V-Guard Industries (Buy@Rs.317, Target Rs.400) - LKP Bytes

The story so far...

V Guard has grown its revenues and net profits at a CAGR of 35 percent and 28 percent over the last 5 years. While South India still accounts for close to 80 percent of its Rs10bn revenues, North India is now breaking even as V Guard establishes itself as a Pan India player in the electrical segment and makes us re-iterate our Buy call with a revised 1 year price target of Rs400.

The story ahead...

Our preferred pick to play the middle class consumption story in India as we like its asset light business model (6x asset turnover) as it outsources 60 percent of its product portfolio comprising of stabilisers, UPS, invertors, geysers, water heaters, wires and cables, pumps and motors, fans, switchgears and induction cooktops.

While stabilisers remain the most profitable (50 percent of EBIT) by virtue of its 25 percent market share, wires and cables despite being least profitable continues to grow well as the southern real estate market is largely end user driven and hence V Guard is doubling its capacity.

Shift to vendor financing is already getting reflected in its much improved working capital cycle of 70 days now. We believe that 8.5 percent EBIDTA is sustainable going forward as revenues and profits is expected to grow at a CAGR of 25 and 20 percent over FY12-14 with an ROE of 25 percent.

Re-iterate Buy on V-Guard trading at 13xFY13-14E earnings of Rs24 with a revised 1 year price target of Rs400.

Source : Equity Bulls

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