HOLD V-Guard Industries - Strong summer season pulls up Q1 revenue: AnandRathi Institutional Research

V-Guard Industries - Strong summer season pulls up Q1 revenue; Hold

The strong summer and better fixed-cost absorption led to V-Guard's Q1 revenue and margins rising substantially. The reducing debt-equity and healthy return ratios are added advantages. We alter our earnings estimates for FY17/18 by 7.2%/9.9%, due to improved outlook.

Rising Q1 sales driven by growth in all products. The strong summer and healthy, more than 20%, growth in all product-ranges (stabilisers, UPSs, pumps, fans) helped V- Guard's revenue climb 14.7% yoy to Rs.5.7bn (6.2% above our estimate). The core electrical/electro-mechanical segment which accounts for 60-70% of revenues grew 10% yoy, electronics grew 23.4% yoy.

Healthy fixed-cost absorption pushes up margin. The better gross margin and lower employee cost led to the Q1 FY17 EBIDTA margin rising 243bps yoy to 11.1%. Lower input costs and better inventory management aided gross-margin expansion. We expect above 10% margin to be retained.

Commendable jump in profit. With a steep drop in finance costs (85% yoy), a 97% yoy jump in other income and a slight decline in the tax rate (91bps yoy) , Q1 profit clocked in at Rs.428m, a 70% yoy rise.

Path ahead. The company plans to launch in Q2 FY17 gas stoves in kitchen appliances. Also, it has set up at Coimbatore an in-house PVC compounding unit (leading to backward integration), expected to commence production in Aug '16. Planned capex for FY17 is ~Rs.350m on cables & wires and he PVC plant at Coimbatore. It has planned 3.5-4 % ad spend in FY17.

Valuation. With greater pricing power in non-south markets, better working capital efficiency is likely. Strong housing demand, a growing distribution network, rising brand visibility and higher disposable incomes would help. At the ruling price, the stock quotes at P/E and EV/EBIDTA of respectively 25.4x and 16.9x, discounting its FY18e. Given our revised price objective Rs.1,726 (earlier Rs.1,337), we maintain our Hold call. Risk. A sharp drop in global commodity prices could cut into profitability in the short term.

Shares of V-GUARD INDUSTRIES LTD. was last trading in BSE at Rs.1602.2 as compared to the previous close of Rs. 1614.25. The total number of shares traded during the day was 1675 in over 187 trades.

The stock hit an intraday high of Rs. 1625 and intraday low of 1581.1. The net turnover during the day was Rs. 2688162.

Source : Equity Bulls

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