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2H to see strong demand recovery; reiterate ADD

Result Synopsis

VGRD reported inline revenue growth of 15.0% aided by consolidation of Sunflame appliances. Excluding sunflame appliances revenue growth stood at 8.7%. The growth was led by electronics segment which grew by 12.1%, while electricals and consumer durables revenue grew by 9.6% and 5.1% respectively. VGRD’s non-south growth of 11.3% significantly outperformed south which saw growth meager growth 6.7% yoy. Gross margins for the quarter expanded by 452bps yoy on back of softening of commodity prices and is now moving towards pre-covid levels. Company’s recent acquisition of Sunflame appliances is facing some demand headwinds, this is largely on account of some product gaps and issues with after sales service. The company expects growth from Sunflame appliances in 2H as issues has been resolved. Management has however cut it revenue guidance for Sunflame appliances and now expects revenue for Sunflame appliances to remain flat for FY24. 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 that there is further improvement in gross margins as the new manufacturing stabilize and scale increase. Improvement in gross margins should translate into higher EBITDA margin going forward. We expect synergy benefits from Sunflame appliances to accrue as new management has stabilized and they have started to implement their strategies. Considering further scope of margin improvement and potential of industry leading growth we continue to maintain our ADD rating

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 are coming closer to the pre-covid levels. We are factoring FY23-25E Revenue/EBITDA/PAT CAGR of 17%/33%/36% and continue to value company at 40x resulting in PT of Rs329 maintaining our ADD rating.

Result Highlights

* Quarter summary – V-guard has registered revenue growth 19% YoY aided by consolidation of Sunflame appliances. Ex of Sunflame integration the revenue growth has been 8.7%. Electronics has led revenue growth by growing in double digit, while electricals and electronics segment has grown in high to mid-single digit.

* Margin – Gross margin has expanded on back of softening of commodity prices. Gross margins have expanded by 452bps and now is close to the pre-covid levels. EBITDA margin showed improvement of just 78bps despite sharp improvement in gross margins led by higher employee and other expense.

* South vs Non-south – South market grew 6.7%, while non-south market has seen growth of 11.3%. Contribution of non-south revenue has increased to 43.8% vs 42.7% in Q2FY23

* Working capital – Working capital continues to see improvement with NWC coming in at 68 days vs 91 days in Q2FY23. Improvement is on back of normalization of the inventory.

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