Case Study: VIP Industries - Hard Luggage V/S Soft Luggage margins
Now that we have a thorough understanding of computing Manufacturing and Trading profit margins, lets try and see if we can apply this concept to compute product level margins? We will be taking a look at VIP Industries which manufactures hard luggage as well as soft luggages Lets see how to compute product level margins now.
To compute margins, we need Revenue breakup (hard luggage v/s soft luggage) and COGS breakup for the same.
In our previous blog (Blog 107- Analysing sources of revenue), we have already covered how to extract hard luggage and soft luggage revenue breakup for VIP Industries. All we need now is the COGS breakup. However, COGS can be split only into Manufacturing and Trading from the standard footnote data.
To come up with the answer to this enigma, we need to understand the business structure of VIP Industries first.
Note: If the data is not given directly, take a look at the macro picture and try to understand the structure of the company. For example, there might be a subsidiary which is engaged in one segment/ sub segment manufacturing giving us a starting point for our analysis. This need not always work, but can definitely give you a headstart.
Such color can be obtained in the management Con-calls shown in the snapshot below.
Source: Concall Q1 2020
Also, from our Standalone and Consolidated financial statement analysis in the previous blog and above screenshot, we conclude three things: (previous blog link)
All Bangladesh subsidiaries manufacture Soft luggage and sell only to VIP Industries India (Parent)
Soft luggage are also outsourced to few Indian and Chinese vendors purchased directly by Indian Parent entity
Hard luggage is only manufactured by the parent company in India
By looking at the above data points, we can conclude, if we were to take a look at the Standalone financials of VIP Industries India (Parent) company, all the purchases/ traded goods COGS would correspond to Soft luggage COGS only (from Chinese, Indian vendors as well as Bangladesh subsidiaries) and Manufactured goods COGS correspond to Hard luggage COGS only (Since parent manufactures only hard luggage)
An Analyst can make a mistake if they take a look at Consolidated traded goods for Soft luggage COGS computation as it will only capture the Indian and Chinese vendors' soft luggage COGS. The transactions of buying soft goods manufactured by subsidiaries will be reported in the manufacturing COGS section as the subsidiaries falling under the Entity umbrella are manufacturing it inhouse which was considered outsourced from the reference of standalone financials.
Thus, summarising what we have discussed so far and where to source that information from
Hard luggage/ soft Luggage Revenue breakup - MGT 9 form (discussed in blog-107)
Revenue figures- consolidated financial statements/ Standalone (either is fine as both are approximately equal considering subsidiaries sell only to parent who eventually sell it outside)
Soft luggage COGS - Traded COGS from Standalone financials
Hard Luggage COGS - Manufactured COGS from Standalone financials.
There’s just one small last action item remaining. We understood that the Bangladesh subsidiaries manufacture and sell soft luggage to the Parent company VIP Industries, but they don't do it at cost as the subsidiaries seem to be generating profits over the years and that profit does fall under the VIP Entity. This would mean that the purchases made by VIP Industries of Soft luggage are done at a higher price and actual cost of those COGS would be in fact lower than the COGS amounts we are planning to take them for.
At a product level, if we are trying to generate hard luggage and soft luggage profit margins, we should back out these BD subsidiaries profits from the COGS of soft luggage to get actual incurred cost to create those soft luggages at an Entity level!. The BD subsidiaries profits can be found in AOC-1 form (highlighted in previous blogs)
We have done a sample calculation of one of the years for both Soft luggage and hard luggage COGS and Margins. Let's take a look.
Backing this out, INR 34.41 Cr subsidiaries profit from the COGS computation to result in adjusted Soft luggage COGS, eventually to be used for Soft luggage Margin computation as below.
We have already covered how to calculate Manufactured COGS in our previous post. Considering Moving to the hard luggage margin computation, we compute it as follows:
Hard Luggage Margin AR-20
If we conduct similar analysis across time series, it gives us a very good idea of margins data across Soft luggage and hard Luggage computed at an Entity level.
Overall Gross Profit Margin of business has increased over the years for VIP Industries. As one can see, the product mix has been more or less same across the years (30- 70 proportion) for Hard and Soft luggage. Improving Hard luggage profit margins has been the major driver behind the improvement in the overall gross profit margins.