Muted performance led by electrical division • V-Guard :: ICICI Securities

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Muted performance led by electrical division
• V-Guard reported a muted Q3FY15 performance wherein revenue
growth of ~11% YoY was largely hit by lower-than-expected
revenue growth in electrical segment (up 8.5% YoY). In the electrical
segment, revenue from the pumps and cable segments declined
~9% and 27% YoY, respectively. However, the electronics segment
revenue reported growth of 22% YoY led by the stabilisers and
digital UPS segments, which grew 23% and 30% YoY, respectively
• A sharp rise in advertising expenses by 130 bps YoY coupled with
117 bps YoY increase in employee expenses took a toll on EBITDA
margins that declined 334 bps YoY. The management has guided at
maintaining advertisement expenditure it at ~4% of sales for FY15E
• The tax rate at 32% was due to a reduction in tax benefits at certain
plants. Lower sales growth, a sharp dip in EBITDA margin and a
higher tax rate led to a decline in PAT by 47% YoY
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 a 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 faster 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 510 distributors and 4932
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 our south markets, which are 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. Outsourcing model helps V-Guard to maintain its return
ratios with lower capex requirement. Despite falling OPM, its average
RoEs have remained at ~24% in FY11-14 due to lower capital employed.
Recent rally in prices in near term positive
At the CMP, the stock is trading at a PE multiple of 35x FY16E and 26x
FY17E earnings. Multiple expansions over the years were largely due to
improved 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 maintain our cautious view and value the stock
at 23x FY17E earnings with a revised target price of | 958/share and a
HOLD recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_V-Guard_Q3FY15.pdf