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Back on a strong growth trajectory; maintain BUY

Our view

Q2 has seen a strong build‐up to the growth momentum which started in Q1 which helped V‐Guard post its highest ever quarterly turnover. Volume growth stood at 26% which is very encouraging. Timely pricing actions to pass on commodity inflation helped in protecting gross margin to a large extent. Improving consumer demand across markets as with the reopening of the economy continued in Q2 as well with festive season starting on a positive note.

We believe the company has right ingredients to return to its 15% growth trajectory in the medium term as it focusses on developing new categories and aggressively increases it presence in the non‐South markets. It is also looking to increase in‐house manufacturing which is expected to increase efficiencies and thus help in improving margins. Considering the above reasons, we continue to maintain our positive stance on the stock and continue with our BUY rating. 

Result Highlights

* Quarter Summary – Q2 growth was broad‐based with positive contribution coming from all products and geographical segments. Volume grew by 26% which is very encouraging and definitely best among peers indicating share gains for the company.  

* Margin –The sharp increase in input costs has had some impact on gross margins. Company has already taken pricing action to offset major part of cost inflation. EBITDA margin was impacted due to higher A&P expenses and employee costs.

* In‐house manufacturing – VGRD has now capitalized its subsidiary, V‐Guard Consumer Products that will focus on expanding in‐house manufacturing set‐up, thereby reducing reliance on imports and creating higher efficiencies.

* Inventory and operating cashflow – Company had made conscious decision to carry higher than normal raw material inventory to ward off any supply chain challenges. Receivables have returned to normal levels.

Valuation

We believe VGRD’s brand strength and investments in non‐South markets is now paying rich dividends with Southern market now gaining traction after a lull of couple of years. We build‐in FY21‐24E Revenue/EBITDA/PAT CAGR of 15%/17%/18% and arrive at a PT of Rs308 and continue to value the company at 40x FY24 EPS and maintain our BUY rating. Consistent delivery and margin improvement would be key for further re‐rating.

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