Delivery weaker than peers
* V-Guard reported in-line revenues but weaker than peers. Revenues were supported by 4% yoy growth in non-South markets, while South markets saw a 3.2% decline. Gross margin contraction was due to adverse product mix and lower utilization of Sikkim plant.
* EBITDA beat of 8% was driven by A&P spend reduction as well as control over other costs. Cash generation in H1FY21 was strong at Rs3bn with working capital improving to 53 days from 58 days in Q2FY20.
* Supply side challenges are easing while it has impacted sales of water heaters in Oct as well. Demand is returning to normal levels except in Kerala which has been impacted by a resurgence in Covid cases. Management is targeting to achieve FY20 revenues in FY21.
* We have marginally tweaked our estimates and continue to bake in strong revenue recovery in H2FY21. VGRD has to consistently deliver both revenue growth and steady margins to get its mojo back. We maintain Hold with a TP of Rs174 (30x FY23E EPS).
In-line revenues; EBITDA beats estimates
Standalone revenue remained flat yoy at Rs6.1bn. Electronics and Electricals segments grew 2% each, while Consumer Durables saw a decline of 6.6% yoy. EBITDA fell 4.7% yoy to Rs739mn, with EBITDA margins of 12% (down 54bps yoy). Gross margin contracted by 220bps yoy to 31.6% due to adverse product mix and low utilization of the Sikkim plant on account of lockdown. Employee cost increased 11.6% yoy to Rs502mn. It includes one-time write-back of ESOP charges to the tune Rs26mn vs. Rs101mn in Q2FY20. Other expenses declined 18.5% yoy to Rs705mn. PAT stood at Rs500mn - down 12.7% yoy - on higher ETR.
VGRD’s revenue growth lagged peers Crompton ECD (+18%), Polycab FMEG (+25%) and Orient Electric (+7.5%) that have reported results so far. Over the last 3-4 years, the company has been either able to deliver healthy revenue growth or margin expansion while both have not come along together due to various reasons. Gross margin expansion in FY20 was commendable. We believe that revenue recovery and sustained margin delivery will augur well for EBITDA growth going forward. However, VGRD’s revenue growth has to match peers or outpace them through existing product segments and fast-paced product refreshment to get the investor mojo back as competitive intensity remains high. Cash generation has been strong and it also provides strength for inorganic expansion going forward. Key risks: betterthan-expected revenue growth, sustained gross margin expansion, improved margin trajectory in non-South markets and a moderation in competitive intensity in the South region.
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