Consumer durables, including electricals and appliances, are some of the key consumer categories that bore the brunt of Covid-induced lockdowns. Companies lost two business seasons in the April – June period in FY21 and FY22 due to lock-downs and supply disruptions. As demand took a hit, the sector and especially white goods and small appliances, lost its sheen even as markets soared. The sector additionally had to deal with spiraling input costs, serving to further compress margins. But with input prices cooling off and the demand scenario shaping up better than previous years, the outlook for this sector can improve.
V-Guard Industries, whose product line encompasses electronics, electricals and other consumer goods, is a good play on this sector’s revival.
Why Buy
#1 Demand for durables expected to revive
For the consumer durables sector, lockdowns and supply chain disruptions hit hard. Festive demand, a key sales driver, also remained muted as the economy’s opening up was gradual. Even as demand dropped, durables players faced spiraling input costs which pressured margins.
This bleak scenario, though, shows strong signs of turning around. The upcoming festive season holds promise and can show strong growth over the lows of the past two years. Credit, that fuels purchases, is also expected to take off with NBFCs, small finance banks and micro-finance institutions coming out of Covid related stress and on the growth path. Input prices have cooled off which can directly improve margins.
For V-Guard, the loss of two business seasons during the April-June periods in FY 21 and FY 22 was especially hard, as these are key sale periods. The company, though, has begun to shake this off with price increases aiding growth in some segments. It additionally has a smaller share of segments that saw severe input cost pressures, compared to peers, which has helped it hold up better.
Its varied portfolio, catering to customers across Tier I, II and III cities will also help it ride the demand recovery. It has also improved geographic diversity – from being a largely South-based player, 45% of sales now come from non-South markets with the aim of taking this share up to 60% over the next 5 years.
#2 Expanding product portfolio aiding growth
V-Guard is also very well-placed to ride the demand uptick owing to its wide product portfolio that encompasses electronics, electricals and consumer durables. The V-Guard brand has been synonymous with stabilizers, a segment where it has a dominant 40-45% market share. The segment is its cash cow, contributing 30% to revenues and delivering superior margins.
To diversify and drive growth, the company began pushing into other emerging categories. For instance, it moved early into products like water heaters where it now has a market share of ~16%. Fans, switchgears and modular switches have emerged as new growth drivers where it is building market share. These segments have clocked strong double-digit sales growth aided by premiumization and portfolio expansion. Premiumization can also help push margins up, in what is otherwise a relatively lower-margin product line.
This apart, V-Guard appears to be geared up for a competitive advantage through technological advancement; its new product plans aim at using the capabilities of renewable battery technology start-up gegadyne, in which it acquired a stake, in areas such as stabilizers, UPS and consumer durables. If these projects bear fruit, it has the potential to be a key growth driver. All these initiatives point to a strong growth trajectory going forward for V Guard.
#3 Prudent capital allocation
V-Guard has been a cash-rich company with a track record of strong cash flows despite high growth. This apart, the company has been prudent in its capital allocation. For example, the company made a Rs. 27 crore non-cash acquisition of premium modular switches manufacturer Simon India (MNC division). It acquired an ~18% stake in renewable battery technology start-up gegadyne Labs for Rs.33 crore which can aid technology development.
The company has also allocated Rs.200 crore to a new manufacturing plant for consumer durables which can aid margins and step-up capacity. It will enhance in-house manufacturing from 50% to 60% while having greater control over premium products that are moved to in-house manufacturing. These are indicators of the management’s ability to allocate resources towards initiatives that can enhance competitiveness, improve cost efficiencies and add to margins with scale.
#4 Strong track record of financial performance
V-Guard scores a healthy ROCE of over 25% along with healthy cash flows. While the operating cash flows turned negative in FY22 due to carrying of high inventory amid supply disruption, it returned to positive in Q1Fy23. Inventory levels are expected to normalize and even improve compared to pre-Covid levels due to higher levels of digitization.
For reasons explained in the points above, earnings growth took a blow during the FY-20 and FY-21 period. However, earnings growth can come in strongly over the medium term, driven by revenue growth and margin improvement – through demand revival, a better product and geographic mix, manufacturing efficiencies and cheaper inputs. V-Guard appears to have started well, with Q1FY23 on a strong note crossing Rs.1,000 crores in quarterly revenue for first time, though margin pressure cast a shadow on performance. Margin recovery is expected from Q2 onwards as input cost pressures ease and the festival season kicks in.
Risks to the recommendation
For V-Guard, segments such as electricals and appliances, where it has lower market share and is trying to grow, have stronger players such as Havells, Polycab, Schneider, Legrand, Crompton, Kirloskar and CRI pumps. Any setback in winning reasonable market share and achieving scale in newer segments may impact earnings growth and valuation.
While consumer electrical players across the board have seen margin pressure in Q1FY23, stocks have recovered post earnings on hopes that lower commodity prices aid margin expansion in the coming quarters. Any sharp upswing in commodity prices may therefore hit stock prices.
Valuation
At Rs. 237, the V-Guard stock is trading at close to 39 times earnings, which is close to the lower end of its PE band in the last 5 years, at 36 times. Markets appear to be pricing in an earnings recovery ahead of it playing out. The stock offers an entry opportunity at this price as the sector is gearing up for a comeback, and V-Guard’s product portfolio and positioning as well as financials places it better than other durables players in the mid-cap space.
Suitability
This recommendation is suitable only for investors with a high-risk appetite.
Disclosures and Disclaimers
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (hereinafter referred to as the Regulations).
1. PrimeInvestor Financial Research Pvt Ltd is a SEBI-Registered Research Analyst having SEBI registration number INH200008653. PrimeInvestor Financial Research Pvt Ltd, the research entity, is engaged in providing research services and information on personal financial products. This Research Report (called Report) is prepared and distributed by PrimeInvestor Financial Research Pvt Ltd with brand name PrimeInvestor.
2. PrimeInvestor Financial Research Pvt Ltd, its partners, employees, directors or agents, do not have any material adverse disciplinary history as on the date of publication of this report.
3. I, N V Chandrachoodamani, author/s and the name/s in this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or PrimeInvestor Financial Research Pvt Ltd do not have any financial interest in the subject company.
I/we or my/our relative or PrimeInvestor Financial Research Pvt Ltd do not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. I/we or my/our relative or PrimeInvestor Financial Research Pvt Ltd do not have any material conflict of interest. I/we have not served as director / officer, etc. in the subject company in the last 12-month period.
4. I, N V Chandrachoodamani, do not hold this stock as part of my investment portfolio. I/analysts in the Company have not traded in the subject stock thirty days preceding this research report and will not trade within five days of publication of the research report as required by regulations.
5. PrimeInvestor Financial Research Pvt Ltd has not received any compensation from the subject company in the past twelve months. PrimeInvestor Financial Research Pvt Ltd has not been engaged in market making activity for the subject company.
6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, PrimeInvestor Financial Research Pvt Ltd has not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report.
General disclosures & disclaimers
