Vaibhav global limited - BUY

Vaibhav
Global
Limited
(VGL)
-‐
Strong
business
in
the
making
Arun
Gopalan
MBA
Candidate
@
Oxford
Indian
Equity
Strategist
|
Investor
Cell
-‐
+44
7546
883
484
Email
–
Arunmozhi.Gopalan@mba2014.sbs.oxford.edu
Linkedin
-‐
hLps://www.linkedin.com/in/gopalanarun
*
Disclosure
–
I
am
invested
in
VGL

VGL
–
Investment
Case
A
smiling
host
awaits
you
–
neatly
trimmed,
sharply
dressed
and
very
a?racAve
too.
She
has
something
to
show
you
in
front
her
–
well
cut,
sparkling,
colored
tanzanite.
As
you
start
guessing
“What
in
this
world
is
a
Tanzanite?”,
she
narrates
you
a
story
of
Tanzanite’s
history,
exclusivity
and
rarity
that
would
want
you
to
own
one.
And
as
the
host
conAnues
to
entertain
you
by
sharing
some
of
her
personal
experiences
of
Tanzanite
and
providing
you
with
ideas
of
how
you
can
giL
your
daughter
for
the
Thanksgiving,
the
prices
conAnue
to
roll
down,
someAme
to
the
extent
of
-‐90%.
With
only
5
minutes
into
the
narraAve,
the
Final
price
is
shown
and
you
see
orders
start
pouring
in.
Now,
aLer
witnessing
an
a?racAve
host,
wonderful
narraAve,
eye
catching
product,
falling
prices,
the
reminder
for
Thanksgiving
and
stocks
running
out,
would
you
want
to
wait?
No!
You
feel
your
adrenaline
flowing
and
you
pick
your
phone.
Welcome
to
the
world
of
Vaibhav
Global
Limited
(VGL),
Welcome
to
the
world
of
Home
Shopping
!.
VGL
is
an
electronic
retailer
of
fashion
jewelry,
fashion
accessories
and
lifestyle
products.
They
are
verAcally
integrated
and
they
source
their
inventories
from
India,
Thailand,
China
and
Indonesia.
VGL
predominantly
focuses
on
the
US
and
UK
consumer
markets
through
their
exclusive
cable,
satellite
and
broadcast
television
networks,
extremely
well
supported
and
integrated
with
a
e-‐commerce
pla]orm.
They
are
available
in
the
US
through
LiquidaAon
Channel
(TV
broadcast)
and
liquidaAonchannel.com
(Web)
and
in
the
UK
through
Jewellery
Channel
(TV
broadcast)
and
thejewellerychannel.tv.
In
FY
14,
VGL
reported
revenues
of
INR
12,983
mn
(growth
of
45%)
and
PAT
of
INR
1,526
mn
(growth
of
94%)
with
a
Basic
EPS
of
INR
47.4.
It
generated
an
ROE
of
66%,
ROCE
of
53%
with
an
EBITDA
margin
of
11%.
Current
Market
Price
–
INR
587.85
Bloomberg
Code
–
VGM:IN
BSE
/
NSE
Code
–
532156
/
VAIBHAVGBL
Shares
Outstanding
(mn)
–
32.1
Mkt
Cap
(INR
mn
/
USD
mn)
–
19030/
314
FY
14
Revenue
(INR
Mn)
–
12,983
EBITDA
Margin
(%)
–
11
PAT
Margin
(%)
–
11.8
FY
14
EPS
(INR)
–
47.4
ROE
/
ROCE
(%)
–
66
/
53
P/E
(TTM)
–
16.34
1
Year
Price
Target
–
INR
926.1
(57.5%
upside)
3
Year
Price
Target
–
INR
2216
(276.9%
upside)

While
the
numbers
already
look
extremely
impressive,
I
believe
that
the
business
has
just
scratched
the
surface.
VGL
has
a
really
long
runway
for
growth
with
improving
EBITDA
margin
and
improving
FCF
at
consistently
high
return
raAos,
thus
making
it
a
MulAbagger
stock
in
the
making.
Following
are
key
factors
which
make
VGL
a
highly
probable
MulAbagger
opportunity
available
at
a
reasonable
valuaAon.
1) Long
runway
for
growth
–
The
2
largest
players
using
the
Home
Shopping
pla]orm
are
QVC
and
HSN.
They
churn
out
a
combined
revenue
of
~
USD
11
bn
-‐
52x
VGL’s
revenues,
indicaAng
the
huge
opportunity
size
that
the
pla]orm
provides.
2) Penetraaon
to
increase
–
VGL’s
penetraAon
(households
purchasing
/
households
reached)
stands
at
.4
as
against
3.2
for
HSN
and
4
for
QVC.
The
low
penetraAon
provides
a
huge
opportunity
for
VGL.
3) Increase
in
Revenue
/
household
–
Expansion
in
product
category
along
with
improved
product
differenAaAon,
content
and
markeAng
investments
to
drive
Revenue
/
household
from
$2.03
in
FY
14
to
$
4.91
in
FY
19E.
4) Low
capital
intensity
–
Incremental
sales
to
come
at
a
high
Fixed
asset
turnover
and
high
Working
Capital
turnover
of
more
than
12.
5) Low
Compeaave
intensity
–
The
industry
is
consolidated
with
handful
of
sizable
players
with
clear
&
established
market
leaders.
The
compeAtors
are
all
of
various
sizes
with
altogether
different
value
proposiAon
to
customers,
thus
diverging
away
from
a
common
ground
to
compete.
6) Improving
EBITDA
margins
-‐
Currently
VGL
pays
fixed
price
per
household
as
broadcasAng
cost
and
as
the
projected
revenue
/
household
improves
form
$2
in
FY
14
to
$5
in
FY
19,
the
siginicant
cost
saving
will
be
directed
to
the
EBITDA
margins.
7) Presence
of
a
casual
moat
–
VGL’s
moat
is
very
casual
and
a
hard
one
to
idenAfy.
VGL’s
moat
is
invisible
and
a
summaAon
of
really
small
things
–
right
product,
right
price,
right
understanding,
right
value
posiAoning,
right
Ame,
right
team
play.
8) Incredible
return
raaos
–
VGL
to
report
ROE
of
35%
plus,
ROCE
of
50%
plus
and
ROTCE
of
100%
plus
consistently
every
year
for
the
next
5
years.
VGL
–
Investment
Case

VerAcally
integrated
business
model
B2C
-‐
TV
B2C
-‐
Web
B2B
Sales
Channels
Warehousing
and
Distribuaon
faciliaes
Own
Manufacturing
–
Robust
warehousing
and
distribuAon
faciliAes
based
out
of
AusAn,
Texas
and
London,
UK.
–
Own
manufacturing
plant
at
Jaipur,
India
with
a
capacity
of
around
6
million
pieces
annually.
This
contributes
to
roughly
50%
of
volumes.
–
Direct
sourcing
from
vendors
based
out
of
Indonesia,
China
and
Thailand
contributes
to
50%
of
volumes.
Sourcing
capacity
stands
at
close
to
10
million
pieces
per
year.
Direct
Sourcing
Aggressive
trend
spobng
–
More
than
200
employees
across
key
fashion
centers
aggressively
spot
the
recent
trends
and
contribute
to
the
product
design
and
development

Product
profile

DistribuAon
channel
–
TV
(the
higher
ASP
pla]orm)
TV
channel
contributes
to
70%
of
the
company’s
revenue.
Excluding
the
B2B
business,
TV
contributes
to
80%
of
B2C
revenue
and
to
68%
of
B2C
volumes.
Though
the
Web
channel
is
increasingly
churning
out
higher
revenue
growth
numbers,
TV
will
conAnue
to
be
the
major
sales
contributor
for
the
current
decade.
VGL
has
access
to
95
million
households
across
US
and
UK.
It
is
accessible
through
liquidaAon
channel
across
70
million
households
(Total
–
116
million
households)
in
US
and
through
Jewellery
channel
across
25
million
households
(100%
availability)
in
UK.
TV
channel
revenues
have
growth
at
a
CAGR
of
23.5%
over
the
past
3
years
and
I
expect
them
to
grow
at
a
CAGR
of
13.1%
over
the
next
5
year
period.
While
TV
channel
revenues
will
conAnue
to
post
lower
growth
compared
to
Web,
Average
Selling
Prices
(ASP)
is
expected
to
be
significantly
higher
through
TV
Sales
than
Web
Sales.
In
FY
14,
TV
recorded
an
ASP
of
USD
24
compared
to
USD
13
for
the
Web.
The
higher
ASP
on
the
TV
channel
can
be
a?ributed
to
the
high
probability
of
impulse
purchase
that
a
TV
viewer
undergoes
as
against
a
Web
customer
who
browses
through
the
catalog
and
takes
his/her
Ame
to
make
the
buying
decision.

DistribuAon
channel
–
Web
(the
higher
margin
pla]orm)
The
Web
channel
contributes
to
17%
of
the
company’s
revenue.
Excluding
the
B2B
business,
Web
contributes
to
20%
of
B2C
revenue
and
to
32%
of
B2C
volumes.
VGL’s
e-‐commerce
pla]orm
includes
liquidaAonchannel.com
in
the
US
and
jewellerychannel.tv
in
the
UK.
The
Web
revenues
have
grown
at
a
CAGR
of
45%
over
the
last
3
year
period
and
I
expect
them
to
grow
at
a
CAGR
of
38%
over
the
next
5
year
Ame
period.
While
the
ASPs
are
lower
compared
to
the
TV
channel,
the
web
margins
are
significantly
higher,
since
the
real
estate
cost
of
hosAng
the
web
pla]orm
is
insignificant
compared
to
the
TV
carriage
costs.
Also,
the
markeAng
costs
are
very
minimal
and
a
significant
part
of
the
Web
traffic
is
driven
from
the
TV
channel.
While
the
TV
channel
sales
follow
a
reverse
aucAon
model
(prices
drop
from
the
iniAal
price
to
final
price),
the
Web
sales
happen
on
rising
aucAon
model
and
Catalogue
model.
In
the
rising
aucAon
model,
the
starAng
price
of
the
items
listed
start
at
either
1$
or
1
GBP
and
the
customers
conAnue
to
bid
up
the
prices.
While
the
rising
aucAon
model
in
itself
has
a
lot
of
potenAal,
it
is
to
be
noted
that
VGL
currently
uses
this
model
to
sell
only
the
leL-‐over
items
from
TV
sales.

The
Presenter
/
Host
–
Story-‐telling
at
its
best
The
hosts
play
a
vital
role
on
the
TV
channel
sales
pla]orm.
They
are
experienced,
talented
and
trained
marketers
who
connect
with
the
audience
through
narraAve
story
telling
revolving
around
the
product
being
sold.
Every
product
gets
a
predetermined
air-‐Ame
following
a
daily
schedule
of
broadcast
content
and
the
hosts
play
a
major
role
in
selling
the
maximum
number
of
pieces
in
the
airAme
possible.
They
are
one
of
the
major
reasons
to
drive
the
impulse
buying
on
the
TV
and
hence
result
in
higher
Average
selling
prices
through
the
TV
channel
than
the
Web.
They
usually
do
a
3-‐hour
LIVE
coverage
a
day
for
around
4
to
5
days
a
week.
It
would
be
no
exaggeraAon
to
say
that
the
hosts
have
a
strong
customer
following,
who
would
even
stop
buying
from
a
channel
if
the
hosts
moves
out.

CompeAtors
VGL
QVC
HSN
Shop
HQ
Product
profile
Fashion
Jewelry,
Fashion
Accessories,
Lifestyle
products
Jewelry,
Personal
care,
Home
Care,
Electronics,
Lifestyle
products,
Kitchen
&
Food,
Toys,
Décor
items,
Lifestyle
products
Jewelry,
Personal
care,
Home
Care,
Electronics,
Lifestyle
products,
Kitchen
&
Food,
Toys,
Décor
items,
Lifestyle
products
Jewelry,
Personal
care,
Home
Care,
Electronics,
Lifestyle
products,
Kitchen
&
Food,
Décor
items,
Lifestyle
products
Yearly
Sales
USD
215
Million
USD
8.6
Billion
USD
2.3
Billion
USD
640
Million
Reach
95
195
96
87
(millions
of
household)
Unique
Sales
ProposiAon
Deep
discount
value
products
Proprietary
or
Excusive
line
of
products
that
are
not
available
at
the
department
stores.
Proprietary
or
Excusive
line
of
products
that
are
not
available
at
the
department
stores.
Upscale,
luxury
and
naAonal
third
party
brands
EBITDA
Margin
(%)
12
21
11
3
Average
Selling
price
USD
23
USD
51
USD
58
USD
81

Large
opportunity
size
of
the
pla]orm
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Sales
(USD
Mn)
VGL
Shop
HQ
HSN
QVC
VGL
Shop
HQ
HSN
QVC
The
two
largest
players
that
use
the
home
shopping
pla]orm
are
QVC
and
HSN.
They
churn
out
a
combined
revenue
of
close
to
USD
11
billion
-‐
52
ames
larger
than
VGL.
While
QVC
and
HSN
are
not
exact
comparables
due
to
their
wide
array
of
product
lineup,
much
larger
revenue
base
and
enArely
different
ASPs
&
value
proposiAon,
they
stand
to
indicate
the
opportunity
size
of
the
Home
shopping
pla]orm.
Home
shopping
pla]orm
built
through
a
TV
channel
and
enhanced
by
E-‐commerce
is
an
established
and
profitable
business
model
in
the
developed
countries.
In
fact,
as
witnessed
during
the
recent
economic
downturn
in
2008,
they
are
highly
resilient
to
the
economic
shiLs
–
QVC
US
posted
almost
a
flat
sales
growth
in
comparison
to
the
department
stores
that
posted
an
average
two-‐year
same-‐store
sales
decline
of
12%.
Even
the
largest
player
-‐
QVC
conAnues
to
grow
(constant
currency
revenue
growth
of
4%
CAGR
-‐
2008
to
2013),
constantly
taking
market
share
from
the
tradiAonal
retailers
and
through
geographic
expansion.
Moreover,
the
industry
has
been
highly
nimble
and
has
integrated
into
the
Web
and
mobile
pla]orm
over
the
last
decade,
enabling
them
to
engage
with
the
younger
audience.
The
average
age
of
shoppers
at
these
companies
are
on
a
constant
decline
and
in
fact
the
largest
players
today
get
close
to
40%
of
their
revenues
from
Web
/
mobile
pla]orms.

PenetraAon
–
Case
comparison
of
VGL
Vs.
HSN
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Penetraaon
(%)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
Households
purchasing
/
Households
reached
(%)
Globally,
QVC
has
the
largest
reach
measured
in
millions
of
households
carrying
it’s
TV
channel.
QVC
has
access
to
195
mn
households
and
inclusive
of
their
China
JV,
the
reach
is
closer
to
300
million
households.
However,
HSN
and
VGL
reach
out
to
more
or
less
the
same
number
of
households
-‐
~
95
million,
but
with
HSN
having
8X
more
number
of
households
purchasing
from
them
compared
to
VGL.
This
has
a
lot
to
do
with
the
fact
that
HSN
has
been
at
the
forefront
of
the
Home
Shopping
industry
since
1985
(a
year
prior
to
QVC)
and
has
even
led
the
dynamic
change
into
web
and
mobile
pla]orms.
Also,
HSN
is
present
across
several
product
cateogires
and
carries
more
than
100,000
SKUs
compared
to
VGL
which
carries
65,000
SKUs
highly
concentrated
around
the
Jewelry
segment.
I
believe
that
the
low
penetraAon
provides
a
huge
opportunity
for
VGL.
Having
got
the
pricing,
the
value
proposiAon
and
the
sales
channels
right,
I
believe
that
VGL
will
successfully
transcend
across
related
product
categories
over
the
next
5
years.
The
product
category
expansion
will
be
the
primary
driver
to
bringing
new
households
that
will
purchase
from
VGL.
0
2013
A
2014
A
2015
E
2016
E
2017
E
2018
E
2019
E
PenetraAon
(%)
0.4
3.2
4
0
VGL
HSN
QVC

Revenue/Household
–
Case
comparison
of
VGL
Vs.
Shop
HQ
5
4
3
2
1
VGL
-‐
Revenue
/
Household
reached
1.48
2.03
2.17
(USD)
2.67
3.27
4.01
4.91
60
50
40
30
20
10
Revenue
/
Household
reached
(USD)
Revenue
per
household
is
a
funcAon
of
households
reached,
product
categories
carried,
penetraAon
and
ASP.
VGL
has
posiAoned
itself
as
a
discount
&
value
retailer
and
has
found
a
sweet
spot
at
a
price
range
of
$20
–
$25.
VGL
would
be
very
interested
in
maintaining
it’s
unique
posiAoning
and
hence
I
do
not
expect
the
ASPs
to
change
over
the
years.
And
as
menAoned
in
the
previous
slide,
product
cateogory
expansion
will
be
the
key
driver
to
increase
revenue
from
households.
This
will
be
aided
by
improved
content,
improved
programming
and
investment
into
markeAng.
Currently
VGL
generates
$2.03
/
household
compared
to
$7
for
Shop
HQ.
Speaking
about
Shop
HQ,
it
was
recently
at
the
center
of
mismanagmeent
allegaAons,
which
eventually
ended
up
in
a
management
ouster
by
acAvist
investors
led
by
Clinton
group.
If
ShopHQ
with
a
bloated
management,
lack
of
proprietory
brands,
skewed
&
unfavorable
product
mix,
strained
vendor
relaaons,
repeaave
programming
schedule
and
lack
of
innovaaon
can
churn
out
$7
per
household
reached,
this
gives
me
a
lot
of
confidence
with
the
upside
and
scalability
prospects
for
an
efficient
and
nimble
orgaizaaon
like
VGL.
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
2.03
7
24
57
0
VGL
Shop
HQ
HSN
QVC

Increasing
product
por]olio
and
reach
Increase
in
product
por]olio
to
get
new
customers
-‐
Currently,
VGL’s
product
por]olio
is
highly
concentrated
on
the
Fashion
Jewelry
segment
which
makes
up
close
to
90%
of
the
total
revenues,
while
the
same
would
be
11%
for
HSN
and
12%
for
QVC.
This
under-‐penetrated
product
por]olio
leaves
a
huge
scope
for
VGL
to
transcend
across
related
product
categories
which
will
bring
more
new
customers
into
its
hold.
VGL
over
the
last
year
has
started
improving
its
por]olio
of
fashion
accessories
and
Home
care
products
and
has
introduced
products
like
handbags,
scarfs
and
more
recently
bedding
collecAons.
Increase
in
reach
an
easier
opAon
but
not
preferred
–
In
US
alone,
VGL
has
another
46
million
households
(paid)
to
reach
out
to
and
globally,
the
upside
is
even
higher.
VGL
always
has
the
opAon
of
expanding
geographically
into
newer
and
mature
markets
like
Japan
or
Germany.
However,
I
believe
that
the
prudent
and
conservaAve
management
at
VGL
will
not
be
keen
on
geographic
expansion
for
the
next
3
to
5
years.
I
believe
that
the
reach
of
95
mn
households
that
VGL
has
in
itself
provides
a
long
runway
for
growth
and
the
management
understands
this
extremely
well.
I
do
not
expect
VGL
to
aggressively
expand
even
with
in
the
US
by
adding
households
significantly.
0.65
SKUs
(millions)
1.1
2.5
3
2.5
2
1.5
1
0.5
0
VGL
HSN
QVC
VGL
HSN
QVC
US
US
US
UK
UK
Canada
Japan
Germany
Austria
Italy
China
95
mn
96
mn
305
mn

Low
Capital
intensity
18
16
14
12
10
8
6
4
2
Working
Capital
turnover
16
14
12
10
8
6
4
2
Incremental
Sales
/
Incremental
Fixed
Assets
VGL’s
business
model
is
asset
light
and
it
requires
li?le
capital
for
operaAons
and
for
expasion.
Working
Capital
-‐
Almost
all
of
VGL’s
B2C
clients
(87%
of
revenues)
make
their
payments
using
registered
credit
cards
and
the
payments
are
usually
realized
by
VGL
in
2
to
3
days
Ame
period.
While
inventory
is
held
by
the
company
at
various
levels,
predominantly
this
is
made
of
gemstones
and
the
iniAal
input
materials
that
go
into
the
final
produce.
I
believe
that
VGL’s
entry
into
newer
product
categories
will
increase
third-‐party
sourcing,
thus
impacAng
the
working
capAal
requirement
favorably.
Tangilbe
Assets
–
The
Fixed
asset
investments
includes
capital
spent
on
program
producAon
studion,
warehouses,
logisAcs,
machineries
and
computers.
I
expect
VGL’s
incremental
sales
to
come
at
a
mulAple
of
more
than
12X
on
the
incremental
Fixed
asset
investments
required.
16
12
12
12
13
14
0
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
6.7
14
13
15
12
0
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E

OperaAng
Leverage
to
kick
in
–
EBITDA
margins
to
expand
20
18
16
14
12
10
8
6
4
2
EBITDA
Margin
(%)
30
25
20
15
10
5
TV
Channel
Expense
/
Sales
(%)
Currently,
the
cost
structure
of
VGL
looks
like
(in
%
of
Sales)
–
COGS
(33%),
TV
Carriage
(25%),
Employee
(16%),
SG&A
(9%)
and
Manufacturing
(6%).
COGS
and
Manufacturing
expenses
are
variable
and
are
expected
to
grow
with
sales.
At
the
other
end,
Employee
expense,
SG&A
expense
and
TV
Carriage
expense
are
Fixed
costs
to
variable
intensity.
As
VGL
expands
its
product
por]olio
and
revenue
/
household
keeps
improving,
TV
channel
expense
will
be
the
key
driver
to
kick
in
the
operaAng
leverage.
Currently
VGL
pays
fixed
price
per
household
as
broadcasAng
cost
and
as
the
projected
revenue
/
household
improved
form
$2
in
FY
14
to
$5
in
FY
19,
the
siginicant
cost
saving
will
be
directed
to
the
EBITDA
margins.
TV
Channel
expense
(25%)
contains
Carriage
cost
(18%)
and
Content
cost
(7%)
and
I
expect
carriage
cost
to
fall
more
sharply
than
the
content
cost.
Current
core
carriage
cost
for
QVC
is
just
more
than
3%.
While
SG&A
expense
and
employee
expense
can
be
credited
as
Fixed
costs
to
an
extent,
I
expect
VGL
to
maintain
the
expense
raAo
and
to
improve
customer
saAsfacAon.
While
these
costs
are
likely
to
have
a
posiAve
impact
on
EBITDA
margins,
they
will
be
insignificant
(probably
a
2%
savings
over
a
5
year
period).
7.2
11
12.6
14.3
15.5
17.2
18.4
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E

Low
CompeAAve
intensity
–
Challenger
likely
to
be
a
new
player
VGL
Shop
HQ
HSN
QVC
The
industry
is
consolidated
with
handful
of
sizable
players
with
clear
&
established
market
leaders.
The
compeAtors
are
all
of
various
sizes
with
altogether
different
value
proposiaon
to
customers,
thus
diverging
away
from
a
common
ground
to
compete.
Moreover
the
compeAAon
if
any
is
likely
to
happen
on
value
or
product
proposiAon
(such
as
product
features,
delivery
Ame,
support
services,
brand
image)
than
on
price,
which
I
believe
will
be
very
healthy
for
the
industry.
Also,
rivalry
focused
on
such
dimensions
can
improve
value
relaAve
to
subsAtutes
or
raise
the
barriers
facing
new
entrants.
Almost
all
of
the
established
players
are
reasonably
successful
and
profit
making
with
clearly
idenAfied
future
goals
and
strategies,
thus
removing
the
incenAve
to
try
with
a
new
deep
discount
business
model
and
to
enter
VGL’s
turf.
A
compeAtor
to
VGL
is
more
likely
to
be
a
new
player
who
will
have
to
build
his
verAcally
integrated
model
with
a
lot
of
trials
and
errors.
Business
model
Discount
model
Luxury
model
Exclusive
product
por]olio
model
Exclusive
product
por]olio
model
Value
proposiAon
Every
day
low
price
Luxury
&
upscale
items
Exclusive
products
that
you
don’t
find
anywhere
else
Exclusive
products
that
you
don’t
find
anywhere
else
EBITDA
Margin
(%)
12
3
11
21
ASP
(USD)
23
81
58
51

Where
is
the
Moat?
The
opportunity
size
is
large,
the
business
needs
very
li?le
capital
to
operate
&
expand
and
whatever
capital
that
you
throw
in
are
employed
at
high
return
raAos
and
even
be?er,
the
returns
are
thrown
as
hard
cash
every
year.
So,
Where
is
the
moat?
I
think
the
moat
around
VGL
is
an
emerging
moat
which
is
very
casual
and
hard
to
idenAfy.
PotenAal
compeAtors
may
not
have
a
clue
as
to
where
the
valuable
resource
in
the
company
resides
and
what
really
it
is.
I
think
that
these
capabiliAes
are
more
organizaAonal
in
nature
and
it
depends
on
several
factors.
And
as
the
scale
of
operaAons
improves
every
year,
the
emerging
moat
becomes
more
stronger.
VGL
as
an
organizaAon
and
VGL’s
management
in
parAcular
has
a
very
strong
understanding
of
their
products
and
their
business
values.
This
helps
them
to
come
out
with
unique
product
at
a
great
value
proposiAon
and
to
conAnuosly
innovate
into
newer
product
categories.
Customer
engagement
could
be
a
differenAaAng
factor
which
cannot
be
taught
or
replicated.
For
instance,
the
company
does
seepstakes
few
Ames
a
year
when
the
winner
will
get
the
item
deliver
personally
by
ThePresident
of
the
channel.
VGL
has
free
giLs
for
their
top
40,000
to
50,000
customers,
four
Ame
a
year
and
this
is
something
that
not
many
of
the
others
do.
VGL
moAvates
its
execuAve
and
top
level
employees
through
Stock
opAon
plans.
I
firmly
believe
that
VGL’s
moat
is
emerging,
casual,
grows
with
scale
and
a
summaaon
of
really
small
things
–
right
product,
right
price,
right
understanding,
right
value
posiaoning,
right
ame,
right
team
play.

Internet
not
a
threat
but
an
enhancing
factor
50
45
40
35
30
25
20
15
10
5
Web
%
of
Revenues
40
35
30
25
20
15
10
5
VGL's
Web
%
of
Revenues
A
criAcal
and
commendable
element
of
the
Home
Shopping
industry
has
been
it’s
ability
to
embrace
the
technology
changes
rather
than
fight
with
them.
The
industry
has
been
very
nimble
in
incorporaAng
internet
and
then
the
mobile
pla]orms
as
part
of
it’s
sales
strategies,
transforming
themselves
into
an
an
Omni-‐channel
retailer.
The
customers
who
do
not
have
access
to
TV
are
able
to
watch
the
LIVE
streaming
online
and
in
case,
a
show
was
aired
at
an
inconvenient
Ame,
they
can
access
the
online
video
libraries.
The
convergence
of
television,
internet
and
smartphones
is
something
that
these
players
understand
very
well.
And
when
the
cable
boxes
and
the
browsers
in
your
phone
and
laptop
become
one,
they
feed
each
other.
Television
channels
currently
drive
tremendous
traffic
to
online
shopping.
There
are
customers
who
watch
the
shows
on
TV
and
place
their
orders
on
internet
and
there
are
customers
who
do
it
the
other
way.
In
short,
the
conAnued
success
of
home
shopping
pla]orm
and
the
industry
players
are
examples
of
how
you
can
manage
to
survive
in
the
Amazon
era
–
by
developing
deeper
relaAonships
with
your
customers,
by
differenAaAon
your
product
mix,
focusing
on
areas
such
as
product
demos
and
by
creaAng
a
community
around
the
company.
17
44
38
0
VGL
HSN
QVC
11
13
17
19
24
29
34
38
0
FY
12A
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E

ROE,
ROCE
and
ROTCE
=
Extra-‐ordinary
return
capabiliAes
ROCE
(%)
49
65
ROE
(%)
*
37
36
35
38
37
70
60
50
40
30
20
10
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
27
53
48
51
51
52
51
60
50
40
30
20
10
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
46
112
ROTCE
(%)
99
102
110
122
130
150
100
50
0
FY
13A
FY
14A
FY
15E
FY
16E
FY
17E
FY
18E
FY
19E
VGL
has
high
cash
generaAng
abiliAes
coupled
with
li?le
need
for
incremental
working
capital
and
incremental
Capex.
Hence
ROE
or
ROCE
may
not
provide
the
true
picture
of
the
business
quality,
but
Return
on
Tangible
Capital
(ROTCE)
will.
ROTCE
is
calculated
as
OperaAng
income
/
(Net
Current
Assets
+
Net
Fixed
Assets).
The
denominator
takes
into
account
only
the
core
operaAng
capital
that
is
Aed
to
the
business.
ROTCE
of
100%
or
more
is
just
unheard
anywhere
in
the
retail
industry
globally.
QVC’s
ROTCE
stands
at
~80%
and
HSN’s
ROTCE
at
40%.
*
-‐
Fall
in
ROE
aLer
FY
14
is
due
to
change
in
tax
rate.
EffecAve
tax
rate
for
FY
15E
is
27%
as
against
1.4%
in
FY
14.

Projected
Financials
Fiscal
year
2012A
2013A
2014A
2015E
2016E
2017E
2018E
2019E
Fiscal
year
end
date
3/31/12
3/31/13
3/13/14
3/31/15
3/31/16
3/31/17
3/31/18
3/31/19
Revenue
from
operaAons
6,465
8,929
12,983
14,096
16,963
20,412
24,648
29,854
Other
Income
from
OperaAons
0
0
0
0
0
0
0
0
Net
Revenue
from
Operaaons
6,465
8,929
12,983
14,096
16,963
20,412
24,648
29,854
(Cost
of
Sales)
2,280
3,022
4,305
4,551
5,477
6,591
7,959
9,640
Gross
Profit
4,185
5,907
8,678
9,544
11,485
13,821
16,689
20,214
Gross
Margin
(%)
64.7
66.2
66.8
67.7
67.7
67.7
67.7
67.7
(Employee
expense)
905
1,419
2,069
2,291
2,714
3,164
3,697
4,478
(Selling,
General
&
AdministraAve)
472
736
1,109
1,240
1,476
1,674
1,972
2,329
(Manufacturing
expense)
349
576
792
810
967
1,123
1,356
1,642
(TV
Channel
Expense)
1719
2,537
3,285
3,425
3,901
4,695
5,423
6,269
EBITDA
740
639
1,423
1,777
2,427
3,166
4,242
5,496
EBITDA
Margin
(%)
11.4
7.2
11.0
12.6
14.3
15.5
17.2
18.4
(DepreciaAon
&
AmorAzaAon)
91
73
75
96
136
180
237
310
Operaang
Income
(EBIT)
649
566
1,348
1,682
2,292
2,986
4,005
5,186
(Interest
expense)
144
145
145
70
30
30
30
30
Other
Income
283
377
350
150
150
150
150
150
Pretax
Profit
788
798
1,553
1,762
2,412
3,106
4,125
5,306
(Tax)
23
17
27
476
796
1,025
1,196
1,539
Net
Income
765
781
1,526
1,286
1,616
2,081
2,929
3,767
Net
Margin
(%)
11.8
8.7
11.8
9.1
9.5
10.2
11.9
12.6
Basic
EPS
24.1
24.4
47.4
39.5
49
62.4
87
110.8
Basic
EPS
growth
(%)
1.24
94.26
-‐16.67
24.05
27.35
39.42
27.36
Diluted
EPS
24
24.1
46.8
39
48.5
61.8
86.2
109.7

Risks
Changing
television
distribuaon
landscape
• If
current
bundled
distribuAon
model
changes
or
if
customers
are
allowed
to
unbundle
at
their
preference,
VGL
could
suffer
from
a
decline
in
new
member
addiAon
and
hence
the
cost
of
acquiring
a
new
member
may
rise.
• If
the
recently
announced
consolidaAon
in
US
pay
television
industry
takes
shape,
the
carriers
will
have
more
pricing
power
and
can
push
the
carriage
costs
higher.
E-‐commerce
is
extremely
compeaave
• E-‐commerce
compeAtors
namely
Amazon
and
eBay
are
willing
to
spend
huge
sums
on
sales
and
markeAng
and
are
ready
to
maintain
extremely
lower
prices
to
a?ract
new
customers.
• VGL
has
the
burden
of
developing
interesAng
content
and
consistently
engaging
its
viewers
in
addiAon
to
providing
its
retail
offerings.
Changes
in
TV
viewing
habits
• Changes
in
TV
viewing
habits
such
as
usage
of
recording
facility,
shiL
towards
internet
tv
can
have
long
term
impact
on
addiAon
of
new
customers.
Currency
Risk

ValuaAon
&
Conclusion
Among
its
sizable
peers,
while
VGL
is
the
smallest
in
terms
of
revenues,
VGL
has
the
most
promising
growth
story
among
them.
From
the
above
comparison,
it
is
very
evident
that
the
peers
usually
trade
in
a
narrow
valuaAon
band,
making
the
comparison
more
reliable.
Shop
HQ,
though
thrice
the
size
of
VGL
in
revenues,
has
not
churned
out
a
dime
in
profits
for
almost
a
decade.
It
has
been
grossly
mismanaged
for
several
years
now
and
the
damage
is
deep
on
many
dimensions.
SAll,
investors
are
ready
to
bet
on
a
quick
turnaround
and
Shop
HQ
is
trading
at
a
1
Yr
Forward
PE
of
22
compared
to
VGL
which
trades
at
a
1
Yr
Forward
PE
of
11.9.
Had
VGL
been
listed
on
NASDAQ
and
had
VGL
been
closely
noAced
among
its
peers,
I
believe
that
the
comparaAve
return
capabiliAes,
unique
business
posiAoning
and
superior
growth
prospects
will
fetch
a
1
Yr
Forward
PE
that
is
be?er
than
that
of
its
peers.
I
value
VGL
based
on
a
1
Yr
Forward
PE
of
18.9
(15%
discount
valuaAon
to
Shop
HQ)
and
arrive
at
a
price
target
of
INR
926.1
(57.5%
upside)
in
12
months.
Long
term
investors
with
a
3
year
perspecAve
are
likely
to
be
more
rewarded
since
the
a?racAveness
of
the
business
mulAplies
with
scale
and
Ame.
Based
on
a
1
Yr
Forward
mulAple
of
20,
I
arrive
at
a
price
target
of
INR
2216
(276.9%
upside)
in
the
next
3
year
ame
period.
A
reasonable
and
probably
a
significant
dividend
payout
policy
aLer
2
years
can
amplify
the
real
stock
returns.
VGL
Shop
HQ
HSN
QVC
Market
Cap
(USD
Bn)
0.39
0.32
3.7
16.1
Sales
(USN
Bn)
0.21
0.64
2.3
8.6
EBITDA
Margin
(%)
12
3
11
21
Last
3
Year
Sales
growth
CAGR(%)
26.19
4.68
3.5
2.34
ROTCE
(%)
112
0
47.3
81
TTM
PE
16.34
0
23
24
1
Year
Forward
PE
11.9
22
20
21

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