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Strong growth momentum continues; reiterate BUY

Result Synopsis

VGRD reported better than expected revenue growth of beating estimates for 3rd consecutive quarter. The growth was driven by a strong performance across the product categories. Margin headwinds owing to high commodity cost inflation is now getting eased as commodity prices have corrected from its recent peak. Company expects margin to improve from Q3 as it takes pricing action in certain product categories and inventory adjustments will be done away with. The company is confident of growth momentum continuing in ensuing quarters with improving margin trajectory. Inventory has also reached its normalized level and Q2 has started on normalized inventory. Moreover, the company is also looking to increase in house manufacturing to 75% in next 2 3 years from 60% currently which is expected to increase efficiencies and reduce supplychain shocks that it encountered in the past. Considering the above reasons and recent outperformance in terms of revenue growth, we continue to maintain our positive stance on the stock and our BUY rating.

We believe VGRD’s brand strength, investments in own manufacturing and increased distribution in non South markets are now paying rich dividends with Southern market also gaining traction after a lull of couple of years. This improvement in execution and growth trajectory company should now start commanding higher valuation multiples. We build in FY22 24E Revenue/EBITDA/PAT CAGR of 14%/19%/19% with a revised PT of Rs289 and continue to value company at 40x FY24 EPS and maintain our BUY rating. Consistent delivery and margin improvement would be key for further earnings upgrades.

Result Highlights

* Quarter summary – V guard has seen strong growth momentum continuing from Q4 with growth across product categories. Company has increased prices of products by 2% in certain product category to pass on commodity inflation.

* Margin – Margins in wires and cables were impacted due to sudden drop in copper prices during June and this impact is likely to continue in some part of Q2. Gross margins in consumer durables is expected to reach normalized levels as company takes some pricing action.     

* Non south sees stronger growth – Non south market has seen stronger growth with non south market growing by 96% vs 68% growth in south market. Non south market now contributes 47% to the total revenue.

* Working capital and operating cashflow – Company’s working capital has reduced to 84 days vs 106 days as inventory is being liquidated.   CFO in Q1FY23 stood at Rs1.78bn vs negative Rs1.01bn in Q1FY23.

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