Safari Industries was incorporated in 1980 by Mr Mehta and his family. Later, in the year 2012, the company was taken over by Mr Sudhir Jatia. The company has two fully owned subsidiaries namely~ Safari Lifestyles Ltd (SLL) and Safari Manufacturing Limited (SML). It manufactures and sells luggage under the brand name, Safari. The manufacturing unit is in Halol, Gujarat.
The Safari industry is a well-established player in the organised luggage industry with an established market share of 20-22% as of 30th September 2022. The company has a distribution network comprising over 3,500 customer touchpoints. Given mass positioning, Safari is in a sweet spot to gain from up-trading as well as downtrading post COVID.
RM cost inflation, liquidity and cost management became a challenging task for unorganised players in Covid. Organized players tackle this situation very well and emerge stronger.Supply chain disruptions led by COVID in China has severely impacted the unbranded segment. This has created a vacant space for value for money luggage segment. Unbranded used to be 60-70% pre-pandemic is now at 40-45% of total industry. Unbranded (imported from China) used to be cheaper by 50-60% vs. branded luggage in past. Now the gap has narrowed down to 15-20%. Higher ocean freight cost, rise in labor cost and rupee depreciation have made the imported luggage business unviable. This segment needs after sales service. Higher operating cost makes the after sales service difficult for unbranded players.
The current demand for value brand is largely led by new travellers (ones who are buying branded luggage for the first time). Luggage is no longer viewed as a utility product. It's now been viewed more of a lifestyle based product wherein customers want their luggage to look trendy and match well with their apparels. This trend is also helping overall luggage industry grow including the value for money segment.
The company is currently expanding its EBO reach. Safari is doing well in high street stores, e-commerce, and Modern Trade
Previously the company use to import soft luggage from China, but due to currency rate fluctuations, the imports are now from Bangladesh. Additionally, the company is expanding its Halol facility for increasing its manufacturing of hard luggage. This expansion is outlined for Rs 25 crores, which will expand the final capacity to the manufacturing of 5 lakh pieces per month.
The 5-year revenue & PAT CAGR of the company is at Rs 15% and 17% respectively. For the year ended 31st March 2022, the revenue of the company stood at Rs 706 crores, with a PAT of Rs 22 crores. The five-year average ROCE & ROE of the company stood at 8.5% & 7.8% respectively.
Q3 FY23 Analysis
During the quarter ended 31st December 2022, the company's revenue was Rs 303 crores, an increase of 49% YoY basis. The EBITDA for the quarter stood at Rs 49 crores vs 13 crduring the previous quarter ended December 2021. EBITDA margin 16.22% vs 6.41% during the previous quarter ended December 2021. PAT for the quarter stood at Rs 34 crores, the highest of all times vs 7.2 crduring the previous quarter ended December 2021.
Risk & Concerns
The company deals with products that require high quality and durability. In this process, the raw materials used are of A1 quality, and therefore, for manufacturing high-quality products the company requires high working capital. Also, in the luggage industry, the debtor days and cash conversion days are high, which requires strong working capital requirements.
A key risk for Safari Industries is capital allocation due to its relatively smaller scale and size. The relative size of peers gives them an edge over Safari in terms of resources to strengthen their innovation, technology, distribution network, marketing, and capital expenditure which may make it difficult for Safari to garner market share in newer segments.
Outlook & Valuation
We believe safari Ind. is a key beneficiary of unorganised to organised shift, change in customer preference for branded bags, increase in travel after covid led disruption. Expansion in hard luggage will improve its margin. At a CMP of Rs 1887, the stock is trading at 25.5x its FY25E earnings. We recommend a 'BUY' rating for the stock.