Business Analysis, Model and User characteristics:
Vaibhav Global is an India based & listed global E-retailer of Fashion, lifestyle and home décor accessories.Established in 1980, Vaibhav global is owned and run by first generation Entrepreneur Mr. Sunil Agarwal. I always have a penchant to look for the first generation entrepreneurs who are passionate, have a larger purpose and attain performance year over year to shareholders. They exude strong integrity, passion for growth and care for communities. CSR program of One-For-One is a case in point which aims at serving meals for every sale to eradicate poverty and hunger.
They have operations in US, UK primarily doing sales through Electronic channels like TV, Ecommerce website and also catering to B2b demand. They are anchored on the purpose of ‘Delivering Joy’ with due importance to passion and performance in all aspects entailing customer, suppliers and shareholders. They rebranded Liquidation channel to ShopLC in USA which was a TV based medium of sales channel. But of recent, they launched ShopLC.com website to cater to the Ecommerce demand in US showing deeper customer engagement. The other sales channel is called The Jewellery Channel in UK which has a website called TCJ.co.uk. They launched mobile apps for both ShopLC and TCJ in 2017 to expand customer accessibility.
Vaibhav Global is an end to end vertically integrated B2C business for jewelry, accessories and other lifestyle products including home décor items. They have exposure to 110 Million households on TV shopping in addition to Ecommerce websites and mobile apps called ShopLC in USand TCJ in UK. They have end to end supply chain with manufacturing facilities in Jaipur, India. They have built the annual manufacturing capacity of 7 Million pieces and also do sourcing from China, Thailand and Indonesia. They tout their customer retention model indicating that an average of 27 products were bought 19 times in a year. Interestingly most of their E-retail products target woman customers as user base. Product ranges includes Jewelry items ( like rings, earrings, bracelets, necklaces, stones), fashion accessories like watches, scarves, handbags, dresses and home items like decors, bath, kitchen items. Company has also launched Budget pay instalment equal monthly installment options in their Shoplc US sites. They also operationalized robust post-sales service through dedicated call centers and other on-demand interfaces.
Affordable Fashion sales to play large scale of opportunity:
An interesting strategy they recently executed was partnering with New York fashion week icons like Zang Toi to showcase their designer-wear ranges available at affordable prices. Shop LC provided dramatic fashion sapphire and diamond chandelier earrings and cocktail rings to frame Zang Toi’s “Brilliant Royal Blue” runway show. Company has launched array of discrete fashion products like jewelry and accessories attuned to the growth concept in fashion retailing at low cost.
Customers worldwide showing widened propensity towards digital and ecommerce platforms for retail shopping will give definite impetus to the growth for the company. They have also ventured into private label brands of their own which can be another factor for scale.
Scale and Operating leverage:
When the fixed capacity at 20% of total assets are already built to scale for next 3-4 years, company will benefit from the operating leverage kicking in as the scale increases in sales volume. If the company focuses on faster inventory turnover, it will aid to the margins by improving the operating assets turnover. Its interesting to see that the company has close to 100% of its returns coming from operating assets since there is no investments or leverage related factors. New products in fashion retailing to allure new customers, repeat orders from existing customers can build the scale. Also marketing campaigns on digital and social platforms can increase market penetrations there by more customer acquisitions. This will help increase the topline which will also help increase gross and operating margins.
Recently Vaibhav Global received revision in the credit rating from stable to Positive outlook underpinned by vast experience of the promoters in the manufacturing and retailing of gemstone-studded fashion jewellery and its end-to-end vertically integrated operations along with its comfortable capital structure and debt coverage indicators as well as moderate liquidity position at consolidated level.
Financials and Valuation:
In FY18, company achieved a sales of 1572 crores ($234 Mn) growing at 9% year on year. Operating profits increased by 60% to 145 crores led by increase in operating margins by 300 bps. Profit after tax has doubled 112 crores from FY17 to FY18. A double digit sales growth with stable fixed costs over next 2-3 years can increase profits YoY by atleast 50% for next 3 years. Company also has cash flow from operations at 82 crores in FY17 and any further cash flows will add to the economic value creation for shareholders considering not much incremental capex expected in next 2 years. Hence Return on equity is going increase well beyond 15% from now on. Priced at 19 times trailing earnings, company`s market cap stands at 2227 crores ($332 Mn).
Couple of risks risks I can think of are Brexit related currency devaluation risk as well as threats from other Ecommerce sites venturing into third party fashion retailing at low cost since there is little entry barriers in these businesses. Considering management has been ahead of the curve, they might be able to pull it off in the near future.