V Guard Industries Ltd. – To Invest or Not to Invest?

In this blog, we will look at V Guard Industries Ltd and understand the business model and the future prospect to help investors take the right decision of whether to invest or not to invest.

Company Overview

V Guard Industries Ltd was founded by Mr. Kochouseph Chittilappilly in 1977 with a capital of Rs.100,000 borrowed from his father and two workers who assisted him.

V Guard Industries Ltd. is an established player in the electrical and electronics industry, with strong market position in south India. It is a reputed Indian company manufacturing innovative and experiential products in the categories of Electronics, Electricals and Consumer
Durables.

It has grown from being a brand synonymous with voltage stabilizers across South India, to a brand offering a wide array of thoughtfully engineered products to consumers across the length and breadth of the country. Underpinned by its continuous quest to enrich consumer lives and power a stronger tomorrow.

The company works on an asset-light manufacturing model for most of its products except cables, water heaters and solar water heaters, 50% of the overall requirements are currently outsourced. The company has four manufacturing facilities located at Tamil Nadu, Uttarakhand, Himachal Pradesh and Sikkim.

Products:

The company has a diversified product portfolio across three segments:

• Electronics – Stabilizers and Digital UPS & Batteries.
• Electricals – House Wiring cables, Modular Switches, Switchgears and Pumps.
• Consumer Durables – Solar & Electric water heaters, Fans, Air coolers and kitchen appliances

Subsidiaries:

The Company has only one subsidiary named Guts Electro-Mech Limited as of Mar’21.

Share Holding & Revenue Breakup:

Key Rationale:

1. Leading position in the voltage stabilizer segment :

V-Guard is the market leader in the voltage stabilizer segment with 45% share, and has increased its market share in most product categories, including water heaters, fans, cables, and pumps recently. Most of the business segments are highly fragmented and intensely competitive.

Hence, while revenue has been improving, it is difficult to significantly increase the market share in these product segments, especially fans, polyvinyl chloride (PVC) insulated cables, and motor pumps. The strong brand equity will help strengthen the market position in the electrical and consumer durables segments over the medium term.

V Guard has also incorporated a wholly owned subsidiary (V-Guard Consumer Products Limited) during the current fiscal to undertake manufacturing of some products in the consumer electricals segment. The manufacturing for these products is currently outsourced.

2. Strong brand equity:

The V-Guard brand has a strong recall among customers, given its 40-year-old vintage in South India. Besides, the company is also gradually improving its footprint in the non-South markets as revenues from this region has more than doubled in the last 6 years ending fiscal 2021.

Complementing its strong brand equity, VGIL has created an extensive distribution network across multiple channels with more than 40,000 retail touch points majorly in the non-south region The company focuses on after-sales service and has a separate team for this segment in the southern markets.

3. Robust Q2FY22

The company recorded highest ever quarterly revenue of Rs.907 crs growing by 46% YOY on the back of strong recovery in the consumption scenario with gradual opening up. The growth was partly contributed by value growth of 20% due to rising costs and balance 26% was volume growth.

Demand recovery boosted by gradual opening up and vaccination also aided the company’s revenue growth. Both South and Non south market witnessed strong growth. The South and East market which contributes the most to the company’s revenues also seemed to be recovering.

The Non-South markets contributed to 39.4% of total revenue in Q2FY22, up from 38.8% in Q2FY21.

4. Financial Performance

The company has a strong balance sheet with virtually zero debt and a cash and equivalents of Rs.243 crs as of H1FY22. It is on track on their capex plan of Rs.70-80 crs per year for the next two to three years to increase their in-house manufacturing percentage to 60% levels.

The contribution from in-house manufacturing has improved to 50% this quarter from 45% in the previous quarter. CFO in H1FY22 was at Rs.28.2 crs on account of higher working capital, as debtor levels back to normal and higher inventory was maintained to address the recent supply chain issues.

5. Growth Drivers:

The Government of India has allowed 100% Foreign Direct Investment (FDI) under the automatic route in Electronics Systems Design and Manufacturing sector. FDI into single brand retail has been increased from 51% to 100%, the government is planning to hike FDI limit in multi-brand retail to 51%.

In September 2021, FICCI Electronics Manufacturing Committee Chairperson Mr. Manish Sharma said that 52 companies have applied for availing PLIs for white goods makers, proposing an investment of Rs.6,000 crs (US$ 813 million) in manufacturing components for air conditioners (ACs) and LED lights.

The Indian government has been encouraging to consumer durable brands in India to ‘Make in India’ thereby expecting they should be self-reliant for the future, consumer too is showing an affinity towards homegrown products.

Outlook

From a single product company in 1990s (stabilizers), V-Guard has quickly grown into a leading pan-India FMEG player with more than 15% sales growth over the past decade. It has a broad product portfolio in the electricals and consumer durables segment. Stabilizers, wires, fans, kitchen appliances and digital UPS have been the key growth drivers while water heaters have struggled due to supply disruptions.

The management expects a very good fourth quarter for the AC stabilizer business which witnessed a difficult time during their peak period over the last two years. V-Guard’s distribution network is spread over 40,000 channel partners. It plans to add 3,000-5,000 retailers every year for the next five years, with greater addition in the non-south region.

VGIL has now capitalized their subsidiary, V-Guard Consumer Products that will focus on expanding the in-house manufacturing set-up, thereby reducing reliance on imports and create higher efficiencies. The company will continue to take pricing actions in the coming quarters to offset cost inflation and improve their margins

We expect the company to grow strongly across segments on the back of demand recovery, launch of multiple products with constant investment in developing newer products across existing and new product categories to stay at the forefront of the ever-growing consumer market.

Hope you liked our report on “V Guard Industries Ltd”, please read our other report on “Top 10 High Dividend Yield Stocks“