VIP Industries - Sharp Ad Spends Mar Profitability; Result Update Q3FY15 ::Edelweiss

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VIP Industries’ (VIP) Q3FY15 revenue growth was marginally below estimate. EBITDA, however, came in ~54% lower than estimates. The 18% YoY surge in other expenses with the 69% YoY spurt in ad spends (towards revitalising Carlton and VIP brands and establishing Caprese brand), led to EBITDA declining by 51% YoY. Led by slower-than-expected operating margin growth with higher selling expenses and slow gross margin expansion due to revision in our FY16 USD/INR assumption to INR62 (INR60 earlier), we are pruning our FY15E and FY16E earnings by 13% and 18% to 13% and 44% growth, respectively. Also, we introduce FY17E EPS with 26% earnings growth.

Sales growth slow, primarily price led 

Top line grew 7% YoY, 1% below estimates. This was majorly (6-7%) price led with nil volume growth. Pick up in discretionary demand was slow and seasonal demand was muted. While traditional, company-owned channels and CSD channels were flat, hypermarket clocked higher than 7% growth. The company highlighted that CSD segment grew by mere 5% due to loss of market share to competitor Safari. Among brands, the company highlighted that Carlton and Caprese posted strong 30% surge.

Operating profit growth lower; gross margin expansion ahead

Gross profit margins dipped 100bps YoY and 189bps QoQ to 43.2%, primarily on account of depreciating currency and lower sales mix. Also, ad spends increased by 69% YoY (INR90mn) to INR220mn in Q3FY15, leading to ad spend at 8.5% of revenues in the quarter. As a result, with 18% YoY surge in other expenses, EBITDA fell 51% YoY, yielding EBITDA margin of 3.7% (dip of 440bps YoY). VIP took a price increase of 5% in CSD segment and 3% in trade segment in November, which will reflect in gross margin expansion in Q4FY15. Going forward, management guided broad range of ad spends at 5-10% of revenues versus 5-6% earlier.

LINK
https://www.edelweiss.in/research/VIP-Industries--Sharp-Ad-Spends-Mar-Profitability;-Result-Update-Q3FY15/10005512.html