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Growth momentum maintained with strong margin delivery as well; reiterate BUY

Result Synopsis

VGRD reported better than expected revenue growth of 23.7% beating estimates for 3rd consecutive quarter. The growth was driven by a strong performance in consumer durables and electrical segments which grew 32.3% and 32.5% respectively. The company has now started to deliver on the margin front as well despite continued commodity price inflation. The company is confident of growth momentum continuing in Q1FY23 onwards and on margin front, they expect to achieve double‐digit EBITDA margins assuming the worst of commodity inflation is behind them. Current high levels of inventory are also likely to get normalized by Q2FY23 as inventory has already started to reduce from May. Moreover, the company is also looking to increase in‐house manufacturing which is expected to increase efficiencies and reduce supply‐ chain 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 have upgraded our EPS in FY23 and FY24 by 8.5% and 5.8% respectively and now build‐in FY22‐24E Revenue/EBITDA/PAT CAGR of 13%/20%/20% with a revised PT of Rs293 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 – Strong Q4 growth has been aided by traction in consumer durables and electrical segment which grew at 32.3% and 32.5% respectively. Company has increased prices of products by 10% (ex‐wires) in FY22 to pass on commodity inflation.

Margin – Gross margins were impacted by continued commodity price inflation. Lower gross margins have resulted in contraction of EBITDA margin. Company is confident of achieving double digit EBITDA margin in FY23. 

Investments – During the quarter, company has made further investments of Rs151.7mn in V‐Guard Consumer Products Ltd taking total investments to Rs600mn. The first project under VCPL has stared with manufacturing of electronics.

Working capital and operating cashflow – Company’s working capital has increased on higher inventory levels which is a conscious decision by the company. Inventory levels will be normalized by Q2. CFO in FY22 was negative at Rs343mn.

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