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Profitability cushioned by significant cost savings…

V-Guard’s Q1FY21 performance was severely impacted by the lockdown, wherein topline, bottomline fell 42%, 93%, respectively. While EBITDA fell 87% YoY, the company took significant cost saving measures (in employee, advertisement & other costs) to cushion operating profit in Q1FY21. Going forward, the company expects a sharp margin recovery with improvement in sales. V-Guard saw a sharp recovery in sales on a month on month basis with 90% business recovery in June 2020 compared to almost zero sales in April 2020. While the business recovery was faster in south region (~59% of sales) due to fewer Covid-19 infections, non-south region’s recovery was delayed owing to pandemic related lockdowns. Business contribution of non-south regions has increased from 33% in FY15 to 41% in FY20. While intermediary lockdowns in selected regions weigh on recovery process, the good part is that low inventory at channels would lead to a faster sales recovery for the company as and when normalcy returns in economy. We revise our FY21E, FY22E earnings estimates upward marginally and maintain our positive stance on the stock with expectation of sharp business recovery from FY22E onwards and intact margin profile.

June 2020 sales recover 90% YoY

With faster sales recovery in south due to easing of lockdown restrictions (especially Karnataka, Kerala), overall June 2020 sales recovered to 90% YoY. Segment wise, electronic, electrical, consumer durable sales declined, 51%, 31%, 44% respectively. According to the company, a faster demand recovery in suburban regions would offset a delay in recovery from urban regions, which are facing intermediary lockdowns, going forward.

Sharp decline in other costs rescues operating profit

A sharp fall in revenue of high margin products (like stabilisers) weighed on the gross margin, which fell 334 bps YoY. However, cost rationalisation measures on multiple fronts (ad spends was 0.8% of revenues vs. 2.9% in Q1FY20), employee cost was down 9% YoY while other expenditure fell 43% YoY, respectively. The management has guided at a better EBITDA margin, going forward, with improvement in sales.

Valuation & Outlook

We like V-Guard for its long journey from being a regional to a national player without compromising the quality of earnings with balance sheet. Despite such a challenging condition, the company has generated CFO of | 216 crore in Q1FY21 with improvement in working capital turnover. Further, the company’s plan to increase focus on profitable business through expanding dealer networks and brand building activities along with prudent working capital management, would keep V-Guard’s cash flow generation capacity intact. We maintain our BUY rating on the stock with target price at | 210/share.

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