V-Guard Industries: Sharekhan Research Report

Sharekhan is bullish on V-Guard Industries and has recommended buy rating on the stock on the following investment rationale:

V-Guard Industries is transforming into a multi-product company with pan-India presence: V-Guard Industries, a well-established brand in electrical and household goods, is a play on the growing consumer spending on discretionary items. To ride the consumption boom and leverage on its strong brand name, V-Guard Industries has invested in strengthening its product portfolio and distribution reach. V-Guard Industries is transforming itself from a mere maker of stabilisers (and other electrical goods) in south India into a multi-product consumer goods company having pan-India presence with focus on tier-II and tier-III cities.

Expansion in place, outsourcing model to supplement it: V-Guard Industries has completed capacity expansion in cables, water heaters, fans and pumps, as envisaged, using the proceeds from its initial public offering (IPO). However, in the water heater, fan and pump categories, V-Guard Industries would manufacture only 10% of the total requirement; the balance would be outsourced. V-Guard Industries has tie-ups with various small-scale industries (SSIs)/self-help group units spread across the southern states to manufacture products as per its needs. This blend policy helps V-Guard Industries in lean manufacturing and optimises its capital expenditure (capex) and working capital requirements.

Strong growth trajectory: V-Guard Industries has witnessed a compounded annual growth rate (CAGR) of 27.3% in its revenues over FY2005-10 and is expected to grow at a much faster rate of 37.6% CAGR over the next four years. V-Guard Industries‘ growth will be driven by a multifold rise in the sales from regions other than south India, an exponential growth in newer products like power cables and uninterruptible power supply (UPS) systems, and the domestic consumption boom. We expect V-Guard Industries’ net revenues and earnings to more than double over FY2010-12.

Attractive valuations: At the current market price, V-Guard Industries‘ stock is trading at 8.9x FY2012 earnings estimate. In its brief listing span since February 2008, V-Guard Industries has traded at an average multiple of 8x its one-year forward earnings per share (EPS). However, we feel that V-Guard Industries is poised for a re-rating due to the strong earnings growth trajectory expected in the next four years. Moreover, V-Guard Industries‘ stock is currently trading at a 30-40% discount to the valuations enjoyed by its peers like Bajaj Electricals and Havells India. We initiate coverage on V-Guard Industries with a Buy recommendation and a price target of Rs228 at 12.5x FY2012 EPS (that is a 20% discount to its peers’ current valuations on consensus FY2012 earnings estimate).