 days and this would be the key to its success as it ventures into additional product categories.
• The management has a long history in the jewellery retailing business and have built a competent management team with Mr. Sunil Agarwal at the helm.
• VGL’s increasingly omni-channel presence could swell its revenues as the lifetime value from Omni-Channel customer is many times that of Live TV or Online Customer.

Valuation and Conclusion

E-commerce penetration in both US and UK markets has seen a sharp increase following the outbreak of Covid-19 pandemic. E-commerce as a percentage of retail sales has gone up 300 bps to 14% in US and 680 bps to 25.9% in the UK in the first 6 months of 2020. Although, some of it might reverse when things come back to normal, VGL’s recent moves like budget pay, increasing omni-channel presence, mobile pay, and overall focus on e-commerce will help it increase its user base.

VGL is a net debt free company currently valued at around 30 PE in sunrise industry of online retailing. The company has made significant infrastructure investments in customer interface, manufacturing, warehouse facilities, supply chain, and ERP software. These investments provide a scalable foundation to grow sustainably with limited capex requirements while generating healthy free cash flows. Considering its gross margins are high at 60% plus, it would be reasonable to expect its operating margins increasing further from its current levels of 14% resulting in decent operating leverage playing out.

Disclaimer: Have personal investments in Vaibhav Global at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.