Sachin PalMoneycontrol Research
Consumer durables manufacturer V-Guard Industries put up a strong performance for the first quarter of FY19, reporting double-digit revenue growth and an expansion of operating margin.
The company is on a secular growth path as is adding new products to its portfolio. It is also diversifying its geographical presence by expanding outside of southern India.
Results snapshot
V-Guard's revenue for the June quarter rose 13 percent year on year to Rs 635 crore. Its operating profit jumped 43 percent to Rs 47 crores and operating margin expanded to 7.3 percent.
The company's net profit for the quarter under review was 48 percent higher at Rs 34 crore.
The rise in revenue was partly because of a 30 percent year-on-year rise in income from markets outside of southern India. However, its revenue from southern India, which is its core operating region, grew only 4 percent as a weak summer impacted sales of some of its products.
V-Guard had increased the prices of its products in the March quarter to offset some of the pressure coming from a rise in cost of raw material. This was largely why the company's operating margin expanded by 150 bps expansion in the quarter gone by.
Consumer durables business leads growth
V-Guard's consumer durables business reported a like-to-like growth of 36 percent, aided by a low base and new product launches (modular switches, coolers, kitchen appliances).
The growth in company's electricals business was driven by cables and wires, for which it reported a volume growth of around 10 percent. Pumps faced a minor dip in sales in southern India due to weak demand.
In the company's electronics business, an increase in sales of uninterruptible power sources (UPS) was offset by some weakness in sales of stabilizers.
Expanding geographic presence
V-Guard has launched a brand transformation exercise to position itself as a leading multi-product, pan-India manufacturer of consumer electricals. The company expects its new brand identity to help increase its visibility in markets outside of south India, and improve its sales in the south as well.
The campaign has been launched with the introduction of 3-4 new products like smart fans, water heater, stabilizers and inverters. The company also plans to add newer products across geographies.
Advertisement and promotion expenses continue to remain high on account of V-Guard's brand transformation exercise. The company had incurred a one-time marketing expense of Rs 36 crore in the March quarter as a part of the exercise.
The company's expenses towards advertising and marketing in the June quarter stood at Rs 41 crore, largely due to a spillover from the previous quarter. The higher ad spend is expected to normalise in Q2.
The company has a network of around 3,000 distributors and 32,000 retailers. It plans to add 3,000 retailers every year, mainly in non-south India regions, and expects its margins to improve on account of economies of scale.
Outlook and Recommendation
The government's focus on pan-India electrification and affordable housing, coupled with rising income levels, will aid the growth of the consumer durables sector.
V-Guard is expected to benefit from the increasing penetration of consumer durables as well its own brand revamp strategy. The company's incremental growth will primarily be driven by newer geographies and product launches and therefore, its business execution needs to be monitored closely.
From a valuation standpoint, the company seems priced to perfection at more than 40 times its expected earnings for FY20. We advise long-term investors to make use of any correction to slowly buy into the stock.
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