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Healthy growth across geographies and durables

Key takeaways: (1) revenues grew 15.8% YoY, led by strong growth in consumer durables and kitchen appliances, and price hikes across products, (2) revenue growth in South India and Non-South India markets was 15.0% and 17.7% YoY, respectively, (3) EBITDA margin declined 486bps due to inflation in input cost and other expenses and (4) working capital investments increased due to higher inventory days. V-Guard’s consumer durables business revenue was up 28.1% YoY. We believe strong growth in kitchen appliances and Non-South region are DCF accretive. We continue to like V-Guard’s business model due to (1) strong market shares in stabilizers, water heaters and pumps, (2) investments in distribution and brand-building and (3) investments and likely success in kitchen appliances over the medium term. However, we cut our earnings estimates due to continued input material inflation. We maintain ADD rating on the stock with a revised DCF-based TP of Rs240 (implied P/E 30x of FY24E EPS).

Q3FY22 performance:

V-Guard reported revenue growth of 15.8% YoY. However, EBITDA and net profit declined 24.9% and 31.8%, respectively, YoY. Gross and EBITDA margins contracted 194bps and 486bps, respectively due to inflation in input prices and higher other expenses. We believe increase in freight cost and adspends led to higher other expenses. PAT margin declined 384 bps YoY to 5.5% in Q3FY22

Segment-wise performance:

Segment-wise revenue growth rates: Electronics - 3.7%, Electricals 18.1% and Consumer Durables 28.1% YoY. Revenue growth in South India was 15.0% whereas Non-South region reported revenue growth of 17.7% YoY. Non-south region contributed 41.8% of total revenues in Q3FY22, up from 39.4% in Q2FY22. Kitchen appliances registered strong growth as well.

Higher working capital investments:

Inventory days increased substantially from 101 to 142 YoY and impacted operating cashflows. We believe input material inflation and unsold stock due to Omicron scare are potential reasons. However, we believe this issue is short term in nature and will be resolved in next 1-2 quarters.

Price hikes across categories:

To offset the adverse impact of sharp inflation in input material prices, the company increased prices across segments. We note VGuard may need raise prices again to reduce impact on its profitability.

Maintain ADD:

We model V-Guard to report PAT CAGR of 19.8% over FY21- FY24E and RoE to be >17% over FY23-24. We remain positive on V-Guard’s business model due to strong competitive advantages in South India and growth potential across segments. Maintain ADD with a DCF-based target price of Rs240 (implied P/E 30x FY24E

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