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ECD segment margin expansion holds the key

We remain positive on V-Guard as we believe the ECD segment margin is likely to expand over FY23-24 due to (1) input price correction, (2) higher scale of operations and (3) better utilization of Roorkee plant and lower effect tax rate in FY24-25. The company has entered into water purifier category via the ecommerce channel and we model it to be a growth driver in medium-long term. Its new manufacturing facilities have reduced its dependence on third party manufacturers and will help drive premiumization. We continue to like V-Guard due to: (1) its strong market shares in stabilizers, water heaters and pumps; (2) investments in distribution and brand; and (3) investments and likely success in kitchen appliances over the medium term. Maintain ADD with unchanged DCFbased target price of Rs250 (implied P/E 32x FY24E EPS).

ECD margins to inch upward:

ECD segment of V-Guard operates on gross margins comparable with the industry peers. The EBIT margin of the segment fell from 5.5% in FY21 to 1.6% due to input material inflation. The remaining differential with peers is largely due to (1) Lower scale and (2) Higher investments. We model steady recovery in EBIT margin of ECD segment as inflation cools off and production scales up.

New production facilities to drive growth:

V-Guard has scaled up production at its Sikkim and Roorkee facilities. In-house manufacturing now accounts for 60% of its fan sales. We believe higher production from in-house facilities will help reach North and East market faster and also reduce effective income tax rate from FY24-25.

Geyser in kitchen – a new growth driver:

In the northern parts of India, very low temperatures in winter lead to higher demand for warm water. Thus, there is an increasing acceptance of small-capacity geysers in the kitchen for dish-washing purposes. We believe, this will likely result in higher growth for the category.

Entry in water purifier segment:

Company has entered into the water purifier business to expand its offerings in the consumer durables portfolio. It currently sells its water purifiers through the e-commerce only.

 Maintain ADD:

We model V-Guard to report a PAT CAGR of 21.5% over FY22- FY24E and RoCE at >22% over FY23E-FY24E. We remain positive on its business model due to the strong competitive advantages it enjoys in South India, and growth potential across segments. Maintain ADD with a DCF-based target price of Rs250 (implied P/E 32x FY24E).

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