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V Guard Industries Q3FY14 results update

January 22, 2014, Wednesday, 06:09 GMT | 01:09 EST | 10:39 IST | 13:09 SGT
Contributed by Nirmal Bang


Near term catalyst lacking…performance to remain subdued
 
- Overall weak consumer durable environment coupled with wide seasonal product-line impacted the top-line growth: V Guard has reported a muted quarter during Q3FY14 where net sales grew by meager 0.5% YoY to Rs. 350cr and by 5.7% QoQ. The electronic segment declined by 18.2% YoY (stabilizers, UPS and inverters), the electrical segment grew by 8.3% YoY, comprising (cables & wires, fans, electric water heaters etc) and the Other segment grew by 30.4% YoY. The Stabilizer (+6.4% YoY), Inverter (-47.3% YoY), pumps (-15.9% YoY) and wire segment grew by 12.8% YoY as against +20% YoY growth in preceeding quarters. We feel wide seasonal product-line, availability of power, an extended monsoon plus low construction activity acts as demand dampeners.
 
- Decline in raw-material and advertisement cost supported operating margin despite muted sales growth: V Guard reported an increase in EBIDTA by 13.3% YoY to Rs. 29.1cr due to decline in raw-material cost as a % of sales despite muted sales growth. However, the advertisement expenditure cut down to 3.6% of sales in Q3FY14 as against 4.6% in Q3FY13 further helped in improvement in EBITDA margin. Management has maintained its A&P guidance of 3.5%-4% of the sales for FY14E. EBITDA margin increased by 90bps YoY to 8.3% in Q3FY14 and up by 20bps QoQ. Gross margin was up by 60bps YoY and down by 70bps QoQ to 26.3% in Q3FY14.
 
- Adjusted PAT up by 14.2% YoY: PAT increased by 14.2% YoY to Rs. 17.5cr and by 21% QoQ. PAT margin increased by 90bps YoY to 8.3% and marginally up by 20bps QoQ. The decline in tax rate which stood at 19.5% in Q3FY14 as against 20.7% in Q3FY13 and 29.4% in Q2FY14 supported the profitability.
 
- FY14E Guideline revised further downward: Management has revised its FY14E guideline from 20% top-line growth to 11%-12% because of the lower-than-expected sales in the product lines. In addition, management also revised its EBITDA margin guidance from 9%-9.5% to atleast 8.5% for FY14E.
 
 
Valuation & Recommendation
 
We feel that the overall general consumption slowdown and wide seasonal product-line has hurt V Guard’s near-term performance, however, the company has sharpened its focus on non-South market (+29% YoY revenue growth in Q3FY13 and contributes 30% to the sales in Q3FY14 as compared to 23% in Q3FY13). Further, we feel that the company will continue its strategy of going slow on introducing new products, incubating them first in South before going pan-India. However, we feel that good growth in the non-South operations will provide upside potential which could yield better profitability going forward. With further downward revision of FY14E guideline, we have tweaked our estimates of net revenue by 6.1% to Rs 1511.5cr FY14E and by 9.5% FY15E to Rs. 1764cr, to incorporate the same. At CMP, stock is trading at a PE of 19.3x FY14E and 13.2x FY15E. We have revised our TP of Rs. 479 per share at PE 14x FY15E (earlier Rs 562). We recommend “HOLD” rating.

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