V-Guard Industries: Warming up - Buy

Investors with a medium-term perspective can buy the stock of consumer electronics maker V-Guard Industries. Increasing market share in non-south markets, improving operational parameters and debt repayment — which will help save on interest costs — should help improve the company’s prospects.

From our buy recommendation in March at ₹935, the stock rallied 20 per cent but has since declined due to lacklustre results and broader market correction. At ₹876, the stock trades at about 21 times its estimated earning for 2016-17; it has traded in the valuation band of 10-30 times in the last three years. Havells India, a listed peer, trades at about 23 times its consolidated earnings.

In the first half of the year ending September 2015, V-Guard’s sales have grown 3 per cent and profits have risen 16 per cent year-on-year.

Revenue growth was impacted by the drop in realisation on cables and wires due to sharp correction in copper prices. The weak consumer sentiment was also a dampener. However, now that interest rates have begun to move south, consumer spending should improve, at least in the urban markets.

The second half of 2015-16 should be good for consumer appliance makers, including V-Guard Industries. This year, Diwali sales appear better than last year. Though the cables segment may be under pressure due to falling copper prices, other products — fans, water heaters and stabilisers — should make up for growth.

In the September quarter, V-Guard reported sales growth of just 0.9 per cent. Though volume growth in cables and wires (a segment that contributes a third of revenues) was 6 per cent, a 10 per cent drop in realisations saw the segment drag overall sales.

A shorter summer, which impacted air-conditioner sales and thus volumes in stabilisers and drop in power outages in the South which saw lower sales of digital UPS and inverters also hit revenues. In fans however, the company recorded a strong 24 per cent growth in volumes and 35 per cent in value terms, year-on-year, thanks to the new models launched in the premium category in April.

V-Guard has been growing its presence in the premium-end fans in recent years to keep up with changing consumer preferences. Over the next few years, this should help both the top-line and margins of the company. The revenue growth in the south market in the September quarter was about 3 per cent over last year, but the non-south markets posted a 5 per cent decline in revenues led by lower stabiliser sales due to shorter summer.

In the last few years, V-Guard has been improving its non-south presence and de-risking its business, which was concentrated in the south. Today, of its 580 distributors, about 63 per cent are present in non-south markets. To gain visibility in these new markets, the company has also been increasing its ad spends. In the September quarter, the company spent about 3.7 per cent of revenue on advertising and promotion, up from 3.2 per cent in the same quarter last year.

V-Guard’s operating profit margin stood at 8.46 per cent in the September quarter, up from 8.3 per cent recorded in the same quarter last year. Despite a steep drop in realisation in cables and wires, and a jump in employee costs (12 per cent), what helped margins were better operational efficiencies, good inventory management and price increases in consumer appliances.

Also, thanks to interest costs more than halving, the company’s net profit recorded 20 per cent growth over the same quarter last year. V-Guard has repaid debt of about ₹90.5 crore in the last one year. The company intends to become debt-free in the next year.

Going ahead, as the company’s employee costs stabilise, interest costs drop further and premium products see better traction, margins should improve.

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