V-Guard Industries. V-Guard: Wired to grow

The stock of V-Guard Industries, maker of cables and consumer electronics, seems a good buy. Growing market share in non-south regions that is helping stronger-than-industry growth in sales, new product additions to portfolio and the improving operating efficiency that is seeing margins expand are arguments in favour of the stock. The company is targeting 15 per cent average annual growth in sales over the next four to five years.

Increasing disposable income of the middle-class should keep demand for consumer electricals growing. Further, a demand shift from unorganised to organised producers should also help.

At the current market price of ₹215, the stock discounts its estimated earnings for 2018-19 by 41 times, bridging the gap with its larger rival, Havells India.

The valuation is expensive, but given the company’s promising prospects, it seems justified. From our last ‘buy’ recommendation last July at ₹183, the stock is up 17 per cent.

Over the last five years, the PE on trailing earnings of one year has been in the band of 20-75 times. Currently, the valuation on trailing earnings is 65 times.

In the last five years (ending 2016-17), V-Guard’s revenues have grown at a compounded annual rate of 17 per cent and profit at 24 per cent. In its key product — voltage stabilisers — the company has 51 per cent market share. The company makes only 40 per cent of its products in-house. The rest is outsourced (though it owns all its designs and moulds). While a slower offtake in business for real estate players has impacted the company’s sales of cables and wires to some extent, the diversification into consumer electronics and entry into new markets in non-south areas are helping growth.

The company has a network of over 676 distributors, 5,975 channel partners and over 25,000 retailers across the country today. Post GST, the company has increased product prices by about 8 per cent, but demand hasn’t been impacted.

Aggressive market expansion

V-Guard makes a third of its revenue from cables and wires. Stabilisers, which were once contributing to a chunk of its revenue, now account for only 15 per cent. The second-largest segment for the company now is water heaters (20 per cent).

In the December 2017 quarter, V-Guard recorded revenue growth of 14 per cent y-o-y.

Adjusting for excise impact (post GST), sales growth was an even stronger 23 per cent.

Two new products were launched during the quarter — rice cookers in the kitchen appliances segment and modular switches in the electrical segment. The y-o-y growth was strong across segments — kitchen appliances (54 per cent), cable and wires (25 per cent), switchgears (47 per cent), fans (38 per cent) and digital UPS (32 per cent).

However, lacklustre growth in water heaters (up 8.4 per cent) and pumps (7.9 per cent) and stabilisers (0.1 per cent), pulled down the overall growth.

Contribution to sales from the non-south region was 35 per cent of revenue, helped by the company’s improved visibility in the market, thanks to the aggressive marketing. Five years back, the non-south market contributed only a fifth of the revenue. In value terms, sales from the non-south markets recorded an increase of 24.7 per cent, year-on-year. Growth in the southern market was 13.3 per cent.

The company intends to grow its presence further in the non-south market over the coming years and take it to 50 per cent of sales by increasing the number of dealers/retailers in the market. The company is targeting to add 15,000 retailers over the next few years, a majority of which will be in the non-south market.

V-Guard had a total 676 distributors as of March 2017, up from 205 distributors five years back.

The company has indicated its intention to continue spending aggressively on advertising. Ad expenses as a percentage of sales were 4.4 per cent in 2016-17, up from 4.3 per cent in 2015-16 and 4 per cent in 2014-15. V-Guard has been scouting for an opportunity to acquire companies in the non-south markets. If a deal is struck, inorganic growth will buttress overall sales growth. Recently, the company got an approval from its board to raise ₹500 crore via equity or debt or a combination of both.

The company had debt of ₹3.3 crore and cash outstanding of ₹105 crore as of end-December 2017.

Margin to improve

V-Guard’s operating profit margin was 9.9 per cent in the December 2017 quarter, up 110 basis points over the same quarter last year, thanks to improved operating efficiency and pass-through of higher copper prices in the case of wires. However, operating margin for the nine months ending December 2017 is 9.5 per cent, sharply lower from 10.8 per cent in the same period the previous year. This seems to be due to unfavourable product mix and higher ad and employee expenses.

In the March 2018 quarter and in 2018-19, as sales volumes grow further, operating leverage should aid margins. With copper prices rising sharply, the company has been trying to hold minimum inventory so that if there is an about-turn in copper prices, it is not hit badly.

COMMENT NOW