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Marketing investments stepped-up

Key takeaways: (1) Strong consumer off-take in June, price hikes across products and favorable base resulted in strong revenue growth of 38.5% YoY, (2) revenue growth in South India and Non-South India markets was 34.7% and 43%, respectively and (3) higher working capital investments due to higher inventory days resulted in negative cash flow from operations. Steady investments in marketing is likely to drive strong revenue growth over FY21-23. 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 medium term. We upgrade the stock to ADD rating with DCF-based target price of Rs269 (implied P/E 40x of FY23E EPS).

* Q1FY22 performance: V-Guard reported revenue, EBITDA and PAT growth of 38.5%, 363% and 575.8%, respectively, YoY. Despite lockdown restrictions, we note (1) strong consumer off-take in June’21, (2) price hikes across products and (3) favorable base helped the company to report strong revenue growth. Gross and EBITDA margins expanded 410bps and 560bps, respectively due to revenue mix improvement and cost saving initiatives.

* Segment-wise performance: Segment-wise revenue growth rates: Electronics 15.5%, Electricals 38.8% and Consumer Durables 75.1%, YoY. Revenue growth in South India was 34.7% whereas Non-South region reported revenue growth of 43.0% YoY. Non-south region contributed ~43% of total revenues in FY21.

* Higher working capital investments: Due to lower sales (impacted by lockdown restrictions) in Q1FY22 and seasonal stocking up by the company, the inventory days increased substantially from 77 to 123 YoY. Thus, the working capital investments were up significantly, resulting in negative operating cash flow of Rs1.02bn. However, we believe this issue is short term in nature and will resolve in next 2-3 quarters.

* Marketing expenditure inching-up: The company increased its ad-spends (exclusive of schemes) to 2.5% of sales in Q1FY22, against 0.8% in Q1FY21. We believe these marketing investments will lead to strong brand building and drive revenue growth for the company. We model higher brand building investments in rest of FY22 to gain additional market share

* Upgrade to ADD: We model V-Guard to report PAT CAGR of 20.8% over FY21- FY23E and RoE to be >18% over FY22-23. We remain positive on V-Guard’s business model due to strong competitive advantages in South India and growth potential across segments. We upgrade the rating to ADD with a DCF-based target price of Rs269 (implied P/E 40x FY23E).

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