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Growth back on track…

V-Guard’s performance in Q3FY21 was much ahead of our estimates mainly due to smart sales recovery followed by strong festive demand and market share gains from unorganised/regional players. The company also saw channel re-filling of key products ahead of peak season. According to the management, V-Guard will continue to focus on expanding its distribution network in non-south regions (~41% of revenue). Revenue of non-south regions posted phenomenal growth of 43% YoY, better than ~25% YoY revenue growth from south regions. Other than this, the company will also launch new products (initially under the stabilisers and digital UPS category) by leveraging technology benefit from its recent investment in battery startup ‘Gegadyne Energy’. As on 9MFY21, its balance sheet remained strong with net cash position at | 482 crore supported by robust cash flow from operation (CFO) of | 369 crore during the same period. We believe the strong CFO was mainly due to improvement in working capital cycle (48 days in December 2020 vs. 53 days in December 2019). The company is also looking at inorganic opportunities into adjacent product categories where RoCE of business is not less than 20%. However, in case of nonmaterialisation of deal cash would be utilised as payout to shareholders.

Channel filling, strong festive demand drive topline

In Q3FY21, revenues at | 835 crore, up 32% YoY, was led by similar growth in all three product categories (electronics, electricals, consumer durables) largely led by volume growth. The price hike was in the range of 3-5% across product categories. On the margin front, EBITDA margin expansion by ~413 bps YoY at 13.8% was due to rationalisation of advertisement expenditure and other costs during Q3FY21. Finally, PAT growth of 77% YoY to ~| 78 crore was a function of strong sales growth and margin expansion. The company has guided for a strong Q4FY21, which would help in a further recovery in sales for FY21 (9MFY32 sales recovery was at 95%).

Focus on strengthening product portfolio

The recent investment of | 33 crore for ~18% stake in battery startup Gegadyne Energy is for its long term strategic plan to strengthen its existing product portfolio (initially UPS and stabilisers segment). Through enhancing product portfolio, the company would be increasing its share of premium products sales in overall sales in the next two to three years.

Valuation & Outlook

We tweak our revenue, earning estimates upward for FY23 by ~12%, ~14%, respectively, given a strong construction push by the government and market share gain will benefit organised players like V-Guard. We reiterate our BUY rating and revise our target price to | 260 (earlier | 210), valuing the company at 37x FY23E earnings.

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