Speaking to CNBC-TV18 Radhika Piramal, MD, VIP Industries said the April-May-June quarter is generally the most important quarter for the company. However it would be too early to say how this quarter will pan out, says Piramal. The current market share for VIP currently stands at 64 percent and it spends around 8-10 percent of sales in advertisement. The company plans to increase its spend for FY14.
She also added that soft luggage contributes around 75 percent to overall sales. The company expects EBITDA margins to expand by 100 bps in FY14. VIP has recently announced price hike in soft and hard luggage segment. She hopes margins to go up by 100 bps in FY14 if rupee does not depreciate.
Also read: Samsonite goes beyond metros with project pappu
Below is the edited transcript of her interview to CNBC-TV18.
Q: Your company has launched new product in your line up. How the demand does looks like as the economy is undergoing slowdown. This being the holiday, travel season it is best for your company. How is demand compared to last quarter and a year ago?
A: April-May-June quarter is the most important quarter for us when holiday starts. It is too early to predict how the whole quarter will pan out but the early results are promising. We are definitely expecting growth over the previous quarter at the same time last year.
CSD which is an important channel for us is showing good recovery. In the previous year 2012-13, CSD declined due to working capital management issues on their side. Now, that channel has recovered.
So while we are not expecting double digit growth, we are certainly expecting discretionary spending to increase compared to how it has been in the last six months.
The company also successfully launched Caprese handbag last Diwali and we have tremendous response to that product line. Consumers have appreciated the product collection and affordable pricing, so we are looking towards for a good quarter ahead.
Q: Sales in the Q3 were down 5 percent from year ago levels. While you cannot give me very clear numbers on your Q4, would they be lower or would that downturn have been covered or are you seeing an upturn only in the current quarter?
A: I can only say that the CSD which had declined in previous year is now showing elements of recovery and stability.
Q: What kind of competition are you facing from Samsonite? What is the market share of VIP and how has it changed?
A: Currently, our market share stands at about 55-60 percent and about 35-40 percent for American Tourister and Samsonite combined. They are the second largest branded player in the luggage market and between the two companies we have the most of the branded luggage market. So, I am very pleased with our competitive position in the last year although the growth results for VIP in terms of sales have not been good, our competitive position has strengthened in the last one year. Our market share has increased, even our competitors have not grown.
Q: What about advertisement spends or marketing spends in a situation where the consumer is spending less so obviously you have to work harder to get to his wallet. What were ad spends in FY13 as a percentage of sales, what they might be in FY14? Have you already started upping it?
A: Yes, we have already started advertising for the current quarter. Our ad spends typically range between 5-7 percent of sales and in the last year we increased our ad spends by about 20 percent over the previous year.
Essentially, we have a long-term view of the Indian consumer and we do not want to hold back on advertising spends because of a few difficult quarters. The strength of our brand is the underlying strength of our company and so we continue to invest in advertising and brand building.
In addition to that, we are heavily promoting our new ladies handbag brand Caprese so that also takes a good amount of advertising spend. In the year ahead we are looking to spend about 7 percent of our sales on advertising and that is a significant increase over what we did the previous year and the year before that as well.
Q: So what will this do to your margins because in Q3 you saw a very sharp decline in your EBITDA margins, it came down by over 500 bps and was in single digit. For FY14 roughly will it be better than FY13 and any kind of price increases just on the annual?
A: We are expecting our margins to stabilize at 12-13 percent levels or increase by 100 bps because we will take another round of price increases this month. Last week we announced price increases in hard and soft luggage category. We hope for 100 bps increase if the rupee does not depreciate.
If the rupee further depreciate to 60 then that would offset any gain from the price increase because the majority of our sales is in soft luggage and we import our soft luggage from China, hence a bulk of our buying is in dollars so rupee depreciation matters for VIP
Q: With respect to your new launch in the ladies handbag segment, what kind of profitability will it enjoy? Is it going to be loss making in the first year and thereby it will start improving?
A: It will make losses for the first two-three years but positively most of the losses are due to discretionary ad spends. So, any new brand in the first few years will be loss making as we build up consumer franchise. The good part about it being loss making due to ad spends as oppose to any fixed capital investment, is that there is a degree of management discretion involved in that so we can control the pace at which we grow the brand.
If we see recovery on consumer demand then we can go a bit faster, put some more money into advertising, but if we feel that consumer discretionary spend remains low then we can moderate that and grow as per the market.
Q: How do you expect FY14 will pan out in terms of sales and margins? Would it be 10 percent sales growth or would you do better than that?
A: We expect our gross margins to stabilize at the last year's levels and some improvement in net margins. In terms of the sales growth rate I am cautiously optimistic. We are looking at 10 percent or higher sales growth and we stand a good chance to achieve it in the year ahead.
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