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Higher in-house manufacturing to be RoI accretive

Three highlights:

(1) Strong consumer off-take continued from Q3FY21, 40% growth in E-commerce channel, price hikes of 5-10% across products and favorable base resulted in strong revenue growth of 58% YoY,

(2) revenue growth in South India and Non-South India markets was 49.6% and 70.9%, respectively and (3) though input prices are inching upwards, selective price hikes as well as cost saving measures are expected to result in sustainable EBITDA margin of 10- 10.5%. We continue to like V-Guard’s business model due to (1) strong market shares in stabilizers, water heaters and pumps, (2) increase in in-house production which is expected to be RoE accretive and

(3) investments and likely success in kitchen appliances over medium term. However, we believe the stock price upside is capped at current valuations. Upgrade to HOLD with DCF-based revised target price of Rs269 (implied P/E 40x FY23E, Earlier TP-Rs215).

Q4FY21 performance:

V-Guard reported revenue, EBITDA and PAT growth of 58%, 142% and 111%, respectively, YoY. We note (1) heathy momentum in consumer offtake, (2) 40% higher revenues from E-commerce, (3) price hikes of 5-10% across products and (4) favorable base helped to report strong revenue growth. Gross margin declined 200bps but EBITDA margins expanded 450bps due to revenue mix improvement and cost saving initiatives.

Segment-wise performance:

Segment-wise revenue growth rates: Electronics 61.5%, Electricals 57.6% and Consumer Durables 55.2%, YoY. Revenue growth in South India was 49.6% whereas Non-South region reported revenue growth of 70.9% YoY. Revenues through E-commerce channel were up 40% YoY.

Higher focus on in-house production:

As the company plans to increase production of mid-premium and premium products, it plans to increase in-house production and plans to incur capex of Rs600mn in FY22. It expects the gross margin on additional in-house production to be higher by 700-800bps and the contribution to be positive even after adjusting for additional depreciation.

Likely increase in costs and sustainable margin in range of 10-10.5%:

Apart from steep inflation in input prices, some of the cost savings are expected to reverse in FY22. The ad-spend is likely to increase after Q1FY22. We believe there will be some increase in distribution and travel expenses too. However, the company believes 10- 10.5% EBITDA margin is sustainable.

Upgrade to HOLD:

We model V-Guard to report PAT CAGR of 20.8% over FY21- FY23E and RoE to be >18% over FY22-23. While we remain positive on V-Guard’s business model due to strong competitive advantages in South India and growth potential across segments, we believe stock price upside is capped at current valuations. We upgrade the rating to HOLD with a DCF-based revised target price of Rs269 (implied P/E 40x FY23E; Earlier TP-Rs219).

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