V-Guard Industries Ltd 9 th June, 2012

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY V-Guard Industries Ltd 9 th June, 2012 CMP Rs.215.00 The V-Guard Group has emerged as one of the most trusted brand in India. VGIL plans to add 25% growth in topline in FY13. Target Price Rs.280.00 BSE Code 532953 NSE Code VGUARD Market Cap (Rs Mn) 6417.22 52 Week High/Low 240.80/141.25 Industry Consumer Electronics Face Value Rs.10.00 Shares O/S 29847520 EPS 17.05 Book Value 70.57 P/E 12.61 P/B 3.05 Shareholding Pattern The company has registered excellent numbers for the quarter ending March 2012. The revenue jumped about 25% from Rs.2226.75 in Q4FY11 to Rs.2774.82 million. Operating profit moved sharply higher by 70% at Rs.330.33 million on a y-o-y basis. A comparatively tremendous net profit growth of 81% to Rs. 191.68 million was reported for the Q4FY12 compared to Rs.105.91 million of same quarter previous year; excluding exceptional profit in FY11. EPS stood at Rs.6.42. Margins too expanded sharply; operating profit margin expanded by 317bps at 11.90% and NPM surged 215bps at 6.91% on a y-o-y basis. Margins for the quarter improved mainly due to better product mix, price hikes across product verticals, value engineering activities and cost control measures implemented by VGIL. The demand for all the product verticals was good during the quarter ended March and thus contributed to the robust sales growth. Despite an inflationary environment and macroeconomic concerns, VGIL has been able to improve in operating margins. Product wise sales growth- almost all products have done well. Stabilizer has grown by 15%, wires have grown by 15%, pump has grown by 12%, water heater sales have grown by 28%, UPS and battery segment that is the inverter segment has grown by 260%. Electric fans have grown only by 7% and solar water heater sales have also been flat at 4%. This has contributed to an overall sales growth of 24% for the quarter. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With new product launches, extensive distribution network, strong growth across all product verticals, V-guard industries Ltd. revenue visibility looks strong. We believe VGIL is trading at an attractive valuation at 9.49x and 7.84x of FY13EPS of Rs.22.65 and FY14EPS of Rs.27.43. We initiate a BUY on the stock with a target price of Rs.280 (appreciation of about 30%) with the long term investment horizon. For Private Circulation Only 1 Hem Research

Business Details V-Guard Industries, incorporated in 1996, manufactures a range of products namely voltage stabilizers, pumps, electric water heaters, solar water heaters, cables, UPS, ceiling fans, etc. This Kerala-based company was a vision of Kochouseph Chittilappilly that was started with a seed capital of Rs.1 lakh. He set up the company by establishing a SSI unit manufacturing and selling stabilizers, with just two workers. V-Guard has emerged from being a single product company to owning a portfolio of household products. The company directly employs 1300 people and indirectly over 5,500 people. It has a network of 290 distributors and service centers and 9500 retailers across the country making it a pan-india company. It has 50 million satisfied customers. V-Guard has received ISO 9001 certification for its electrical wiring cables unit located at Coimbatore in Tamil Nadu. The company also conducts research and development initiatives for electronic products, electric geysers, electro-mechanical products, electrical wires and solar water heaters. The R&D centre is located at Cochin. V-Guard owns two wind energy converters type E30 at Erode in Tamil Nadu with a capacity of 230 KW. Currently it produces 13 lakh units per annum, which is transferred to the state electricity grid. Products Stabilizer and UPS- V-Guard is the largest selling brand of electronic voltage stabilizers across India. It manufactures stabilizer for ACs, TV, digital equipment and refrigerators. The company also manufactures a wide range of UPS for computers. Cables- V-Guard manufactures PVC wiring cables, XLPE Insulated power Cables and PVC Insulated Power Cables. V-Guard also manufactures water and solar heaters, pumps, motors and fans. In the year 2000, the company set up Veega Land -- one of the most attractive amusement parks in the country with a spectacular range of rides and entertainment located in Kerala, thus stepping into the leisure industry. The company set up its second and India's biggest amusement park -- 'Wonder La'- in Bangalore. For Private Circulation Only 2 Hem Research

Growth driven by new product launches The company is introducing two new products domestic switch gear and induction cooker in the market in the current financial year. Both these are in the pilot phase. Launch of these products marks VGIL s entry in the kitchen appliances segment. A pilot project has been carried out in central Kerala prior to launching the switchgear which includes Earth Leakage Circuit Breakers (ELCBs) before making an entry in domestic switchgear market. Looking to the positive response in central Kerala, VGIL plans to launch the product in north and south Kerala in the coming six months; before entering to the north Indian market. The company plans to tap the market through the same kind of channel and using same team of marketing. Further, switchgear business is expected to add Rs.10 crore to the topline in fiscal 2013. Manufacturing is outsourced for such products saving on excise duty of upto 10% for the company. The company has launched induction cookers recently and it turned out to be a very successful pilot launch. It plans to launch this product in South India in the next 12 months time. And in the current year, it is looking at selling about 50,000 units of induction cookers. VGIL is in talks with vendors to manufacture induction cookers in India. The company is targeting a turnover of Rs 100 crore from the kitchen appliances segment in the next four years along with looking at few more other products in this segment. Capacity expansion spree VGIL has planned a capex of Rs.25 crore for fiscal 2013. About 14 crores to 15 crores will be going for doubling of expansion of its house wiring and cable factory at Kashipur plant in Uttaranchal. This plant is running at nearly full capacity producing 2.75 lakh coils a month. The company has plans to double this capacity to 5.50 lakh coils per month to make sure that the advantage of excise duty and the incentives which will accrue till 2018. Further, a second solar water heater manufacturing plant is also coming up at Perundurai near Erode; for which Rs.3 crore will be spent out of capex. And the remaining capex will be going for some incremental expansion, manufacturing facilities, extension of existing factories etc. For Private Circulation Only 3 Hem Research

Key growth triggers ahead VGIL s management expects a growth of 25% in the top line for fiscal 2013 driven by strong product portfolio. Having a good network and strong wide acceptance in the inverter segment; it continues to grow at a very fast pace and will drag some growth ahead. The company has also seen a good demand for solar water heaters due to various schemes announced by the government. There is considerably good growth for wires too. Further, overall for the whole fiscal 2013; EBITDA margin of 10% is expected to be achieved. There would be an increase in advertisement and sales promotion spends in fiscal 2013 for Q1, Q2 and Q3. VGIL plans to increase it to Rs.46 crores from Rs.38 crores clocked in fiscal 2012. The company continues to have tax benefit in its Kashipur plant resulting in increase in profits and bringing tax rates down in coming years. Tax rate for FY13 is expected to continue at 29%. Going forward, the company plans to convert all its non-profitable operations in profitable. Regarding working capital, VGIL is targeting at least five to six days improvement in every quarter in the three quarters of FY13 on account of better management of inventories and debtors along with negotiating better terms with suppliers. Therefore, there will be improvement of 10-12 days by the end of FY13 and the main reduction will come from more use of vendor financing. At the current quarter ended VGIL has 280 or 290 distributors and plans to add more distributors in the new markets. The more addition will come in non-south market as the south market is nearly full. It further expects each distributor to run a widely a minimum of 5 crores of revenue per year on an average, thus at a full potential it can generate a revenue of 1,500 crores. Recently the company has opened an office in Guwahati; so in the Northeast it will be adding some distributors along with expanding to West Bengal, Chattishgarh and Northeast belt of India. VGIL focus to improve the penetration levels of its products in these East market in fiscal 2013. For Private Circulation Only 4 Hem Research

Broad based growth VGIL had an exceptional year in terms of financial performance for fiscal 2012. The gross revenues from operations surged about 36% at Rs.10065.3 million from Rs.7374.70 million; crossing milestone of Rs.1,000 crore mark. Net sales climbed about 37% at Rs.9936.27 million. Non-south Indian market, where the company has concentrated over the past four years has contributed about 21 percent to the gross revenue. Looking at the geographical spread of turnover for the whole year, the non-south market has grown by 40% to Rs.2270 million and the south markets have grown by 38% to Rs.5170 million. Operating profits surged 28% at Rs.936.18 million from Rs.730.35 million a year ago. PAT stood at Rs.508.81 million in FY12; moved up by sharp 30% over the PAT of Rs.390 million, excluding exceptional profit achieved during the previous year. EPS for the financial year ended March 2012 stood at Rs.17.05 over Rs.13.07 last year. Volume growth for the year is about 25%. The yearly growth rate for all the product lines are- Wires has grown by about 35%; Stabilizer 20%; Pump single 21%; Water Heater 44%; Digital UPS 236%; Fan 20%; LT Cable 39%; UPS 55%; Solar Water Heater 20%; Pump Three 77% and others 17%. So a broad based growth among all the product categories has been witnessed in fiscal 2012. Increasing market share V-Guard Industries, over the past few years, has successfully gained market share in all of its product categories. In Stabilizer, it had a market share of about 12% which is now improved to 16% over three years. And in the wires industry, roughly about Rs.6,500 crores, the company used to be a very small player about three years back having about 1% market share which has now improved significantly to 4%. In the electric water heater segment, VGIL has increased its market share to 10% from 3.5%. The company holds number three position in India in solar water heater segment, enjoying roughly 10% market share. In the single phase pump segment which is a market of about 2,000 crores; VGIL s market share has improved to 7% from 5% three years back. For Private Circulation Only 5 Hem Research

Standalone Profit & Loss Account Rs. Million Particulars FY10 FY11 FY12 FY13E FY14E Net sales 4540.89 7266.22 9936.27 12470.02 15275.77 Growth 60.02% 36.75% 25.50% 22.50% Expenditure 4037.19 6535.87 9000.09 11247.95 13809.29 EBITDA 503.70 730.35 936.18 1222.06 1466.47 Growth 45.00% 28.18% 30.54% 20.00% EBITDA margin 11.09% 10.05% 9.42% 9.80% 9.60% Other income 14.24 17.08 23.52 27.43 30.55 Depreciation & Amortization 71.50 79.37 96.94 107.50 129.46 EBIT 446.45 668.07 862.77 1142.00 1367.57 EBIT margin 9.83% 9.19% 8.68% 9.16% 8.95% Interest 51.33 113.34 170.25 190.02 219.24 PBT 395.13 554.73 692.51 951.98 1148.33 Tax 140.40 164.73 183.70 276.07 329.57 PAT 254.73 390.01 508.81 675.90 818.76 Minority interest/share of JV/Associates 0.00 0.00 0.00 0.00 0.00 Adjusted PAT 254.73 390.01 508.81 675.90 818.76 Growth 53.11 30.46 32.84 21.14 Net Profit margins 5.61 5.37 5.12 5.42 5.36 Extraordinary item 0.00 36.36 0.00 0.00 0.00 Reported PAT 254.73 426.37 508.81 675.90 818.76 Equity Capital 298.48 298.48 298.48 298.48 298.48 Res. & Surplus 1116.35 1421.30 1807.90 2,364.41 3,048.86 Equity Shares 29.85 29.85 29.85 29.85 29.85 EPS 8.53 13.07 17.05 22.65 27.43 Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity 18.00 22.68 24.16 25.38 24.46 Return on Capital employed 20.11 21.58 27.34 29.66 28.72 Debt/Equity 0.57 0.80 0.50 0.45 0.42 Asset turnover 1.46 1.79 2.11 2.19 2.20 Current Ratio 2.31 3.24 2.23 2.25 2.32 Book value per share 47.40 57.62 70.57 89.22 112.15 For Private Circulation Only 6 Hem Research

Balance Sheet Rs. Million Particulars FY10 FY11 FY12 FY13E FY14E Share Capital 298.48 298.48 298.48 298.48 298.48 Reserves & Surplus 1116.35 1421.30 1807.90 2,364.41 3,048.86 Shareholders funds 1414.82 1719.78 2106.37 2662.89 3347.34 Borrowings 805.11 1375.68 1049.32 1187.62 1414.42 Deferred tax Liability 57.28 61.23 42.63 42.63 42.63 Sources of funds 2277.22 3156.68 3198.33 3893.14 4804.39 Gross block 1,378.94 1,455.80 1,738.63 2150.00 2589.11 Accumulated Depreciation 255.96 335.33 432.27 539.77 669.23 Net block 1122.98 1120.47 1306.36 1610.23 1919.88 Capital work in progress 28.88 31.76 34.94 41.35 56.12 Investments 45.77 0.00 0.00 0.00 0.00 Projects in progress 0.00 0.00 0.00 0.00 0.00 Inventories 985.27 1,424.27 1,574.21 1,778.48 2,147.51 Sundry debtors 755.99 1,230.70 1,478.19 1,818.90 2,261.85 Cash and bank balance 74.14 71.01 33.69 97.01 114.34 Other current assets 0.00 0.00 0.00 0.00 0.00 Loans and advances 88.63 171.58 279.33 347.61 447.40 Total current assets 1,904.03 2,897.56 3,365.43 4,042.00 4,971.10 Deferred tax asset 0.00 0.00 0.00 0.00 0.00 Current liabilities and provisions 824.44 893.10 1,508.39 1,800.45 2,142.71 Net current assets 1,079.60 2,004.46 1,857.03 2,241.56 2,828.38 Misc exp 0.00 0.00 0.00 0.00 0.00 Uses of funds 2,277.22 3,156.68 3,198.33 3,893.14 4,804.39 For Private Circulation Only 7 Hem Research

Quarterly Financial Highlights Rs. Million Particulars Q4FY12 Q4FY11 Q3FY12 YoY% QoQ% Revenues 2774.82 2226.75 2569.44 24.61 7.99 Expenditures 2444.49 2032.33 2343.14 20.28 4.33 Operating Profit 330.33 194.42 226.30 69.91 45.97 Net Profit 191.68 105.91 124.51 80.98 53.95 OPM% 11.90 8.73 8.81 317bps 309bps NPM % 6.91 4.76 4.85 215bps 206bps EPS 6.42 3.55 4.17 80.85 53.96 Past Price movement of the stock V GUARD INDS (216.0000, 216.9000, 214.0000, 215.0000, -0.4500) 245 240 235 230 225 220 215 210 205 200 195 190 185 180 175 170 165 160 155 150 145 140 135 245 240 235 230 225 220 215 210 205 200 195 190 185 180 175 170 165 160 155 150 145 140 135 e July August September October November December 2012 February March April May June For Private Circulation Only 8 Hem Research

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