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Our Take:

From a single product company in 1990s (stabilizers), V-Guard has quickly grown into a leading pan-India FMEG player with 22% sales growth over the past decade. It has a broad product portfolio in the electricals and consumer durables segment. It is a market leader in stabilizers with ~51% market share. It is outsourcing almost 57% of its business manufacturing requirements. Stabilizers, wires, fans, kitchen appliances and digital UPS have been the key growth drivers while water heaters have struggled due to supply disruptions.

V-Guard’s distribution network is spread over 40,000 channel partners. It plans to add ~3,000-5,000 retailers every year for the next five years, with greater addition in the non-south region. Growth in non-south markets continued to be a key driver with 12% CAGR in FY15-20 and the market is expected to grow at 21% CAGR in FY20-23E. We expect the weak real estate growth to become a hurdle for the company’s future growth.

In the near term, we expect its growth to be hit by slow economic activity, liquidity challenges, and sluggish demand for consumer durables from sectors such as offices, marriage halls, auditoriums, hotels and restaurants. We believe FY21E growth could slow down due to the COVID-led lockdown and economic slowdown. The industry has a greater dependency on China for components; thus, any supply-side disruptions in China could increase cost pressures for it.

Valuations & Recommendation:

We expect V-Guard to benefit from debt-free cash-rich balance sheet, pan-India presence with increasing market share, and a diversified product portfolio. However, over the medium term, COVID-19 bounce-back and curfews in metro cities could impact adversely. Going forward, we expect a 22% CAGR in the top-line and 32% EPS CAGR over FY20-23E, led by its wide products portfolio and growing distribution reach with more focus on non-south market, which current comprises of ~40% of its overall revenue. Also, the increasing summer season temperature in the country will drive demand for cooling products. We feel the base case fair value of the stock is Rs.241 (33.5x FY23E EPS) and the bull case fair value is Rs.259 (36.0x FY23E EPS) over the next two quarters. Investors may buy the shares on dips to Rs.219.50 band (30.5x FY23E EPS) and add more on dips to Rs.202 band (28.1x FY23E EPS).

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