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Margins profile to improve...

V-Guard Industries Ltd. (VGIL) is one of the leading players in the electrical consumer durables space. Major product segments include Stabilizers, Cables & Wires, UPS, Pumps and Electrical Appliances.

* In Q1FY24, revenue and profitability were up by 19% & 20% YoY, respectively, due to stable growth across segments and a 5% revenue contribution from Sun Flame (recent acquisition).

* EBITDA increased by 27% YoY & margins expanded by 50bps YoY to 8.6%, supported by gross margin expansion.

* Looking ahead, a stable inventory and softer raw material prices are anticipated to support an improvement in margin, while the festive season will drive topline in H2FY24E.

* We remain positive on the stock on account of its increasing share of own manufacturing, expanding product portfolio, growth momentum in consumer durables, and further scale-up in the nonsouth market.

* We value VGIL at a P/E of 42x on FY25E, and given the strong earnings outlook and healthy balance sheet, we maintain an Accumulate rating with a target price of Rs.363.

Core portfolio revenue growth remained stable

VGIL’s Q1FY24 revenue grew by 19% YoY, led by stable performance in its core portfolio and a healthy contribution from the Sun Flame business (recently acquired). Revenue growth was broad-based, led by the consumer electronics segment, which grew by 20% YoY. The electrical and consumer durable segments grew by 12% & 11% YoY, respectively. Fans continued to witness softness due to the issue with the change in BEE ratings. Revenue growth from Sun Flame was lower than expected due to stress in the kitchen market. Revenue growth from the south & non-south markets grew by 10% & 17% YoY, respectively. Management aim is to increase the share of manufacturing, add new products, and expand its non-south markets. Going ahead, we expect H2FY24 growth to remain healthy on account of festive and summer related demand. We expect revenue to grow by a 17% CAGR over FY23–25E.

EBITDA margin to improve...ad spends to increase

EBITDA and PAT increased by 28% and 20%, respectively, in Q1FY24. The gross margin improved by 250bps YoY to 32.5%; however, improvement in EBITDA margins was limited to 50bps YoY to 8.6%. This was on account of increases in other expenses and employee costs, which increased by 29% & 32% YoY. The increase in other expenses was due to an increase in ad spending. Going ahead, with festive and stable inventory in the channel, we expect revenue growth momentum to pick up. While an ease in copper prices will support a gradual improvement in margin. However, given the likely increase in ad spends, we expect only a gradual improvement in margin. We expect PAT to grow at a healthy 39% CAGR over FY23–25E.

Valuations

VGIL’s long term outlook is improving, given its strong product portfolio, expansion in non-south markets, strong cash flow and healthy balance sheet. While an ease in RM prices will support margin expansion. The earnings outlook remains healthy, at 17% CAGR. We value VGIL at a P/E of 42x on FY25E EPS and maintain Accumulate rating with a target price of Rs. 363.

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