V-Guard - Continuing the growth spree - Edelweiss

V-Guard has reported strong set of numbers for Q2FY13, with revenue growth of 49% and PAT growth of 165% for the quarter (YOY). EBITDA margins stood at ~9.6% against 7.2% during the corresponding quarter of the last fiscal year. Sharp improvement in the EBITDA margins of Cable, Stabilizers and Pumps segments on YOY basis has resulted in the overall margin expansion. PAT for Q2FY13 has increased by ~165% YOY and is better than estimates due to high OPM and strong revenue traction. After witnessing a 40% growth in H1FY13, the management is hopeful of achieving 35-40% revenue growth versus earlier guidance of ~ 30%. The company sees OPM at ~9.5-10% in FY13.

Secular growth across product categories

Revenues for the quarter increased from INR 211 crores in Q2FY12 to INR 312 crores in Q2FY13 on the back of strong numbers in its Electrical and Electronics business, especially Cables, Pumps, Fans and Digital UPS. The Company has seen good traction in LT cables business due to increased construction activity in South India as compared to last year. Further, delayed monsoon has caused depletion in water levels, thereby boosting the demand for Pumps. A longer summer followed by power cuts added to the demand for Fans and UPS.

Margins improve sharply YOY basis

Margins for Q2FY13 improved sharply by 240bps to ~9.6% on a lower base. A steep jump in EBITDA margins of PVC Cables (from 4% in Q2FY12 to 10% in Q2FY13), Stabilizers (from 11% in Q2FY12 to 20% in Q2FY13), and Pumps (from 0% in Q2FY12 to 9% in Q2FY13) on YOY basis has resulted in overall margin expansion. Advertisement expenditure is expected to increase in H2FY13 to capitalise on strong demand during the festive season. The management has maintained its guidance of INR 45 crores (3.5%-4% of sales) adspend for FY13.

Share of non-South revenues rises to 27%

V-Guard has aggresively built up its distribution network, especially in non South regions. The company has improved its distribution in non-South markets, which is showing positive results. The non-South market is accounted for 23% of total revenes in Q2FY13 vs 20% in Q2FY12. The company continues to expand its distribution network to 230 (Vs 227 in Q1FY13).

Working capital cycle improving

The company has improved its cash conversion cycle from 94 days in Q2FY12 to 71 days in Q2FY13. It has improved on a YOY basis by 23 days, but is marginally higher compared to 68 days in Q1FY13. The QOQ rise in working capital was on account of higher sundry debtors of 52 days in Q2FY13 Vs 46 days in Q1FY13. The management has guided to maintain debtors at 50 days. It has maintained that working capital cycle will be reduced further in FY13 due to higher vendor financing.

Valuations and Outlook: Attractive

V-Guard is expected to grow its revenues at a CAGR of 35%+ over FY12-14E while PAT is estimated to grow at a CAGR of 30% with ROCE of 28%. We like the stock due to its strong cash flows, stable margins and diverse product categories. The stock is trading at a P/E of 13.1x FY14.

Source : Equity Bulls

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