Maintain ADD on V-Guard Industries - Loss of peak season sales, state mix impact the show - HDFC Securities

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities and Mr. Saras Singh, Institutional Research Analyst, HDFC Securities

V-Guard's performance was impacted more severely than its peers, given its high business contribution from the south and east India (more impacted by the second wave). Revenue grew by 38% YoY with electronics, electrical and consumer durables segments growing 15/38/75% YoY. Electronics segment (stabilizers) and air coolers saw a huge impact as the usual peak season demand was missing. The company lost out on ~INR 2.5-3bn of sales during the second wave. It registered higher non-south growth (42% YoY) compared to south (up 35% YoY), taking the non-south contribution to 43% of total sales. The Q1FY21 gross margin expanded by 380bps YoY on a low base to 33% due to the loss of stabilizer sales (high margin business) and negative operating leverage. While the company's GM will be better compared to FY21, it will be lower compared to FY20 due to loss of ~INR 700mn of stabilizer sales. While V-Guard has lost out on peak season sales, demand recovery ahead and normal trade inventory can help it recover faster. We maintain our FY22/23/24 EPS estimates and value V-Guard at 35x P/E on Jun-23 EPS to derive a target price of INR 265. Maintain ADD.

Revenue impacted by seasonal, state mix: Net revenue grew by 38% YoY (- 42% in Q1FY21 and +58% in Q4FY21, 46% HSIE). Electronics (stabilizer, UPS, etc.), electrical (wires, pump, etc.) and consumer durables (fan, water heater, KEA, etc.) segments registered 15/38/75% YoY growth (-51/-31/-44% YoY in Q1FY21). The south region grew 35% YoY growth (-8% 2-year CAGR) while the non-south region registered 42% YoY growth (-13% 2-year CAGR). South: non-south mix was at 57: 43% vs. 58:42% YoY.

Loss of high-margin sales impacts GM: Gross margin expanded by 380bps YoY (-334bps in Q1FY21, -191bps in Q4FY21), a miss vs our expectation. A&P expenses (excl. schemes) as a percent of revenue stood at 2.5% vs. 0.8% YoY. Employee costs were up by 5% YoY (-9% in Q1FY21, +32% in Q4FY21). EBITDA margin was up by 550bps YoY (-794bps YoY in Q1FY21, +453bps YoY in Q4FY21) to 7.7% (HSIE 10.3%). EBIT margin for the electronics/electricals segment expanded by 625/637bps YoY (-1,076/-197bps YoY in 4QFY20). The consumer durable EBIT loss was at INR 59mn vs. INR 87mn in Q1FY21 and profit of INR 66mn in Q1FY20. APAT was at INR 246mn (HSIE INR 436mn).

Con call takeaways: (1) Working capital is high on company's planned decision to stock up inventory. (2) Margin impact was due to loss of stabilizer (high margin) sales during the peak period. (3) Sikkim was shut during the quarter, but this didn't impact the supply as inventory was already built and the facility was reopened a week earlier. (4) Trade inventory is at normal levels. (5) Have set up a subsidiary for inhouse manufacturing of products. New entity has been formed to take advantage of tax benefit. (6) CD margin is expected to remain low as the company is still in the investment phase for products like air coolers, kitchen appliances.

Shares of V-Guard Industries Ltd. was last trading in BSE at Rs. 247.15 as compared to the previous close of Rs. 246.95. The total number of shares traded during the day was 68629 in over 2412 trades.

The stock hit an intraday high of Rs. 250.4 and intraday low of 245. The net turnover during the day was Rs. 16937890.

Source : Equity Bulls

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