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Performance in-line; Lower demand restricts growth

VGRD’s standalone sales grew 9% YoY to Rs10.7bn, in-line with our estimate, as subdued consumer demand restricted topline growth. Electronics sales grew 15% YoY while Electricals/Consumer Durables sales grew 10%/5% YoY. South region sales grew 7% YoY at Rs6bn (56% of total sales) while Non-South sales grew by 11% YoY to Rs4.7bn (44% of total sales). Led by softer commodity costs, gross margin rose 320bps YoY and 130bps QoQ to 31.8% and is moving closer to pre-COVID levels. EBITDA grew 13% YoY to Rs803mn, leading to EBITDA margin of 7.5%, up 30bps YoY. However, it was below our/consensus estimate of 8.2%/8.5% on account of higher employee cost at Rs997mn, up 53% YoY. Higher other income (up 4x YoY to Rs135mn) led to 21% YoY growth in PAT to Rs520mn, above our/consensus estimate by 4% each. VGRD believes that a further 100bps gross margin expansion is likely, while EBITDA margin will expand once B2C demand revives and the new factory achieves scale. We cut our earnings estimates for FY24/25 by 4% each and roll over valuation to Sept’25. Maintain ADD rating with a revised target of Rs330 (Rs310 earlier) based on 35x H1FY26E EPS

Consumer Durables update: Revenue growth was tepid at only 5% YoY to Rs3.5bn due to low discretionary spending by consumers. With lack of scale and presence of highcost old inventory in water heaters, EBIT turned negative at Rs1mn. While fans sales were decent, VGRD and other brands had to offer discounts due to unseasonal rains in North India. Newly launched fans range is gaining good traction while VGRD expects this category to bounce back soon. Premium fans (priced above Rs3,000) forms 45% of total VGRD’s fans sales. Demand for water heaters was soft in Q2FY24 while VGRD still has some carry-forward high-cost inventory of last year. Large water heater brands have refrained from taking any price hikes due to sluggish demand environment. VGRD expects the fans and water heater industry to take price hikes over next 6 months.

Electronics update: Sales grew 15% YoY to Rs2.6bn with EBIT margin of 12.5%, down 250bps YoY. Benefits from newly set-up factory at Pantnagar for stabilizers and inverters will accrue in 6-12 months. Currently, lower scale amid demand weakness has restricted conversion from gross margin to EBITDA margin.

Electricals update: Revenue grew 10% YoY to Rs4.6bn while EBIT margin rose 300bps YoY to 8.1% on a low base. B2C demand for housewires in 2QFY24 was muted. Cables used in infra and industrial segment are growing fast, aided by central & state government capex, but VGRD is not present in this B2B cables segment. Pumps growth in Q2FY24 was lower than historical run-rate of 8-10%.

Sunflame update: Sales of Sunflame in Q2FY24 stood at Rs617mn (vs Rs632mn QoQ) with EBIT margin of 6% vs. 9.2% QoQ. Sales were impacted due to industry-wide demand weakness. The new team was inducted during March-April 2023 and is expected to deliver results in H2FY24. Sales in FY24 are likely be similar to FY23.

Maintain ADD rating with a revised target price of Rs330

While gross margin expansion is healthy; growth poses near term headwinds amid soft consumer demand. Maintain ADD as current valuation offers limited upside.

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