Conference-call Update Institutional Equities V-Guard Industries 7 November 214 Reuters: VGUA.NS; Bloomberg: VGRD IN We hosted the conference-call of V-Guard Industries (VIL) on 5 November 214 to discuss its 2QFY15 financial performance. Strong revenue CAGR of 19.5%, a 125bps improvement in operating margin, strong reach in the non-southern region, a 594bps improvement in RoCE at 26.5% and free cash flow of Rs2,279mn over FY14-FY17E are likely to drive VIL s valuation. We have retained Buy rating on VIL with a target price of Rs1,19 based on 24x average FY16E-FY17E EPS of Rs46.2 and 15.6x EV/EBITDA. Following are the key takeaways: VIL maintained advertisement expenditure at 3.3% of net sales for 2QFY15. The company also maintained advertisement expenditure guidance at 3.5%-4.% of net sales for FY15E. VIL has introduced a new service model under its warranty cost system. Under this system, instead of the distributor bearing the cost of after-sales service, there is a franchisee system to deal with the warranty of products. This change in the model led to a clean-up activity, as a result of which VIL incurred an additional cost of Rs1mn during the quarter. In addition, because of heavy rains and lightning in Kerala affected the inverters installed there. This led VIL to incur one-time costs of Rs2mn-Rs25mn as some products had to be repaired and delivered to the consumers. Further, VIL shifted its call centre activity to a third party at Noida. The total one-off cost s stood at Rs4mn-45mn for the quarter, leading to a jump in other expenditure by 34.3% YoY atrs356mn. The additional one-off expenditure led to a one percentage-point impact on EBITDA margin at 8.3%. VIL sharpened its focus on the non-southern region (46.7% YoY revenue growth in 2QFY15, with a 33% contribution versus 28% in 2QFY14). The products like voltage stabilisers, wires, pumps, electric water heaters and inverters did exceptionally well and contributed to high growth in the region. After muted growth in South India for the past four quarters, VIL posted a strong 2.7% growth at Rs2,935mn led by voltage stabiliser and DUPS divisions on the back of coal shortage and power cuts resuming in the region. States like Andhra Pradesh, Karnataka and Tamil Nadu reported strong numbers except Kerala, which witnessed lower growth in the pumps segment because of two years of good rainfall. VIL posted just a 5bps gross margin expansion at 46% for the quarter, despite reporting strong growth in the non-southern region. In anticipation of good growth in the winter season, VIL built up an inventory which is expected to normalise post winter season. VIL and its competitors built up inventory in the inverter and battery segments with their channel partners, leading to an oversupply of products and as a result they remained unsold. The management expects the inventory to normalise in 3QFY15. Piling-up of inventory and no price hike impacted profitability of the product. Post likely normalisation of inventory in 3QFY15, a price hike is on the cards which will improve the margin in the product. Improvement in EBIT margin of inverters alone can provide a 1% improvement in EBITDA margin of VIL. The electric water heater category registered a growth of 5%-8%, but, VIL reported 42.6% growth in 1HFY15 mainly led by: a) Expansion to newer geographies, b) Nonsouthern region doing well, and c) New products like Pebble performing better. VIL has been able to gain market share from its competitors in the southern region. VIL has been able to maintain its margin in the electric water heater segment. As per management, the fall in copper prices will impact VIL in the short term because of MTM (mark-to-market) impact on high-cost inventory. However, in the long run, the fall in copper prices will help in improving the margins of VIL as the company is not liable to pass on the benefit to its customers, especially in segments like voltage stabilisers, inverters etc, where other items are also used in the manufacturing process. However, in case of wires, VIL needs to pass on the benefit to its customers. BUY Sector: White Goods CMP: Rs914 Target Price: Rs1,19 Upside: 21% Jignesh Kamani, CFA jignesh.kamani@nirmalbang.com +91-22-3926 8239 Ruchita Maheshwari ruchita.maheshwari@nirmalbang.com +91-22-3926 823 Key Data Current Shares O/S (mn) 29.9 Mkt Cap (Rsbn/US$mn) 27.3/444 52 Wk H / L (Rs) 937/43 Daily Vol. (3M NSE Avg.) 41,123 One-Year Indexed Stock Performance 2 19 18 17 16 15 14 13 12 11 1 9 8 7 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 V-GUARD IND LTD Price Performance (%) 1 M 6 M 1 Yr V-Guard Ind. 4.2 74.6 88.4 Nifty Index 4.9 24.5 32. Source: Bloomberg NSE CNX NIFTY INDEX Please refer to the disclaimer towards the end of the document.
Exhibit 1: Financials Y/E March (Rsmn) cons. FY12 FY13 FY14 FY15E FY16E FY17E Revenue 9,646 13,62 15,176 18,81 21,592 25,889 YoY (%) 32.8 41. 11.6 19.1 19.4 19.9 EBITDA 936 1,1 1,226 1,576 1,915 2,415 EBITDA (%) 9.7 8.1 8.1 8.7 8.9 9.3 Reported PAT 59 63 72 943 1,188 1,57 Adj. PAT 17. 21.1 23.5 31.6 39.8 52.6 FDEPS (Rs) 19.1 23.8 11.5 34.3 26. 32.2 YoY (%) 26.6 26.7 24.2 26.4 26.5 27.7 RoCE (%) 2.3 21.3 2.5 23.3 24.3 26.5 RoIC (%) 18.5 19.4 18.4 2.7 22. 24.4 RoE (%) 53.7 43.3 38.9 28.9 23. 17.4 P/E (x) 13. 1.4 8.6 6.9 5.5 4.3 P/B (x) 3.2 26.1 23. 17.8 14.5 11.2 EV/EBITDA (x) 9,646 13,62 15,176 18,81 21,592 25,889 As of now, VIL has no plan to introduce new product categories. VIL has already launched induction cook-top and mixer-grinders in the kitchen appliances segment and also switchgear. However, in the induction cook-top segment, after a two-year successful stint in Kerala, the company plans to enter Tamil Nadu. As per the management, 2HFY15 is expected to witness EBITDA margin expansion because of a favourable product mix. Exhibit 2: Result analysis VIL s management continues to maintain its guidance of 2% revenue growth and also EBITDA margin in the range of 8.5%-9.% for FY15. Y/E March - consolidated (Rsmn) 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 1HFY14 1HFY15 YoY (%) Net sales 3,34 4,777 4,313 29.1 (9.7) 7,422 9,89 22.5 Net raw material costs and finished goods purchases 2,418 3,537 3,12 28.3 (12.3) 5,447 6,639 21.9 % of sales 72.4 74. 71.9 - - 73.4 73. - Employee expenses 22 254 275 24.8 8. 437 529 21.1 % of sales 6.6 5.3 6.4 - - 5.9 5.8 - Other expenses 431 581 579 34.3 (.4) 958 1,16 21.2 % of sales 12.9 12.2 13.4 - - 12.9 12.8 - Total expenditure 3,7 4,372 3,956 28.9 (9.5) 6,842 8,329 21.7 Operating profit 271 44 356 31.7 (11.9) 58 761 31.2 OPM (%) 8.1 8.5 8.3 - - 7.8 8.4 - Interest costs 48 54 53 9.1 (2.8) 13 17 3.4 Depreciation 29 37 38 33.3 2.5 57 75 31.3 Other income 11 7 11 (5.6) 62.5 22 17 (22.7) PBT 25 32 277 34.7 (13.5) 442 597 34.9 Tax 6 97 85 4.5 (13.) 121 182 5.9 Effective tax rate (%) 29.4 3.5 3.7 - - 27.3 3.5 - Adjusted PAT 145 223 192 32.4 (13.8) 321 414 28.9 NPM (%) 4.3 4.7 4.4 - - 4.3 4.6 - EPS (Rs) 4.9 7.5 6.4 32.4 (13.8) 1.8 13.9 28.9 Equity 298.5 298.5 298.5 - - 298.5 298.5-2 V-Guard Industries
Exhibit 3: Segment-wise analysis standalone Y/E March (Rsmn) cons. 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 1HFY14 1HFY15 YoY (%) Segment revenue Electronics 846 1,934 1,214 43.4 (37.2) 2,497 3,148 26.1 Electrical/electro-mechanical 2,41 2,747 2,979 23.6 8.5 4,762 5,726 2.2 Others 84 96 12 42.3 24.7 163 215 31.9 Total 3,34 4,777 4,312 29.1 (9.7) 7,422 9,89 22.5 EBIT Electronics 19 219 14 28.1 (36.2) 38 358 16.2 Electrical/electro-mechanical 15 16 23 35.6 27. 256 363 41.6 Others 1 9 1 18. (84.6) (1) 11 (23.3) Total 259 388 344 32.7 (11.3) 554 732 31.9 EBIT margin (%) Electronics 12.9 11.3 11.5 (1.7) 1.7 12.4 11.4 (7.8) Electrical/electro-mechanical 6.2 5.8 6.8 9.7 17.1 5.4 6.3 17.7 Others.6 9.5 1.2 96.8 (87.7) (6.2) 4.9 (178.4) Exhibit 4: Segment-wise break-up of revenue standalone Y/E March (Rsmn) 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 1HFY14 1HFY15 YoY (%) Electronics Voltage stabiliser 543 1,11 679 25.1 (38.9) 1,445 1,789 23.8 Standalone UPS 11 69 81 (26.3) 17.1 225 15 (33.3) Digital UPS 197 755 455 13.8 (39.8) 83 1,21 45.7 Segment total 849 1,934 1,214 43. (37.2) 2,499 3,148 26. Electricals Pump 338 497 41 18.6 (19.3) 894 898.4 House wiring cable 1,172 1,265 1,42 19.6 1.8 2,233 2,667 19.4 LT cable 198 151 161 (18.7) 6.4 354 312 (11.8) Electrical water heater 422 28 64 43.2 115.9 62 884 42.6 Fan 154 443 21 36.5 (52.7) 473 653 38.1 Others 126 111 28 65.1 87.7 189 319 68.8 Segment total 2,41 2,747 2,986 23.9 8.7 4,763 5,733 2.4 Others Solar water heater 81 96 112 38.5 17. 16 28 3.1 Others - - - - - Segment total 81 96 112 38.5 17. 16 28 3.1 Grand total 3,34 4,777 4,313 29.1 (9.7) 7,422 9,9 22.5 Exhibit 5: Geography-wise gross revenue standalone Region 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 1HFY14 1HFY15 YoY (%) Revenue-South 2,431 3,14 2,935 2.7 (6.5) 5,31 6,75 14.6 Contribution (%) 72 65 67 - - 7 66 - Revenue-Non-South 964 1,67 1,415 46.7 (15.3) 2,234 3,85 38.1 Contribution (%) 28 35 33 - - 3 34 - Total 3,395 4,81 4,35 28.1 (9.6) 7,535 9,16 21.6 3 V-Guard Industries
Oct-8 Oct-8 Oct-8 Oct-8 Institutional Equities Exhibit 8: One-year forward P/E Exhibit 6: Working capital analysis (Rsmn) Particulars (Rsmn) 1HFY14 FY14 1HFY15 YoY (%) 1HFY15 over FY14 (%) Revenue 7,422 15,176 9,89 22.5 19.8 Inventory 2,418 2,525 3,2 24.2 18.9 Inventory days 69 81 7 - - Sundry debtors 1,613 2,121 2,32 26. (4.2) Sundry debtors days 39 5 4 - - Sundry creditors 1,548 1,753 1,728 11.6 (1.4) Sundry creditors days 88 56 8 - - Net working capital 2,483 2,894 3,36 33.2 14.2 Net working capital days 2 75 3 - - Ex-cash current assets 4,466 5,25 5,58 24.9 11. As % of annualised sales 3.1 33.1 3.7 - - Current liabilities 2,89 2,478 2,363 13.1 (4.7) As % of annualised sales 14.1 16.3 13. - - Ex-cash net current assets 2,377 2,547 3,217 35.3 26.3 As % of annualised sales 16. 16.8 17.7 - - Exhibit 7: Actual performance versus our estimates, Bloomberg consensus estimates (Rsmn) 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 2QFY15E Chg. (%) 2QFY15 BBE Chg.(%) Revenue 3,34 4,777 4,313 29.1 (9.7) 3,951 9.2 4,11 7.5 EBITDA 271 44 356 31.7 (11.9) 34 4.9 343 3.8 EBITDA (%) 8.1 8.5 8.3 16bps (2)bps 8.6 (33)bps 8.6 (3)bps Adjusted PAT 145 223 192 32.4 (13.8) 189 1.5 19.8 (Rs) 1, 9 8 7 6 5 4 3 2 1 22x 19x 16x 13x 1x 7x (x) 25 2 15 1 5 Median 1.8 Source: Nirmal Bang Institutional Equities Research Exhibit 9: One-year forward EV/EBITDA (Rsbn) 3 25 2 15 1 5 14x 12x 1x 8x 6x (x) 18 16 14 12 1 8 6 4 2 Median 7.1 Source: Nirmal Bang Institutional Equities Research 4 V-Guard Industries
Financials (standalone) Exhibit 1: Income statement Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E Net sales 9,646 13,62 15,176 18,81 21,592 25,889 Growth (%) 32.8 41. 11.6 19.1 19.4 19.9 Raw-material 7,19 1,128 11,217 13,115 15,639 18,581 Staff costs 518 71 848 1,13 1,29 1,45 Other expenses 1,174 1,673 1,885 2,378 2,828 3,443 Total expenditure 8,71 12,53 13,95 16,55 19,677 23,474 EBITDA 936 1,99 1,225 1,576 1,915 2,415 Growth (%) 28.1 17.5 11.5 28.6 21.5 26.1 EBITDA margin (%) 9.7 8.1 8.1 8.7 8.9 9.3 Other income 23 36 48 54 58 65 Interest costs 17 2 211 155 131 77 Gross profit 789 936 1,63 1,475 1,843 2,43 Growth (%) 17.6 18.6 13.6 38.7 24.9 3.4 Depreciation 97 114 12 147 169 192 Profit before tax 692 822 943 1,328 1,673 2,211 Growth (%) 17. 18.7 14.7 4.8 26. 32.2 Tax 184 193 242 385 485 641 Effective tax rate (%) 26.5 23.4 25.6 29. 29. 29. Net profit 59 629 71 943 1,188 1,57 Growth (%) 19.2 23.7 11.5 34.4 26. 32.2 Exhibit 12: Balance sheet Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E Equity 298 298 298 298 298 298 Reserves 1,88 2,315 2,886 3,673 4,686 6,65 Net worth 2,16 2,613 3,185 3,971 4,985 6,363 Total loans 1,49 1,574 992 892 692 242 Deferred tax liability 43 79 95 1 15 217 Liabilities 3,198 4,267 4,272 4,963 5,827 6,822 Gross block 1,625 1,888 2,323 2,723 3,137 3,552 Depreciation 395 56 626 773 943 1,135 Net block 1,23 1,382 1,697 1,95 2,194 2,418 Capital work-in-progress 111 88-14 16 18 Long-term Investments - - - - - - Inventories 1,574 2,486 2,525 2,98 3,553 4,238 Debtors 1,478 1,988 2,121 2,461 2,879 3,38 Cash 34 15 28 84 251 428 Other current assets 263 455 379 452 54 647 Total current assets 3,349 5,79 5,53 5,977 7,223 8,694 Creditors 962 1,629 1,753 2,19 2,569 3,65 Other current liabilities 53 652 725 868 1,36 1,243 Total current liabilities 1,492 2,282 2,478 2,977 3,65 4,37 Net current assets 1,857 2,797 2,575 3, 3,618 4,386 Total assets 3,198 4,266 4,272 4,963 5,827 6,822 Exhibit 11: Cash flow Y/E March (Rsmn) FY12 FY13 FY14 FY15E FY16E FY17E EBIT 838 985 1,15 1,429 1,746 2,224 (Inc.)/dec. in working capital 75 (85) 1 (369) (45) (592) Cash flow from operations 913 18 1,25 1,6 1,296 1,631 Other income 23 36 48 54 58 65 Depreciation 97 114 12 147 169 192 Deferred liabilities (19) 36 16 5 5 66 Interest paid (-) (17) (2) (211) (155) (131) (77) Tax paid (-) (165) (229) (242) (385) (485) (641) Dividend paid (-) (14) (14) (13) (157) (174) (192) Net cash from operations 575 (166) 88 569 784 1,45 Capital expenditure (-) (286) (243) (347) (414) (416) (418) Net cash after capex 289 (49) 46 155 368 627 Inc./(dec.) in short term borrowings (497) 42 (572) (1) (1) (375) Inc./(dec.) in long term borrowings 171 123 (1) - (1) (75) (Inc.)/dec. in investments - - - - - - Others - - - - - - Equity issue/(buyback) - - - - - - Cash from financial activities (326) 525 (582) (1) (2) (45) Opening cash 71 34 15 28 83 251 Closing cash 34 15 28 83 251 428 Change in cash (37) 116 (122) 55 168 177 Exhibit 1: Exhibit 13: Key ratios Y/E March FY12 FY13 FY14 FY15E FY16E FY17E Per share (Rs) EPS 17. 21.1 23.5 31.6 39.8 52.6 Book value 71 88 17 133 167 213 Valuation (x) P/E 53.7 43.3 38.9 28.9 23. 17.4 P/sales 2.8 2. 1.8 1.5 1.3 1.1 P/BV 13. 1.4 8.6 6.9 5.5 4.3 EV/EBITDA 3.2 26.1 23. 17.8 14.5 11.2 EV/sales 2.9 2.1 1.9 1.6 1.3 1. Return ratios (%) RoIC 18.5 19.4 18.4 2.7 22. 24.4 RoCE 2.3 21.3 2.5 23.3 24.3 26.5 RoE 26.6 26.7 24.2 26.4 26.5 27.7 Margins (%) EBITDA margin 9.7 8.1 8.1 8.7 8.9 9.3 PBIT margin 8.7 7.2 7.3 7.9 8.1 8.6 PBT margin 7.2 6. 6.2 7.3 7.7 8.5 PAT margin 5.3 4.6 4.6 5.2 5.5 6.1 Turnover ratio Asset turnover ratio (x) 3. 3.2 3.6 3.6 3.7 3.8 Avg. inventory period (days) 65 72 65 65 65 65 Avg. collection period (days) 55 53 5 49 48 47 Avg. payment period (days) 4 47 45 46 47 47 Solvency ratios (x) Debt-equity.5.6.3.2.1. Interest Coverage 4.9 4.9 5.3 9.2 13.4 28.9 Growth (%) Sales 32.8 41. 11.6 19.1 19.4 19.9 EBITDA 28.1 17.5 11.5 28.6 21.5 26.1 PAT 19.1 23.8 11.5 34.3 26. 32.2 5 V-Guard Industries
Rating track Date Rating Market price Target price (Rs) 1 July 214 Buy 64 915 3 July 214 Buy 728 915 5 November 214 Buy 94 1,19 7 November 214 Buy 914 1,19 6 V-Guard Industries
Institutional Equities Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 823, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 81/811, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 812/813, +91 22 6636 883 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park Lower Parel (W), Mumbai-413. Board No. : 91 22 3926 8/1 Fax. : 22 3926 81 7 V-Guard Industries