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V-Guard Industries Ltd. (VGIL) delivered a strong first quarter both in terms of financial and operating performance. Despite the covid induced lockdowns in the months of April and May, the company was able to bounce back much stronger in the month of June.

South and East being the major business geographies bore a greater impact than the rest of the country in the months of April and May. The non-south market contributed around 43% of the total sales in this quarter. The company reported revenues of ₹565 crs which increased by 38.5% on YoY basis, however sequentially it declined by 34%.

For the second consecutive year, the summer sales for VGIL got impacted however; the company took a calculated call to stack up high inventory to avoid supply chain risks. This decision has helped the company to continue its sales even though the production facilities were temporarily closed due to lockdowns. VGIL also witnessed an increasing trend in raw material costs which was majorly offset by the company’s calibrated price hikes.

The company earned an EBIDTA margin of 8.1% in the quarter as compared to 2.4% in Q1FY21 and 12.9% in Q4FY21. The sequential contraction in the margins is a result of adverse operating leverage. The management expects the second half of this fiscal to cover major part of the lost sales in this quarter. We maintain our BUY recommendation on VGIL with a target price of ₹354.

Business coming back to normalcy

VGIL’s business got impacted in the month of April and May led by lockdowns across the country. The South and East market which contributes the most to the company’s revenues were severely impacted in the second wave.

VGIL is witnessing demand recovery across product categories and expects to recover the sales lost in first quarter by second half of this fiscal. As per the management, the growth from Voltage Stabilizers - air conditioners will remain flattish this year as first quarter is considered to be the best quarter for this product category. The Water Heater business of the company has performed well for the first four months of this fiscal and the company is expecting to gain market share further.

Inventory buildup in the last quarter was due to expectation of very good summer season as last year was a wash-out year in terms of sales. The company expects the inventory levels to normalize in the coming months. The inventory days for this quarter ended stands at similar levels as in Q4FY21 at around 123 days which increased from 77 days in Q1FY21. This led to higher working capital days and lower cash levels.

VGIL is on its way to manufacture ~60% of the products in-house from current ~45% in next three years. For this, the company is expected to incur capex of around ₹70-80 crs annually for next two to three years for building additional capacities. VGIL is planning to manufacture certain categories in-house going forward which are currently imported to reduce their reliance on imports and also to mitigate the increasing ocean freight costs.

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