Investors with a two-year perspective can buy into the stock of V-Guard Industries. V-Guard's strong sales and the correction in copper prices since March, which should expand margins, are arguments in favour of investing in the company.

At the current market price of Rs 216, the stock discounts its 12-month earnings by 15 times. For the June quarter of FY12 the company reported a growth of 43 per cent in sales and 11 per cent in net profits. In the September quarter sales continued to grow strongly but profits declined on higher selling expenses and input costs. V-Guard may, however, see operating profit margins improve from now with copper prices down 15 per cent from the peak seen in July and one time costs on an advertisement campaign already charged to profits. The stock is a play on the growing market for consumer electronics. V-Guard's portfolio, which initially had only voltage stabilisers and cables, now includes pumps and motors, fans, geysers, solar water heater and UPS.

Last year, V-Guard launched new models across product categories. Five-star rated energy efficient models in pumps and motors, decorative models in ceiling fans and stabilisers for washing machines are among them. The company also made in-roads into the northern market. Thanks to these initiatives the company achieved a 60 per cent growth in top-line in 2010-11 followed by a 40 per cent growth in sales for the first six months of 2011-12. In terms of revenue contribution, cables are the largest product category for V-Guard. Wiring cables contribute 28 per cent and voltage stabilisers 23 per cent to overall sales. Though air-conditioner sales has witnessed a slowdown in the market in the last few months, higher demand for panel televisions from Tier-II towns will keep up voltage stabiliser demand for the company. Low-ticket consumer electronic items such as electric fans, water heaters and UPS may see good demand growth with higher rural spending over the coming months given that there was a good monsoon and above average rainfall this year.

V-Guard's solar water heater business looks promising over the long term. With the Government subsidising the cost of a solar water heater to promote use of renewable energy, there has been growth in demand for these products from the industrial users.

Softening input prices

Copper and aluminium are two key inputs for V-Guard. A 21 per cent rally in copper price and a 14 per cent increase in price of aluminium between March-2010 and March-2011 kept company's profit margins under check. For 2010-11 the company's reported operating profit margins was at 10.8 per cent (versus 11.4 per cent in previous year). In the recent September quarter operating profit margins fell further to 7 per cent on sustained increase in input prices and higher selling and distribution expenses. Poor demand in the fans and pumps segment on extended winter led to an inventory build in the company's warehouse and V-Guard had to push them by offering additional discounts. This had pushed up selling expenses. The cost incurred on the ad-campaign for voltage stabilisers was charged to profit in the September quarter and this too ate into profit margins.

There is, however, some respite for V-Guard on input front now. Both copper and aluminium have seen price corrections on global growth worries. From the peak price of $9,830 a tonne in July, copper has dropped to $8,149 a tonne now (lower by 15 per cent from the peak). Though part of this fall is offset by rupee depreciation, we expect relief on margins in the December quarter from lower input costs and selling expenses will be lower.

Outstanding loan in V-Guard's balance sheet as of end-March 2011 was Rs 139.7 crore. The debt-to-equity ratio stands at 0.8. The company's interest expense, though, has increased significantly in the last year on higher working-capital borrowings, the interest coverage ratio is still at a comfortable five times.

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