VIP Industries (VIP) is a dominant player in the global luggage industry and India?s largest with 58% market share. We expect it to post 22% sales CAGR (compound annual growth rate) over the next two years, higher than the industry?s 20%, on the back of strong growth and higher contribution from the soft luggage segment. VIP plans to leverage its strong brand and distribution channel to boost the sales of its soft luggage products, to capture market share from the unorganised segment. The domestic luggage market is pegged at Rs 3,000 crore, of which, the unorganised segment accounts for Rs 2,000 crore.

VIP has worked aggressively on brand building through advertising and exclusive stores like VIP Lounge over the past three-four years, and is reaping the benefit of the same. The company has spent Rs 50 crore over the past two years on advertisement and brand marketing to enhance the brand image and recall. More than 50% of VIP?s top line comes from the VIP brand exclusively owing to strong advertisement and brand marketing. The company is now planning a multi-brand strategy and will incur Rs 25-30 crore on advertisement and brand marketing for its other brands, specially soft luggage brands like Alfa, Skybags, Footloose and Buddy. This, we believe, will help boost the company?s sales as consumers are made aware of other products in VIP?s kitty.

VIP luggage is currently sold in 9,000 retail outlets in India. Of these, 5,000 outlets sell VIP products directly. The company currently has about 450 exclusive VIP outlets selling luggage exclusively, located in the best localities; of these, 120 are self operated and the remaining are either owned by dealers or are on franchise model. One of the large segments of the Indian luggage market is the Canteen Store Department (CSD).

In these, VIP luggage enjoys a prominent position with 60% market share and is one of the most respected brands. The canteen store department enjoys VAT exemption and, hence, its products are priced at a much lower rate compared with those in stores. VIP plans to add 50-60 stores every year, going forward. It already has a global footprint with its products available not just across India but also all over the Middle East, UK, Germany, Spain, Italy, and select African and South East Asian countries where it not only sells Carlton, but also VIP brands.

Soft luggage contribution for VIP is likely to go up from 45% to 53%, which should result in margins expansion for the company as it outsources its soft luggage from China vis-?-vis hard luggage that is manufactured in-house. The soft luggage segment is expected to grow at 30% per annum against 5% in the case of hard luggage.

To value VIP, we have compared the company?s growth potential and P/E multiple with some other consumer durable companies. Forward P/E (price-to-earnings) multiples of other consumer durables companies have traded in the 14-15x range. VIP, being a leader in the luggage segment with more than 58% domestic market share and high growth visibility for the next few years, should trade in line with other domestic peers.

We arrive at a fair value of Rs 655 per share based on 15x FY12E P/E, in line with domestic peers. The luggage market is expected to grow at 20% with soft luggage growing at 30% and hard luggage at 5%. With soft luggage contribution to increase going forward, and the company?s multi-brand strategy and strong balance sheet, revenue and profit estimates are strong for FY11 and FY12. We estimate VIP to post EPS (earnings per share) of Rs 31.9 and Rs 43.7 in FY11E and FY12E respectively, on consolidated basis. At CMP (current market price) of Rs 495, the stock is available at 15.5x and 11.3x consolidated P/E of FY11E and FY12E, respectively. The stock looks attractive at current levels. Hence, we initiate coverage with a Buy recommendation.