Recommendation from Electric Equipment

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

V-GUARD INDUSTRIES: DIVERSIFICATION IS THE KEY TO GROWTH

HERE IS WHY
✓Wide product portfolio
✓Rising demand for consumer durables
✓Financially sound

As the per capita income of the Indian households is likely to increase, the probability of a rise in disposable income is stronger. And one part of the domestic disposable income will be spent on consumer durables. Hence, a company known for its electronics products can take advantage of this emerging scenario. V-Guard was founded in 1977 and is into manufacturing electronics, electrical and consumer durables products. The company was earlier mainly known for its voltage stabilisers but now has a diversified product portfolio. Recently the company added one more segment by acquiring 100 per cent stake in Sunflame Enterprises, a well-known kitchen appliances brand, for ₹660 crore. 

The transaction was financed through a mix of debt and internal accruals. The electronics segment of the company comprises stabilisers, digital UPS systems and solar inverters. The sales in this segment are dependent on the power situation of the country and the quality of the power supply. And in this segment, there is a close linkage between demand for stabilisers and demand for air conditioners, refrigerators and television sets. The company is a market leader in this segment. Its revenue in this segment in the latest quarter has grown at a rate of 9 per cent YoY while the profitability was down by 15 per cent in the same period.

This segment reported revenue and profit of ₹227.36 crore and ₹33.26 crore, respectively, for Q2FY23. The electrical segment is the largest contributor to revenue which consists of wiring cable, pumps, switchgears and modular switches. These products are dependent on the construction of houses and buildings. This segment has huge potential of growth as the economy has opened up post the pandemic and infrastructure activities are now in a booming phase. The revenue of this segment has grown at a rate of 1 per cent YoY in Q2FY23 and profitability in this segment was down 46 per cent in the same period

The consumer durables segment consists of fans, air coolers and kitchen appliances. The company has both solar and electric water heaters. The company has now planned to launch fans with new models following the new energy guidelines and BEE norms. The new fans will be focused on the premium segment with 5-7 per cent higher price. The revenue of this segment has grown at a rate of 21 per cent YoY and 13 per cent QoQ while the profitability was up by 15 per cent YoY and 154 per cent QoQ for Q2FY23. As of Q2FY23, the consolidated revenue of the company stood at ₹981 crore, which is 8.61 per cent higher YoY, whereas on QoQ basis the revenue declined by 3 per cent.

The decline was mainly due to higher input cost and higher cost of an inventory of wires. The sector has healthy growth prospects and low penetration. With the inflationary pressures and commodities prices cooling off, the margin of the company will improve. The stock is trading at a PE of 46.6 times and has manageable debt. The company is growing its manufacturing capacity to cater to and penetrate the non-south region. It now has a diversified product portfolio and this will be further scaled for a stronger presence in the southern and nonsouthern region. The company has a ROCE of 21.8 per cent and ROE of 17.4 per cent. Given the strong growth revival in the sector and falling commodity prices, we recommend BUY.