Motilal Oswal Financial Services

5 May 2016

4QFY16 Results Update | Sector:

Consumer

BSE SENSEX

25,262

Bloomberg

Equity Shares (m)

M.Cap. (INR b) / (USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val (INR m)

Free float (%)

S&P CNX

7,736

VGRD IN

29.9

27.8/0.4

1,197/787

34/39/29

34.1

CMP: INR1,187



TP: INR1,250 (+6%)

V-Guard Industries

Neutral

4QFY16 results ahead of estimates; Positive growth outlook

Financials & Valuation (INR b)

Y/E MAR

Sales

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh (INR)

RoE (%)

RoCE (%)

Payout %

Valuations

P/E (x)

P/BV (x)

EV/EBITDA(x)

Div. yield (%)

EV/Sales (x)

Estimate change

TP change

Rating change

32.0

7.6

19.9

0.6

1.9

25.4

6.2

16.1

0.9

1.6

20.8

5.0

13.1

0.9

1.3

2016 2017E 2018E

18.6

1.8

1.1

37.1

57.4

26.3

36.6

21.9

21.8

2.1

1.4

46.7

25.7

26.9

38.3

26.1

25.5

2.6

1.7

57.0

22.1

26.7

38.2

22.4



156.5 191.0 235.2

+13%

+38%



Stabilizers and fans category lead the growth:

V-Guard Industries (VGRD)

reported revenue of INR5.1b (vs. our estimate of INR4.9b) in 4QFY16, up 16.2%

YoY, led by a strong growth in summer products like stabilizers (up 26% YoY to

INR1b) and fans (up 46% YoY to INR720m), which together accounted for 34% of

total revenue. The robust growth in these products was on account of early

summer and its magnitude. The electronics segment grew by 18.1% YoY to

INR1.5b, while the electrical segment was up 15.5% YoY to INR3.4b. Non-south

markets grew 12.6% YoY, while south markets were up 18.1% YoY. The south to

non-south mix stood at 68:32, vs 67:33 in 4QFY15. The cables & wires segment

(highest contributor of 30% to total revenue) grew by 1.5% YoY to INR1.5b.

EBITDA margin expands by 480bp YoY:

Gross margin improved by 490bp YoY to

30.7%, while EBITDA grew 80% YoY to INR634m in 4QFY16 (vs. our estimate of

INR399m). EBITDA margin expanded by 480bp YoY to 12.4% (vs. our estimate of

8.2%). According to the management, half of the gross margin expansion was on

account of lower commodity prices and the remaining half was due to a better

product mix. Interest costs declined by 73% YoY to INR12m due to a decline of

~INR570m YoY in debt. At the end of 4QFY16, gross debt stood at INR104m, as

compared to INR677m at the end of 4QFY15. Consequently, PAT grew 109% YoY to

INR 420m (vs. our estimate of INR250m).

Favorable weather and product launches to drive growth:

Management expects

1QFY17 to remain a strong quarter as the summer season begins late in the north

as compared to the south. Non-south gross margin has now converged to the

south and profitability is expected to increase as operating leverage kicks in. The

company plans to launch new products like mixer grinders and gas stoves in the

kitchen appliances category for the south, which will help sustain its growth

momentum. VGRD recently launched stabilizers for inverter ACs which is a fast

growing segment (inverter ACs now comprise 15% of the industry, as compared to

2% a couple of years ago). VGRD is targeting revenue CAGR of 7-8% in the south

and 25% in non-south with a blended CAGR of 15% and EBITDA margin at 10%.

Valuation and view:

We are raising our revenue estimates by 5%/6% for

FY17/FY18, which translates into an upward revision of 13% in our PAT estimate

for each year, on the back of estimated margin expansion of 40bp and expected

deleveraging. We expect revenue CAGR of 17% and PAT CAGR of 24% over FY16-

18E. Maintain

Neutral

with a TP of INR1,250 (22x FY18E EPS).

Niket Shah

(Niket.Shah@MotilalOswal.com); +91 22 3982 5426

Chintan Modi

(Chintan.Modi@MotilalOswal.com); +912239825422/Kaustubh

Kale

(Kaustubh.Kale@MotilalOswal.com); +912230102498

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

V-Guard Industries

Results beat estimates



VGRD reported revenue of INR5.1b (est. INR4.9b) in 4QFY16, marking a 16.2%

YoY growth led by strong growth in summer products like stabilizers of 26% to

INR1b and fans of 46% to INR720m.

Overall volume growth for the company has been 24% in 4QFY16 with value

growth of 16%. Cables segment saw a 12% volume growth while realizations

declined 10% in FY16.

Stabilizers and fans together accounted for 34% of revenues. Robust growth was

on account of early summer and its magnitude.

Overall electronics segment grew 18.1% YoY to INR1.5b while electrical segment

grew 15.5% YoY to INR3.4b. Non-south markets grew 12.6% YoY while south

markets grew 18.1%.

South to Non-south mix stood at 68:32 v/s 67:33 in 4QFY15. Kerala accounted

for 35% of south India sales.

Revenues ex-cables and wires grew 24%.

Cables and wires segment (the largest segment contributing 30% to revenues)

grew 1.5% to INR1.5b.

Pumps which contributed 14% of revenues, grew 20% YoY, water heaters grew

28% YoY, contributing 8% to revenues. Demand in pumps has been on account

of demand as a result of lack of water.

Management highlighted that it has maintained pricing as such and reduced

discounts in non-south despite raw material prices being subdued.

For FY16, 60% of stabilizers revenues have come from air-conditioner segment.

Exhibit 1: Segment wise revenue break-up (INR m)

Segments

Electronics

Electrical / Electromechanical

Others

Total

4QFY16

1,546

3,412

176

5,134

4QFY15

1,309

2,953

154

4,416

YoY Gr. (%)

18.1

15.5

14.3

16.3

3QFY16

1,099

2,905

QoQ Gr. (%)

40.7

17.5

159

10.7

4,163

23.3

Source: Company, MOSL

Exhibit 2: Quarterly revenue trend (INR m)

Total Sales (INR m)

28%

4,224

3,529

12%

4,777

3,340

17%

4,313

29%

4,416

5,133

16%

YoY Growth

4,082

12%

3,954

4,993

4,334

4,163

Source: Company, MOSL

EBITDA margins expand 480bp



5 May 2016

Gross margins improved 490bp YoY to 30.7% while EBITDA grew 80% YoY to

INR634m in 4QFY16 (est. INR399m).

EBITDA margins expanded 480bp YoY to 12.4% in 4QFY16 (est. 8.2%).

V-Guard Industries



Management highlighted that half of the gross margin expansion was on

account of lower commodity prices and half due to better product mix.

Margins were aided by lower input costs, inventory management (inventory

days reduced by 17 days YoY and 9 days QoQ to 57 days) and operating

leverage.

Interest costs declined 73% YoY to INR12m due to ~INR570m YoY debt

reduction.

Gross debt as at 4QFY16 stands at INR104m v/s INR677m as at 4QFY15.

Consequently, PAT grew 109% YoY to INR 420m (est. INR250m).

Ad spends as a % of revenues increased by 80bp to 3.8%.

PBT margins for FY16 stood at – south India 11% and non-south 3.5%

Exhibit 4: PAT trend (INR m)

12.4%

PAT (INR m)

129%

26%

634

-15% -19%

14%

32%

-47%

-2% 13%

YoY Growth

133%

109%

20%

Exhibit 3: EBITDA margins trend (INR m)

EBITDA (INR m)

7.6% 8.1% 8.3%

8.4%

8.5% 8.3%

5.5%

EBITDA margins

8.0% 8.7% 8.4% 8.3%

404 356

353 435 365 346

309 271 291 354

217

176 145 175 205 223 192 92

201 252 231 215 420

Source: Company, MOSL

Exhibit 5: Product wise revenue break-up (INR m)

Segments (INR m)

Stabilizers

UPS (Digital + Standalone)

Pumps

Cables & Wires (PVC + LT)

Water Heaters (Electric + Solar)

Fan

Others

Total sales

4QFY16

1,001

544

741

1,546

404

720

176

5,132

4QFY15

795

513

619

1,523

317

494

154

4,415

Growth%

25.9

6.0

19.7

1.5

27.4

45.7

14.3

16.2

3QFY16

Growth%

763

31.2

336

61.9

432

71.5

1,305

18.5

907

-55.5

261

175.9

159

10.7

4,163

23.3

Source: Company, MOSL

Exhibit 6: Geography wise revenue break up (INR m)

South

Non south

3,470

3,140

3,090

2,894 2,496 3,016

2,910

3,000 2,910

2,7102,960

2,431

Exhibit 7: Non south contribution continues to increase

South (%)

Non south (%)

1,290 964 1,0731,2511,6701,4001,2501,4901,9301,3401,2501,670

Source: Company, MOSL

5 May 2016

V-Guard Industries

Exhibit 8: Quarterly A&P spend trend (INR m)

5.3

3.3

215

110

3.6

Ad spends

4.6

3.3

3.4

144

220

142

194

% of revenues

4.9

3.0

246

134

161

4.9

3.7

4.9

3.7

5.1

3.8

4.2

Exhibit 9: Annual ad spend trend (INR m)

Ad spends

4.5

% of sales

3.8

3.9

4.3

180

204 190

162

FY09

231

FY10

277

FY11

408

FY12

617

FY13

582

FY14

689

FY15

800

FY16

Source: Company, MOSL

Exhibit 10: Balance sheet and key ratios

Balance sheet snapshot

Net worth

Working Capital

Term Loan

Total Debt

Acceptances

Key ratios

Inventory (days)

Debtor (days)

Creditors (days)

Working capital turnover (days)

4QFY16

4,762

104

4QFY15

3,777

367

310

677

969

3QFY16

4,508

236

238

Source: Company, MOSL

Key highlights from conference call



Company is now third largest player in electric water heaters, second largest in

water heaters including solar and largest national player in solar water heaters.

VGRD has a 7% market share in south Indian fans market.

It recently launched a new range of stabilizers for inverter ACs. Management

comments that inverter ACs are extremely well received in market and now

account for 15% of the industry v/s 2% couple of years back. These stabilizers

form a part of premium category of buyers and is seeing good traction.

Company has plans to launch mixer grinders in Tamil Nadu, and introduce a new

product line ‘gas stoves’ in kitchen appliances category in Kerala during 1QFY17.

On the non-south front, company is not aggressively adding sales force now and

most of its efforts are already baked in, with efforts flowing in future. Hence

management expects profitability to increase. Currently, the margins at gross

level have converged to south, and management expects on a net EBITDA level

too it should happen in near future.

Company has a sales staff of 800, 60% of which is non-south based. It reaches

32,000-33,000 retailers, has ~2200 channel partners, 500 distributors. Out of the

total universe of retailers in India estimated at ~60,0000 by management, it

reaches 95% of retailers in south and close to 35% in non-south.

On competition front, inverter and conditioner manufacturers have entered the

stabilizers segments. However, management expects competition to increase

the pie in a similar price point where VGRD is present i.e. at a premium to

smaller players.

5 May 2016

V-Guard Industries

Company’s focus remains on profitability and selling higher value products – for

example, its gross margins in fans have increased from 10% to 25% in five years.



Guidance for FY17: Revenue growth of 15% and margins of over 10%.



VGRD targets 10-12% volume growth in wire and cables going forward.



It guides for revenue CAGR of 7-8% in south, 25% in non-south with a blended

CAGR of 15% and EBITDA margins at 10%.



It targets for a reduction in cash conversion cycle of 5 days annually.



Valuation and view

We value VGRD at 22x FY18E EPS which we believe is justified considering:



Strong return ratios

: V-Guard derives 57% of revenues through outsourcing

model thereby helping to keep business model asset light and enabling the

company to focus on branding. Outsourcing model leads to higher ROCE with

overall corporate RoCE of 33% for FY18E and a debt free balance sheet.



Significant potential for growth and margin expansion:

V-Guard has over

the past five years significantly expanded its presence in non-south markets with

distributors in non-south markets standing at 328 higher than south of 208

distributors. However, revenue per distributor in non-south markets stands at

INR17-20mm as against INR55-60m in south markets, implying significant

scalability from non-south markets. Distributor margins and discounts in non

south margins are currently higher than south markets, which we expect to

decline going forward, thus improving margins.

We value VGRD at 22x FY18E EPS, in-line with its historic five-year average multiple

of 19.9x and value the stock at INR1,250. Maintain

Neutral.

Exhibit 11: Price to earnings (one year forward)

15.0

19.2

20.1

P/E (x)

5 Yrs Avg(x)

7 Yrs Avg(x)

Exhibit 12: Price to book (one year forward)

10.0

8.0

6.0

4.0

3.3

2.0

0.0

4.3

4.9

P/B (x)

5 Yrs Avg(x)

7 Yrs Avg(x)

Source: Company, MOSL

5 May 2016

V-Guard Industries

Story in charts

Exhibit 13: V-Guard's ad spends highest among peers

4.3%

3.1%

55.9

1.3%

0.7%

39.1

35.2

33.1

26.1

25.8

21.9

4.3

FY08

Source: Company, MOSL

4.8

FY09

9.3

FY10

36.9

16.7

23.0

Exhibit 14: Revenue/ Distribution pan India trend (m)

South

Non South

Pan India average

77.7

71.6

49.1

57.8

45.9

20.4

37.3

20.7

56.3

32.7

17.7

FY11

FY12

FY13

FY14

FY15

Source: Company, MOSL

Exhibit 15: Distribution network pan India trend

South

Non south

328

220 208

187

167

134

Exhibit 16: Robust RoCEs

RoCE (%)

10397 11095

100

Source: Company, MOSL

Exhibit 17: Annual sales trend

Sales (INR m)

60%

43%

33%

41%

Growth (%)

Exhibit 18: Annual PAT trend

67%

47%

PAT (INR m)

Growth (%)

58%

1,404

1,714

4,541

7,263

9,646

13,602

25,503

21,809

17,459 18,623

17% 17%

15,176

255

12%

15%

426

19%

508

24%

629

701

12%

707

1,117

26%

22%

FY11

FY12

FY13

FY14

FY15

FY16 FY17E FY18E

Source: Company, MOSL

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Source: Company, MOSL

FY10

5 May 2016

V-Guard Industries

Financials and valuations

Standalone - Income Statement

Y/E March

Net Sales

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income - Rec.

PBT bef. EO Exp.

PBT after EO Exp.

Current Tax

Deferred Tax

Tax Rate (%)

Reported PAT

PAT Adj for EO items

Change (%)

Margin (%)

Net Profit

FY12

9,646

32.8

936

9.7

839

170

692

202

-19

26.6

508

27.0

5.3

508

FY13

13,602

41.0

1,099

8.1

114

985

200

821

156

23.4

629

23.7

4.6

629

FY14

15,176

11.6

1,225

8.1

120

1,105

211

943

225

25.6

701

11.5

4.6

701

FY15

17,459

15.0

1,330

7.6

154

1,176

206

1,014

305

30.3

707

0.8

4.0

707

FY16

18,623

6.7

1,780

9.6

154

1,627

1,610

493

30.6

1,117

58.0

6.0

1,117

(INR Million)

FY17E

21,809

17.1

2,115

9.7

175

1,941

2,006

602

30.0

1,404

25.7

6.4

1,404

FY18E

25,503

16.9

2,550

10.0

194

2,356

2,449

735

30.0

1,714

22.1

6.7

1,714

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY12

298

1,808

2,106

1,091

3,240

1,625

395

1,230

111

3,365

1,574

1,478

279

1,466

1,222

245

1,899

3,240

FY13

298

2,315

2,613

1,650

4,343

1,888

506

1,382

5,079

2,486

1,988

149

455

2,205

1,959

246

2,873

4,343

FY14

298

2,886

3,184

1,084

4,363

2,280

618

1,662

5,053

2,525

2,121

379

2,386

2,069

317

2,667

4,363

FY15

300

3,478

3,777

728

4,597

2,407

783

1,624

5,613

2,609

2,437

545

2,652

2,255

397

2,961

4,597

FY16

301

4,407

4,708

4,854

2,537

926

1,611

5,360

2,047

2,792

445

2,311

1,914

398

3,049

4,854

(INR Million)

FY17E

301

5,445

5,745

5,820

2,837

1,101

1,736

109

8,142

3,657

2,629

1,278

579

4,361

3,657

705

3,781

5,820

FY18E

301

6,775

7,076

7,150

3,137

1,295

1,842

128

10,041

4,264

3,074

1,950

752

5,054

4,264

790

4,987

7,150

5 May 2016

V-Guard Industries

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Working Capital Turnover (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

FY12

17.0

20.3

70.6

3.5

23.9

FY13

21.1

24.9

87.6

3.5

19.3

FY14

23.5

27.5

106.7

3.5

17.3

FY15

23.6

28.7

126.0

3.5

17.2

50.3

41.3

9.4

2.1

27.2

0.3

26.6

27.3

3.0

2.3

0.5

26.6

27.4

3.1

2.3

0.6

24.2

27.0

3.5

2.1

0.3

20.3

27.8

3.8

2.1

0.2

FY16

37.1

42.2

156.5

7.1

21.9

32.0

28.1

7.6

1.9

19.9

0.6

26.3

36.6

3.8

2.3

0.0

FY17E

46.7

52.5

191.0

10.6

26.1

25.4

22.6

6.2

1.6

16.1

0.9

26.9

38.3

3.7

1.9

0.0

FY18E

57.0

63.4

235.2

11.1

22.4

20.8

18.7

5.0

1.3

13.1

0.9

26.7

38.2

3.6

2.0

0.0

Standalone - Cash Flow Statement

Y/E March

Oper. Profit/(Loss) before Tax

Depreciation

Interest and finance charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO expense

CF from Operating incl EO

(inc)/dec in FA

Free Cash Flow

Others

CF from investments

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

FY12

692

162

157

823

837

-293

544

-277

-310

-166

-121

-597

-38

FY13

822

114

180

256

-772

105

-256

-151

-254

575

-190

-121

265

116

150

FY14

943

120

191

189

-23

1,042

1,108

-324

784

-280

-591

-236

-122

-950

-122

149

FY15

1,014

154

206

307

-212

856

-94

762

-94

-405

-206

-156

-768

-6

FY16

1,610

154

493

-84

1,275

-129

1,147

-155

-284

-605

-89

-244

-938

(INR Million)

FY17E

2,006

175

602

470

2,058

-409

1,649

-409

-71

-9

-366

-447

1,202

1,278

FY18E

2,449

194

735

-534

1,374

-318

1,056

-318

-384

672

1,278

1,950

5 May 2016

V-Guard Industries

Corporate profile

Company description

Established in 1977, V-Guard Industries is a

dominant player in south India in the light electrical

industry. Beginning with its flagship product,

voltage stabilizers (in which it is the market leader),

the company has, over last 10 years, expanded its

product profile to include PVC insulated cables, LT

power cables, Fans, Geysers, Solar water heaters,

Pumps, UPS and Inverters. The company, which

went public in 2008 and has seen revenue CAGR of

37% and a PAT CAGR of 32% in the past five years.

Exhibit 20: Shareholding pattern (%)

Dec-15

Promoter

DII

FII

Others

65.9

7.6

17.0

9.5

Sep-15

65.9

7.5

17.1

9.6

Dec-14

66.1

4.4

9.1

20.5

Exhibit 19: Sensex rebased

Exhibit 21: Top holders

Holder Name

Nalanda India Equity Fund Limited

Steadview Capital Mauritius Limited

Nalanda India Fund Limited

ABG Capital

LTR Focus Fund

ICICI Prudential Long Term Equity Fund(Tax Saving)

Holding

4.3

3.5

2.6

2.3

1.9

Note: FII Includes depository receipts

Exhibit 22: Top management

Name

Kochouseph Chittilappilly

Cherian N Punnoose

Mithun K Chittilappilly

Designation

Chairman

Vice Chairman

Managing Director

Exhibit 23: Directors

Name

Kochouseph Chittilappilly

Cherian N Punnoose*

Mithun K Chittilappilly

A K Nair*

Name

C J George*

Joshna Johnson Thomas

Ullas K Kamath*

Ramachandran Venkataraman

*Independent

Exhibit 24: Auditors

Name

S R Batliboi & Associates

Keyul M Dedhia & Associates

Ajeesh & Associates

Type

Statutory

Secretarial Audit

Cost Auditor

Exhibit 25: MOSL forecast v/s consensus

EPS

(INR)

FY17

FY18

MOSL

forecast

46.7

57.0

Consensus

forecast

41.6

50.6

Variation

(%)

12.3

12.7

5 May 2016

V-GUARD INDUSTRIES GALLERY

V-GUARD INDUSTRIES

V-Guard Industries

NOTES

5 May 2016

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V-GUARD INDUSTRIES

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