IGI Logo

Rising scale and self?manufacturing to aid growth & margin

VGRD reported a healthy topline of Rs10.1bn (Q1FY20?23 CAGR at 13%), above our / consensus estimates by 18%/11%. South/Non?south sales mix was Rs5.4bn/Rs4.8bn with 3 year CAGR of 12%/14%. Gross margin rose 110bps QoQ to 29.8%, due to pricing actions in Q4FY22 and is likely to revert to pre?COVID level of 32?33% due to a further 3% price hike in Q1FY23 for certain products and softening of commodity costs. EBITDA margin rose 40bps YoY to 8.1%, lower than our/consensus estimate of 9.1%/9.9% due to Rs100mn write?off in wires amid falling copper prices (1% margin impact). EBITDA stood at Rs819mn (Q1FY20?23 CAGR at 5%). PAT stood at Rs540mn (Q1FY20?23 CAGR flattish), 8% above our estimate but 7% below consensus. Summer driven categories such  as  stabilizer,  fans, inverter  and  pumps witnessed  demand  slow  down  in  June. Once the industry growth normalizes, VGRD aims for 15% growth per annum. We cut our earnings estimates by 5%/2% for FY23E/24E and retain BUY rating with a revised target price of Rs295 (Rs300 earlier) based on 40x FY24E EPS

Consumer Durables update:

Revenue  stood at Rs3bn  (Q1FY20?23 CAGR at  25%) with weak EBIT margin at 1.3%. In ceiling fans, 40?50% of sales are premium fans and will rise further post BLDC norms, as 85?90% of manufacturing plant output is geared towards premium fans. TPW fans (30% of fan sales) were imported earlier, but are outsourced now from Hyderabad based vendor to save higher duty & freight. VGRD currently owns moulds & dyes and is setting up a plant in a year with ~Rs350mn capex. In water heater, a high margin category, VGRD is growing well post regaining market share in FY22. For pumps (less than 10% of total sales), industry?wide volume and margin are impacted due to sharp price hikes. After 6 quarters of weak margin (mainly due to fans), recovery will start due to input cost decline & remedial action in fans (targeting 7% margin in Q4FY23)

Electronics update:

Revenue was Rs3bn (Q1FY20?23 CAGR is low at 2.4%) with healthy EBIT margin at 14.5%.  Sustainable EBIT margin is at 15?16%. Stabilizer grew strongly but since VGRD has high market share in a mature category, growth potential is limited. In inverter, growth potential is high as VGRD has only 3% mkt share in Rs120bn category. To improve its pricing, VGRD is setting up a factory for inverter and battery each.

Electricals update:

Revenue was Rs4.1bn (Q1FY20?23 CAGR at 16%) while EBIT margin fell 260bps YoY to 6.8%. In wires, VGRD’s 95% sales is in retail market where construction demand is decent, while 5?7% sales is to projects. In June, VGRD took Rs100mn write?off amid falling copper prices. Switches & switchgears will grow at 25% CAGR for next 5 years on current base of Rs1.5bn. Balance 26% stake in GUTS will be acquired for Rs62mn.

Key concall highlights: (1) OCF in Q1FY23 was Rs1.8bn vs. negative OCF of Rs348mn in FY22.  (2) In?house mfg. share is at 60% and will  rise  to 75% in 2?3 years.  (3) Finished goods and raw material inventory is 70 days for VGRD and 60 days for copper & wires.

Maintain BUY rating with a target price of Rs295

We expect VGRD to register 13%/18% revenue/earnings CAGR over FY22?24E. Healthy growth  prospects,  distribution  expansion,  scale  up  of  newly  forayed  categories  and improvement in margin profile will aid valuations.

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer