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V-Guard Industries: Book profits

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Premium valuations and the threat from rising copper prices suggest that investors should lock into profits on the stock.

Rajalakshmi Sivam

Making its debut in 2008 just around when the market began its plunge, the stock of V-Guard Industries staged an unexciting show in the year of listing — from the issue price of Rs 82, it corrected sharply to Rs 36.

Over the next year, the stock recouped lost ground. But, based on the prospects of V-Guard's business, we recommended a ‘buy' on the stock in January last at close to its issue price. In the year since, the stock price has more than doubled to Rs 180. For the nine months ended December 2010 V-Guard has reported a 46 per cent growth in PAT.

Shareholders can now consider booking profits in the stock given the high valuation enjoyed by the stock and its small-cap status (less than Rs 500 crore).

At a price-to-earnings ratio of 17 times, the stock trades close to Bajaj Electricals (a bigger player in the consumer electronics space) in valuation terms, which we think is not justified. Also, the BSE Smallcap index has a valuation of only around 14 times

Besides, as there has also been a significant increase in domestic and foreign institutional stake in the company (with promoters diluting holdings) in the last six months, downsides in the market may see the stock falling more sharply.

Sales outlook positive

V-Guard Industries, a leading manufacturer of voltage stabilisers (an also water heaters, fans, low-tension power cables), will continue to see good growth in its top-line, with the demand for consumer electronic items remaining buoyant. Increased capacities post expansion (in the North) and its efforts to expand reach in Tier II/III cities where stabiliser demand continues to be strong will help revenue growth. With higher focus on the retail segment, the power cables business which currently contributes to around 30 per cent of revenues will also grow. But what remains a concern about the business is the rising cost of inputs.

Margins under pressure

Working with thin margins at the EBIT level, raw material costs play a key role in V-Guard's prospects. The price of the key input, copper, which goes into making stabilisers, wires and power cables, is northbound now with rising global demand. In the last one year, the metal's price has risen 30 per cent to $9777/tonne in the London Metals Exchange.

In 2007-08, when copper prices were on the ascendant, V-Guard did face difficulty. EBIT margins dropped by 100 basis points for the year and PAT growth came at much lower point compared to sales growth (13 per cent growth in EBIT against 25 per cent in sales). Is this sequence of events likely to repeat in 2011-12? Margins have already come off the peak for the company. From 13.6 per cent in the June 2009 quarter, EBIT margin has come down to 8 per cent in the recent December quarter. Notwithstanding the current rally, many commodity analysts expect copper prices to further trend upwards. The consumer electronics market has many bigger players, such as Havells and Bajaj Electricals. There is stiff competition from the unorganised players too. With market share being vigorously fought for, it remains to be seen whether V-Guard will be able to successfully pass on cost increases.

The company's debt burden has also increased over the last one year. From an outstanding debt of Rs 39.3 crore in September 2009, the company's books show a debt of Rs 107.6 crore now. Though the debt:equity is not high at 0.7, rising interest rates on the higher borrowings will likely weigh on net margins. The company has been borrowing funds for the various expansion activities (cable manufacturing units, production plants for water heaters, fans, and so on).

Related Stories:
V-Guard PAT rises 63% in Q3 on wires, cable segment
V-Guard records 40.5% rise in PAT

(This article was published in the Business Line print edition dated January 23, 2011)
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