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V-Guard - Initiating Coverage

V-Guard - Initiating Coverage

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V-Guard - Initiating Coverage
V-Guard - Initiating Coverage

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Published by: Paramasivan Vinayakam on Jan 14, 2013
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07/15/2014

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52 Week High/Low INR 457/141Bloomberg code VGRD INReuters code VGUA BOIssued Equity(shares in mn)29.85Mkt. Cap in mnMkt. Cap in
b
n USDINR 11,700$
0.2
Avg. Daily Vol. (‘000)
249.99Avg. Daily Vol. (mn) INR 96.9/$ 1.7
Shareholding
Jun11 Mar12 Jun12
Promoters(%) 67.34 67.38 66.04FII (%) 5.92 7.42 9.68DII (%) 2.81 2.22 2.50Others (%) 23.93 22.98 21.78Pledge (% of promoterholding)- - -
Performance
%
 
1M 3M 12M
V-Guard -19.9 38.0 104.4Sensex 1.3 4.7 11.2
Vinayakamp +91-44-30007360vinayakamp@chola.murugappa.com
Play on the consumer theme
Growing consumer spend to aid VGIL
VGIL has a wide product profile catering to the mass consumption market in the household electricalappliances segment. With growing per capita income, higher disposable income, nuclearisation of families & increasing aspirational levels, demand for these products is expected to remain strong. According to NCAER, the number of high income households rose from 13.8 million households in2001-02 to 46.7 million households in 2009-10. Going ahead, the numbers of middle incomehouseholds are expected to increase by 70% to 238 million by 2015. Moreover, VGIL is likely to gainon increasing urbanization and change in consumer preference. The robust rise of middle incomehouseholds, growing disposable income, strong demand, expansion into new geographies byincreasing outlets and new product lines will drive revenues for VGIL in the next two years.
 Outlook & Valuation 
VGIL, at CMP of INR 392, trades at 19.37X and 15.63X to its FY13 & FY14 earnings respectively. TheEPS of the company has been growing at a CAGR of about 21.39%.Given the growing consumer demand, entry into new products, successful diversification into newer segments, increasing marketshare, increasing outlets, and strong distribution network provide earnings visibility for the stock. Weexpect V-Guard to report an EPS of INR 20.24 in FY13E and INR 25.08 in FY14E. At the CMP of INR392, the stock trades at 19.37X EPS of FY13E and 15.63X EPS of FY14E. We Initiate coverage of V-Guard with an
OUTPERFORMER
rating
 
and price target of INR 426 based on a target PE multiple of 17x its FY14E EPS (PEG-0.79).
Key Risks
to our recommendation include steep increase in rawmaterial cost and slow down in the Indian economy which will lower consumption demand.
 Valuation Summary
Y/E March ( INRmn) FY11 FY12 FY13E FY14ERevenue
7,266 9,936 11,461 13,517
EBIDTA
730 935 1,081 1,311
PAT
426.36 508 604.02 748.44
EPS
14.28 17.02 20.24 25.08
EPS growth (%)
67.46 19.15 18.90 23.91
FCF / Share
NA 25.88 23.92 37.83
PE
27.44 23.03 19.37 15.63
P/ BV
6.80 5.55 4.55 3.68
EV / EBIDTA
17.84 13.93 12.05 9.94
EV / Sales
2.9 1.3 1.1 1.0
Dividend Yield (%)
0.89 0.89 1.02 1.02
ROCE (%)
25% 27% 29% 29%
ROE (%)
25% 24% 23% 24%
Net Debt / Equity
0.79 0.32 0.30 0.02
Sensex Nifty18,832 5,704
3 October 2012
 
V-Guard(VGIL)
Sector: Midcap
October 3, 2012
Initiating Coverage
 
Background
: V-Guard Industries (VGIL) was started in 1977 by Shri.Kochouseph Chittilappily to manufacture and market Voltage Stabilizers under the brand nameV-Guard. VGIL emerged as a leading player in the stabilizer segment and became a household brand. V-Guard began to aggressively diversify from 1992 andbecame a multi product company with presence in Stabilizers, Pumps, Cables, UPS, Water Heaters, Fans, Switch Gear and Induction Cooker. VGIL manufactures aswell as outsources in all these products with share of manufacturing and outsourced at 59% and 41% respectively in FY12. VGIL has a strong distribution network with230 exclusive distributors, 1,200 channel partners and 11,000 dealers across India.
 
Price: INR 392 Target Price: INR 426OUTPERFORMER
 
 
Growth driven by new product launches:
V-Guard
 
started its business as a single product company namelystabilizers and has expanded its product portfolio to Cables, Stabilizers, Water Pumps, Solar Water Heaters,Geysers, Digital UPS for computers, Inverters for households and Fans.
 
The company has introduced two newproducts
 –
domestic switch gear and induction cooker in the market. Both these are in the pilot phase. Launch of induction cooker 
marks VGIL’s entry in the kitchen appliances segment. A pilot project has been carried out in central
Kerala prior to launching the switchgear which includes Earth Leakage Circuit Breakers (ELCBs) before making anentry in domestic switchgear market. Looking at the positive response in central Kerala, VGIL plans to launch theproduct in North and South Kerala in the coming six months before entering the North Indian market. The companyalso plans to tap the market through the same kind of channel and using same marketing team. The share of revenues from outsourced goods in FY12 was at INR 5902.42mn vs INR 4371.54mn an increase of about 35.01%.The overall share of manufactured goods and traded goods in FY12 stood at 59% and 41% respectively.The company has launched induction cookers recently and it turned out to be a very successful pilot launch. It plansto launch this product in South India. VGIL is in talks with vendors to manufacture induction cookers in India. Thecompany is targeting a turnover of INR 1000mn from the kitchen appliances segment in the next four years by addinga few other products such as Mixers, Grinders in this segment.
Capacity expansion:
VGIL has planned a capex of INR 250mn for fiscal 2013. VGIL is investing about INR 150mntowards doubling of expansion of its house wiring and cable factory at Kashipur plant in Uttaranchal. This plant isrunning at near full capacity producing 0.27mn coils a month. The company has plans to double this capacity to0.55mn coils per month to take advantage of excise duty and the incentives which will accrue till 2018. Further, asecond solar water heater manufacturing plant is also coming up at Perundurai near Erode; for which INR 30mn willbe spent out of capex. And the remaining capex is likely to be spent on incremental expansion, manufacturingfacilities, extension of existing factories etc.
Strong distribution network:
VGIL has about 230 distributors of whom 100 are in South India, 1200 ChannelPartners (large retailers with many outlets) and plans to add more distributors in the markets, apart from South India.VGIL expects each distributor to generate minimum of INR 50mn per year on an average, which will generaterevenues of INR 15bn per annum. VGIL has recently opened an office in Guwahati apart from plans to adddistributors in the Northeast, West Bengal, and Chhattisgarh. VGIL intends to focus to improve the penetration levelsof its products in the Eastern market in fiscal 2013.
 
 
Increasing market share:
V-Guard Industries, over the past few years, has successfully gained market share in allof its product categories. In Stabilizers, it had a market share of about 12% which has now improved to 16% over three years. And in the wires industry, with size of roughly about INR 65bn the company used to be a very smallplayer about three years back having about 1% market share which has now improved significantly to 4%. In thegeyser segment, VGIL has increased its market share to 10% from 3.5%. The company holds number three positionin India in solar water heater segment, enjoying roughly 10% market share. In the single phase domestic water pumpsegment with a market size estimated at about INR 20bn,
VGIL’s market share has improved to 7% from 5% three
years back.
Diversified Product Growth:
 
The success of VGIL lies in its diverse product portfolio which is directly related to
the rise in disposable income of the middle class consumer in India. VGIL’s major chunk of revenue
s in FY12 wasgenerated through cables and stabilizer contributing 30% and 20% respectively. Both the products grew by 36% and20% YoY. Further, LT Cables, Digital UPS and Fans individually registered growth of 39%, 236% and 20%respectively in FY12. During FY12 other products such as Pumps, Water Heaters and Solar Water Heater reportedexpansion in its sales by 25%, 44% and 21% respectively.
Expanding Pan India to de-risk business:
 
VGIL’s
sales are currently predominantly from the southern region led byits strong brand name as well as its distribution network. It had been primarily focusing on these markets and hasbuilt a wide product portfolio. Moreover, over the past few years it has widened its distribution network to pan-India.The company ventured into Maharashtra, Haryana, Madhya Pradesh, Orissa, Himachal Pradesh, Chhattisgarh, Uttar Pradesh and Gujarat in FY10, with an objective to focus on pan-India presence. Going ahead the company wants toexpand its presence in Bihar and the north-eastern states. This strategy, although margin dilutive in the initial yearswould enable VGIL to become a formidable player in all its product categories in a few years from now.
Growing distribution network aid growth
:
Currently, VGIL’s products are sold through 230 exclusive distrib
utors,1200 Channel Partners and 11,000 dealers with 52% of sales concentrated in four southern Indian states of AndhraPradesh, Karnataka, Kerala and Tamil Nadu. Its network is also spread across all states in India except North Eastand Jammu & Kashmir. The company has a diversified client base which differs from product to product and includes
Cable, 28%Stabilizers, 20%Pumps, 15%WaterHeater, 9%Digital UPS, 7%Fan, 6%UPS, 6%LT Cable, 4%Solar WaterHeater, 3%Others, 2%
% of Revenues
 

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