10 March 2014 Update | Sector: Electrical Goods

V-Guard Industries
BSE Sensex 21,935 S&P CNX 6,537

CMP: INR441

TP: INR550

Buy

Indian summer in sight

Growth to pick pace, attractive valuations
Stock Info Bloomberg Equity Shares (m) 52-Week Range (INR) 1, 6, 12 Rel. Per (%) M.Cap. (INR b) M.Cap. (USD b)

VGRD IN 29.8 570/403 -6/-26/-18 12.9 0.2

We interacted with V-Guard Ind (VGRD) MD, Mr Mithun K Chittilappilly to get an update on the demand scenario and growth prospects, going forward.

Poised for recovery, current valuations warrant a Buy

Financial Snapshot (INR Billion) Y/E March 2014E 2015E 2016E Sales EBITDA NP EPS (iNR) EPS Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) 14.9 1.3 0.7 24.0 13.7 24.8 26.6 18.4 4.2 17.9 1.6 0.9 31.7 32.2 27.0 31.2 13.9 3.4 21.6 2.0 1.2 39.3 24.1 27.3 34.3 11.2 2.8

VGRD has seen YoY growth of ~12-12.5% in January and February 2014, against our expectation of 5% for 4QFY14E (1.1% growth in 3QFY14). Possibility of strong summer season could be a significant driver for revenue in FY15E, given ~65-70% of VGRDs products are summer-poised in nature. Margins in 4QFY14E are expected to improve significantly to 9.7%, compared to 5.3% in 4QFY13 due to significant one-offs in 4QFY13 and lower ad spends during 4QFY14. We believe that growth has bottomed out after two quarters of lower single digit performance and is expected to accelerate going forward, given the strong outlook for summer season and lower base effect.

Revenue set to post a recovery: Our interaction with the management

suggests that the company has seen strong growth of ~12-12.5% in January and February 2014 (v/s 4QFY14E growth expectation of 5%), driven by 15% growth in stabilizers, 10% in pumps, 30% in household wires 30% in fans And 40% in Induction cooktops due to revival in Tamil Nadu market. Inverter segment continues to remain a drag with a de-growth of ~25-30%. However, growth in March is expected to be ~8-10% due to unseasonal rains in non-south markets affecting demand. International weather forecasters expect strong summer in CY14, which could be a significant driver for VGRDs revenue in FY15 as ~65-70% of its products are summer-facing in nature. Given the low base in FY14 and expectation of strong summer, we expect revenue growth of 20% in FY15E.

105.7 129.3 159.4

Shareholding pattern % As on Promoter Dom. Inst Foreign Others Dec-13 Sep-13 Dec-12 55.8 16.8 10.2 17.2 55.8 16.7 9.6 17.9 55.8 16.9 10.1 17.2

Margins set to improve going forward: We expect margins in 4QFY14E to

improve significantly to 9.7%, compared to 5.3% in 4QFY13 due to significant amount of one-offs in 4QFY13. Also, VGRD plans to spend ~INR100m (2.5% of revenue) as ad spends in 4QFY14, compared to INR140m (3.7% of revenue) in 4QFY13, which should aid the margin expansion. We expect margins to improve by 40bp to 8.8% in FY15E, primarily driven by improved operating leverage.

Stock Performance (1-year)

Valuation and view: We expect VGRD to post 20.3% CAGR in revenue and
28.1% CAGR in PAT over FY14E-16E. We believe that growth has bottomed out after two quarters of lower single digit performance and is expected to accelerate, given the strong outlook of summer going forward and lower base effect. At CMP of INR442, the stock trades at 13.9x FY15E and 11.2x FY16E earnings respectively. We value VGRD at 14x FY16E EPS of INR39.3 and arrive at a target price of INR550. Maintain Buy. Niket Shah (Niket.Shah@MotilalOswal.com); +91 22 3982 5426 Atul Mehra (Atul.Mehra@MotilalOswal.com); +91 22 39825417
Investors are advised to refer through disclosures made at the end of the Research Report.

V-Guard Industries

Revenue set to post a recovery

Our interaction with the management suggests VGRD has seen strong growth of ~12-12.5% in January and February 2014 (v/s 4QFY14E growth expectation of 5%) driven by 15% growth in stabilizers, 10% in pumps, 30% in household wires and 30% in fans. Induction cooktop sales are witnessing a robust growth of ~40%, albeit on a lower base. Inverter segment continues to remain a drag with a de-growth of ~25-30%. However, management guided that demand in invertors will return in March. Going forward, growth in March is expected ~8-10%, marginally lower than the current run-rate of 12%, largely due to the impact of unseasonal rains in nonsouth markets affecting demand for some product categories.

Segment-wise revenue breakup (INR m)

Segments Electronics Electrical / Electromechanical Others Total 3QFY14 846.0 2,543.0 140.0 3,529.0 3QFY13 1,034.0 2,349.0 107.0 3,490.0 Growth % -18.2 8.3 30.8 1.1 2QFY14 846.3 2,410.0 84.0 3,340.4 Growth % 0.0 5.5 66.6 5.6

Source: Company, MOSL

Product-wise revenue breakup

Segments (INR m) Stabilizers Standalone UPS Digital UPS Pumps House wiring cable LT cable Electric water heater Fan Other Products Solar water heater Total sales 3QFY14 554.0 57.0 235.0 408.0 1,122.0 171.0 582.0 161.0 99.0 140.0 3,529.0 3QFY13 521.0 107.0 406.0 485.0 995.0 177.0 464.0 138.0 89.0 107.0 3,489.0 Growth% 6.3 -46.7 -42.1 -15.9 12.8 -3.4 25.4 16.7 11.2 30.8 1.1 2QFY14 543.0 110.0 194.0 338.0 1,172.0 198.0 422.0 154.0 126.0 84.0 3,341.0 Growth% 2.0 -48.2 21.1 20.7 -4.3 -13.6 37.9 4.5 -21.4 66.7 5.6

Source: Company, MOSL

Yearly revenue breakup geography-wise

Yearly contribution % to sales geography-wise

Source: Company, MOSL

Source: Company, MOSL

10 March 2014

V-Guard Industries Quarterly revenue breakup geography-wise

South 2,400 2,478 2,002 916 928 693 879 1,290 964 1,073 2,401 Non south 2,764 2,876 2,894 2,431 2,496 9.5 7.1 2,115 2QFY12

Quarterly contribution % to sales geography-wise

Total sales (INR mn) 12.1 10.7 9.6 9.2 EBITDA margins %

1,787 1,773

2,005

7.4 5.3 3,787 4QFY13

7.6

8.1 3,340

8.3

630 433 570 537 1QFY12 2QFY12 3QFY12 4QFY12

2,734 2,467 3QFY12 4QFY12 3,190 1QFY13

3,135 3,490 2QFY13 3QFY13

4,082 1QFY14 2QFY14

3,529 3QFY14 3

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

Source: Company, MOSL

3QFY14

1QFY12

Source: Company, MOSL

El Nino could lead to an elongated summer

International weather forecasters (The Australian Bureau of Meteorology and The National Oceanic Atmospheric Administration of United States) expect enhanced possibility of an El Nio in 2014. El Nio shifts rainfall patterns and can weaken or delay the Asian monsoon. In the last decade, it was one of the factors responsible for two of Indias most severe monsoon failure (2002 and 2009). El Nino could elongate the summer period, which could be a key benefit for companies like VGRD who have a summer-centric product portfolio. We believe this can be a significant driver for VGRDs revenue in FY15E, given ~65-70% of its products are summer-facing in nature. Given the low base in FY14 and strong summer, we expect revenue growth to be 20% in FY15E.

Margins set to improve going forward

Margins in 4QFY14E are expected to improve significantly to 9.7%, compared to 5.3% in 4QFY13 due to significant amount of one-offs in 4QFY13. One-offs composed the 450bp decline in base quarter (4QFY13) and with lower ad spend expected during 4QFY14 (INR100m v/s INR140m), we estimate PAT margin for 4QFY14E at INR223m, against INR89m in 4QFY13. Going forward, we expect margins to improve by 40bp to 8.8% in FY15E, primarily driven by improved operating leverage.

Higher ad spends, fall in copper prices and one-offs impacted 4QFY13 margins
Company reported EBITDA margin of 5.3% (est. of 9.7%), compared to 12.1% in 4QFY12, marking a decline of 680bp. This was primarily due to the following: 1) Significant increase in ad spends (INR136m in 4QFY13, compared to INR30m in 4QFY12) on YoY basis, which impacted margins by 360bp. VGRD spent 4.3% of sales on ad spends for FY13, compared to 3.8% in FY12, marking an increase of 50bp and guided for 4% of sales advertisement spends for FY14. 2) MTM hit of inventory on account of reduction in copper prices (100bp). 3) One-off scrapping of old spares due to shifting of solar water heater factory and other one-offs impacted margins by 80bp. 4) Increase in freight cost impacted margins by 80bp as the cost increase is passed on with a lag.
10 March 2014

V-Guard Industries

5) Additional discounts in digital UPS and stabilizers segment due to extended winters and higher inventory of 80bp.
Break-up for decline in EBITDA margin
Particulars Advertisment expenses Inventory write down due to copper price reduction Scrapping due to shifting of Solar water heater factory Additional gratuity due to higher provision Increase in freight cost Additional discount on digital UPS and stabilizers Total Amount (INR m) 136 40 30 10 30 30 236 Impact on margins (% of revenue) 3.6 1.1 0.8 0.3 0.8 0.8 7.3 Source: Company, MOSL

Yearly Ad spend % of sales trend

Quarterly ad spends % of sales trend

Ad spends 6.3 4.6 3.6 2.1 116 1QFY13 160 66 2QFY13 Q3FY13 Q4FY13 Q1FY14 238 215 110 Q2FY14 Q3FY14 8.3 3,529 3QFY14 4 % of revenues 5.3 3.3 3.6 180

Source: MOSL, Company

Source: MOSL, Company

Sales growth and EBITDA margin trend

Total sales (INR mn) 12.1 10.7 EBITDA margins % 9.6

9.5 7.1

9.2

7.4 5.3

7.6 4,082 1QFY14

8.1

2,401 1QFY12

2,115 2QFY12

2,467 3QFY12

2,734 4QFY12

3,190 1QFY13

3,135 2QFY13

3,490 3QFY13

3,787 4QFY13

3,340 2QFY14

Source: MOSL, Company

Strong distribution network, focus on improving revenue per distributor

VGRD has a strong network of ~230 distributors, 3,000 direct dealers and 15,000 retailers. Company plans to increase the retailers below the distributors going forward, thereby increasing revenue contribution per distributor going forward. Revenue/distributor for FY13 stood at INR85.4m/distributor for south and INR35.8m/distributor for non-south. VGRD plans to improve non-south

10 March 2014

V-Guard Industries

revenue/distributor to INR75m per distributor, thereby driving growth and operating leverage. Average realization in non-south is 3-4% lower than in south and management expects this gap to reduce over the next two to three years. Unified pricing is already being followed in the Wires segment and the plan is to replicate the same in other product categories.
Revenue/ Distribution pan India trend

Distribution network Pan India trend

Source: MOSL, Company

Source: MOSL, Company

Key Assumptions
Segment wise Sales (m) PVC Insulated Cable Stabilizers Pumps Electric Fans LT Cables Solar Water Heaters Water Heater UPS Digi UPS Induction cooktops and switchgears Total sales Segment wise revenue growth (%) PVC Insulated Cable Stabilizers Pumps Electric Fans LT Cables Solar Water Heaters Water Heater UPS Digi UPS Induction cooktops and switchgears FY13 3,734.1 2,376.9 2,052.3 796.4 728.3 309.2 1,103.0 482.7 1,732.3 267.8 13,583.0 32% 18% 35% 25% 25% 19% 28% 15% 138% FY14E 4,722.9 2,674.1 1,949.7 960.8 742.9 416.4 1,392.5 386.2 1,364.2 314.2 14,923.8 26% 13% -5% 21% 2% 35% 26% -20% -21% 17% FY15E 5,958.9 3,032.4 2,339.6 1,114.3 795.6 583.1 1,670.9 347.5 1,702.5 393.5 17,938.3 FY16E 7,518.3 3,469.3 2,807.4 1,292.2 852.1 816.4 2,004.9 312.8 2,036.2 493.1 21,602.7

26% 26% 13% 14% 20% 20% 16% 16% 7% 7% 40% 40% 20% 20% -10% -10% 25% 20% 25% 25% Source: Company, MOSL

10 March 2014

V-Guard Industries

Financials and valuation

10 March 2014

V-Guard Industries

Financials and valuation

10 March 2014

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V-Guard Industries

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