Maintain REDUCE on V-Guard Industries - Miss on all fronts - HDFC Securities

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

V-Guard Industries (Q4FY20): Miss on all fronts. Maintain REDUCE
(TP Rs 145, CMP Rs 180, MCap Rs 77bn)

V-Guard posted a weak show in 4QFY20 with revenue/EBITDA decline of 28/42% yoy. The revenue decline was broad based as Electrical/Electronic/CD segments dipped by 32/27/20% yoy. In Jan/Feb, V-Guard saw a healthy growth of 7% yoy, which was close to 6.5% yoy growth clocked in 9MFY20. Lockdown impacted channel filling of seasonal products during the last 2 weeks of March. Channel inventory is at 40 days (20-30 days normally) and liquidation of inventory will be a challenge for the co. V-Guard is also holding high inventory (105 days vs. 75 days), resulting into higher NWC days. South performance remained challenging in FY20 and posted 6% yoy decline. Non-south revenue mix has increased to 41% in FY20 (34% in FY17). We cut our EPS for FY21/FY22 by 14/9% (18% cut in FY21/FY22 in our 4QFY20 Preview) in order to factor in channel liquidity concerns and weak demand. We value V-Guard at 28x on Mar-22E EPS, deriving a TP of Rs 145. Maintain REDUCE.

Miss on revenue: Revenue was down by 28% yoy to Rs 5,366mn (+12% 4QFY19 and +5% 3QFY20) vs est decline of 10%. Electrical Seg (Cables, Pump) was down by 32% yoy (+21% in 4QFY19, +5% in 3QFY20), Electronics Seg (Stabiliser, Inverter) dipped by 27% yoy (-1% in 4QFY19, +1% in 3QFY20) and CD Seg (Fan, Water Heater, Gas Stoves) was down by 20% yoy (+15% in 4QFY19, +10% in 3QFY20). Loss of sales during March had a heavy impact in 4QFY20 (Rs 2.5bn, 35% of 4Q), especially as co is no. 3 or 4 player in most non-south markets, and channel partner prefers to stock up products of market leaders on priority. We expect FY21 to remain challenging for V-Guard due to co missing out on sales of seasonal products and weak sentiments.

EBITDA decline by 42% yoy: GM expanded 374bps yoy to 33.3% vs our estimate of expansion of 241bps yoy. Employee/Advertising/Other expenses grew by -18/-42/+31%. Co was not able to reduce overhead cost which led to EBITDA decline of 42% yoy to Rs 451mn vs est of Rs 741mn. EBITDAM contracted by 215bps yoy to 8.4% (HSIE +50bps). APAT declined by 45% yoy to Rs 325mn (exp Rs 557mn). Co plans to take sharp cut in overhead cost in the coming quarters and we expect EBITDA margin will sustain in FY21/22.

Call & other takeaways: (1) Channel inventory currently stands at ~40 days, expected to normalize by July, (2) Revenue in May was ~70% of May 2019, (3) Southern and Eastern markets have shown good recovery while West has been most impacted, (4) 60-70% of co's dealers are open right now with the number increasing progressively, (5) Inventory level has seen a sharp increase in FY20 due to loss of sales in March, (6) Net debt for the co improved to negative Rs 1.4bn from negative Rs 1.6bn in FY19.

Shares of V-GUARD INDUSTRIES LTD. was last trading in BSE at Rs.185.95 as compared to the previous close of Rs. 180.3. The total number of shares traded during the day was 56362 in over 1668 trades.

The stock hit an intraday high of Rs. 191.8 and intraday low of 182.4. The net turnover during the day was Rs. 10600051.

Source : Equity Bulls

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