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Non-south regions drive performance…

About the stock: V-Guard is among India’s leading fast moving consumer electrical companies with market leadership position in the stabiliser business.

* The company has a wide portfolio of products ranging from switchgears, water heaters, stabilisers, fans and many more.

* The company has maintained strong return ratios with RoE and RoCE at ~18% and ~24%, respectively (three year’s average).

Q1FY22 Results: The company reported a better-than-expected Q1FY22 performance despite pandemic led disruptions in its key selling markets.

* Topline grew ~39% YoY to | 565 crore, aided by low base, strong growth in electronics, consumer durables (up 39%, 75% YoY, respectively).

* Gross margin increased ~408 bps YoY, supported by price hikes (~2-3%) in Q1FY22, which drove EBITDA margin up ~564 bps to 8.1%.

* PAT grew 7x YoY to | 26 crore.

What should investors do?

V-Guard’s share price has grown by ~2x over the past five years (from ~| 122 in July 2016 to ~| 250 levels in July 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value V-Guard at | 310 i.e. 44x P/E on FY23E EPS.

Key triggers for future price performance:

* Expansion in non-south regions (revenue contribution increased from 37% in FY18 to 43.2% in Q1FY22) and government housing thrust (to build 1.7 crore new houses under PMAY) will be key growth driver for V-Guard.

* Plan to increase in-house manufacturing from current 40% to 60%, which will help the company to improve profitability.

* Strong CFO generation in FY21 of ~| 226 crore in FY21 vs. | 153 crore in FY21.

Alternate Stock Idea: We also like CGCEL in our coverage universe.

* Market leader in the domestic fan industry with value market share of 24%. The company has increased focus on increasing market share in home appliances categories

* BUY with a target price of | 540.

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