Add V-Guard Industries Ltd For Target Rs.335 - ICICI Securities
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Strong performance in Electronics; Sunflame synergies are key for further rerating
V-Guard reported improvement in gross margins (+251bps YoY) due to commodity deflation similar to peers. However, we believe the key drivers for rerating of V-Guard would be (1) expected synergy benefits in distribution and sourcing and likely improvement in market shares for V Guard as well as Sunflame, (2) The consumer durables segment is EVA negative since FY22 due to lower margins. We believe the revival in profitability of Consumer durables is key earnings growth driver and (3) repayment of debt (savings in interest cost) will lead to additional funds for brand building and distribution expansion. We remain positive on V-Guard and maintain ADD rating with DCF based revised target price of INR 335 (implied P/E of 38x FY25E; Earlier TP: INR 275).
Q1FY24 results
V-Guard reported revenue, EBITDA and PAT growth of 19.3%, 27.7% and 20.3%, respectively YoY. The revenue growth (ex-Sunflame acquisition) was 13.7%, YoY. With correction in commodity prices, the gross and EBITDA margins were up 251bps and 51bps YoY, respectively YoY.
Segment-wise performance
Segment-wise revenue growth rates: Electronics 19.9%, Electricals 9.8% and Consumer durables 10.7% YoY. EBIT margin of Electronics expanded with input correction but that of Electricals contracted due to higher ad-spend (our view). Consumer durables turned EBIT positive after losses in H2FY23.
Synergies post acquisition of Sunflame and lower interest cost
We believe post acquisition of Sunflame has invested in integration of systems, sourcing and distribution. We model the synergy benefits to accrue in H2FY24 and FY25. We also believe the company to repay debt over FY24- 25 and reduce interest costs.
Valuation and risks
We model V Guard to report revenue and PAT CAGR of 20.3% and 37.2%, respectively over FY23-25 with improving RoCE. We rate V Guard as ADD with DCF based revised target price of INR 335 (implied P/E of 38x FY25E). Key risks are steep competition and material inflation in commodity prices.
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