Vaibhav Global Ltd. Ready to Sparkle!!!

Vaibhav Global Ltd Ready to Sparkle!!!

4 Recommendation CMP (16/01/2013) Target Price Sector Stock Details BUY Rs. 133 Rs. 213 Retail Jewellery Valuation & Recommendation Vaibhav Global Ltd (VGL) profitability got impacted during FY07 to FY10 as the company incurred losses on account of acquisitions at higher value and launch of TV Channels. This was further impacted by the global economic turmoil, resulting in global economic slowdown/recession. To combat the crisis, the company downsized its operation and changed its business model to full year discount retailing of artificial jewellery and fashion BSE Code 532156 accessories through TV channel in US and UK. The discount model has differentiated VGL from giant global players like QVC and HSN and brought its NSE Code VAIBHAVGBL recognition in the market. VGL is the only company operating in full year Bloomberg Code VGM IN discount model. This has helped company to turnaround its operation in last Market Cap (Rs cr) Free Float (%) 421 41.5% two years. We feel the discounted sale retailing on TV channel in US and UK business is highly scalable and will help company to grow its revenue and PAT 52- wk HI/Lo (Rs) 151/33 by 25.7% and 23.4% CAGR during FY12 to FY14E respectively without any big investment. We expect VGL to report EPS of Rs. 22.6 and 30.5 in FY13E and Avg. volume BSE (Quarterly) 38280 FY14E respectively. ROCE is expected to improve from 16.4% in FY12 to 22.8% in Face Value (Rs) Dividend (FY 12) 10 No Dividend FY14E. We initiate coverage with a BUY recommendation and target of Rs. 213 per share (7x FY14E EPS), a 60% upside from the current levels. Shares o/s (Crs) 3.2 Relative Performance 1Mth 3Mth 1Yr VGL 67.3% 95.7% 286.7% Sensex 3.0% 6.4% 23.0% 170 VGL 150 130 110 90 70 50 30 Shareholding Pattern 30 th Sep 2012 Promoters Holding 58.5% Institutional (Incl. FII) 19.9% Corporate Bodies 3.3% Public & others 18.2% Ruchita Maheshwari Research Analyst (+91 22 3926 8023) ruchita.maheshwari@nirmalbang.com Sunil Jain HOR (Retail) (+91 22 3926 8196) sunil.jain@nirmalbang.com Year Consolidated Net Sales (Rscr) Growth (%) EBITDA (Rs cr) Investment Rationale Not Jewellery but a retail company: VGL has changed its business model from being a jewellery company into a retail company where the company sells its products through electronic retailing, i.e. sales through television and the internet. The company has successfully transformed into a retail company which can be easily divulged from the sales break-up of FY12 where US TV Channel accounts 58%, UK TV Channel accounts 28% and Wholesale accounts 14% of the total revenue. Liquidation / discount sale has become a differentiator: VGL had started retailing jewellery through television channels like any other player. But was not able to sustain against the big players. The Company thought to close it down and company announced liquidation of inventory over TV channel. The company was able to sell its entire inventory in a matter of few months. This influenced VGL to change its TV channel sell model to discount sell model where the products are sold on discount for the entire year. This strategy has become differentiator amongst the already established players like QVC (Liberty International) and HSN. Highly scalable business model: Retailing through home TV shopping business model is highly scalable with limited investment. Company can expand customer base by reaching additional home with adding up more cable/satellite service provider. Company can mine the existing customer with different products and can get higher share of its customer s wallet. Apart from this the investment required in the expansion of business is also limited as company does not need much capex on account of outsourcing of product and smaller working capital cycle. Margin (%) APAT (Rs cr) Margin (%) Adj. EPS (Rs) FY11 525.8 55.5% 53.4 10.2% 42.4 8.1% 13.4 10.0 21.7% FY12 646.5 22.9% 74.0 11.4% 62.3 9.6% 19.6 6.8 26.5% FY13E 838.5 29.7% 87.8 10.5% 71.7 8.5% 22.6 5.9 23.7% FY14E 1021.5 21.8% 112.6 11.0% 96.8 9.5% 30.5 4.4 26.6% PE (x) ROE (%) 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 1

Company Background is a global retailing company selling through TV channels in US and UK. It operates mainly in two business segments namely Wholesale Operations and Retail Operations with retail operations contributed 86% of total revenue in FY12 and balance by wholesale operations. In wholesale operations, VGL, through its Indian operation and through its subsidiary in Hong Kong, sells precious, semi-precious and artificial jewellery, etc to retailers like Wall Mart, Carrefour, etc. Its retail operations include two wholly owned TV channel subsidiary companies, one running 24 hours in USA and the other running 20 hours in UK, which are involved in TV marketing. These channels showcase VGL's products to customers, take orders from customers and then ship the product to the customers. VGL went through a turbulent cycle during FY08 and FY09 on account of new business initiatives, high cost acquisitions and global slowdown, VGL suffered huge cash losses and was referred for Corporate Debt Restructuring (CDR) programme. Since then, VGL has reorganized its operations in various countries and has reported considerable improvement in performance in last two to three years. The Journey so far 2004-05 VGL ventured into international retail market by setting up its wholly owned subsidiary Jewel Gem Inc. USA. The company set up retail chain stores at major tourists destinations like Alaska and Caribbean under the brand name GenoA Jewelers. VGL also commissioned diamond-processing unit at Adarsh Nagar, Jaipur for captive consumption in manufacturing jewellery and exports. 2005-06 Acquisition of a manufacturing facility at Thailand and marketing facilities at USA, UK, Japan, Hong Kong and Canada Retail Chain stores at Alaska, Caribbean Islands, Mexico, St. Kitts, St. Thomas, St. Maartin was set up Warburg Pincus Group, one of the leading private equity investors in the world, invested USD 47 million (Rs. 245 crores) in the company by way of private equity placement. Moreover, VGL also marketed products on the UK-based Jewellery TV channel (launched in April 2006) under the brand name of Iliana, FH (For Him) and Kara. Completion of USD 70 Million GDR issue 2006-07 Set up seven more retail stores at high-end holiday destinations, taking the total count of stores at holiday destinations to nineteen outlets. Started twenty four hour online jewellery shopping channels The Jewelry Channel Inc. in USA in April 2007. Started a 24-hour jewellery TV channel in Germany. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 2

2007-08 Nalanda Capital s India Fund acquired 14.9% share of the company in the form of Global Depository receipts and an additional 5% stake through warrants. The total transaction size was about US $25 million. 2008-09 Global turmoil took a toll on the company s financial health. Company took various restructuring initiatives to counter the ill-effects. The company exited business in German TV retail market and Caribbean and Alaska B&M Retail Markets. VGL consolidated Gemstone manufacturing operations in Jaipur. The company had applied for restructuring of its working capital and term loan under CDR Mechanism. 2009-10 The company decided to close down its TV retailing business by clearing / liquidating the entire inventory at discounted rate. This strategy was an instant success and this helped VGL in identifying the discount segment within electronic retail, which was underserved. VGL changed its TV channel sell model to discount sell model where the products are sold on discount for the entire year. 2011-12 Promoter made an open offer to acquire share. The promoters of Vaibhav Gems have acquired nine million shares for Rs 37.57 crore through open offer. The voluntary open offer was made to consolidate the promoter group's holding. The open offer was made at Rs 41.75. Subsidiaries The Company has the following operating Subsidiaries: STS Jewels a 100% subsidiary is engaged in the wholesale segment and selling jewellery to the Inc., USA departmental stores, TV channels and others in USA. STS Gems a 100% subsidiary is engaged in outsourced manufacturing for the group and Limited, Hong marketing of Jewellery in Europe. Kong The Jewellery a wholly owned step down subsidiary of Vaibhav Global Limited, is engaged in Channel Ltd. marketing of jewellery through electronic media and operates a dedicated 20 hours UK (TJC UK) jewellery TV shopping channel and Internet Jewellery shopping website in the UK. The Liquidation a wholly owned step down subsidiary of Vaibhav Global Limited is engaged in Channel, USA marketing of jewellery through electronic media and operates a dedicated 24 hours (TJC USA) jewellery TV shopping channel and Internet Jewellery shopping website in the USA. Source: Company and Nirmal Bang Research 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 3

Investment Rationale Not Jewellery but a retail company VGL sells its products through electronic retailing, i.e. sales through television and the internet. This retail drive has helped VGL to enhance its brand value and come closer to the customers. VGL launched The Liquidation Channel to cater the discount market segment which was an instant success. The company also launched The Jewellery Channel in UK. These LIVE channels can be reached out on the Internet also (www.liquidationchannel.com and www.tjc.co.uk). Company sells artificial jewellery and fashion accessories in retail business. UK TV Channel Source: www.tjc.co.uk and Nirmal Bang Research US TV Channel Source: www.liquidationchannel.com and Nirmal Bang Research 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 4

VGL has successfully transformed into a retail company which can be easily divulged from the sales break-up of FY12 where US TV Channel accounts 58.7%, UK TV Channel accounts 28.1% and Wholesale accounts 13.3% of the total revenue. It s TV channel reaches to 65mn houses and has 5.27 lakh registered customer in US where as in UK its channel reaches to 31mn household and has 4.39 lakh registered customer. In H1FY13, VGL sold 25mn pieces with an average selling price per piece of $19 through TV retailing in US and 6.7mn pieces in UK with an average selling price per piece of $31. Company has a gross margin of around 65% align with retail industry. We expect the company to continue focus on retail business which is expected to contribute 88.6% in FY13E and 90.5% in FY14E from 82.9% in FY11 and 86.7% in FY12. On the other hand, the contribution from wholesale business is expected to decline from 17.1% in FY11 to 9.5% in FY14E. Sales Break-up 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 17.1% 13.3% 11.4% 9.5% 28.1% 24.9% 25.5% 31.0% 51.9% 58.7% 63.7% 65.0% FY11 FY12 FY13E FY14E US Retail UK Retail Wholesale Source: Company and Nirmal Bang Research Liquidation / discount sale has become a differentiator Company launched full - fledged retailing on TV channel in UK and US during FY06 and FY07 more like any other TV channel retailer, but company found it very difficult to stabilize itself and compete with TV retailer giants like QVC and HSN. Over and above that those economies also went into recession. This resulted into huge losses for the company. The company decided to close down it business by clearing / liquidating the entire inventory at discounted rate in US. The company was able to sell its entire inventory in matter of few months. This strategy was an instant success and helped VGL in identifying the full fledged discount segment within electronic retail, which was underserved. VGL changed its TV channel sell model to discount sell model where the products are sold on discount for the entire year. While there are 8-10 major players in electronic jewelry retail in both the US and UK markets, almost none of them address the discount market segment. To en-cash the available opportunity, VGL changed its TV channel name to The Liquidation Channel (currently has an access to 65mn of the 115mn households in the US) to cater to the discount market segment which was an instant success. This strategy has become differentiator amongst the already established players like QVC (Liberty International) and HSN who deals into high-end products. It also helped the company to survive amongst the big players and gain recognition. VGL changed its business model to Liquidation Channel which has helped it grow its US revenue by 133.4% in FY11 and by 36% in FY12. In UK also, company is changing its business model to discount model. In FY12, company brought down its average selling price per piece to $50 from $59 in FY11. This has translated into volume growth of 29.6% in FY12. In H1FY13, the sales volume was up by 177.5% compared to H1FY12 where the average selling price per piece has fallen from $65 in H1FY12 to $31 in H1FY13. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 5

Highly scalable business model The key trends going across the industry include consumers inclination towards online jewelry shopping and changes in consumer preferences and buying behavior. The major growth drivers overhauling the growth of the jewelry industry in the US are: increasing internet penetration, rising global gross national income and ease of shopping with the information available at a click. US online jewellery sales are 13% (approximately $4 billion) of the US jewellery market (approximately $30 billion). The business model of retailing through TV channel is highly scalable wherein VGL can mine the same customer with different products. Initially company was selling artificial jewellery and real jewellery through TV channel but recently VGL has extended its product line by adding fashion accessories to the same portal. This strategy will help VGL to increase its share of the customer s wallet as the company does not have to spend on building network which is already established through retailing of artificial jewellery products. VGL currently caters to 96 mn households on Home TV shopping and E-commerce in the US and UK. Company TV channel reaches to 65mn houses and has 5.27 lakh registered customer in US where as in UK its channel reaches to 31mn household and has 4.39 lakh registered customer. VGL can expand the reach by adding few more service providers of satellite TV to its network. We feel, VGL will continue to concentrate on these two markets and expand its business by reaching to more households, increasing per customer sale, increasing market share and introducing other fashion accessories (like hand bags, scarves, Iphone/Ipad covers, etc) which is expected to contribute significantly to growth going forward. The new launch of fashion accessories has increased the market size to over $ 10bn for VGL in electronic retailing to both US and UK. The new offerings combined with lower price points have increased the repeat purchase rate to over 8 average per customer per year in FY12 from 6.5 per customer in FY11. We feel that this will act as a revenue driver for the company with the increase in the household reach and repeat purchase order from the existing customers. We also feel that the company will be focusing more on outsourcing and marketing which will keep the business assets light as the company will not have to invest in capex. Apart from this, the cash involvement in working capital is also only towards inventory. VGL gets its payment on cash as the products are sold and company prefers to make payment to creditor on cash basis to get good discount. According to rough calculation, VGL will need Rs. 190 crores to double its sales which means Sales to capital Employed of 3.4 times. With 10% EBIT margin, company can generate 37% ROCE on an incremental capital employed. All this indicates that the business model of VGL is highly scalable. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 6

Operating Performance 7000 VGL - US Home TV Market (Sales Volume '000s) 6827 60 53 Average Selling Price US (US$) 6000 5000 4000 3000 2000 1000 456 1821 3291 5251 50 40 30 20 10 33 24 18.5 18 0 FY10 FY11 FY12 FY13E FY14E 0 FY10 FY11 FY12 FY13E FY14E Source: Company & Nirmal Bang Research 2000 1800 1600 1400 1200 1000 800 600 400 200 0 VGL - UK Hme TV Market (Sales Volume '000s) 1820 1300 745 575 318 FY10 FY11 FY12 FY13E FY14E 120 100 80 60 40 20 0 115 Average Selling Price UK (US$) 59 50 30 27 FY10 FY11 FY12 FY13E FY14E Source: Company & Nirmal Bang Research VGL has devised a strategy according to which they are reducing the average selling price of their products whereas increasing the sales volumes. This strategy has been formulated on the basis of the success of The Liquidation Channel. If we analyze the above graph, the company has successfully reduced its average selling price from $53 per piece in FY10 to $19 per piece in H1FY13 and which the management expects to stabilize around $18-19 in US. The same modus operandi can be seen in UK market as well where the management has reduced the average selling price of UK very sharply in FY12 and H1FY13. This has resulted in volume growth of 29.6% in FY12 and further 178% in H1FY13 compared to H1FY12. This has helped the company to increase its reach to mid segment which majorly buys the discounted products. If we see the above graph, the sales volumes have increased significantly and the management expects to continue the momentum going forward. In nutshell, this strategy has helped the company to survive amongst its competitors like QVC and HSN which are present in high-end segment. This kind of business model is highly scalable in nature as the company s modus operandi is to source the low cost product and to sell these products at a very competitive price. The company is able to enjoy strong foot in the discount segment as there are no certified players present. The only concern is the fall in average selling price if the company is not able to grow on the volume terms, the revenue growth will be severely impacted. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 7

Financial Analysis VGL has transformed itself to a discount retail business through TV channel from the jewellery business. This discounted model has helped the company to post a remarkable growth in terms of revenue and PAT and also to survive amongst the biggies. VGL is expected to continue the same model where it will sell the products at discounted rate and increase the volume by expanding its reach and providing other aligned fashion accessories. We expect VGL s revenue to grow at a 25.7% CAGR over FY2012-14E and PAT by 23.4% CAGR during the same period. 1200.0 1000.0 800.0 600.0 400.0 200.0 0.0 Net Revenue & Growth% 80.0% 55.5% 60.0% 46.5% 40.0% 29.7% 22.9% 21.8% 20.0% 0.0% -21.8% -20.0% -43.1% -40.0% -60.0% FY08 FY09 FY10 FY11 FY12 FY13E FY14E Net Revenue Growth% Source: Company & Nirmal Bang Research We expect VGL to report 10.5% and 11% operating margins in FY13E and FY1E respectively. We also expect the EBIDTA to increase by 18.7% to Rs. 87.8 crore and by 28.2% to Rs. 112.6 crore for FY13E and FY14E respectively. We expect VGL to report APAT at Rs. 71.7 crore in FY13E and 96.8 crore in FY14E. The APAT margins will be 8.5% and 9.5% in FY13E and FY14E respectively. 200.0 100.0 0.0-100.0-200.0-300.0 EBITDA, APAT & Margins FY08 FY09 FY10 FY11 FY12 FY13E FY14E EBITDA APAT EBITDA% APAT% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% Source: Company & Nirmal Bang Research Due to carried forward losses and CDR, the company does not pay any dividend and has lower tax outgo. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 8

Q2FY13 Consolidated Result Analysis Rs. in Crores Particulars Q2FY13 Q2FY12 YoY% Q1FY13 QoQ(%) Net Sales 217.8 124.9 74.3% 199.8 9.0% Other Operating Income 4.5 0.9 412.5% 4.6-1.3% Total Income 222.3 125.8 76.7% 204.4 8.7% TOTAL EXPENDITURE 208.9 114.9 81.8% 170.6 22.4% EBITDA 13.4 10.9 22.9% 33.8-60.5% Interest 3.4 3.8-9.3% 3.8-9.8% Other Income 0.2 10.7-98.6% 1.8-91.6% EBDT 10.1 17.8-43.3% 31.8-68.3% Depreciation 2.0 2.4-15.6% 2.2-9.9% PBT 8.1 15.4-47.6% 29.6-72.6% Total Tax 1.2 0.9 25.5% 1.5-21.9% Reported Profit After Tax 6.9 14.5-52.3% 28.1-75.4% Extra-ordinary Items 0.0 0.0 0.0 Adjusted Profit After Extra-ordinary item 6.9 14.5-52.3% 28.1-75.4% EPS (Unit Curr.) 2.18 4.57 8.85 Equity 31.70 31.70 31.70 BPS BPS EBITDA(%) 6.1% 8.7% -260 16.9% -1080 PBT(%) 3.7% 12.4% -870 14.8% -1110 PAT(%) 3.2% 11.6% -840 14.0% -1080 Segment Revenue Wholesale 107.5 88.4 21.6% 122.0-11.9% Retail 203.6 106.2 91.8% 174.5 16.7% Total 311.1 194.6 59.9% 296.6 4.9% Less: Intersegment 93.3 69.6 34.0% 96.7-3.5% Net Sales 217.8 124.9 74.4% 199.8 9.0% Segment Result Wholesale 8.3 0.3 3102.9% 12.3-32.1% Retail 2.6 8.2-68.2% 18.6-86.0% Total 10.9 8.4 29.6% 30.8-64.6% Interest Income 0.4 0.1 0.7 Interest Expense -3.4-3.8-3.8 Exchange Gain/Loss unallocated 0.2 10.7 1.8 PBT 8.1 15.4-47.6% 29.6-72.6% EBIT Margin BPS BPS Wholesale 7.7% 0.3% 740 10.1% -240 Retail 1.3% 7.7% -640 10.6% -930 Total 3.5% 4.3% -80 10.4% -690 Source: Company and Nirmal Bang Research Q2FY13 Analysis: The Net Sales grew by 74.3% YoY to Rs. 217.8 crore in Q2FY13 and by 9% QoQ. The jump in sales is mainly attributed to the growth in retail business which grew by 91.8% YoY and by 16.7% QoQ. The EBITDA and EBITDA margin came in at Rs. 13.4 crore and 6.1%, respectively in Q2FY13. EBITDA margin declined by 260bps YoY and by 1080bps QoQ primarily due to jump in employee and other expenses. Employee is a major expense in the total expenditure and accounts for 14% which jumped to 17% in Q2FY13 as a % of sales. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 9

Q2 is the seasonally weak quarter where the company prepares for peak season in Q3. Apart from this company added warehousing capacity in US which has resulted in higher costs in Q2. During the quarter under review, the reported PAT fell by 52.3% YoY to Rs. 6.91 crore and by 75.4% QoQ. Segmental EBIT margin of the Wholesale segment was up by 740 bps YoY and down by 240 bps on QoQ basis to 7.7%, whereas; Retail segment EBIT margin fell by 640bps YoY and by 930bps QoQ to 1.3% in Q2FY13, dragged overall EBIT margin of the company to 3.5%; down by 80bps and 690bps YoY and QoQ respectively. Peer Comparison There is no direct competitor of VGL in India as the company deals in retailing of jewellery through TV channels, so we have compared VGL with HSN and QVC (Liberty Interactive Corp) of USA which deals into the same products and function of the business is also same. If we compare VGL with HSN and QVC, VGL is relatively much smaller in size. VGL trades at a lower PE multiple and EV/EBITDA compared to HSN and QVC. The plus point which sets VGL apart from HSN and QVC is selling a product by discounted model through TV channel. VGL is able to control the cost as the company is backward integrated and sources the raw-material at a very low price and get the material manufactured in low cost area like India, China, Thailand, etc. This helps the company to lower the average selling price. VGL like HSN and QVC has extended its product line where it has added other fashion accessories like scarves, handbags, etc. VGL is available at a PE of 6x FY13E and 4.4x FY14E compared to 21.5x FY13E and 17.4x FY14E of HSN and 21.1x FY13E and 16.3x QVC. With the ability to grow strong and focus on the discounted segment where it differentiated with its competitor, we feel that VGL valuation can also improve. INR Net Sales EBITDA EBITDA% PAT PAT% EV/EBITDA In Rs. crores Companies FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Vaibhav Global** 838.5 1021.5 87.8 112.6 10.5% 11.0% 5.4 7.3 0.6% 0.7% 4.6 3.5 0.5 0.4 23.7% 26.6% 6.0 4.4 HSN* 18083.6 19111.0 1778.0 1920.1 9.8% 10.0% 850.3 1029.9 4.7% 5.4% 10.1 9.4 1.0 0.9 26% 41% 21.5 17.4 QVC* 55959.8 58893.2 6879.5 7702.3 12.3% 13.1% 3184.5 3449.1 5.7% 5.9% 12.2 10.9 1.50 1.4 9% 10% 21.1 16.3 EV/Sales ROE PE Source: Bloomberg Estimates & **Nirmal Bang Research *December ending 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 10

Valuation & Recommendation Vaibhav Global Ltd (VGL) profitability got impacted during FY07 to FY10 as the company incurred losses on account of acquisitions at higher value and launch of TV Channels. This was further impacted by the global economic turmoil, resulting in global economic slowdown/recession. To combat the crisis, the company downsized its operation and changed its business model to full year discount retailing of artificial jewellery and fashion accessories through TV channel in US and UK. The discount model has differentiated VGL from giant global players like QVC and HSN and brought its recognition in the market. VGL is the only company operating in full year discount model. This has helped company to turnaround its operation in last two years. We feel the discounted sale retailing on TV channel in US and UK business is highly scalable and will help company to grow its revenue and PAT by 25.7% and 23.4% CAGR during FY12 and FY14E respectively without any big investment. We expect VGL to report EPS of Rs. 22.6 and 30.5 in FY13 and FY14 respectively. ROCE is expected to improve from 16.4% in FY12 to 22.8% in FY14E. At the CMP of Rs. 133, VGL trades at P/E of 5.9x FY13E and 4.4x FY14E. EV/EBITDA of 4.5x and 3.5x FY13E and FY14E respectively. The ROE for the company is expected at 23.7% and 26.6% in FY13E and FY14E respectively. We initiate coverage on VGL with a 'BUY' recommendation and a 12-month price target of Rs. 213 per share valued at 7x PE of FY14E, representing a potential upside of 60% from the current levels. Risks & Concerns With the continuous decline in average selling price, if the company is not able to generate high volume from the same, it can dampen the revenue growth for the company and our projections. The company business model involves higher fixed cost commitment and if company is not able to generate sufficient revenue to cover fixed cost than it can have major repercussions in the profitability. Any new competitor ventured into the discounted space can increase competition for VGL. The carried forward losses and CDR plan restrict the company from paying dividend. The company is trying to replicate the success model of business of US in UK. Any failure in the same can lead to disruptions in revenue growth and our estimates. 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 11

Consolidated Financials Consolidated Profitability (Rs. In Cr) FY11 FY12 FY13E FY14E Balance Sheet (Rs. In Cr) FY11 FY12 FY13E FY14E Y/E - March Issued Share Capital 31.7 31.7 31.7 31.7 Revenues - Net 525.8 646.5 838.5 1021.5 Redeemable Pref Share 44.0 44.0 44.0 0.0 % change 96.6% 22.9% 29.7% 21.8% Total Shares 75.7 75.7 75.7 31.7 EBITDA 53.4 74.0 87.8 112.6 Reserves & Surplus 129.4 189.6 260.9 357.4 % change -19.8% 38.6% 18.7% 28.2% Net Worth 205.1 265.3 336.6 389.1 Interest 14.5 14.4 15.1 13.7 Total Loans 201.6 177.6 157.6 147.6 Other Income 11.7 12.0 14.2 15.6 Minority Interest 0.0 0.0 0.0 0.0 EBDT 50.5 71.6 87.0 114.5 Net Deferred Tax Assets -0.4-0.3 1.4 3.5 Depreciation 8.1 9.1 9.9 10.5 Total Liabilities 406.3 442.7 495.6 540.2 Exceptional (Gain)/ Loss -0.7 10.1 0.0 0.0 Net Fixed Assets 23.2 22.9 18.0 12.5 Fores Gain / (Loss) 0.0 16.3 0.0 0.0 CWIP 1.5 0.0 0.0 0.0 PBT 43.1 68.7 77.0 104.0 Goodwill on consolidation 179.8 179.8 179.8 179.8 Tax 0.0 0.2 5.4 7.3 Investments 17.2 13.1 13.1 13.1 PAT 43.1 68.5 71.7 96.8 Inventories 147.9 171.8 220.7 271.3 Adj PAT 42.4 62.3 71.7 96.8 Sundry Debtors 23.4 37.5 48.9 59.6 Preference Dividend @1% 0.0 0.0 0.4 0.2 Cash & Bank 20.1 18.7 28.2 28.6 PAT after Preference Div 42.4 62.3 71.2 96.5 Loans & Advances 34.8 70.5 78.9 87.4 Shares o/s ( No. in Cr.)* 3.2 3.2 3.2 3.2 C A L&A 226.2 298.4 376.8 446.9 EPS 13.6 21.6 22.6 30.5 CL & P 41.6 71.5 92.0 112.1 Adj EPS* 13.4 19.6 22.6 30.5 Working Capital 184.6 226.9 284.7 334.8 Cash EPS 16.2 24.5 25.7 33.8 Total Assets 406.3 442.7 495.6 540.2 DPS (Rs.) 0.0 0.0 0.0 0.0 Cash Flow (Rs. In Cr) FY11 FY12 FY13E FY14E Quarterly (Rs. In Cr) Dec.11 Mar.12 Jun.12 Sep.12 Operating Revenue including OI 205.7 192.3 204.4 222.3 Profit Before Tax 42.4 68.7 76.6 103.8 EBITDA 30.0 25.7 33.8 13.4 Direct Taxes paid -0.1-0.2-3.7-5.2 Interest 3.5 3.8 3.8 3.4 Depreciation 8.1 9.1 9.9 10.5 EBDT 26.5 21.9 30.0 9.9 Change in WC -10.4-38.6-48.3-49.7 Dep 2.7 2.0 2.2 2.0 Interest Expenses 13.1 12.8 15.1 13.7 Other Inc. 9.4 0.2 1.8 0.2 Other Operating Activities 0.7-0.2 0.0 0.0 PBT 33.2 20.1 29.6 8.1 CF from Operation 53.8 51.6 49.7 73.1 Tax 2.2-2.9 1.5 1.2 Investment PAT from ordinary activities 31.0 23.0 28.1 6.9 Capex -5.9-7.5-5.0-5.0 Extraordinary items 0.0-1.9 0.0 0.0 Other Investment -3.8 4.8 0.0 0.0 PAT 31.0 24.9 28.1 6.9 Total Investment -9.8-2.7-5.0-5.0 EPS (Rs.) 9.8 7.2 8.9 2.2 Free Cash Flow 44.0 48.9 44.6 68.1 Adjusted EPS (Rs.) 9.8 7.9 8.9 2.2 Financing Operational Ratio FY11 FY12 FY13E FY14E Equity raised/(repaid) 0.0 0.0 0.0 0.0 EBITDA margin (%) 10.2% 11.4% 10.5% 11.0% Inc/Dec in Reserves 0.0 0.0 0.0 0.0 Adj.PAT margin (%) 8.1% 9.6% 8.5% 9.5% Repayment of Redemable Preferenace 0.0 0.0 0.0-44.0 Adj.PAT Growth (%) NA 46.8% 15.1% 35.0% Debt raised/(repaid) -0.7-29.3-20.0-10.0 Price Earnings (x) 10.0 6.8 5.9 4.4 Dividend (incl. tax) paid 0.0 0.0 0.0 0.0 Book Value (Rs.) 50.8 69.8 92.3 122.8 Deferred Revenue Exp. 0.0 0.0 0.0 0.0 ROCE (%) 13.4% 16.4% 19.7% 22.8% Interest Expenses -13.1-12.8-15.1-13.7 RONW (%) 21.7% 26.5% 23.7% 26.6% Deposits 1.1 2.3 0.0 0.0 Debt Equity Ratio 1.0 0.7 0.5 0.4 Foreign Currency Translation -23.6-8.2 0.0 0.0 Price / Book Value (x) 2.6 1.9 1.4 1.1 Cash Flow from Financing Activities -36.3-48.0-35.1-67.7 EV / Sales 0.8 0.6 0.5 0.4 Net Cash Flow 7.7 0.9 9.6 0.4 EV / EBIDTA 7.5 5.5 4.5 3.5 Beginning Cash Flow 10.1 17.8 18.7 28.2 Cash as reported in Balance Sheet 17.8 18.7 28.2 28.6 Source: Company & Nirmal Bang Research 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 12

Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities PVT LTD) B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax : 022 3926 8010 17-Jan-13 Please refer to the disclaimer towards the end of the document P a g e 13