Thursday, August 9, 2012

>V‐Guard Industries: Stable copper prices help margin expansion

Robust growth in top‐ and bottom‐line: V‐Guard’s top‐line grew by 36% YoY to Rs. 3,272mn in Q1FY13 due to strong growth in stabilizers, pumps, water heaters and digital UPS. The company has increased EBITDA by 51% YoY to Rs. 343mn and expanded the margin by 99 bps to 10.5% due to higher pricing in PVC wires and stabilizers and lower advertising expenses. Net income increased by 67% YoY to Rs. 207mn.

Summer and power cuts help top‐line growth: Sales of stabilizers grew by 38% YoY to Rs. 803mn due to extended summer and delay monsoon across India as the demand for air conditioners has increased. Top‐line of UPS and digital UPS grew by 34% and 151% due to power availability & supply issues, further worsened by extended summer in Q1. Sales of other products such as PVC cables, pumps and electric water heaters grew by 26%, 36% and 37% due to higher dealer mining and inherent demand of the products.

Stable copper prices help margin expansion: V‐Guard has increased EBITDA margins in PVC wires and stabilizers by 510bps and 400bps respectively. Margin expansion in PVC wires is mainly due to stabilized copper prices as against sudden decrease in copper prices in H1FY12, which forced the company to reduce its prices. Better pricing and higher turnover and reduced A&P expenses have increased margins stabilizers. However, margins of UPS and Digital UPS decreased due to imported components and the company was not able to pass on the price hikes to end customers. Margin of solar water heaters declined as the company follows cash accounting for subsidies portion on solar water heaters.

Outlook & Valuation: We believe that the company will register 30% and 26% revenue growth in FY13E and FY14E respectively. We expect the net income to grow by 48% and 34% in FY13E and FY14E respectively. At CMP of Rs. 402, the stock trades at 15.9x of FY13E and 11.9x of FY14E earnings. We maintain our “BUY” recommendation and revised our target price to Rs. 473, which has a potential upside of 18%. We have increased our FY14E target multiple to 14x due to expected sales and net income CAGRs of 28% and 39% during FY12‐14E.