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Growth momentum to continue with gradual margin improvement in ensuing quarters; maintain BUY

Result Synopsis

VGRD reported better than expected revenue growth of 15.8%, driven by strong growth in consumer durables and electrical segments which grew 28.1% and 18.1% respectively. The company however has disappointed on the margin front on the back of continued commodity price inflation, higher A&P expenses and factory‐related costs in commissioning of manufacturing facilities in Roorkee and Sikkim. The company is confident of growth momentum picking up further from Q4 onwards. Current high levels of inventory are also likely to get normalized by Q1FY23.Moreover the company is also looking to increase in‐house manufacturing which is expected to increase efficiencies and help in improving margins. Considering the above reasons and recent correction in stock, we continue to maintain our positive stance on the stock and our BUY rating.

We believe VGRD’s brand strength and aggressive investments in non‐South markets are now paying rich dividends with Southern market also gaining traction after a lull of couple of years. This improvementin execution and growth trajectory should now startthe re‐rating journey for the company. We build‐in FY21‐24E Revenue/EBITDA/PAT CAGR of 16%/13%/14% with a revised PT of Rs276 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 – Q3 growth has been aided by strong traction in consumer durables and electrical segment which grew at 28.1% and 18.1% respectively. Volume growth in 9MFY22 is 11% and 20% growth is contributed by price increase.

Margin – Gross margins were impacted by continuing commodity price inflation. Higher A&P spends and factory related costs in commissioning of manufacturing facilities at Roorkee and Sikkim impacted EBITDA margin.

Investments – During the quarter company has made further investments of Rs191.3mn in V‐guard Consumer Products Ltd taking total investments to Rs446.3mn. manufacturing project under VCPL is already under implementation stage.

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 May. CFO in 9MFY22 was negative at Rs866mn.

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