V-guard Note.pdf

Private & Confidential

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B.Natesan – 044 43440006,[email protected] 1

Corporate Factsheet

Promoter Background Promoted by Mr. Kochouseph Chittilappilly in the year 1977. His son

Mr. Mithun Chittilappilly has taken charge of the business and is an

Executive Direct\or on the board of the company

Presence 3 facilities – Coimbatore, Kashipur, Uttaranchal and Rishikesh, Himachal

Pradesh

Management depth Guided by Mr. Kochouseph Chittilappilly, V-Guard has a strong and

experienced second line of management . Senior team comprises seasoned professionals heading different functions.

Business Manufactures and markets stabilizers, pumps, cables, water heaters, UPS

under the flagship brand name V-Guard

Corporate Structure Single Company

Revenue Model On per product basis

Capacity -

Key Clientele All are retail products

Key Vendors ~100 SSIs based across the country

Key Success Factors Household name for stabilizers in South.

Capital History Issued 8mn fresh shares tor Rs.10 each o the public through IPO in

Feb,2008.The issue proceeds were utilized to expand wires capacity in

Kashipur and a fresh LT cable facility in Coimbatore

Credit Rating

Corporate Bankers SBI, Dhanalakshmi Bank, Standard Chartered, HDFC Bank Limited

IPO Bankers Anand Rathi Financial Services Limited

Auditors Deloitte Haskins and Sells

Market Data

Market Cap (Rs.mn) 5680

Shareholding Promoters: 68%

Institutions/Others: 32%

Key Shareholders Franklin Templeton MF- 4%

52-week High-Low

(Rs.)

212.9 – 71.3

All time High-Low

(Rs.)

3M Average Volume Qty:51,454

Stock Return (%)

Correction from 52WH 11%

Rise from 52WL 228%

F&O -

Index -

Stock exchange list BSE,NSE

3M 6M 1Y YTD

29.4 75.9 146.5 110.7

Fundamental View

Current Market Price Rs. 196

Recommended

entry priceRs. 160-170

Target IRR >35%

Date 4th October,2010

V-Guard Industries


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V-Guard could be the next Bajaj Electricals (CMP : 328; Target Price : 348; Rating : OPF ) and Havells (CMP : 418 ;Target Price : 481; Rating : OPF ) * CMP is closing

price as on 12th October 2010

Promoted by Mr. Kochouseph Chittilappilly and with the distinction of being a top class stabilizer brand over the last ~ 33 years

A la Bajaj Electricals and Havell’s V-Guard derives growth from retail demand for electrical products and appliances. We estimate Revenue CAGR of 41% for V-guard in FY10-

12E driven by industry growth, newer products and greater geo spread

In our view, V-Guard has started evolving from being a South-focused stabilizer firm to being a national-level, multi product company; Non-South markets to contribute ~ 25% in

FY12E versus ~ 5% in FY08 and stabilizer revenues to be 23% of total in FY12E versus 32% in FY08

We estimate healthy improvements in RoE, Scale and Spread (in markets and products).

Renewed management enthusiasm with a hunger to grow business

With ~ 68% held by promoters, we see promoters have enough vested interest to grow the business. The Promoter’s son Mr. Mithun Chittilappilly joining the business has

resulted in a renewed enthusiasm and business focus to make V-Guard a pan India name in the consumer discretionary space…

. …culminating in a strategy to expand its product basket (addition of cables, fans, water heaters) and increase its presence in the North through expansion of dealership

network coupled with higher media publicity

We like the renewed management hunger which will result in business witnessing a 35-40% CAGR growth over the next 2-3 years

Valuation discount of more than 20% (to Bajaj Electricals and Havells) might not be justified

On a expected PAT of Rs.391mn (1st quarter PAT of Rs.110mn) and Rs.506mn for FY11E and FY12E,the stock, at CMP of Rs.196 trades at 14.5x and 11.3x its FY11E and

FY12E EPS. We expect V-Guard to grow bottom line at a CAGR of 41% over FY10-12E and a PEG of 0.27 on FY12E appears quite attractive as an entry point

Change in sales-mix to lower-margin businesses (Cables) operating margins can come down by 100 bps though the higher operating leverage (doubling of sales) over the next

two years will partially offset the same. However, dampened results in 2Q and 3Q FY11E might provide good entry valuations on the stock

We expect debt equity ratio to be comfortable at <1 in FY12E. Driven by higher asset turnover, we expect ROCE and ROE (aided by lower tax rate) of 18% and 26% in FY12E

Its peers Bajaj Electricals and Havells enjoy valuations of 16-17x FY12E earnings. V-guard scores lower on working capital cycle, positive operating cash-flows and superior

return ratios. V-guard, however, compares favourably in likely improvements to revenue-growth, product portfolio and We therefore think V-Guard should trade at valuation

multiples that are at a 20% discount to Bajaj Electricals and Havells

Attaching a PE multiple of 13x to its FY12E EPS, we arrive at a Target Price of Rs.230 leaving an upside 16% from the current levels. However, we like the story better from a 2-

3 year perspective and would recommend a BUY with a three star rating implying strong business fundamentals. We would urge investors to buy the stock on any correction and

believe ~ Rs.160-170 to be an excellent level to buy the stock

Investment Thesis

V-Guard Industries (Cont’d)


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Particulars V-Guard Bajaj Electricals Havells (St. alone)

Sales (Rs. mn) 4,541.0 22,286.3 24,871.6

EBITDA % 11% 11% 13%

ROE (FY10) 19% 33% 39%

Net WC 70 days 55 days negligible

Expected growth

(CAGR next 3 yrs)

40% 26% 22%

Growth drivers (a) Increased penetration in northern region

(b) High growth in LT cables and domestic wires

(c) high growth in Fans and water heater over a low base

(a) High growth across segments

(b) New verticals

(a) High growth across segments

(b) New verticals

Growth strategy (a) Targeting tier II/III towns in northern region where the competition from

market leaders like BJE and havells is less

(b) Leveraging the premium quality brand in stabilizer to position new verticals

(c ) Corporate functioning to be restructured - separate BUs for better

monitoring (in lines with what Havells and Bajaj has done). They are in talks

with couple of consulting firm

( d) Brand repositioning is being done to reform it from stabilizer player to a

electrical equipment player - AD expense budgeted for FY11 is Rs. 25cr but

actual may cross Rs. 35 crore

(a) Expanding distr network in rural to tap latent demand

(b) Leveraging the versatile appliance player brand to

introduce new verticals - pressure cookers, gas appliances,

water purifier and microwave

(c ) Introduction of new products in the existing segments

(a) Expanding distr network in rural to tap latent

demand

(b) Leveraging the housing electricals player

brand to introduce new verticals related to

housing requirement - water heater and

appliances

(c ) Introdiucing Havells Galaxies to directly tap

retail consumers. Also to develop a direct retail

network by the time it launches appliances

Business Model 70% outsourcing 80% outsourcing 60% outsourcing

Verticals Stabilizer

Pumps

Cables & wires

Elect water Heater

Solar water Heater

UPS

Digital UPS

Fans

CFL & other Lighting

Fans

Appliances

Eng Projects

Dom. Switchgear

Indust. Switchgear

Cables & wires

CFL & luminaires

Fans

Dist. Network 180 distributors (around 70 in north) coupled witn 1200 direct selling agents 5000 distributors - PAN india 4500 distributors - PAN india

Brand positioning Known as Stabilizer player Versatile Lighting and Appliance player Versatile Electrical equipment player

Financial

summary outlook

(a) strong growth in topline (CAGR 40%)

(b) margins to compress owing to penetration pricing in new verticals and new

markets;though operating leverage to partially compensate the same

(c ) Working capital to stretch owing to higher credit provided to new dealers

in north and increased inventory levels. However, management targets to

rationalise inventory levels

(d) debt levels could increase owing rising WC

(e ) Strong growth in Topline and increased utilisation levels may more than

offset the adverse impact of rising WC and falling margins on capital

efficiency ratio

(a) Strong growth in topline (CAGR 26%)

(b) Margins to decline in FY11 and revert back to sustainable

11% level in FY12E

(c ) Interest cost to decline as debt has been reduced in

FY11E

(d ) stable WC - rising WC in Eng business is likely to get offset

by improving WC in consumer business

(e ) Debt levels to remain stable

(f) capital efficiency ratios to remain stable

(a) Strong growth in topline (CAGR 22%)

(b) Margins to decline in FY11 and revert back

to sustainable 12% level in FY12E(c ) stable WC

(d ) Debt levels to remain stable

(e) capital efficiency ratios to remain stable



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About the company

V-Guard is a Kochi based company in the business of electrical and electromechanical devices and is synonymous with stabilizers in which it enjoys market leadership

Was promoted in the year 1977 by Mr.Kochouseph Chittilappilly as a stabilizer manufacturing company. At present he and his family members hold 68% stake in the company

From being a pure stabilizer player, the company has diversified its product portfolio across 5 verticals and has embarked on a strategy to become a pan India player in the

ensuing years

In February 2008,company came out with a public issue of 8mn shares at Rs.82 per share raising Rs.650mn to fund its capacity expansion

Product profile

Product portfolio comprises Stabilizers, Cables & Wires, Pumps (These 3 contribute 75% of revenues); UPS, Fans and Water Heaters, with a move into “Green” products like

Solar water-pumps and opportunistic products like inverters, that could provide “uniqueness” benefits

V-guard enjoys market leadership in Stabilizers with a market share of 15% of the organized segment; In the cables segment, the company focuses on wires and LT cables; The

pumps division, markets both household and agricultural (recent product stream) pumps, and is expected to drive high-growth for V-guard in the future

In 2006, the company made a foray into the highly competitive fans industry. It has a pilot manufacturing facility at Himachal Pradesh which has capacity to produce 0.6mn fans

though only 10% of the capacity is being used at present

ProductsMarket Size in

Rs. bn Competition

Expected

CAGR Growth Rate

FY10 Revenuesin Rs. mn

FY12 Revenuesin Rs. mn CAGR FY08-10

CAGR FY010-12E

Stabilizers 10.0 Keeline, Blue Bird, Capri, Premier, 20% 1,221.6 2064.5 14% 30%

PVC 60.0 Finolex, Havells 10-15% 1,279.6 2700.0 35% 45%

LT Cables 60.0 Finolex, Havells, Polycab 10-15% 171.5 500.0 314% 71%

Pumps & Motors 40.0 Texmo, CRI, Kirloskar & Crompton-Greaves - 858.3 1450.5 23% 30%

Electric Water Heaters 8.0 Racold, Bajaj, Venus - 369.8 700.0 17% 38%

Fans 35.0 Crompton Greaves, Bajaj, Usha, Orient, Havells 20% 256.0 680.0 73% 63%

UPS 20.0 Numeric, APC, Emerson 10-15% 173.6 340.0 2% 40%

Inverters 40.0 Microtek, Sukam, Luminus 30% 87.8 340.0 - 97%

Solar Water Heater 4.0 Tata BP Solar, Racold 0.06 164.3 340.0 14% 44%


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Business strategy

At present, the company outsources 70% of its manufacturing through a network of ~100 SSIs spread across the country. The rest is manufactured in-house across 3 locations

at Coimbatore, Kashipur-Uttaranchal and Himachal Pradesh.( the company enjoys excise benefit as well 5 year tax holidays at the 2 latter locations)

Incurred a capex of Rs.520mn on putting up a new wires manufacturing facility at Kashipur-Uttaranchal ,an LT cable and facility at Coimbatore and a pilot manufacturing facility

for fans and solar water heaters at Kala amb, Himachal Pradesh

Product Location Capacity Date of Commissioning Comments

Wires Kashipur, Uttaranchal 3 lac coils per month Commissioned in FY10

Wires Chavady, Coimbatore 1 lac coils per month

LT cables Chavady, Coimbatore - Commissioned in FY10

Fans Kala Amb, Himachal Pradesh 6 lac fans p.a Commissioned in FY10 in the pilot production stage

Pumps Chavady, Coimbatore 18,000 p.a Commissioned in FY10

Solar Water Heater Kala Amb, Himachal Pradesh 1,500 per month Commissioned in FY10 in the pilot production stage

V-Guard has embarked on a strategy to become a pan India player on the lines of Bajaj Electricals/Havells.

Ramped up its distributor network by 75 (65 in North and 10 in South) in FY10 to a count of 200 dealers,1,800 distributors and retailer count at 12,000 with 1,200 comprising

direct selling agents and rest through the distributor channels

Incentives to the dealers and to the electricians. for example : an additional Rs.5 per coil is given to the electricians for pushing their products

Organizing electrician meets and plumber meets to educate them on the products

Media Planning being awarded to Publicis Ambience; focus on spreading the V-Guard brand name through advertisements in Hindi speaking channels. Last year the ad spends

amounted to Rs. 250mn overshooting the budget of Rs. 160mn.This year the company has budgeted Rs. 250mn for the same.

As a business strategy, the company will be focussing on the tier II and tier III cities for its stabilizers and cables where competition is lesser. Especially for cable wires where

there is a strong competition from Finolex and Havells in metros and NCR, the company will focus on tier II/IIII cities like Bilaspur, Ranchi, Siliguri to name a few. In metros and

tier 1 cities, the company will use penetration pricing with prices 5-10% lower than its competitors

The higher focus on north has resulted in its share in sales shooting up from 5% in FY08 to 24% in Q1FY11. Going ahead we see north contributing 25-30% of the revenues for

the next couple of years


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Topline to double in the next 2 years; net profit to follow suit

The topline has grown at a CAGR of 23% over the last 2 years. We expect the company to double its sales in the next 2 years driven by Stabilizers, wires and pumps each

growing at a CAGR range of 35-45%.We expect overall sales to grow at 41% CAGR over the next 2 years

Stabilizer and pump margins rising secularly in the last 3 years

Source: Company Presentation figure in kg

The EBITDA for FY10 stood at 10.7%.Stabilizers is the most profitable segment

wherein margins have been robust over the last 3 years increasing by 600 bps

to 20% in FY10.Pumps have been strong at 11.8% in FY10 with margins

expanding by 400 bps in the last 2 years

We expect overall blended margins to come down marginally thanks to the

most profitable stabilizers business reducing in proportion from 26% in FY10 to

23% in FY12E coupled with the pressure on pricing on account of entering the

northern markets. On the back of a high topline growth, we expect net profit to

double from Rs.250mn to Rs.515mn by FY12E

Sales to grow at a CAGR of 41% over FY10-12


Product mix expected by FY12


299.4 316.8454.1

679.4

911.5

0

200

400

600

800

1,000

FY08 FY09 FY10 FY11E FY12E

Rs. m

n

Sales

Pump, 15.9%

Cable, 29.6%

L.T.Cable, 5.5%

WH, 7.7%

Inverters, 3.7%

Fan, 7.5%

UPS, 3.7%

SWH, 3.7%

Stabilizers,

22.6%

Stabilizers,

pumps and

cables will

contribute

68% of the

topline

14%

8%9%

2%

14%

21%

4%

0% 0%

17%

10%

-1%

-18%

17% 19%

9%

-2%

0%

20%

12%

6%

-24%

15% 17%11%

4%

12%

-30%

-20%

-10%

0%

10%

20%

30%

Stabilizers Pump Cable L.T.Cable WH SWH UPS Fan Inverters

FY08 FY09 FY10


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Key concerns

Higher Working Capital requirements with credit terms being made easier to suppliers

Volatility in copper prices and pricing pressures on products

Slowdown in economy and retail purchasing intent

Likely dilution at lower prices

Working capital cycle stands at ~ 70 days. Going ahead we could see working capital days stretching thanks to higher credit given to distributors in the north

The company funds working capital through short term loans from banks comprising Dhanalakshmi Bank, HDFC Bank, Standard Chartered, Citibank. Working capital debt stood

at Rs.700mn. It enjoys a total limit of Rs.1.4bn from these banks

Debt/Equity ratio has been extremely comfortable at 0.36:1 in the last 3 years. We expect debt./equity ratio to increase to 0.7:1 by FY12E on account of a higher working Cycle

Though cash flows have been on a shaky ground over the last couple of years ,we expect the company not only to be operating cash positive but also free cash positiveby

FY12E

For FY10, ROE stood at 19% and ROCE at 15%.We would expect the return ratios to improve going ahead on the back of an increasing asset turnover. We expect ROE to

increase to 26% and ROCE to 18% by FY12E

Dividend at Rs.3 per share for FY10 translating into a dividend yield of 1.5%

Strong Balance Sheet ; Return ratios to improve going ahead

Its peers Bajaj Electricals and Havells enjoy valuations of 16-17x FY12E earnings. V-guard scores lower on working capital cycle, positive operating cash-flows and superior

return ratios. V-guard, however, compares favourably in likely improvements to revenue-growth, product portfolio and We therefore think V-Guard should trade at valuation

multiples that are at a 20% discount to Bajaj Electricals and Havells

Attaching a PE multiple of 13x to its FY12E EPS, we arrive at a Target Price of Rs.230 leaving an upside 16% from the current levels. However, we like the story better from a

2-3 year perspective and would recommend a BUY with a three star rating implying strong business fundamentals. We would urge investors to buy the stock on any correction

and believe ~ Rs.160-170 to be an excellent level to buy the stock.

Urge investors to enter the stock at Rs.160-170 levels


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P & L (Rs. mn) FY09 FY10 FY11E FY12E

Total Revenue 3167.8 4540.9 6793.9 9115.0

EBITDA 314.5 503.9 764.0 966.6

Other Income 36.4 14.2 3.6 5.8

EBIT 310.5 310.5 446.6 677.6

PBT 524.3 263.2 395.1 574.5

PAT 173.9 254.7 390.7 502.7

Cashflows (Rs.mn) FY09 FY10 FY11E FY12E

Operating 267.1 -186.9 -114.0 130.5

Financing -230.2 396.9 245.2 50.7

Investing -374.98 -183.84 -100.00 -100.00

Free-cash -107.9 -370.7 -214.0 30.5

Balance Sheet (Rs. Mn) FY09 FY10 FY11E FY12E

Networth 1,264.5 1,414.8 1,718.5 2,134.2

Total debt 263.0 805.1 1,255.1 1,555.1

Gross fixed assets 901.1 1,379.0 1,479.0 1,579.0

Net fixed assets (incl. CWIP) 712.8 1,123.0 1,133.0 1,136.6

Net working capital 487.0 1,079.5 1,840.8 2,538.1

Investments 113.6 45.8 45.8 45.8

Cash & Cash equivalents 40.9 74.1 105.3 186.4

Inventories 358.6 985.3 991.2 1,339.5

Debtors 487.5 756.0 1,209.9 1,623.2

Ratios/Valuation FY09 FY10 FY11E FY12E

Sales growth (%) 5.8 43.3 49.6 34.2

EBITDA growth (%) -1.1 60.2 51.6 26.5

EBITDA Margin (%) 9.9 11.1 11.2 10.6

EBIT Margin (%) 9.3 9.8 10.0 9.6

Tax rate (%) 33.9 35.5 32.0 31.0

PAT margin (%) -53.8 46.5 53.4 28.7

Dividend/share 2.6 3.0 3.0 3.0

Total Debt/Equity (%) 0.21 0.57 0.73 0.73

Return on Equity (%) 14.2 19.0 24.9 26.1

CMP (Rs.) 196

EPS (Rs.) 6.0 8.8 13.5 17.3

P/E (x) 31.2 21.3 14.5 11.3

EV/EBITDA (x) 16.2 12.0 9.0 7.4

Financial Summary

V-Guard Industries

Additional Pointers• The company has taken a 36 acre property on lease atPerunthurai,Erode district on a 99 year lease to enhance its solarwater pumps facility. We think V-guard may choose to go in for anequity fund-raise of Rs.400mn for the same.

• Is in the process of undertaking a business restructuring exercise toform separate business units for the product segments that will getindependent focus on growth strategies. Also has plans to offerchannel financing to its dealers in the future


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Analyst Certification

The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subject

companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific

recommendation(s) or view(s) in this report.

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Rating Interpretation

Strong Fundamentals and attractive price: BUY

Metrics appeal, pick on correction: ADD

Cause for worry, gradual exit advised: REDUCE

Weak Fundamentals, price unattractive: SELL

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