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V-Guard is into the manufacturing and marketing of products such as stabilizers, cables, water and solar
heater, pumps, fans, UPS and Digital UPS which have mass consumption demand. It is a significant brand in
South India. It has recently expanded operations pan India and we believe the market for its products offer
high growth opportunities. We expect revenue/PAT CAGR of 28%/25% during FY11-13. Maintain ACCUMLATE
and price target of Rs244 (12x PER FY13E).
Investment Highlights
A play on the mass consumption market in India
V-Guard products are consumed by the mass market. As per NCAER, the number of middle income households
is going to increase by 70% to 238 mn households by 2015. The growing middle class in India, lower penetration
of household appliances, increasing housing activity will lead to sustained demand for the company's product
portfolio. Also increased power availability in the country over the next few years will result in higher demand.
Broad portfolio + wide distributor network + prominent brand name = High Growth
V-Guard over the last decade has expanded its product portfolio from stabilizers and cables to many other
products such as pumps, electric and solar water heaters, UPS, Digital UPS and Fans. These products have
high demand especially in the semi-urban and rural market. It has also over the past three years nearly doubled
its distribution network (208 distributors, 2,688 dealers and ~11,000 retailers) and thus addressed the wide
spread market. As it has a strong brand name, it has been able to enter newer consumer related products and
has significant presence. We believe the robust product portfolio along with a wide reach will enable a
revenue/PAT CAGR of 28%/25% during FY11-13.
Expanding geographical reach to aid high growth
V-Guard has predominantly been a South Indian player but over the past few years it has expanded its presence
across India. It has been able to penetrate the newer markets due to its product portfolio and ability to set up a
wide distribution network. In order to cater to the growing market it has also increased its product portfolio.
VGuard
has grown its revenues from Non-South markets from 3% of sales in FY07 to 22% in FY11. We believe
that the increased product portfolio, wide distribution network and new geographical markets will result in
sustainable growth over the next few years.
Revenue/PAT CAGR of 28%/25% during FY11-13
V-Guard had a top line and bottom line CAGR of ~34% during FY06-11. Going ahead, we expect revenue/PAT
CAGR of 28%/25% during FY11-13 due to entry into new markets and increased revenues from its expanded
product portfolio. V-Guard OPM is expected to decline by ~15bps (9.9%) in FY12 and by further ~10bps (9.8%) in
FY13 due to increased contribution from low margin products (cables, fans etc) and raw material cost pressure.
Working Capital cycle to stabilize
V-Guard‟s working capital increased significantly in FY11 primarily due to higher inventory. The increase in
inventory was primarily due to higher stocking of finished goods in order to cater to the high demand period
(AprJun).
Management has guided that going ahead the working capital should reduce due to lower debtor days
by giving cash discounts and providing channel financing too. Also prudent inventory management will enable
inventory days to reduce.
Attractive Valuation: Maintain ACCUMULATE and a price target of Rs244
V-Guard has outperformed the BSE sensex (return of ~34% since our coverage in August, 2010 as against BSE
giving negative returns of 8%). Going ahead, we believe the company is poised for high growth as it has created
a broad portfolio, wide distribution network and a strong brand name. We continue to value V-Guard at a PER of
12x FY13 and maintain our target price of Rs244.
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