Strong operational performance… • V-Guard :: ICICI Securities,

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Strong operational performance…
• V-Guard reported sharp revenue growth of ~29% YoY in Q2FY15 led
by strong appliances demand in Onam. Electronics segment grew
43% YoY led by 134%, 25% YoY growth in digital UPS, stabilisers
segment respectively. Electrical segment grew ~25% YoY led by
43%, ~37% YoY revenue growth in electrical water heater, fan
segment, respectively. Other products (mixer grinder, induction
cooktop, switchgear) saw strong growth of 60% YoY on a lower base
• EBITDA margin increased ~10 bps YoY, on account of ~50 bps YoY
expansion in gross margin. During Q2FY15, advertisement expenses
remained flat (as percentage of sales). The management has guided
at maintaining it at ~4% of sales for FY15E
• Tax rate at 30.7% was due to a reduction in tax benefits at certain
plants. However, the higher tax rate was offset by ~31% YoY growth
in EBITDA, which resulted in ~32% YoY rise in PAT
Dominant play in ‘stabiliser’ business
V-Guard is a well established brand in stabilisers, PVC insulated cable &
LT cables and pumps in South India. Sales from these segments have
grown at 32% CAGR in FY09-14. These three segments contribute 62% of
sales. The stabilisers business is one of the largest for V-Guard with
topline contribution of ~18% in FY14 and overall value market share of
19% (including unorganised segment). The stabilisers segment revenue
recorded CAGR of ~19% in FY08-14 led by volume CAGR of ~12%
during the same period. Over the years, the company has forayed into
new product categories as well as new geographies across India. We
believe per capita use of consumer durables is extremely low in India,
especially in rural India. This throws up an opportunity for the company to
grow at a more rapid pace in future.
Expansion in new geographies to help drive revenue
We believe the next level of topline growth for the company would come
from expansion in non-south markets. V-Guard is not only increasing its
product portfolio but enhancing its dealer network across India.
Leveraging its brand V-Guard, the company has 415 distributors and 4561
channel partners serving ~25,000 retailers across India. Revenue
contribution from North India has increased from 5% in FY08 to 30% in
FY14. In the long term, the company plans to increase average revenue
per distributor in non-south markets from | 2.5 crore annually to a level at
par with its south markets, which is at | 7.5 crore.
Asset light model helps in maintaining average RoE of ~24% in FY11-14
V-Guard works on an asset light model and outsources more than 60% of
its production. It has tied up with 69 vendors to manufacture its products
across India. The outsourcing model helped V-Guard maintain its return
ratios with lower capex requirement. Despite a falling OPM, average RoEs
have remained at ~24% in FY11-14 due to lower capital employed.
Margin expansion to help in re-rating stock
At the CMP, the stock is trading at a PE multiple of 32x FY15E, 26x FY16E
and 22xFY17E earnings, respectively. We roll over our valuation on FY17E
considering a revival in demand, the company’s improved net working
capital days and positive free cash flows. However, the EBITDA margin is
still lower than its historical average (due to expansion in new
geographies). We have valued the stock at 23x FY17E earnings with a
revised target price of | 970/share and a HOLD rating

LINK
http://content.icicidirect.com/mailimages/IDirect_VGuard_Q2FY15.pdf