Eyeing 8% EBITDA margins for FY15: V-Guard Ind

A: We had almost 2.5-3 percent reduction in EBITDA margins primarily driven by three factors. One is that we had a reduction in commodity prices that happened in Q3 for which we have taken inventory write-downs to the tune of almost about 1.2 percent of margins. So 1.2 percent of EBITDA margins deduction is due to inventory write-downs. About another 1-1.2 percent has come due to additional advertisement expenditure over a previous financial year.

Third factor has been that our sales growth has been only 10 percent, we were budgeting for much better numbers for sales. So, obviously all the other overheads have not been absorbed properly. So that has led to more pressure on margins. So these are the three basic reasons why we had such a sharp fall in EBTIDA margins.

Ekta: Would you change your guidance for FY15 in terms of margins, you were earlier guiding 8.5-9 percent based on what you saw on Q3 and how Q4 is looking, would you revise it lower?

A: Yes, I think now those kind of EBITDA margins maybe difficult to achieve. Looking at the first nine months performance we are at about 7.7 percent EBITDA margins for the first nine months of the year. I think in EBITDA margin of around 8 percent is what we are hoping to achieve but as far as the sales is concerned, we are still hoping to do 20 percent growth. So somewhere between Rs 1,000 crore and Rs 800 crore of revenue we are still hoping to achieve. That should be possible. We have almost 17-18 percent of growth for the first nine months, we are hoping to continue similar kind of growth for the next quarter. But EBITDA margins will be lower. I think about 8 percent EBITDA margins is what we are projecting.

Anuj: Is there a risk of an EPS degrowth if you compare the current full year to last full year or maybe for next full year, would there be a risk of falling EPS?

A: I think definitely the fall in commodity prices will have a short-term impact. We have had a similar impact in 2007-2008 when there was a global financial meltdown followed by a global commodity crash. This is although not a commodity crash but it is looking like one with all the commodities raising downwards. So what happened that year is we had a very bad quarter similar to what we had now but subsequent quarters, our margins had gone up significantly because two things will happen, one is inventory has been written down but the product maybe still sold at higher prices than which the inventory has been marked on so margins could go up in the next few quarters. That is one.

Secondly, copper is one key item of raw material in buyers which forces us to mark down elementary but we are also using copper in many of our other products. For other products, it is actually good news because in the subsequent quarters, at least two-three months we should start seeing a benefit of lower commodity prices flowing into lower cost and then higher gross margins. So I don’t think looking at our previous experience with such a fall in commodity prices, although there were short-term shocks and short-term reduction in margins in the subsequent quarters, it had more than made up for those reductions.

Ekta: Has your entire inventory write-down been undertaken?

A: Yes, what we do is we take the value of the inventory as on October 1 for Q3 and then of course the value of copper as on December 31 and we have written down to the extent of December 31. So the copper price decrease to the extent of December 31 has been completely written down. Of course for this quarter, we will also have to see what is the value of copper in rupee terms at the end of March and that will determine if any further write down is required or not. That is the call we take. We take lower of the net realisable value or the lower commodity prices whichever is low. That is the kind of closing valuation we do for inventory.