V-Guard Industries Limited - Going great guns - Antique

Key highlights

V-Guard Industries Ltd. (VGIL) delivered superlative results in FY12, with revenues vaulting to INR9.9bn (+37%) and operating profits rising creditably by 29% to INR935m. Its operational numbers reveal the underlying strength of its distribution network and ramp up in key product lines. Additionally, the jump in revenues from new markets is heartening, especially since margins were maintained and operating cash flows improved.

Distribution is the key

The steady improvement in sales across the company's stronghold of southern India (+38%) indicates VGIL's ability to pump its various sales channels in this geography with appropriate products at the correct price point. A positive response to sales of relatively new products like switchgears, induction cooktops and three phase pumps points out the same.

The increase in sales of mature product lines like wires, electricals stabilisers and water heaters is proof of increasing penetration of the company's distribution network in northern India, where the company has grown 32% in revenues in FY12.

Working capital and debt levels and interest rates are crucially poised

While the working capital cycle is down to 66 days in FY12 (vs. 100 days in FY11), VGIL's requirements have shot up, owing to expansion in operations. If the current interest rate regime persists, this could erase some profitability. Hence, utilisation of channel financing assumes significance, as VGIL launches a slew of new products (viz. induction cookers and kitchen appliances) over the next 2-3 quarters.

Valuation and outlook

At the CMP of INR244, VGIL trades at a P/E and EV/EBIDTA of 8.2x and 5.3x, discounting its FY14e numbers. We maintain our BUY recommendation with a target price of INR280.

Source : Equity Bulls

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