Decisions made Simpler V-Guard Industries: The company likely to benefit from upcoming summer season and improving economy ! V-Guard Industries, established in 1977, is a Kochi-based company. It manufactures a range of products namely voltage stabilisers, cooktops, solar water heaters, pumps, electric water heaters, cables, UPS, ceiling fans, house wiring cables, etc. The company has the largest selling brand of electronic voltage stabilisers across India. It manufactures stabiliser for TV, digital equipment, ACs and refrigerators. V-Guard has its manufacturing facilities located at KG Chavady, Coimbatore, Tamil Nadu; at Kashipur, Utharakhand; at Kala Amb, Himachal Pradesh and at SIPCOT Industrial growth center, Perundurai, Tamil Nadu. The company is doing well in terms of revenue and profit. In the past ten years, net profit and gross sales of the company grew 28.9 per cent and 27.2 per cent annually. Bottom line and top line figures of V-Guard Industries increased from Rs 5.52 crore and 138.53 crore at the end of March 2005 to Rs 70.13 crore and 1,537.93 crore at the end of March 2014. We believe the company is likely to register profit after tax figures of Rs 84 crore and 96 crore for the financial years ended March 2015 and March 2016, respectively. The company got listed on exchanges on 13 March 2008. Since then the share price of the company jumped 1,253 per cent to Rs 993.65 on January 28 this year against Rs 73.45 on 13 March 2008. V-Guard shares are suitable for those who are looking for regular income and capital appreciation also. The company has good track record of paying dividend. On January 28, valuation of V-Guard Industries was looking expensive as it was trading at trailing twelve months price-to earnings (P/E) ratio of 42.70 against industry P/E of 26.55. However, attractive balance sheet, improvement in net working capital days, positive cash flows, expansion plans to enter into new geographies and strong dealership network indicates revenue visibility and strong growth ahead. Website: www.itipsadvisory.com E-mail: [email protected] Landline No: 080- 40918467 Decisions made Simpler Investment Rationale Bright outlook of consumer electronics and durable sector: India’s macro fundamentals continue to be strong with a young population and higher saving rates. The formation of stable government at the centre has revived hopes of a strong recovery and should augur well for the industry. The onset of the summer season has also seen an uptick in demand for durables like AC’s, refrigerator, inverters etc. This will create further demand for stabiliser in coming months. The long term prospects of the consumer durables and household appliances industry are robust and expected to see significant growth due to lower penetration, increasing incomes, and growing urbanisation. The need for comfort and convenience in urban households will result in change in perception of durables and appliances from luxury to necessity, driving rapid growth. According to a McKinsey Global Institute, the number of middle class households will increase more than fourfold nation-wide from 32 million to 147 million in 2030 driven by rapid urbanisation. Of late, the RBI has cut interest rate by 25 basis points, we believe lower interest rates will spur consumer spending and capital expenditure. A fall in interest rates will also lead to consumers borrowing for the purpose of buying consumer durables, houses, ACs etc. Lower EMI on home loans will also lead to more funds in the hands of consumer. Overall, a reversal in the monetary policy brings optimism in the entire economy and will be beneficial to investors. We expect another 75-100 basis points cut in 2015-16. Zeroing in on non-south geographies: V-Guard has committed towards building on its competitive strengths, expanding its network of channel partners and retailers across the country and enhancing brand recall in the non-south markets through aggressive ad spends and sales promotions. In 2013-14, the company made investments to the tune of Rs 60 crore or 3.9% of revenues on advertising and promotions. Most of the expenditure was targeted on the IPL platform last year where the company was able to reach to a large audience and create a strong visibility for its brand. Ad spends are to be maintained at 3.5-4% of revenues in 2014-15 as well. Further, the company continued to make significant investments in expanding its distribution network and currently has a network of over 407 distributors, 4,344 channel partners and 25,000 retailers at the end of 2013-14 as compared to 301 distributors, 3,548 channel partners and 15,000 retailers in 2012-13. We believe, these investments will help the company to gain more market share in non-south geographies. Non-south markets have recorded a growth of 34 per cent year-on-year in 201314 on the back of strong brand recall that has been created. Uttar Pradesh, Rajasthan, Punjab and National Capital Region (NCR) are the key contributors to the strong growth. Non-south Website: www.itipsadvisory.com E-mail: [email protected] Landline No: 080- 40918467 Decisions made Simpler markets now account for 30 per cent of the total revenues as compared to 25 per cent in 201213 and 16 per cent in 2009-10, a significant achievement in towards diversifying the company’s revenue stream. Improving balance sheet, working capital cycles and return ratios: The balance sheet continues to be robust with a debt-equity ratio of 0.34 as on March 2014 against 0.63 and 0.52 as on March 2013 and March 2012, respectively. Debt to the tune of Rs 57 crore has been repaid during the financial year 2013-14. Cash generated from operations has been robust at Rs 111 crore for 2013-14 as compared to Rs 10.5 crore for the full year 2012-13, driven by an 8 day improvement in the working capital cycle to 76 days. Inventory days have improved by 8 days while debtor days have seen an improvement of 2 days. The company will continue with its vendor financing and bill discounting initiatives and also increase the proportion of channel financing, and is looking for an improvement in net working capital cycle by 5 days every year. This will further improve its return on capital employed (ROCE) and return on equity (ROE) going forward. ROE of the company jumped from 19.01 per cent in 2009-10 to 24.31 per cent in 2013-14. ROCE of the company also moved up from 26.41 per cent to 27.01 during the same period. We believe the company is likely to keep its ROE and ROCE above 23 per cent and 34 per cent for the financial year ended March 2015 and March 2016, respectively. Management retain 20 per cent growth guidance: The management expects, the company is likely to grow at 20 per cent in 2014-15 due to expansion into the non-south markets. It sees recovery in sales of the digital UPS systems and some of its flagship products, like stabilisers, cables and fans, are expected to deliver a healthy growth. The company expects operating profit margins are likely to inch between 8.5-9% in 2014-15. Production outsourcing model: The company has partnered with outsourcing agencies to supplement the manpower requirements in customer service and support services. The outsourcing activities help the company to keep balance sheet light and mange working capital more efficiently. Website: www.itipsadvisory.com E-mail: [email protected] Landline No: 080- 40918467 Decisions made Simpler SWOT Analysis Outlook: We believe the share price of the company will jump further 12-15 per cent in the next 12-14 months due to zeroing in on to increase market share in non-south market, improving market sentiments and shift of demand from unorganised to organised market. Financial Highlights Website: www.itipsadvisory.com E-mail: [email protected] Landline No: 080- 40918467
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