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Likely market share gains across segments

Key takeaways: (1) revenues grew 45.6% YoY, led by strong growth in all segments and price hikes across products, (2) revenue growth in South India and Non-South India markets was 44.9% and 48.8% YoY, respectively, (3) EBITDA margin declined 180bps due to inflation in input cost and freight and brand building spends and (4) working capital investments increased due to higher inventory days. V-Guard’s consumer durables business was up 71% YoY. Steady investments in marketing is likely to drive strong revenue growth over FY22-24. 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 maintain ADD rating on the stock with DCF-based target price of Rs282 (implied P/E 35x of FY24E EPS).

* Q2FY22 performance: V-Guard reported revenue, EBITDA and PAT growth of 45.6%, 24.3% and 15.1%, respectively, YoY. We note (1) strong consumer off-take and (2) price hikes across products helped the company to report strong revenue growth. Gross and EBITDA margins declined 76bps and 180bps, respectively due to inflation in input prices and higher other expenses. We believe increase in freight cost and ad-spends led to higher other expenses.

* Segment-wise performance: Segment-wise revenue growth rates: Electronics 22.3%, Electricals 45.1% and Consumer Durables 71% YoY. Revenue growth in South India was 44.9% whereas Non-South region reported revenue growth of 48.8% YoY. Non-south region contributed 39.4% of total revenues in Q2FY22, down from 43.2% in Q1FY22.

* Higher working capital investments: Due to seasonal stocking up by the company, the inventory days increased substantially from 96 to 125 YoY and impacted operating cashflows. 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 adverse impact of sharp inflation in input material prices, the company increased prices across segments. We believe VGuard will have to take further price hikes to completely pass on the impact of inflation in Oct’21.

* Maintain ADD: We model V-Guard to report PAT CAGR of 20.1% over FY21- FY24E and RoE to be >18% 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 Rs282 (implied P/E 35x FY24E).

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