COMPANY REPORT

V-Guard Industries Ltd – Hold

Strong quarter led by seasonal products

Flagship electronics business registers strong growth CMP (Rs) 235 12-mths Target (Rs) 225 Downside 4.4%
V-Guard managed to register strong earnings growth on the back of Stock data (As on July 25, 2019) Sector: Consumer Electricals
strong sales in its electronics (stabilizer+UPS) segment and superior Sensex: 37,831 Stock performance
product mix. On revenue front, the numbers were below our estimate 52 Week h/l (Rs) 252 / 159 140 Vguard Sensex

Market cap (Rs bn) 102.4 110

of Rs.7.3bn on account of lower contribution from electricals (C&W and
Enterprise value (Rs bn) 101.7 80
pumps) segment. The management mentioned that destocking by 50
6m Avg t/o (Rs mn): 209.6
retailers to take benefit from falling copper prices led to weaker sales in 20
FV (Rs): 1 Jul-18 Nov-18 Mar-19 Jul-19
this segment. Otherwise most of the segment’s performance was strong
Div yield (%): 0.3
during the quarter. Non-South sales (46% of overall sales) continued to Shareholding pattern (As of Jun’19 end)
Bloomberg code: VGRD IN
remain strong at 14% yoy as the company makes inroads in non-South Promoter 64.2%
BSE code: 532953
markets. Demand for stabilizer and UPS was robust as sales of AC FII+DII 24.3%
picked up in Q1. Seasonal products registered good growth due to NSE code: V-Guard
Others 11.5%
strong and elongated summer. The company has discontinued granular
subcategory-wise revenue number, which it believes is sensitive from Exhibit 1: Result table (Consolidated)
competition perspective. (Rs mn) Q1 FY20 Q1 FY19 % yoy Q4 FY19 % qoq
Net sales 7,066 6,424 10.0 7,458 (5.2)
Margin expansion led by superior product mix and price hikes Material costs (4,749) (4,443) 6.9 (5,211) (8.9)
Margin expansion of 281bps yoy was quite higher than our estimate. Personnel costs (611) (505) 21.0 (534) 14.4
Other overheads (985) (1,002) (1.7) (909) 8.4
This was due to a combination of (1) price hikes (2) lower commodity
Operating profit 721 475 51.9 804 (10.3)
prices (3) superior product mix (4) strong sales growth & (5) lower A&P OPM (%) 10.2 7.4 281 bps 10.8 -58 bps
expense. Gross margins improved 195bps yoy after remaining under Depreciation (71) (55) 27.7 (59) 20.4
pressure in FY19 due to jump in commodity prices and sharp Interest (12) (4) 229.2 (3) 251.4
depreciation in Rupee against US Dollar. On a segmental basis, Other income 65 32 100.2 82 (20.7)
electronics segment registered 825bps margin expansion due to higher PBT 704 448 56.9 824 (14.6)
share of AC stabilizer (higher value and margin product), Q1 FY19 was Tax (173) (103) 67.9 (210) (17.4)
quite weak and price hikes taken by the company at the start of the Effective tax rate (%) 24.6 23.0 160 bps 25.5 -84 bps
quarter. Electrical segment margins remained weak due to lower sales. Reported PAT 530 345 53.7 614 (13.6)
Source: Company, YES Sec - Research

July 25, 2019

Research Analyst: Tarang Bhanushali  tarang.bhanushali@ysil.in| Rahul Jain  rahul.jain@ysil.in
Head of Research: Amar Ambani  amar.ambani@ysil.in (For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material.)
V-Guard Industries Ltd
Working capital cycle improves
Strong seasonal demand and the company’s focus to reduce debtor
days allowed the company to reduce working capital days by 17 days
to 51 days. In Q4 the company was carrying higher than expected
inventory due to weak demand in seasonal products in Q4. Cash and
cash equivalents doubled sequentially to Rs.1.7bn led by lower working
capital requirement. Net cash position stood at Rs.3.3bn at the end of
Q1 from Rs.1.6bn at the end of Q4. There would be smaller regional
players available up for sale and the company is looking at acquiring
such players to efficiently use cash reserve.
Valuations reasonable; maintain hold
The company maintained its growth guidance of 12-15% yoy in FY20 as
last year Q2 and Q3 were below par for the company. The company
believes that it has managed even though demand has been subdued
over the last 6-8 quarters. Sustained and focused expansion into the
non-South markets, backed by continued investment in products and
branding will boost overall growth. We expect revenue CAGR of 15.5%
over FY19-21E with OPM to expand to 10.7% by FY21E from 8.6% in
FY19. V-Guard is currently trading at reasonable valuations of 36.8x
FY21E P/E. We maintain our HOLD rating on the stock with a price
target of Rs.225.
CONFERENCE CALL HIGHLIGHTS
 Seasonal product inventory levels have declined sharply at dealer
and distributor level at the end of the quarter
 Construction activity was already slow from past few quarters, also
some business was impacted due to elections.
 Company has taken price hikes of ~2% on major products during
Q4 FY19.
 Wires and cables: 2% sequential decline in cable and wires prices,
while flat on a yoy basis.
 Margin improvement due to better product mix and price hikes
taken.
 Electronics segment saw 100-150bps yoy gross margin improvement
in Q1
 Electronic segment is expected to grow at 13-15% growth in FY20.
 Outsourcing continues to be 59-60%.
 VGuard would incur a capex of Rs.600-700mn in FY20 and FY21
each.
 Switchgear and appliances are expected to grow slightly above
average. Switches, gas stoves and air coolers are expected to double
every year, till they achieve a particular scale.
 Gross margin differential is ~1-1.5% currently between south and
non-south. Wires have single digit margin across India.
 In non-South region, number of retailers to increase by 3,500-4,500
every year.
 Premium/decorative fans accounts for 25-30% of the total fans sales.
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V-Guard Industries Ltd

 Value growth is higher than volume growth in electronics segment Exhibit 2: Cost analysis
due to higher share of AC stabilizer. Price per SKU of AC stabilizer As a % of net sales Q1 FY20 Q1 FY19 bps yoy Q4 FY19 bps qoq
is 30-40% higher than other SKU’s. Material costs 67.2 69.2 (195.0) 69.9 (266.0)
Personnel costs 8.6 7.9 79.0 7.2 149.0
 V-Guard accounts for 50% of the Guts sales of Rs600mn. On full
Other overheads 13.9 15.6 (165.0) 12.2 175.0
utilization, guts can double its revenues Total costs 89.8 92.6 (281.0) 89.2 58.0
 Non-south should grow faster than the overall market for V-Guard. Source: Company, YES Sec – Research
The top products driving growth would be Voltage stabilizer,
invertor batteries and C&W. Exhibit 3: Segmental analysis
(Rs mn) Q1 FY20 Q1 FY19 % yoy Q4 FY19 % qoq
 A&P expense to remain at 4-4.5%. Rs.100mn spillover of ad spends Revenue
from Q4 FY18 to Q1 FY19. Electronics 2,828 2,405 17.6 2,055 37.6
Electronic / EM 2,704 2,689 0.6 3,613 (25.2)
 The company has 40,000 retail outlets. Of this 40% are in South India.
Consumer Durables 1,534 1,330 15.3 1,790 (14.3)
 3,000-4,000 retailers are added every year of which is 70-75% would Total 7,066 6,424 10.0 7,458 (5.2)
be added in non-south market.
EBIT
 70-75% in sales in South is through dealer/distributor, while in non- Electronics 496 224 122.0 303 63.6
south it is 40-45%. The rest comes from wholesalers. Electronic / EM 139 190 (27.1) 382 (63.7)
 There would be smaller players available up for sale and the Consumer Durables 66 38 72.3 118 (44.5)
Total 701 452 55.0 804 (12.9)
company is looking at acquiring such players to efficiently use cash
reserve. EBITM (%) bps yoy bps qoq
Electronics 17.5 9.3 825 14.8 278
Electronic / EM 5.1 7.1 (195) 10.6 (545)
Consumer Durables 4.3 2.9 142 6.6 (233)
Blended 9.9 7.0 288 10.8 (87)
Source: Company, YES Sec – Research

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V-Guard Industries Ltd

Exhibit 5: Financial summary

Exhibit 4: Non-South share zooms to 45.7% in Q1 FY20 Y/e 31 Mar (Rs m) FY17 FY18 FY19 FY20E FY21E
Revenues 20,856 23,257 25,940 30,066 34,632
South Non-South
yoy growth (%) 12.0 11.5 11.5 15.9 15.2
100% Operating profit 2,086 1,904 2,243 2,988 3,701
90% OPM (%) 10.0 8.2 8.6 9.9 10.7
33 36 36 37 37
80% 40 39 44 46 Pre-exceptional PAT 1,454 1,351 1,680 2,185 2,715
70%
Reported PAT 1,454 1,351 1,680 2,185 2,715
60%
yoy growth (%) 30.2 (7.1) 24.4 30.0 24.3
50%
EPS (Rs) 3.4 3.2 3.9 5.1 6.4
40%
30% 60
68 65 61 64 63 63 P/E (x) 70.1 75.6 61.0 46.9 37.7
56 54
20% Price/Book (x) 16.1 13.6 11.4 9.6 8.0
10% EV/EBITDA (x) 48.8 53.7 45.4 33.7 26.9
0% Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19 Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 RoE (%) 26.2 19.5 20.3 22.2 23.2
Source: Company, YES Sec – Research RoCE (%) 36.1 25.9 26.4 29.1 30.5
Source: Company, YES Sec – Research

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RECOMMENDATION PARAMETERS FOR FUNDAMENTAL REPORTS

Analysts assign ratings to the stocks according to the expected upside/downside relative to the current market price and the estimated target price. Depending on the expected
returns, the recommendations are categorized as mentioned below. The performance horizon is 12 to 18 months unless specified and the target price is defined as the analysts’
valuation for a stock. No benchmark is applicable to the ratings mentioned in this report.

BUY > 15%

ADD 5% to 15%
HOLD -15% to +5%
SELL > - 15%
POSITIVE: Positive is rating given to stocks we like but yet to be formally included in our coverage universe.
NEGATIVE: Negative is rating given to stocks yet to be formally included in our coverage universe, but we find valuations expensive vis-a-vis fundamentals.
NEUTRAL: Neutral rating is given to stocks that are not under our formal coverage yet, but we find current valuation fairly representing fundamentals.

ABOUT YES SECURITIES (INDIA) LIMITED

YES SECURITIES (INDIA) LIMITED (‘‘YSL’’) was incorporated on 14th March 2013 as a wholly owned subsidiary of YES BANK LIMITED. YSL is a SEBI registered stock broker
holding membership of NSE and BSE. YSL is also a SEBI registered Category I Merchant Banker, Investment Adviser and a Research Analyst. YSL offers, inter alia,
trading/investment in equity and other financial products along with various value added services. We hereby declare that there are no disciplinary actions taken against YSL
by SEBI/Stock Exchanges.

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DISCLOSURE OF INTEREST
Name of the Research Analyst : Tarang Bhanushali, Rahul Jain
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