Buy V-Guard Industries - Three pronged growth strategy - GEPL Capital

Investment Rationale

Comprehensive product portfolio and new products to drive growth

V-Guard Industries (VGI) has a wide array of products which cater the requirements of consumer durable industry (stabilizers, heaters, fans and UPS), agriculture (pumps) and construction (cables) sectors of the country. The Indian household appliance market has grown at CAGR of 11% between FY04-FY12. We expect the growth pattern to continue till FY14E on the back of a) power deficiency in India, b) strong GDP growth in India, c) growth in middle class population and rising urbansisation, d) rising income levels and e) Growth of consumer electronics led by low penetration levels. Give the fact that VGI's product portfolio caters to the mass market and meets the basic requirements, demand for these products is expected to remain strong.

The company has strategically introduced new products over the last two decades. This has enabled the company to register a 37% CAGR in revenues from FY07-12. VGI also added new products like a) switch gear and b) induction cooker in FY12 which are expected to gain traction in the current fiscal. As VGI has a good market share in the house wiring segment, domestic switch gears can be conveniently marketed and has been launched in the southern markets. Also with a view to offer more products in the home segment, Induction Cooker were launched with different models.

Growth aided by increasing geographical presence

VGI earlier focused mainly in the Southern parts of India where it has built a strong brand name as well as distribution network. 97% of its sales (FY07) came from southern market concentrated in 4 Southern States of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu.

However, over the past few years it has expanded its geographical area of operations pan-India. Over the years, the company has made a strong distribution channel in the southern region. We believe the traditional products like stabilizers, water heaters, and pump has reached a near maturity level in the south. Hence, the company has rightly ventured into the non south market. We hence expect a strong brand equity and extensive distribution network to help VGI roll out its consumer durables products and gain strong foothold going forward in Rest of India (ROI) market and expect the market share of ROI to rise to 40% by FY14E from 22% in FY12.

Mix of manufacturing and outsourcing to be beneficial in the long run

VGI adopts a manufacturing as well as outsourcing model for its product portfolio. In FY12, it operated with ~41% of its products being manufactured while the remaining 59% being outsourced. The company has tie-ups with various SSI/self-help group units in the southern states to manufacture products to meet its needs. Depending on the purchase order, which is normally given one month in advance, the products are manufactured in these units. This enables to keep control over its cost and meet the increased demand without undertaking significant capital expenditure. While VGI assists these units to purchase the raw material and places its quality assurance team at the units.

Extensive investment in distribution network

VGI has created a wide distribution network with over 9,500 retailers, 208 distributors and 353 service centers spread across all states in India except North East and Jammu & Kashmir. In India, the dealer plays a vital role in the sales pitch of consumer products which is highly fragmented by nature. Of the total 28 branches owned by VGI, 18 are located in ROI which is expected to aid growth with greater brand visibility in the coming years.

Valuation

At CMP of Rs.272, the stock is trading at a PE of 11.6x in FY13E and 8.4x in FY14E. We are optimistic on VGI's growth story and believe it can replicate its success story of southern market in other parts of India. We recommend a BUY rating on the stock with a target price of Rs.329 per share (PE of 10.2x in FY14E), an upside of 21% for a long term view.

Source : Equity Bulls

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