Small Cap : Accumulate V-Guard Industries Ltd For Target Rs.286 - Geojit Financial Services
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Margins softness in near term...outlook positive
V-Guard Industries Ltd (VGIL) is one of the leading players in the electrical consumer durables space. Major product segments include Stabilizers, Cables & Wires, UPS, Pumps and Electrical Appliances
* In Q2FY23, PAT declined by 27% YoY, which was below our expectation on account of higher inventory costs.
* EBITDA declined by 24% YoY & margins dropped by 320bps YoY on account higher ad spends & other expenses.
* Going ahead with a reduction in higher priced inventory and softer raw material prices will support an improvement in margin in H2FY23E.
* We remain positive on the stock on account of increasing share of own manufacturing, expanding product portfolio, growth momentum in consumer durable and further scale-up in Non-south market.
* We roll forward to FY25E and value VGIL at a P/E of 34x, given strong earnings outlook and healthy balance sheet. We maintain Accumulate rating with a target price of Rs.286.
Revenue growth remained stable
VGIL’s Q2FY23 revenue grew by 9% YoY, led by healthy improvement in the electronics segment and strong growth in consumer durables business, with revenue growth of 9 & 21%, respectively. Fans witnessed destocking. Water heaters segment witnessed strong growth but was marginally lower than management expectations. Water heater division, which was earlier impacted by supply chain and plant issues, was resolved. Electrical segment witnessed flat growth on account of price reduction in wires. Revenue growth from south & non-south market grew by 3% & 18% YoY, respectively. Management aim is to increase the share of manufacturing, add new products and expand its non-south markets. Going ahead, We expect H2FY23 growth to remain healthy on account of festive and summer related demand. We expect revenue to grow by 15.6% CAGR over FY22-25E.
EBITDA margins starting from Q4FY23E...
Q2FY23 gross margin declined by 230bps YoY to 28.6%, largely due to fall in copper prices and higher price inventory impact. EBITDA margin declined by 320bps to 7.2%, on account of higher ad-spends. Consequently, YoY basis PAT declined by 27%. With festive and summer season, we expect revenue growth momentum to continue, while an ease in copper prices will support gradual improvement in margin. However, we expect to see some more impact on margins in Q3 & Q4FY23. Considering this, we lower EBITDA margins estimates by 70 & 40bps for FY23E & FY24E. Consequently, our EPS estimates stand reduced by 10% & 9% for FY23 & FY24E. Despite this, PAT is expected to grow by healthy 17% CAGR over FY22-25E.
Valuations
An ease in RM prices will support margin expansion. VGIL’s long term outlook is improving, given its strong product portfolio, expansion in non-south markets, strong cash flow and healthy balance sheet. The earnings outlook remains healthy, at 17% CAGR. We roll forward to FY25E and value VGIL at a P/E of 34x and maintain Accumulate rating with a target price of Rs. 286.
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