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V-Guard Industries Ltd (VGRD IN)

On the cusp of strong growth

INDIA | MIDCAP - ELECTRICALS | Company Update

15 October 2018

Why is VGRD in a great place currently? Strong and diversified product offering. Spread to the non-south market – currently 37%, target is 50% over five years. Expects new brand identity to push it to become a leading multi-product pan-India

player. Increasing share of own manufacturing is improving its gross margin. Tight control on working capital and channel financing is lowering working capital

needs. VGRD’s WC days to fall to 55 by FY21; FCF seen at Rs 3.6bn over FY19‐21. RoE/RoCE is improving to 22%/29% by FY21 from 18%/24% in FY18. Additionally, while Kerala floods impacted VGRD, rebuilding is likely to boost demand. Extensive product profile VGRD, a multi-product company, has diversified its offering in electronics & electrical and is adding products in the durables segment. Its product range is specifically tailored to the populations of towns and rural areas, characterised by erratic power supply and high consumption of electrical white goods. Moreover, it regularly upgrades its products and also launches products that capture a greater portion of spending on household electricals. Leader brand in south India. Increasing its presence in the non-south market VGRD has been steadily expanding its operations into the non-south market in an effort to de‐risk its geographical concentration. It has unveiled a new brand identity to reflect its transformation into a leading multi-product pan-India player in consumer electricals. It has 32,000 touch points in India; will add 3,000-5,000 every year over 2-3 years, mainly in the non-south market. In the last 2-3 years, it has also been able to build a strong dealer network for products such as C&W (cables and wires), water heaters, and fans (52% of VGRD sales) in the non-south market. We expect all these efforts will help it to gain market share in these regions and help its non-south contribution to increase to 50% over 4-5 years. Robust business model VGRD’s business model is a mix of in-house and asset-light outsourcing (58%), which has enabled it to optimise capex and working capital. In line with its increasing focus on in house manufacturing, it has expanded its capacity in house wiring cables and added manufacturing facilities for stabilisers and electric water heaters in Sikkim. This will cause the contribution of its own manufacturing to increase, which will improve gross margin by 167bps over 2-3 years. The Sikkim unit will also provide long-term cost advantages in terms of tax benefits.

Outlook and valuation VGRD has successfully negotiated a tricky point in its existence by expanding its geographical and product base, while successfully managing its working capital. Now, it is slowly increasing the contribution from its own manufacturing, which will help improve gross margins. We are convinced that VGRD will continue to successfully monetise its brand equity in southern India while increasing channel sweating in the rest of the country. We expect a PAT CAGR of 27% over FY18-21. The company’s stock price has seen a sharp correction of ~33% over the last month, majorly because of Kerala flood impact and a sell-off in mid-cap stocks. At its current market price, it trades at 34x/27x on FY20/21 EPS and at an EV/EBIDTA of 23x/18x. We value it at a FY21 P/E of 35x (five-year average) and upgrade it to BUY with a revised target of Rs 225 (Rs 216 earlier).

BUY (Upgrade) CMP RS 176 TARGET Rs 225 (28%)

COMPANY DATA

O/S SHARES (MN) : 426

MARKET CAP (RSBN) : 73

MARKET CAP (USDBN) : 1.0

52 - WK HI/LO (RS) : 255 / 159

LIQUIDITY 3M (USDMN) : 3.2

PAR VALUE (RS) : 1

SHARE HOLDING PATTERN, %

Jun 18 Mar 18 Dec 17

PROMOTERS : 64.3 64.3 64.5

FII / NRI : 12.0 11.8 12.0

FI / MF : 12.1 12.4 12.0

NON PRO : 2.6 2.6 2.7

PUBLIC & OTHERS : 9.0 9.0 8.8

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS -13.4 -15.1 -9.8

REL TO BSE -6.3 -11.0 -19.0

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY19E FY20E FY21E

Net Sales 26,496 30,405 35,103 EBIDTA 2,362 2,975 3,767 Net Profit 1,704 2,152 2,741 EPS, Rs 4.0 5.1 6.4 PER, x 44.0 34.8 27.3 EV/EBIDTA, x 29.5 23.4 18.4 P/BV, x 8.5 7.1 5.9 ROE, % 19.3 20.5 21.7 Deepak Agarwal (+ 9122 6246 4112) [email protected] Akshay Mokashe (+ 9122 6246 4130) [email protected]

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Apr-16 Oct-16 Apr-17 Oct-17 Apr-18

V-Guard BSE Sensex


V-GUARD INDUSTRIES LTD COMPANY UPDATE

Kerala floods impacted VGRD, but rebuilding will boost demand

Beginning in July 2018, severe floods affected the south Indian state of Kerala, due to unusually high rainfall during the monsoon season. It was the worst flooding in Kerala in last 20-30 years. At least a million people were evacuated, mainly from Chengannur, Pandanad, Aranmula, Aluva, Chalakudy, Kuttanad, and Pandalam. All 14 districts of the state were placed on red alert and infrastructure of the state was damaged. Additionally, about 22,000 households were completely destroyed. In order to support Kerala, electronic companies such as Samsung, LG, Sony, V-Guard and Havells have offered discounts on products and product servicing to flood affected people.These companies are also conducting service camps. VGRD has a very strong presence in south India with about 63% revenue coming from this region. The floods have dented sales; the management expects revenue losses of Rs 400mn in 2Q, mainly because of the Kerala floods.

Kerala districts and key affected areas

Source: Census Data, PhillipCapital India

Kerala will undergo reconstruction over the next 4-5 months, which will boost sales of consumer electrical products such as pumps, wire & cables, and switchgears. VGRD has a very strong presence in Kerala with a dealer network of more than 50.

Channel-check from Kerala

Kerala is back to normal. Demand for pumps has already started picking up. Excepts wires and cables demand to pick up soon.

In fans, normal demand has begun. In ceiling fans, VGRD products are priced at about Rs 50 lower then CG and USHA and in TPW (table, pedestal, and wall fans) by about Rs 100.

Started receiving strong quarries for products like: USP & Stabilizers.

We see a strong boost to VGRD products sales from reconstruction activity in Kerala, which will result in strong growth from the south market. We expect south market revenue growth at 12%/13% for FY19/20, driven by wires & cables, switchgears, UPS (uninterruptible power supply), and fans, among others.

Area Name Total no. of

census houses

Total no.

of occupied census houses

Residence Others V-Guard No. of

Authorised Dealer

District – Kasaragod 4,17,805 3,69,671 2,66,288 1,03,383 1

District – Kannur 8,72,479 7,60,576 5,40,566 2,20,010 9

District – Wayanad 2,77,988 2,46,574 1,84,324 62,250

District – Kozhikode 9,90,336 8,83,736 6,80,650 2,03,086

District - Malappuram 11,57,129 10,06,188 7,71,846 2,34,342 4

District – Palakkad 8,94,341 8,04,318 6,21,239 1,83,079 3

District – Thrissur 10,51,867 9,50,463 7,38,916 2,11,547 3

District – Ernakulam 11,74,691 10,37,969 7,85,925 2,52,044 5

District - Idukki 4,12,433 3,62,726 2,74,147 88,579

District – Kottayam 6,78,161 6,18,991 4,76,827 1,42,164 4

District – Alappuzha 7,23,536 6,65,378 5,24,063 1,41,315 2

District - Pathanamthitta 4,72,840 4,22,416 3,17,512 1,04,904 3

District – Kollam 9,25,130 8,44,554 6,57,452 1,87,102 7

District - Thiruvananthapuram 11,69,117 10,55,149 8,18,930 2,36,219 5

KERALA – Total 1,12,17,853 1,00,28,709 76,58,685 23,70,024 ~50

Worst affected districts in Kerala

Channel Check: Kerala more focused on branded products – larger brands will benefit more

South: revenue growth (Rs bn)

Source: Company, PhillipCapital Estimates

16

19

21

-

5

10

15

20

25

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9E

FY2

0E

FY2

1E



Strong product basket. Continues new launches

VGRD’s product range is specifically tailored to the populations of towns and rural areas – characterised by erratic power supply and high consumption of electrical white goods. Consequently, it has a comprehensive range of products such as wires, cables, fans, and stabilisers, enabling it to capture a greater share of consumer spending on electrical goods.

VGRD’s strong product basket…we expect revenue CAGR of 15% over the next three years

V-guard Product

Portfolio:

Total Market

Share (Rs bn)

Organised

(%)

Unorganise

d (%)

Production

Model –

Outsourced #

Distribution Channel

Strategy

Rev. CAGR

(FY18-21)

Remark Key Players

Stabiliser 12,500 56% 44% 80% (OS) CD, hardware, and

electrical stores

7.7% Market leader, but

major growth comes

from the non-south

market

Micro tech,

Livguard, Bluebird,

Capri

UPS (Digital +

Standalone)

56,500 82% 18% 100% (OS) CD, hardware and

battery retail stores

18.0% Increasing penetration

in tier 2 and 3 cities

Microtek, Luminous,

Su-Kam,

Exide

Pump 1,05,000 52% 48% 90% (OS) Electrical and pumps,

fittings stores

13.0% Seasonal product, but

strong growth from

south (Kerala) and

non-south market s

CG, Kirloskar, CRI.

Texmo

Cable & Wires 95,000 58% 42% 100%

(IH)

Hardware and

electrical stores

13.8% Shift from unorganised

players, incremental

demand from Kerala,

increasing share in the

non-south market

Polycab, Havells,

Finolex

Water Heaters

(Electric + Solar)

91,250 74% 26% EH - 55% (OS) &

SH - 100% (IH)

CD, hardware,

electrical stores, and

direct marketing

channel

13% Increasing share in the

non-south market

A.O. Smith, acold,

Bajaj, Venus, CG,

Usha

Fan 65,000 77% 23% 90% (OS) CD, hardware, and

electrical stores

16% Strong growth from

the non-south market

CG, Usha, Bajaj,

Havells, Orient

*Kitchen

Appliances

51,500 57% 43% 100% (OS) CD/kitchen

appliances stores

36% Increasing product

penetration

Prestige, Bajaj,

Preethi, Butterfly

Switchgears 42,000 33% 14% 100% (OS) Electrical stores 38% Strong growth in

modular switches,

pickup infra, and

increasing penetration

Havells, Legrand,

L&T, ABB

Source: Company, PhillipCapital India Note: *Kitchen Appliances includes – Induction Cook tops, Mixers,

Gas Stoves # OS= Outsourced & IH= In-house

Apart from regularly upgrading its products, VGRD launches products to capture a greater portion of spending on household electricals. This policy of having a well‐rounded product basket has enabled it to emerge as one of the market leaders in southern India, and translated to consistent revenue growth over the years.

New product launches and product additions in new geographies 2018 Smart ceiling fans with app controlled features; 7 LED lights

Modular switches in Kerala

Air coolers in Delhi and Hyderabad

Rice cookers in AP and Telangana

Modular switches in Kerala

Gas cooktops

2017 Smart series inverters

IOT enabled water heater

2016 Inverter AC stabilisers

Hands-free mixer grinder

Premium models in fans

Induction cooktops launched in Kerala initially, subsequently in Tamil Nadu and Karnataka

Source: Company, PhillipCapital India

VGRD launched ‘Udaan 2’ in FY18 This phase focuses on new product development and quality management, which it expects will make its innovation process more robust and improve its speed to market



Strategic manufacturing capability

VGRD has a mix of in-house manufacturing (42%) and asset-light outsourcing (58%), which has enabled it to optimise its capex and working capital. It manufacturing facilities (own + vendors) are spread across India, which help it to lower its delivery time and improve its working capital. VGRD has about six manufacturing facilities (owned) and has tie-ups with about 95 vendors across India. It exercises stringent quality and design control across internally manufactured and outsourced products.

VGRD: Pan-India manufacturing locations

Product Manufacturing Facilities

Housing Wiring Cables Coimbatore, Kashipur

Pumps & Motors Coimbatore

Fans Kala Amb

Water Heaters Kala Amb, Sikkim

Solar Water Heaters Perundurai

Stabilisers Sikkim

Pumps 18 units across India

Stabilisers 57 units across India

Fans 11 units across India

DUPS 9 units across India


In line with increasing focus on in-house manufacturing, VGRD has expanded capacity in house wiring cables and added facilities for stabilisers and electric water heaters in Sikkim. This will result in the contribution from its own manufacturing to rise, leading to better gross margins. The Sikkim unit will also provide a long-term cost advantages such as tax benefits.

Own manufacturing vs. outsourced Gross margin to improve by 187bps over next 2-3 years


Leading brand in the south. Increasing its presence in the non-south market

Over the past few years, VGRD has seen sweeping changes and has overcome many challenges. From being completely dependent on south Indian markets, it has built a substantial and profitable non-south business. To make its presence felt as a strong pan-India brand in consumer electricals, it unveiled its new brand identity. This was accompanied by a high visibility media blitz, complete revamp of packaging, store branding, and digital advertising. There was a significant increase in advertisement expenses (6.6% of sales in FY18 vs. 4.5% in FY17). Management expects advertisement costs to come down to about 4.5% from FY19.

40% 43% 40% 40% 40% 42% 42% 42% 42%

60% 57% 60% 60% 60% 58% 58% 58% 58%

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e

Outsourcing Inhouse manufacturing

25.0% 25.5% 25.7%

29.5% 29.1%

30.1% 30.7%

31.3% 31.4%

23%

24%

25%

26%

27%

28%

29%

30%

31%

32%

FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e

VGRD has rolled out pan-India sales-force automation to enhance field force productivity.

We expect gross margin to improve by 187 bps over the next three years majorly because of increasing share of own manufacturing and improving product mix.



VGRD: Advertisement expenses will revert to 4.5% VGRD:New brand identity

Source: Company, PhillipCapital India Research

To increase its product penetration, VGRD has established a strong channel network of direct dealers, distributors, and retailers. This pan-India network of over 30 branches and about 32,000 retailers enables it to reach consumers across the country. Over the last three years, it has added a strong dealer network for products like C&W and water heater and fans (which is 52% of VGRD’s sales) in the non-south market.

VGRD’s non-south dealer network: State-wise breakup

Stabiliser

UPS (Digital + Standalone) Pump Cable & Wires

Water Heaters (Electric + Solar) Fan

Kitchen Appliances Switchgears

VGRD FY18 Rev. Share (%) 19% 12% 12% 30% 12% 10% 3% 2%

Uttar Pradesh 60 70 76 72 66 74 1 1 Madhya Pradesh 10 8 12 30 19 16 0 7 Jharkhand 11 10 15 20 32 16 0 0 West Bengal 77 84 82 88 128 91 57 52 Assam 44 43 1 42 60 53 0 16 Manipur 2 1 0 1 2 2 0 1 Meghalaya 3 0 0 1 3 0 0 0 Mizoram 1 0 0 0 1 0 0 0 Nagaland 4 4 0 4 4 4 0 2 Odisha 40 63 62 79 69 74 57 16 Sikkim 2 2 0 1 2 1 0 0 Tripura 4 3 0 4 2 4 0 1 Bihar 16 22 26 29 17 30 0 0 Rajasthan 28 20 39 50 69 32 0 0 Chattisgarh 10 11 14 14 13 16 14 3 Chandigarh 1 3 2 8 3 3 0 0 Delhi 15 20 13 16 24 18 0 0 Haryana 37 34 43 60 55 53 0 0 Himachal Pradesh 3 2 0 1 5 1 0 0 Jammu & Kashmir 2 9 11 19 17 20 0 0 Uttarakhand 19 27 20 31 21 27 0 0 Maharashtra 128 141 146 208 294 131 0 0 Goa 5 31 4 5 22 26 15 0 Punjab 10 31 32 62 33 29 2 0 Gujarat 60 42 36 48 99 83 0 0

Total 592 681 634 893 1060 804 146 99

VGRD’s non-south dealer network: Region-wise breakup

Stabilizer

UPS (Digital +

Standalone) Pump Cable & Wires

Water Heaters

(Electric + Solar) Fan

Kitchen

Appliances Switchgears

VGRD FY18 Rev. Share (%) 19% 12% 12% 30% 12% 10% 3% 2%

East 177 200 145 220 271 229 114 88

West 193 214 186 261 415 240 15 0

North 141 179 200 290 257 229 16 3

Central 81 88 103 122 117 106 1 8

Source: Company, PhillipCapital India Research.

58 60 69

80

95

153

4.3% 3.9% 4.0% 4.3% 4.5%

6.6%

0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

140

160

180

FY13 FY14 FY15 FY16 FY17 FY18

Ad Spends % of sales- RHS

Brand Re-launch resulted in higher exp.

In the non-south market, it has a strong presence in UP, WB, Odisha, Maharashtra, and Gujarat V-Guard is no longer an unknown brand. Its has been accepted by the market – channel partner from north India



To improve the efficiency of its distribution channel, VGRD has implemented project ‘Tez’ – sales-force automation. In the first phase, it has been rolled out to an entire field force. Its benefits include field-force productivity, real-time order capture, better order fulfilment, and reduced lead times for servicing orders. Its total touch points are at 32,000; it plans to add 3,000-5,000 every year over 2-3 years (increasing by 10% every year), mainly in the non-south market. Two-thirds of its distribution is already in the non-south, which provides significant revenue growth potential.

Channel check from the non-south market Positive: Lower base, strong product profile is resulting in double-digit growth.

Negative: Higher/equal prices with competitors (leading brands) restricting growth.

Wires and cables

Strong traction. Pricing is 2-3% lower than Finolex, but higher the KEI.

Taken a price increase of ~3% effective 1st

October 2018. Stabilisers

Non-south market: Industry has seen a strong growth of about 15%.

VGRD is market leader with +100SKUs. Highest selling product is VG-400, mainly use as an AC stabiliser.

VGRD has seen about 20% growth in stabilisers in its north India market. Fans

Well accepted, good product quality. However, prices are equal to competitors such as CG and Orient, but lower then Havells.

Currently, it has 100SUKs in fans. Price range – Rs 1,100 to 2,600. It is not present in the lower segment / price points of Rs 900-1,000.

Retailers who are not associated with top-3 brands are associating with VGRD, as they enjoy higher profitability.

Water heaters

Launched ~25 SKUs in north India. Prices are higher/equal vs. competitors.

VGRD is executing a ‘retailer connect program’ through water heaters, by offering additional 1.0-1.5% incentive to retailers.

Air-coolers

Product was well accepted in the market. Despite a tepid last season, the channel is not sitting with any inventory. Received strong (good) feedback from retailers.

Branding

Aggressively branding in the non-south market through in-shop branding (buying shelf space of retailers).

Others

Large product portfolio and good product quality is helping VGRD enter new geographies. It offers additional schemes to dealers at initial stages (during product launches).

Currently, it offers higher channel margins vs. competitors, mainly because it has lesser number of dealers. So there is no price war.

Channel check: In Maharashtra, VGRD currently has a presence in eight product segments, with 1,048 dealers It expects to add more by April 2019

VGRD to service its customer better, company has opened ~110 service center across non-south market.

VGRD: Non-South Service Centers

Region VGRD - Service Centers

Central 25

East 21

North 42

West 22

Total 110


VGRD’s Non-South revenue to Show a CAGR of 17% over FY18-FY21E.(Rs bn)


10

12

14

22%

37%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

2

4

6

8

10

12

14

16

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9E

FY2

0E

FY2

1E

Non-South

As % of Sales - RHS

VGRD: Distributor Network

Source: Company

10

3

11

0

13

4

18

7

20

8

21

6

23

1

97

95

16

7 2

20

32

8

40

8

44

5

0

100

200

300

400

500

600

700

800

FY11 FY12 FY13 FY14 FY15 FY16 FY17

South Non-South

Over last 3 year VGRD has seen 225 distributors addition in non-south market vs. 44 in south.



Financials We estimate VGRD to clock a revenue CARG of 15% over the next three

years (FY19 to FY21). Topline growth would primarily come from higher sales of wires & cables, pumps, water heaters, fans, and UPS.

As VGRD consolidates its foothold outside southern India, we expect its focus on sales of manufactured products to generate slight operating leverage. Simultaneously, sales of outsourced product growth should maintain similar momentum. As new branches achieve breakeven, margins should improve. We expect operating margins to improve by 264bps over the next three years.

Meanwhile, we expect VGRD to continue investing in brand building.

We expect revenue CAGR of 15% over FY19-21 We expect PAT CAGR of 27% over FY19-21

Source: Company, PhillipCapital India Research Estimates

We believe that additional working capital needs (because of a jump in sales) would be met internally, without much working capital borrowing. This, coupled with the absence of huge capex and better asset sweating, should see the company maintain its FCF positive status. While VGRD has always had superlative return ratios, we expect these metrics to sustain and improve slightly, majorly driven by improving asset sweating.

ROCE and ROE profile


26

,49

6

30

,40

5

34

,92

1 10.1% 9.7%

8.1% 8.1% 7.6%

9.6% 10.0%

8.1% 8.9%

9.8%

10.7%

0%

2%

4%

6%

8%

10%

12%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000 Revenue (Rs mn) OPM (%) (rhs)

1,7

04

2,1

52

2,7

41

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

500

1,000

1,500

2,000

2,500

3,000 PAT (Rs mn) PAT Margin (%) (rhs)

23.9

27.0 26.8

34.8

32.0

23.6

25.7 27.3

29.0

24.1

22.0

18.7

23.7 22.8

17.7 19.3

20.5 21.7

15

20

25

30

35

40

FY-13 FY-14 FY-15 FY-16 FY-17 FY-18 FY-19e FY-20e FY-21e

ROCE ROE

Over FY-11 to FY17

PAT CAGR was 23%.

Over FY11 to FY18

Revenue CAGR of 18%



DuPont Analysis:

DuPont analysis Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Tax Burden (x) 0.8 0.7 0.7 0.7 0.7 0.8 0.8 0.8 0.8

Interest Burden (x) 0.80 0.82 0.83 0.95 0.99 0.99 1.00 1.00 1.00

EBIT Margin (%) 7.51 7.60 6.99 9.12 9.87 7.74 8.61 9.47 10.44

Asset Turnover (x) 3.2 3.6 3.8 3.8 3.2 3.1 3.0 2.9 2.8

Leverage Multiplier (x) 1.6 1.3 1.2 1.0 1.0 1.0 1.0 1.0 1.0

RoE (%) 23.59 21.85 18.67 23.72 22.43 17.54 19.18 20.41 21.66


Consensus vs. PC estimates

Estimates Change PC Estimates Bloomberg consensus Consensus Vs Actual

(Rs bn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

Sales 26,496 30,405 35,103 25,374 30,952 35,244 -4.2% 1.8% 0.4%

EBITDA 2,362 2,975 3,767 2,495 3,340 4,018 5.6% 12.3% 6.7%

EBITDA margin (%) 8.9% 9.8% 10.7% 9.8% 10.8% 11.4% 92 101 67

Recurring PAT 1,704 2,152 2,742 1,942 2,517 3,026 14.0% 17.0% 10.4%

EPS Recurring (Rs) 4.0 5.1 6.4 4.6 5.9 7.1 14.0% 17.0% 10.4%

Source: Bloomberg, PhillipCapital India Research Estimates

FY20 – Revenue growth rate with operating margins... Earning variation with PC estimates

Revenues / Execution rate (%)

Revenue – FY20 29,875 30,140 30,405 30,670 30,935

Growth / Margin 12.8% 13.8% 14.8% 15.8% 16.8%

17.7% 1,889 1,906 1,924 1,941 1,959

18.2% 2,001 2,019 2,038 2,056 2,075

18.7% 2,113 2,132 2,152 2,171 2,191

19.2% 2,225 2,245 2,266 2,286 2,307

19.7% 2,337 2,358 2,380 2,401 2,423


Revenue – FY20 29,875 30,140 30,405 30,670 30,935

Growth / Margin 12.8% 13.8% 14.8% 15.8% 16.8%

17.7% -12% -11% -11% -10% -9%

18.2% -7% -6% -5% -4% -4%

18.7% -2% -1% 0% 1% 2%

19.2% 3% 4% 5% 6% 7%

19.7% 9% 10% 11% 12% 13%

FY21 - Revenue growth rate with operating margins... Earning variation with PC estimates


Revenue – FY21 34,495 34,799 35,103 35,407 35,711

Growth / Margin 13.5% 14.5% 15.5% 16.5% 17.5%

9.9% 2,434 2,456 2,478 2,500 2,522

10.4% 2,563 2,586 2,610 2,633 2,656

10.9% 2,692 2,717 2,742 2,766 2,790

11.4% 2,822 2,847 2,873 2,899 2,924

11.9% 2,951 2,978 3,005 3,031 3,058


Revenue – FY21 34,495 34,799 35,103 35,407 35,711

Growth / Margin 13.5% 14.5% 15.5% 16.5% 17.5%

9.9% -11% -10% -10% -9% -8%

10.4% -7% -6% -5% -4% -3%

10.9% -2% -1% 0% 1% 2%

11.4% 3% 4% 5% 6% 7%

11.9% 8% 9% 10% 11% 12%


Outlook and valuation VGRD has successfully negotiated a tricky point in its existence by expanding its geographical and product base, while successfully managing its working capital funding (currently at 60 days). It is slowly increasing its contribution from own manufacturing (added Sikkim plant), which will help to improve its gross margin (we have incorporated +187bps over the next three years while factoring in slightly higher selling and distribution expenses – to 4.7% in FY21 from 4.3% in FY17 – resulting in a 264bps improvement in operating profitability over FY18‐21). We are convinced that VGI will continue to successfully monetise its brand equity in southern India while increasing channel sweating in the rest of the country. We expect PAT CAGR of 20% over FY18-21. We have changed our FY19/FY20 estimates by -7.6%/-6% factoring Kerala impact and higher advertisement expenses and also introduce FY21 numbers. V-Guard has seen a sharp correction of ~33% over the last month. This was majorly because of the Kerala impact (floods in Kerala) and mid-cap selloff. At the current price, the stock is trading at a PE of 35x/27x on FY20/21 EPS and EV/EBIDTA of 23x/18x. We value the company at 35x FY21 EPS (five-year average PE). Upgrade to BUY with a revised target of Rs 225 (Rs 216 earlier).

Management remains confident of maintaining 15% growth over the next few years, driven by continued expansion into non-south markets, innovation, R&D, and product development in order to rollout differentiated new products.

We expect margin to improve by 264 bps over the next three years majorly because of increasing share of own manufacturing, improving product mix & new branches achieve breakeven (margin improvement in non-south market).

VGRD’s five-year PE band


`-1 SD (18.1x)

+1 SD (43.6x)

AVG (35x)

0

10

20

30

40

50

60

70

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

P/E



Financials Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Net sales 23,118 26,496 30,405 35,103

Growth, % 10.8% 14.6% 14.8% 15.5%

Raw Material expenses 16,151 18,335 20,827 23,870

Operating expenses 3,395 3,842 4,352 4,944

Employee expenses 1,702 1,957 2,251 2,521

EBITDA (Core) 1,870 2,362 2,975 3,767

Growth, % -10.4% 26.3% 26.0% 26.6%

Margin, % 8% 9% 10% 11%

Depreciation 191 211 226 232

EBIT 1,679 2,151 2,749 3,535

Growth, % -12.7% 28.2% 27.8% 28.6%

Margin, % 7% 8% 9% 10%

Interest paid 17 10 10 10

Other Non-Operating Income 111 130 130 130

Pre-tax profit 1,773 2,272 2,869 3,655

Tax provided 442 568 717 914

Profit after tax 1,331 1,704 2,152 2,742

Net Profit 1,331 1,704 2,152 2,742

Growth, % -7.9% 28.0% 26.3% 27.4%

Margin, % 5.8% 6.4% 7.1% 7.8%

Net Profit (adjusted) 1,331 1,704 2,152 2,742

No. of Eq. Sh O/S (m nos) 426 426 426 426

Balance Sheet Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Cash & bank 50 425 777 819

Debtors 4,445 4,784 5,321 6,143

Inventory 3,105 3,553 4,038 4,613

Loans & advances 1,023 1,173 1,323 1,473

Total current assets 8,623 9,936 11,460 13,049

Gross fixed assets 2,360 2,810 3,230 3,750

Less: Depreciation 354 564 790 1,023

Add: Capital WIP 75 50 50 50

Net fixed assets 2,081 2,295 2,489 2,777

Total assets 11,546 13,375 15,593 18,370

Current liabilities 3,577 4,091 4,650 5,312

Provisions 400 400 400 400

Total current liabilities 3,977 4,492 5,050 5,712

Debt 24 24 24 24

Deferred Tax Liability 29 29 29 29

Total liabilities 4,030 4,545 5,104 5,765

Paid-up capital 426 426 426 426

Reserves & surplus 7,090 8,405 10,064 12,179

Shareholders’ equity 7,516 8,830 10,490 12,604

Total equity & liabilities 11,546 13,375 15,593 18,370


Cash Flow Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Pre-tax profit 1,773 2,272 2,869 3,655

Depreciation 191 211 226 232

Chg in working capital -985 -424 -614 -885

Total tax paid -442 -568 -717 -914

Other operating activities -105 -120 -120 -120

Cash flow from operating activities 432 1,370 1,644 1,968

Capital expenditure -484 -425 -420 -520

Chg in investments 49 -300 -500 -900

Other investing activities 111 130 130 130

Cash flow from investing activities -324 -595 -790 -1,290

Free cash flow 108 774 854 678

Equity raised/(repaid) 199 0 0 0

Debt raised/(repaid) -33 0 0 0

Dividend (incl. tax) -358 -390 -492 -627

Other financing activities -17 -10 -10 -10

Cash flow from financing activities (208) (399) (502) (636)

Net chg in cash (99) 375 352 42

Valuation Ratios

Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Per Share data

Dil. EPS (INR) 3.1 4.0 5.1 6.4

Growth, % (7.9) 28.0 26.3 27.4

Book NAV/ FD share (INR) 17.7 20.7 24.6 29.6

CEPS (INR) 3.6 4.5 5.6 7.0

CFPS (INR) 1.0 3.2 3.9 4.6

DPS (INR) 0.7 0.8 1.0 1.2

Return ratios

Return on assets (%) 11.5 12.7 13.8 14.9

Return on equity (%) 17.7 19.3 20.5 21.7

Return on capital employed (%) 23.6 25.7 27.3 29.0

Turnover ratios

Sales/Total assets (x) 3.1 3.0 2.9 2.8

Sales/Net FA (x) 11.5 11.8 12.5 12.9

Working capital/Sales (x) 0.2 0.2 0.2 0.2

Fixed capital/Sales (x) 0.1 0.1 0.1 0.1

Receivable days 69.2 65.0 63.0 63.0

Inventory days 52.6 53.0 53.0 53.0

Loans, Adv (days) 15.9 15.9 15.7 15.1

Payable days 60.6 61.0 61.0 61.0

Working capital days 77.2 72.9 70.7 70.1

Liquidity ratios

Current ratio (x) 2.2 2.2 2.3 2.3

Quick ratio (x) 1.4 1.4 1.5 1.5

Interest cover (x) 92.7 200.4 248.7 310.8

Dividend cover (x) 4.5 5.3 5.3 5.3

Total debt/Equity (%) 0.0 0.0 0.0 0.0

Valuation

PER (x) 56.3 44.0 34.8 27.3

PEG (x) - y-o-y growth (708.2) 157.2 132.4 99.7

Price/Book (x) 10.0 8.5 7.1 5.9

Yield (%) 0.4 0.4 0.5 0.7

EV/Net sales (x) 3.2 2.8 2.4 2.0

EV/EBITDA (x) 37.4 29.5 23.4 18.4

EV/EBIT (x) 41.4 32.2 25.2 19.6



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

N (TP 919) N (TP 919)

N (TP 1270) N (TP 1270)

N (TP 1510)

N (TP 192)

N (TP 169)

N (TP 216)

N (TP 185) N (TP 175)

N (TP 206)

N (TP 235)

N (TP 216) N (TP 216)

0

50

100

150

200

250

300

N (TP 919) N-15 J-16 F-16 A-16 M-16 J-16 A-16 O-16 N-16 D-16 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 J-18 M-18 M-18 J-18 J-18 S-18



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