Up 8,000% in 10 years! And Ashish Kacholia has just picked a stake in this stock

NEW DELHI: Ace investor Ashish Kacholia bought some 2.18 lakh shares in Safari Industries at Rs 550 apiece for a total value of Rs 12 crore on Friday. Kacholia never owned shares in this mass luggage maker, historical data compiled by database AceEquity suggests.

The stock purchase took place as the company lowered its revenue growth guidance to 15-20 per cent for the next few quarters.

While most brokerages have cut their price targets on the stock, a few still see it in the north of Rs 700 apiece, given benign raw material prices and the company’s strong position in mass luggage making.

Safari Industries reported 31 per cent sales growth for September quarter against VIP Industries’ flat topline growth. But its margin expansion was lower than VIP’s due to the latter’s superior product mix and better negotiations with Chinese vendors. Big Bull Rakesh Jhunjhunwala owns stake in VIP Industries.

On Monday, Safari traded 3.4 per cent higher at Rs 563 on BSE. The stock is down 29 per cent year to date, but up 200 per cent in last two years and 8,200 per cent in last 10.

Brokerage Prabhudas Lilladher said the luggage maker’s DNA underwent a paradigm shift after Sudhir Jatia, who served VIP Industries as MD from February 2007 to April 2010, bought a majority 77 per cent stake in the company in May 2012.

Jatia instituted various strategies, including rationalisation of product portfolios, foray into polycarbonate luggage manufacturing, setting up of offices in China for soft luggage imports, acquiring brands like Genius, Magnum and Egonauts and increasing ad spends, the brokerage said.

Notwithstanding the near-term growth concerns, Angel Broking expects the company to report a topline growth of nearly 26 per cent over FY19-21 at Rs 910 crore on the back of diversified product portfolio and strong distribution network with high brand recall.

“Safari's bottom-line is set to grow at a CAGR of 36 per cent over FY11-21E due to gradual improvement in operating margin. We maintain a ‘Buy’ recommendation on the stock with a price target Rs 717,” the brokerage said.

Safari’s gross margins for the quarter improved 145 basis points to 43.9 per cent. Analysts largely attributed this to a fall in raw material cost in the hard luggage segment. A fall in effective tax rate to 9.8 per cent also boosted profit.

Inventories for the first half of FY20 came down by Rs 50 crore in H1FY20, indicating liquidation in channel inventory.

“Overall, we are cutting our earnings estimates by 2 per cent and 5.5 per cent for FY20 and FY21, respectively. At CMP, the stock trades at 29 times FY21 EPS. We continue to maintain a ‘buy’ rating with a revised target price of Rs 700 against our earlier target price of Rs 740,” said Sunidhi Securities.

Even though growth concerns have aggravated due to a slowdown in discretionary spends, a 30-40 per cent drop in polycarbonate prices and stable rupee and crude oil prices have led to an expansion in gross margins for the luggage maker, said Prabhudas Lilladher, which expects margins on luggage makers to remain healthy in the second half of FY20.

Among key risks, a closure of many luggage units in China has made the surviving suppliers to take price hikes, which could put pressure on the company’s margins, unless the price hike is absorbed, Angel Broking said. “Safari’s 23 per cent sales comes from the hard luggage segment and any increase in input costs could negatively impact profitability,” it said.