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Strong show; growth optionalities lag peers

Q2/Q3 results indicate strong bounce-back by most consumer durable / electrical players. V-Guard Industries (VGRD) too has reported its highest quarterly revenues of Rs8.2bn and highest EBITDA margin of 13.7% in Q3FY21. Yet, its overall performance has been weak in FY17-FY21E vs peers (estimated PBT CAGR of ~8.5% compared to ~12.5% for Havells/Crompton) as well as no major traction in emerging categories. Inorganic growth efforts have been small. We factor-in 18% earnings CAGR between FY20-FY23E. Downgrade to REDUCE from Hold with a revised target price of Rs215 (Rs157 earlier) based on FY23E EPS of Rs7.

* Strong Q3 performance and overall improved outlook lifts FY21E earnings. We factor-in Rs27bn revenues with 11% EBITDA margin resulting in PAT of Rs2.1bn in FY21E. Q3FY21 revenue growth has been broad-based whereas margin expansion has particularly been higher in electronics (stabilisers, UPS, inverters). Management commentary indicates improved consumer sentiment, festive season and share gain from unorganised sector (this is consistent across players) as the key reasons for growth in Q3FY21. Q4FY21 outlook too is good on back of the broad-based recovery in macro environment and strong traction in focus categories on account of seasonal demand. However, high commodity prices and resultant price hikes remain headwinds. There is an element of lumpy demand in Q3FY21 (due to a relatively weaker H1, upcoming commodity price hikes and weakness in the unorganised sector).

* Margin vs growth will be a critical business decision going ahead. Pre-Covid, VGRD’s earnings in FY20 were largely driven by margin expansion compared to revenue growth (Q1/Q2/Q3FY20 revenue growth was 10%/4%/5% YoY vs EBITDA growth of 53%/56%/32% respectively). As such, management can look to move some growth back to the topline in an improving demand outlook. However, increasing commodity prices pose a challenge. If the company continues to invest in brand and distribution, steady-state margins are likely to retrace to 10% in FY22E (FY19 levels) as indicated by the management.

* Inorganic/organic growth efforts have lagged expectations. VGRD’s PBT growth is likely to clock ~7% CAGR between FY17-FY21E. This has been a weak show and the inorganic efforts (acquisition of GUTS Electro-Mech and stake purchase in Gegadyne) remain small in size. Post the launch of water heaters, there is also no new product in the near-term pipeline.

* Downgrade to REDUCE from Hold. We factor-in 15% revenue CAGR during FY20- FY23E with EBITDA margin of ~11%, which results in PAT of ~Rs3bn in FY23E. Based on 30x FY23E, our target price works out to Rs215 (earlier: Rs157).

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