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Non-South sees increased traction; downgrade to NEUTRAL on limited upside

Result Synopsis

VGRD reported strong revenue growth of 19.3% aided by consolidation of Sunflame appliances. There was broad based growth across the segments, with electronics segment growing by 20% yoy followed by consumer durables and electricals which grew by 11% and 10% respectively. VGRD’s non-south growth of 26% significantly outperformed south which saw growth of 9% yoy. Gross margins for the quarter expanded by 251bps yoy on back of better product mix and softening of commodity prices. Company expects further improvement in gross margins as it is still sitting with high-cost inventory in certain product category which will be liquidated by October. Company’s recent acquisition of Sunflame appliances is facing some demand challenges and company has scale down its revenue target to Rs3.3bn vs Rs4bn earlier for the current fiscal. VGRD has started to make inroads in the non-south market and its efforts in increasing inhouse manufacturing is bearing fruits as seen from the gross margin improvement. We feel current momentum in revenue growth and improvement in efficiency is already captured in the stock price and hence we downgrade the stock to Neutral given the stock is fairly valued leaving limited upside from the current levels. We now remain Neutral on the Stock with PT of Rs319.

We believe VGRD’s brand strength, investments in own manufacturing and increased distribution in non-South markets are now paying rich dividends with non-south market growing significantly faster than the Southern market. Moreover, material margins in the nonsouth region are now comparable to that of south. We have build-in FY22-25E Revenue/EBITDA/PAT CAGR of 16%/18%/16% and continue to value company at 40x resulting in PT of Rs319. We downgrade the stock to Neutral as there is limited upside from current levels.

Result Highlights

* Quarter summary – V-guard has registered revenue growth 19% YoY aided by consolidation of Sunflame appliances. Revenue growth has been credible given the subdued demand environment. Electronics segment have made a strong come back with revenue growth of 20%.

* Margin – Gross margin has expanded on back of softening of commodity prices. Company expects gross margin to further improve in coming quarters. EBITDA margin showed improvement of just 57bps despite sharp improvement in gross margins led by higher employee and other expense.

* South vs Non-south – South market has grown by 9.9%, while non-south market has seen growth of 17%. Contribution of non-south revenue has now neared to 50%.

* Working capital – Working capital has seen marked improvement with NWC coming in at 70 days vs 84 days in Q1FY23. Improvement is on back of normalization of the inventory.

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