V-Guard Industries: BUY :: Business Line

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Diversification into markets outside the South, entry into new product segments such as induction cook tops and a presence in digital UPS and solar water heaters offer immense potential for V-Guard Industries to grow over the next two-three years. The broader market correction has triggered a correction in the stock from its all-time high of Rs 590 last December. At the current price of Rs 497, the stock of V-Guard Industries discounts its expected earnings for FY-14 by 17 times. Its competitor, Havells, trades at 19 times.

V-Guard has been growing its sales at a compounded rate of 40 per cent annually in the last five years. Its expansion into markets outside South India may help it outpace peers. Though copper prices may recover to some extent from the current trough, the company may benefit from lower volatility in copper prices on weak Chinese demand. It may also be able to partly pass on cost increases, if any, to customers, given that the appliances it focuses on don’t entail high outlays.

STRONG REVENUES

In 2012-13, V-Guard recorded a sales of Rs 1,360 crore, up 41 per cent over the corresponding previous period. Stabilisers grew by 24 per cent (volume up 13 per cent), while pumps and water heaters recorded a growth of 40 per cent and 33 per cent respectively. In solar water heaters and fans, the growth was around 15-25 per cent. However, going ahead, inverters, solar water heaters and digital UPS are expected to bring in a higher share of revenue.

Stabilisers as a segment might see slower growth as more refrigerators and air-conditioners come with built-in stabilisers. Currently, stabilisers make up around 15 per cent of sales for the company, down from around 25 per cent in 2010.

Cables, digital UPS and pumps contribute almost 65 per cent of sales now. The company entered into the induction cook-tops and mixer grinder market last year, and both these products have been received well by the market.

The company is hoping to grow these segments further with its extensive distribution network of 230 exclusive distributors and over 15,000 retailers across India.

V-Guard is now aggressively marketing its products in the north and eastern pockets. In 2008, less than five per cent of company’s sales were from markets outside South India, but today almost one-fourth of the revenues is from these markets. The company intends to grow its business in these markets by expanding the retailer network.

The company spent around Rs 58 crore (4.27 per cent of sales) on advertising last year to build visibility for its brand in the non-south markets. Revenues from the non-South markets have increased 58 per cent in 2012-13 over previous year. Though, initially, V-Guard had to offer discounts and liberal trade credit to push its products, it has now gained market share and reduced discounts, making for better profit margins.

With expanding geographies and higher sales volumes, the company recently increased the capacity of its cables and wire factory at Kashipur, Uttaranchal. The capacity of this factory now stands doubled at around 6.6 million coils per annum.

PROFIT MARGINS TO IMPROVE

The operating profit margin was two percentage points lower at 8 per cent for FY-13. Higher advertisement expenses for a foothold in the new markets (selling and distribution expenses as a percentage of sales were up to 6.3 per cent from 5.7 per cent last year), inventory write-downs in the March quarter on correction in copper prices and employee settlements were responsible for this. However, as the problem was mainly from one-off items, the margins will be back to around 9 per cent levels in the current year.

Also, the price hikes made across product categories by the company in April will buttress profit margins. Operating leverage following higher sales volumes in other product categories, as the company expands into new markets, may also ensure good profit growth.

This may help offset margin declines as the company’s sales mix changes over the next two-three years, with reduced contribution from stabilisers (that give margin of 16-17 per cent).

Net profit of the company stood at Rs 62.9 crore in FY-13, up 24 per cent over last year. The debt-to-equity ratio was 0.63 as of end March 2013.