Investors Eye

Stock Update

V-Guard Industries Reco: Buy

Stock Update

Healthy earnings performance despite demonetisation; Price target revised to Rs235 CMP: Rs205

Company details Key points

Earnings growth supported by higher other income and lower tax; OPM
Price target: Rs235 maintained: V-Guard Industries delivered yet another healthy performance in
Q3FY2017 despite demonetisation. The company maintained its Operating Profit
Market cap: Rs6,169 cr
Margin (OPM) at 8.4% due to lower input cost and various cost-saving initiatives to
52-week high/low: Rs226/79 counter the impact of demonetisation. The Gross Profit Margin (GPM) expanded by
269BPS to 33.6%, which was offset by an increase in Ad Spend (as a percentage to
NSE volume: 4.7 lakh sales stood at 6% vs. 4.9% in Q3FY2016). Consequently, the operating profit grew
(No of shares) by 11.5% YoY to Rs39 crore. Moreover, the net profit grew by 31% YoY to Rs28 crore,
which was in line with our estimate. The bottomline was supported by higher other
BSE code: 532953 income, and lower interest cost and tax rate. Revenue improved by 10% YoY to
Rs460 crore (ahead of our estimate), driven by Pumps (up 38% YoY), Fans (up 15%
NSE code: VGUARD YoY) and Stabilisers (up 9.3% YoY).
Sharekhan code: VGUARD Prudent working capital management lead to robust cash generation: During
Q3FY2017, V-Guard management took several dealer-level initiatives to counter
Free float: 10.4 cr the adverse impact of demonetisation. The initiatives included an additional cash
(No of shares) discount of 0.5% and installation of card swipe machines (to help the dealers to
tide over the liquidity crunch). Also, they introduced NBFC financing scheme for
Shareholding pattern the customers of high-value purchases like Inverters and Solar Water Heaters.
Further, the company also tied up with global suppliers for the procurement of raw
materials to enjoy higher payable terms. Consequently, the debtor days improved
Others by 6 days YoY, resulting in the reduction of net working capital days to 62 days from
11% 67 days at the end of Q2FY2017. Consequently, V-Guard generated strong cash flow
DIIs from operations (CFO) of Rs138 crore in M9FY2017 vs. Rs102 crore during M9FY2016.
11% Given the de-leveraged balance sheet, better margins and prudent working capital
management, V-guard should sustain its superior returns ratios going forward.
Outlook improves; earnings estimates raised and price target lifted to Rs235;
FII reiterate Buy: The V-Guard management was very forthcoming about the sharp
13% Promoters recovery witnessed in global commodity prices during the last few months. the
65% company has taken a price hike in certain product basket. They intend to hike
prices in the range of 3-7% in Fans, Stabilisers and Water Heaters. Also, V-Guard
hasnt seen any adverse impact of price increase in Cables & Wires taken due to the
upsurge in global copper prices. Moreover, the management is planning to launch
Price chart Switchgears and Solar Water Heaters in the non-south markets of UP and Bihar in
Eastern India and Gujarat and Maharashtra in Western India, respectively. Hence,
225 we have revised our revenue estimates by 5-6% to factor in the afore-mentioned
200 strategy. We broadly maintain our OPM projections for FY2017/FY2018/FY2019. We
have revised our earnings estimates by 12-13% and expect 24% CAGR in earnings
175 from FY2016-FY2019E. The price target has been raised to Rs235 (from Rs210
150 earlier), valuing V-Guard at 33x FY2019E earnings. We reiterate our Buy rating
on the stock, considering the companys strong earnings visibility, superior return
125 ratios (RoE ~25%) and robust cash flows.
100 Results Rs cr
Particulars Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%)
75
Revenues 460 416 10.4 495 (7.2)
Jan-16

Jan-17
May-16

Sep-16

Operating expenses 421 382 10.3 442 (4.7)

Operating profit 39 35 11.5 53 (27.7)
Other income 3 2 83.8 4 (11.4)
Interest 1 1 (65.9) 1 (6.1)
Price performance Depreciation 4 4 9.7 4 6.2
PBT 37 31 19.6 53 (29.3)
Tax 9 10 (3.9) 13 (30.7)
(%) 1m 3m 6m 12m Adj PAT 28 21 30.2 39 (28.8)
Reported PAT 28 21 30.2 39 (28.8)
Absolute 18.0 -10.1 30.3 126.2 Adj EPS (Rs) 0.9 0.5 30.2 0.9 (0.3)
Margins (%) BPS BPS
Relative GPM 32.7 28.7 401 30.9 182
10.9 -8.9 31.6 97.0
to Sensex OPM 8.4 8.3 8 10.8 (238)
NPM 6.1 5.2 92 7.9 (185)
Tax rate (%) 25 31 (610) 25 (51)

Sharekhan 7 January 31, 2017 Home Next

Investors Eye Stock Update

Valuations Rs cr Regional spread non-south regions growth higher

Particulars FY15 FY16 FY17E FY18E FY19E than southern markets
Net sales 1,746 1,862 2,090 2,453 2,845
The non-south markets (33% of total revenue) grew by
YoY growth (%) 15.1 6.6 12.2 17.4 16.0
23% YoY to Rs154 crore while the south markets (67% of
Operating margin (%) 7.6 9.6 9.7 10.2 10.3
total revenue) grew by a more moderate pace of 5% YoY
Net profit 71 112 145 182 215
to Rs306 crore. Growth in non-south markets was higher
Adjusted EPS (Rs) 2.4 3.7 4.8 6.0 7.1
than the southern markets on the back of elevated festive
YoY growth (%) 1.6 56.6 30.2 25.0 18.4
demand, the managements efforts to enhance visibility
P/E (x) 86.9 55.5 42.6 34.1 28.8 and several supply chain initiatives taken in the past.
P/B (x) 16.4 13.1 10.6 8.5 6.9 The southern markets (mainly Tamil Nadu & Kerala) were
EV/EBITDA (x) 45.3 33.3 28.6 23.1 19.4 affected by uncertainty surrounding demonetisation,
RoCE (%) 28.7 37.1 37.3 37.1 35.7 socio-economic situation in Tamil Nadu and cyclone in
RoNW (%) 20.5 26.3 27.5 27.7 26.6 Chennai & suburban areas. However, the management
RoIC (%) 28.9 38.4 39.7 41.1 41.7 continues to lay thrust on advertising and brand building,
Dividend yield (%) 2.2 3.4 0.4 0.5 0.7 especially in the non-south markets to gain market share,
and intends to judiciously expand its distribution network.
Strong revenue growth momentum sustained despite
demonetisation: During Q3FY2017, V-Guards revenue
Regional spread of business
grew by 10.4% YoY to Rs460 crore, which was ahead of
our estimate despite demonetisation. The topline growth 100%

can be attributed to the steady growth in the Electro

30%
31%

31%
31%

32%
33%
80%

33%

33%
35%

35%
Mechanical segment, which grew by 11.4% YoY to Rs324

38%
crore while the Electronics segments revenue grew by 8% 60%

YoY to Rs119 crore due to the festive season. Robust growth

40%
in Pumps (up 38% YoY; volume growth at 35% YoY) and
Fans (up 15% YoY) led to growth in the Electro Mechanical 20%
65%

67%

69%

67%

62%

69%

70%

68%

65%

69%

67%
segment, whereas a steady growth in Stabilisers (up 9%
0%
YoY) resulted in growth in the Electronics segment. UPS,
Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17
Cables and Water Heaters segments revenue grew in the
range of 5-6% YoY. Among the new product categories,
South Zone Non South Zone
Switchgears and Kitchen Appliances category grew by
7-8% YoY.

Product-wise revenue break-up (Rs cr)

Sales Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%)
Stabilisers 83 76 9.3 82 1.6
UPS (Std+Dig) 35 34 5.1 55 (35.2)
Electronics segment 119 110 8.0 137 (13.1)
As a % of total 25.8 26.4 27.6
Pumps 60 43 37.7 50 19.7
Cables (Hw+LT) 138 131 5.8 154 (10.3)
Water Heaters (Elec+Solar) 96 91 5.8 92 4.5
Fans 30 26 15.3 34 (10.4)
Electrical & Electro Mechanical 324 291 11.4 329 (1.7)
As a % of total 70.4 69.8 66.5
Switch Gears 9 8 8.3 10 (9.9)
Kitchen Appliances 8 8 6.7 19 (58.5)
New products 17 16 7.5 29 (41.8)
As a % of total 3.7 3.8 5.9
Total 460 416 10.4 495 (7.2)

Sharekhan 8 January 31, 2017 Home Next

Investors Eye Stock Update

Expansion in gross margins offset by increased ad Strong cash flow generation continues.
spend; higher other income and lower tax outgo lift
earnings: V-Guards GPM expanded by 269BPS YoY to V-Guard continued to manage its working capital
33.6%, mainly on account of lower input costs and the cost prudently, with the net working capital days dropping to
savings from the various supply chain initiatives. V-Guard 62 days from 67 days in Q2FY2017, as debtor days improved
introduced various facilities for the channel partners, like by 8 days to 41 days QoQ. Consequently, the company
cash discounts, installation of card swipe machines etc to generated strong CFO of Rs138 crore in M9FY2017 vs.
help the dealers tide over the liquidity crunch. They also Rs102 crore during M9FY2016. Given the de-leveraged
introduced NBFC financing schemes for customers of high- balance sheet, improved margins and prudent working
value purchases like Inverters and Solar Water Heaters. capital management, V-Guard should sustain its superior
However, heightened Ad Spend at 6% vs. 4.9% in Q3FY2016 returns ratios going forward.
offset the expansion in GPM. Consequently, the OPM stood
Particulars Q3 Q3 Change Q2 Change
flat at 8.4% during Q3FY2017. V-Guard registered an 11.5% FY17 FY16 (YoY) FY17 (QoQ)
YoY growth in the operating profit at Rs39 crore. As a
Inventory days 69 66 3 67 2
result, the adjusted PAT jumped by 30% YoY to Rs28 crore,
Debtor days 41 47 (6) 49 (8)
driven by higher other income (up 84% YoY) and lower tax
Creditor days 48 44 4 49 (1)
rate. The interest cost was lower significantly, owing to
the deleveraging done in the recent past. Net working 62 69 (7) 67 (5)
capital days

Margin maintained YoY in Q3FY2017

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%
12.4%

11.1%

10.8%

2.0%
8.5%

8.3%

5.5%

8.0%

8.7%

8.4%

8.3%

8.4%

0.0%
Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Sharekhan 9 January 31, 2017 Home Next

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