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Very well diversified revenue base growing consistently at double digits in mid teens
V-Guard's revenue base is very well diversified with stabilisers (19% of revenue), UPS (12%), C&W ( 30%), Pumps (12%), Water heaters (12%), and Fans (10%). Revenues are growing consistently at 15% annually very much in line with mgt. Guidance. In H1FY'19, due to exceptional event of heavy floods in Kerala, revenue growth was a tad lower at ~ 10% to Rs 1,232 crs. Kerala forms as high as 25% of the company's revenue. V-Guard has strong pipeline of new & innovative products developed through its R&D team. The company last year enetered air coolers business on pilot basis & has planst to launch the same pan-India in current year.
Positioning itself as Pan-Indian player with aggressive distribution network expansion & advertising spend
The company is aggressively expanding distribution network every year by 3,000 to 5,000 retailers emphasis on non-southern states in its endeavour to become pan-Indian player. Currently 1/3rd of revenues comes from non-southern region & has target to reach ~ 50% over next 5 years. Efforts to expand distribution reach is equally supported by advertising spend in the range of 4-5% of revenue. In FY'18, in order to position itself as a pan-Indian player,V-Guard had increased ad spend to as high as 6.5-7% of revenue. However, going forward, advertising spend is likey to come back to normalised range.
Strong return ratios & Debt free BS to aid inorganic growth
V-Guard's return ratios are strong with ROE in 18-22% range driven by a combination of asset-light business model with it outsourcing ~ 60% of its production. At the same time, its gross margins are continuously on a rising spree & stands at 30%. PAT margins are also robust at ~6%. Management's emphasis to introduce new products that have higher gross margins enables the company to grow its gross margins consistently. Again, its BS is debt free that enables V-Guard to lap up any synergistic business if it falls within its valuation parameters & enhance its earnings.
Outlook We estimate earnings to compound at 33% annually over FY'18- '20. Strong double digit revenue growth (14% CAGR) & robust return ratios aided by debt free BS enables us to recommend BUY on the stock with PT of Rs 248 ( 45x FY'20 E EPS).
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