VGuard Industries Ltd - Q2FY21 Result Update - YES Securities

2Q FY21 result update

- VGuard numbers were a beat on all fronts as the company managed to rebound in its core segment and cost saving measures aided in margin expansion. The recovery in revenues was curtailed by degrowth in its consumer durable segment (largely water heaters). Both, Electricals and Electronics segment growth was led by strong sales in digital UPS and pumps. In the consumer durable segment, fans registered healthy growth. Overall growth was impacted by second wave in Kerala and supply chain impacted by disruptions in Sikkim. The company witnessed 3.3% yoy decline in South India business and 4.4% yoy growth in non-South India. VGuard has managed to resolve its supply chain issues and expects strong recovery in festive season. During this quarter, the launched a range of new products in water purifier, breakfast appliances and kitchen hobs & chimneys.

- Margins too were better than expected led by a sharp recovery in margins in all segments on a sequential basis. Margin expansion was also aided by writeback of provisions for ESOP in employee expenses. However, it was lower on a yoy basis (12% vs 12.5% in Q2 FY20). EBIT margin for the electronics segment came in at 17.9% (vs. 16.9% in 2QFY20), for the Electrical segment it came in at 9.4% (vs. 10.2% in 2QFY20), and for the consumer durables segment it came at 8.3% (vs. positive 10.6% in 2QFY20). On a yoy basis, gross margins decreased by 220bps. Major cost savings was witnessed in other expenditure.

- Interest cost came in at Rs10mn. PAT decreased by 13% YoY to Rs500mn (Higher than street estimate).

- We believe VGuard would remain underperformer in the sector. High competitive intensity in Southern markets has put pressure on earnings growth for the company. In the near term market share gains would be restricted as consumer/dealer preference is for top 2-3 brands present in each segment. We have marginally increased our FY21/22 estimates to factor in the faster recovery in the consumer electricals sector. Current valuations appear reasonable at 32.7x FY23 P/E, however earnings growth would be lower than peers. We maintain our reduce rating on the stock while marginally increasing our TP to Rs177, as we roll forward to Sept '22 earnings.

Earnings call highlights

Revenue

- Revenue growth was impacted by lower offtake in Kerala (biggest revenue contributor) and supply chain issues in most of the product categories.

- Company was expecting high single digit growth rate in Q2, however, supply chain issues curtailed growth. Sikkim factory for water heaters was impacted during the pandemic and impacted sales.

- Rural market continues to perform better than metros.

- Kerala is 20% of revenues for the company and was down 15-20% in Q2

- For H2 the company expects high double digit growth as demand is good, supply chain issues have been resolved and last Q4 was weak

- Supply chain issues was faced across many product categories during the quarter. The company was not able to meet rising demand from the market. However, things are smoothening out for the company

- Online sales revenue jumped 40% yoy

- Consumer durable business: fans did well. Water heater performance was impacted by plant shutdown

Margins

- Gross margin lower on a yoy basis due to product mix and Sikkim plant closure.

- Q3 would witness higher input costs pressure. Company would try to pass on some portion of this via price hikes

- A&P spend lower at 0.5% of sales during the quarter. Would increase in H2.

- Cost saving measures initiated would aid margin expansion in H2

New product categories: water purifiers, breakfast appliances, kitchen hobs and chimneys

- The company would be targeting ecommerce first and then expand its distribution network

- The company is currently in the initial stage of product development and setting up the supply chain for the new products

- Near term contribution would be low. The categories should start contributing meaningfully 2-3 years from now

- Currently the products would be completely outsourced. When the company achieves some scale and healthy market share the company would increase inhouse production

Shares of V-GUARD INDUSTRIES LTD. was last trading in BSE at Rs.169 as compared to the previous close of Rs. 168.45. The total number of shares traded during the day was 35333 in over 1215 trades.

The stock hit an intraday high of Rs. 173.2 and intraday low of 168.5. The net turnover during the day was Rs. 6033988.

Source : Equity Bulls

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