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Inflationary pressure hurts...

V-Guard Industries Ltd (VGIL) is one of the leading players in electrical consumer durables space. Major product segment includes Stabilizers, Cables & Wires, UPS, Pumps and Electrical Appliances.

* Q3FY22 Revenue grew by 16% YoY, supported by electrical & consumer durables.

* EBITDA margin declined by 490bps YoY to 8.8%, due to weak product mix, higher input cost and other expenses. Consequently, PAT decline by 32% YoY.

* In the near term, margins are likely impacted by higher inflation. However, we expect strong summer season and gradual pass through to support margins.

* VGIL continues to focus on increasing penetration in Non-south market, new product launches and expanding retail chains.

* Despite downgrade in EPS, considering healthy balance sheet and strong earnings outlook, we value VGIL at P/E of 32x as we roll forward to FY24E, and maintain “Accumulate” rating with a target price of Rs.243

Revenue growth picks-up..

VGIL’s Q3FY22 revenue grew by 16% YoY, on healthy demand in electrical and consumer segments and improvement in realization. However, electronics segment revenue declined by 4% YoY. Revenue growth from south & non-south market grew by 15% & 18% YoY, respectively. Overall revenue growth was impacted by third wave, as its eastern market was significantly impacted, where VGIL has strong presence. Management focus is on increasing the share of manufacturing, add new products and higher penetration in non-south markets. Company has acquired SimonIndia business at Rs.27cr. This acquisition will provide scalability and an entry in premium switches. Also VGIL made further investment in Vguard consumer products Ltd (VCPL), taking total investment to ~Rs.60cr till date. Going ahead, Q4 is expected to see normalization in revenue growth given strong summer. We expect revenue to grow by 18% CAGR over FY21-24E.

Higher input cost hurts...expect EBITDA margin to improve

Gross margin declined by 200bps YoY to 30.6%, due to delay in pass through of higher commodity prices. EBITDA margins declined by 490bps YoY to 8.8% due to weak product and higher other expenses. EBITDA declined by 26% YoY. Consequently, PAT declined by 32YoY. Going ahead, strong summer season and price hikes to support EBITDA margin. We lower our EPS estimates by 17% & 7% for FY22E & FY23.

Valuations

VGIL long term outlook is improving given its strong product portfolio, improving retail presence, expanding its non-south market, strong cash flow and healthy balance sheet. In the near term, input cost to remain elevated, limiting margin improvement momentum. Despite this, the earning outlook still remains healthy. We value VGIL at P/E of 32x as we roll forward to FY24E and maintain “Accumulate “ rating with a target price of Rs.243.

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