The stock of V-Guard Industries looks a good bet now in the consumer electronics space. Though the first-half of 2018-19 was not good — with muted sales growth following the floods in Kerala, a weak summer and delayed start of the festival season — demand has shown signs of recovery in the last three months and is promising for the March 2019 quarter.

Recovery in demand in Kerala, thanks to people replacing the electronic items damaged by the flood and the increased market share in the non-South markets led by a re-branding exercise recently, should help.

V-Guard’s penetration in the tier II/III cities in the northern markets over the last one year have been strong with improved brand acceptance. Investment in setting up new godown and building the supply-chain network through new dealers/distributors and product launches (smart water heaters, smart inverter, stabilisers and fans with LED lights among others), is helping the company penetrate deep into non-South markets.

In the last five years, V-Guard has grown its revenues and profits at a compounded annual rate of 11 per cent and 16 per cent respectively. It’s a cash-rich company; it’s been debt-free since 2015-16. At the current market price of ₹216, the stock discounts its estimated earnings for 2019-20 by 36 times. This is at a discount to Havells’ multiples, which trades at 42 times. Given V-Guard’s growth trajectory, there may be a case for re-rating in the stock and it may soon bridge the gap in valuation with Havells.

Business growth

V-Guard’s strategy to grow sales by expanding into non-South markets, diversifying product categories with focus on technology and innovation and an eye on customer service, should all payback soon.

V-Guard has become a pan-India player in consumer electronics. From just about 20-21 per cent of revenue from non-South markets in 2011-12, the company’s revenue from these markets is 36 per cent currently. The non-South markets have outpaced the South in revenue growth. In the first half of 2018-19, while the non-South markets reported revenue growth of 20 per cent , South markets grew 2.5 per cent. Market share in the non-South markets may improve, given the company’s aggressive marketing campaign, re-branding exercise and expansion in distributor/retailer network. The company is targeting an addition of 3,000-5,000 more retailers across the country, with greater thrust on non-south markets, every year over the next five years to bring contribution from non-South markets to 50 per cent of sales.

The company’s growth will also be led by innovation in product design and features. V-Guard’s R&D team is reportedly working to build devices with machine learning capabilities.

In the first half of 2018-19, while consumer durables (fans, water heaters, kitchen appliances, air coolers together contribute 25 per cent of sales) saw a strong 17 per cent growth Y-o-Y, stabilisers (contribute 18 per cent to revenue), reported 5 per cent drop in revenue. Wires that contribute to a third of sales reported a nine per cent growth, Y-o-Y.

The revenue (₹1,232 crore) growth in the first half of the year was 12 per cent and net profit (₹73 crore) growth was 4.1 per cent Y-o-Y.

V-Guard has nine manufacturing units spread across the country. However, the company still outsources 58 per cent of its product to vendors from outside (but owns all designs), to keep an asset-light working-capital model. For all its vendors, it provides R&D support and helps in sourcing raw material .

Margins to improve

The company’s operating profit margin in the first half of the year was 8.4 per cent, down from 9.2 per cent in the same period last year. In the call, post-September quarter earnings, V-Guard's management indicated a price hike in January/February to mitigate pressure from commodity price increases already seen. So, the second half of 2018-19 should see improved operating profit margins. Also, given the weak outlook for commodity prices in 2019, there will be some breather for the company, and as product mix improves with recovery in stabiliser sales, margins should return to about 10-11 per cent.

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