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VGuard Ind

VIEWS: 2 PAGES: 5

									                                                                                                                 Recommendation: Buy
                                                                                                                 CMP: Rs. 186
                                                                                                                 Target Price: Rs. 238
                                                                                                                 Date: 24th May 2011




                                    CATEGORY: POTENTIAL GREATS
                                    V-GUARD INDUSTRIES LIMITED                                                    Analyst: Ankit Gor
                                                                                                                  Email: ankitgor@vertexbroking.com
                                    Surefooted Steps In Pursuit Of Scale – Local To Regional To National…..

                                    FINANCIAL SNAP SHOT                                                                                 (Rs. in Crs.)
                                         Y/E      Net    YoY             EBIDTA               YoY       EPS     ROE     ROCE      P/E      EV/EBITDA
                                                                EBIDTA              PAT
V-GUARD INDUSTRIES LIMITED (VGIL)




                                         Mar     Sales   (%)               (%)                (%)      (Rs.)    (%)      (%)      (X)         (X)
                                         FY09   316.8     14     35.1      11.1      17.3     125      5.8      13.7     22.3     32.0         16.4
                                         FY10   454.1     43     51.8      11.4      25.5      47      8.5      18.0     22.7     21.8         12.1
                                         FY11   726.3     60     78.4      10.8      42.6      67      14.3     24.8     24.7     13.0         8.7
                                        FY12E   980.6     35     114.9     11.7      58.8      38      18.4     28.4     30.1     10.1         6.5
                                        FY13E   1323.8    35     144.5     10.9      74.4      26      23.3     29.6     32.8      8.0         5.3
                                    BACKGROUND
                                    V-Guard Industries Limited is a household name for consumer durables in the southern part of the country. A
                                    Kerala based company, involved in manufacturing and marketing of electrical and electronic products, it was
                                    incorporated in February 1996. Through an Initial Public offer (IPO) the Company issued 80 lakh equity shares of
                                    Rs. 10 each at the price of Rs.82 per share in the February 2008.

                                    The Company has a diversified product portfolio - across the Electronics, Electrical/Electro Mechanical and other
                                    Consumer Durable products segments, as delineated in the chart below:




                                    .   Product wise Revenue Breakup For FY10




                                    Four product lines contributed
                                    to over 80% of the sales in
                                    FY2010.
Business Model
The Company follows a business model which brings in efficiency, ensures high margins and offers scope of
expansion and customization. It has entered into long term contracts with several SSI units across the country,
through which it outsources ~60% of its product range. The rest is manufactured in house across three locations
at Coimbatore (Tamil Nadu), Kashipur (Uttaranchal) and Kala Amb (Himachal Pradesh). Currently, it enjoys excise
benefits and 5 year tax holidays at the Kashipur and Kala Amb facilities.
Growing Whilst Maintaining Healthy Margins
The Company has been able to sustain an operating margin of 11% whilst implementing its growth plans in the
last five years:

 Particulars (Rs. In Crs.)                  FY07           FY08           FY09          FY10          FY11
 Sales Growth                               31%            25%            14%           43%           60%
 EPS (Rs.)                                   6              3              6             9             14
 CEPS (Rs.)                                  9              6              8             13            21
 Operating Profit (EBIDTA) Margin           12%            11%            11%           11%           11%
 Net Profit Margin                          6%             3%             6%            6%            6%
 EV/EBIDTA (x)                               16             18             17            13            9

Industry Overview – Growth Here To Stay
Demand for most of V-GUARD’s products is driven by consumer spending and is concentrated around the use of
electricity. Over the last four years, the top players in the domestic electrical consumer goods industry have
demonstrated a revenue growth of 16-20%, driven by rising income levels, increasing urbanization, and greater
rural electrification in the country. Further, with standards of living improving and consumer focus shifting to
saving energy, the demand for quality products has witnessed strong growth. The trend is expected to continue,
with the main beneficiaries being companies with established brands and product attributes that stand out in an
increasingly chaotic market, high quality standards that withstand competition from unorganized-sector players
and wide distribution networks, which enable them to extend their reach. In this context, V-Guard is favourably
placed to capitalize on the sector‘s growth potential. However, it has to face serious competition from well
established players in the industry. The table below provides the comparison of the Company’s profile with two
of the large competitors in the field:
Competitive Snapshot (FY10)

 Particulars (Rs. In Crs.)        V-Guard Industries              Havells India            Bajaj Electricals
 Sales (Rs. in Cr.)                       454.1                      2471.2                    2226.0
 Operating Profit Margin (%)               11.4                        12.9                      10.8
 Net Profit Margin (%)                      5.6                        9.2                        5.2
 ROE (%)                                   42.0                        20.1                      23.7
 ROCE (%)                                  22.7                        23.0                      37.6
 Book Value (Rs. in Cr.)                   47.4                      188.5                       49.7
                               Stabilizers, USP, Digital   Domestic and Industrial     CFL & Lighting, Home
                               UPS, PVC cables & wires,    switchgear, CFL, Cables &   appliances, Fans and
 Verticals                     Pumps, Electronic water     wires, Geysers and          Engineering projects.
                               heaters, Solar water        Capacitors.
                               heaters and Fans.
                               Household name for          Extensive distribution      Brand name and ability
 Critical Success Factor       Stabilizers and wide        channel and direct retail   to explore new product
                               product portfolio.          network.                    lines and new ventures.
STOCK DATA                                        Quest For Scale: National Footprint On The Cards
 BSE Code                          532953

 NSE Code                         VGUARD          The Company has an upper hand in the Southern part of country when it
                                                  comes to brand salience in the electronic consumer goods. It is now
 Bloomberg Code                   VGRD IN
                                                  rolling out the next logical step, by entering the other regions of the
 Market Cap (Cr.)                 Rs. 555.16
                                                  country. Presently, its focus is on the N.C.R., Punjab, U.P., Rajasthan and
 O/S Shares                       Rs 29.85        Maharashtra. It already has a sizable presence in Punjab and U.P. and is
                                  Rs.215.50       presently operating at break-even levels in these two states.
 52-week H/L
                                  /Rs.91.70
 Avg. Weekly Volume                24,328         To meet the demand of the northern part of the country and to have
                                                  smooth supply chain, the Company has installed a manufacturing facility
 Face Value                         Rs. 10
                                                  for Electronic Water Heater & Fans at Kala Amb at Himachal Pradesh in
                                                  2009.
SHAREHOLDING PATTERN (%)
                                                  Capital Expenditure (Capex) and Diversification
 Promoters                         67.35
                                                  Except for a new Solar Water Heater plant near Coimbatore, the
 Institutional                      7.54          Company is not considering any other expansion at the present moment.
 Corporate Bodies                   3.58          Overall, it has a Capex budget of around Rs. 20 cr. for the current fiscal
                                                  year. We have observed that company is able to generate enough of cash
 Public                            21.53
                                                  for expansion through internal accruals, which is very important in this
                                                  rising cost of capital scenario.
PRICE PERFORMANCE                                 The Company plans to diversify into the home appliances segment, but
                    1M      6M         1 YR       only after the expansion into new markets (outside south) stabilizes and
 VGIL            -3.7%     7.9%       89.6%       turns remunerative.
 Sensex          -8.1%     2.0%        9.3%       Financials
                                                  The Company’s financials are on a strong footing. Sales, EBIDTA and PAT
1YEAR INDEX STOCK PERFORMANCE
                                                  have grown at a CAGR of 27%, 24% and 28% respectively, between FY07
                                                  & FY11 and are expected to grow at a CAGR of ~22%,~23% and ~20%
                                                  respectively, between FY11 & FY13E. The Company has successfully
                                                  maintained its EBIDTA & PAT margins at ~11% & ~6% (FY07-FY11)
                                                  respectively and we expect them to remain at the same level in FY12E &
                                                  FY13E. The Company has also effectively maintained its Debt Equity ratio
                                                  below 1 and we expect this strategy to be retained going forward.




        Recommendation
        The Current Market Price of Rs.186 discounts the FY2012E EPS of Rs.18.4 by a factor of 10x and the FY2013E EPS
        of Rs.23.3 by a factor of 8x. Keeping the P/E constant at 13x for a one year forward earnings, we get the target
        price of Rs. 238, vis-à-vis the projected earnings for FY12E. This indicates an upside of Rs. 52 (~28%) with a one
        year perspective. We recommend a buy on the stock, with a one year horizon.

        Concerns
                    The Company’s earnings are vulnerable to raw material price volatility.
                    Competition from the unorganized players having regional presence along with large organized players
                    like Havells, Crompton Greaves, Bajaj Electricals etc.
FINANCIAL STATEMENTS                                                                                                                                         (Rs. in Crs)

Income Statement                                                                              Balance Sheet
 Particulars                FY09           FY10            FY11           FY12E      FY13E     Particulars                           FY-09      FY-10        FY-11    FY-12E   FY-13E

 Sales                      316.8          454.1           726.3          980.6      1323.8    Share Capital                         29.8           29.8      29.8     29.8     29.8
 Other Income                 3.6           1.4             2.8            2.2        2.2      Reserves & Surplus                    96.6       111.6        142.1    175.2     219.1
 Total Income               320.4          455.5           729.1          982.8      1326.0    Share warrants                         0.0           0.0       0.0       0.0      0.0

 EBIDTA                     35.1           51.8            78.4           114.9      144.5     Net Worth                             126.5      141.5        172.0    205.0     249.0
 Interest                     4.7           5.1            11.3           15.9        21.0     Total Debt                            26.3           80.5     139.8    167.8     182.8
 Depreciation                 4.0           7.1             8.0            8.5        9.0      Deferred Tax Liability (Net)           4.4           5.7       6.1       6.5      6.5

 PBT                        26.3           39.5            59.1           90.5       114.5     Total Liabilities                     157.1      227.7        317.9    379.3     438.3
 Tax                          8.9          14.0            16.5           31.7        40.1     Gross Block                           90.1       137.9        139.1    159.1     174.1
 PAT                        17.3           25.5            42.6           58.8        74.4     Less: Depreciation                    18.8           25.6      23.3     31.8     40.8

                                                                                               Net Block                             71.3       112.3        115.8    127.3     133.3
Cash Flow
                                                                                               Capital Work-in-Progress              25.8           2.9       0.0       3.3      3.3
 Particulars                        FY-09          FY-10          FY-11     FY-12E   FY-13E
                                                                                               Investments                           11.4           4.6       0.0       0.0      0.0
 Net Profit before Tax              26.3           39.5           59.1       90.5     114.5
                                                                                               Net Current Assets                    48.7       108.0        202.1    248.7     301.7
 Depreciation                        4.0            7.1            8.0       8.5       9.0
                                                                                               Miscellaneous exp                      0.0           0.0       0.0       0.0      0.0
 Others                              2.7            5.2           11.8       15.4      21.5
                                                                                               Total Assets                          157.1      227.7        317.9    379.3     438.3
 Operating Profit before WC
                                    33.0           51.9           78.9      114.4     145.0
 Changes
                                                                                              Valuations
 Chance in Working Capital           0.4           -55.9          -60.0     -47.7     -47.1
 Cash Flow Before Direct                                                                       Particulars                    FY-09          FY-10         FY-11     FY-12E    FY-13E
                                    33.4           -4.0           19.0       66.7      97.9
 Tax
                                                                                               Per Share Data
 Cash generated from
                                    24.5           -18.1           2.5       35.1      57.8
 operations                                                                                    EPS (Rs) (Basic)                5.8            8.5          14.3       19.7      24.9
 Cash Flow From Investing Activities                                                           EPS (Rs) (Diluted)              5.8            8.5          14.3       19.7      24.9

 Purchase of Fixed Assets           -41.8          -25.4           -1.2     -20.0     -15.0    CEPS (Rs)                       8.1           12.7          20.9       27.7      35.2
 Net Cash used in Investing                                                                    Book Value (Rs)                42.4           47.4          57.6       68.7      83.4
                                    -35.9          -17.2          30.7      -19.0     -14.0
 Activities
                                                                                               Profitability Ratios
 Cash flow from Financial Activities
                                                                                               Operating Margin           11.1%              11.4%         10.8%     11.7%     10.9%
 Equity Raised                       0.0            0.0            0.0       0.0       0.0
 Proceed from Borrowing                                                                        Net profit Margin              5.5%           5.6%          5.9%      6.0%      5.6%
                                    -9.6           54.2            -5.0      26.0      10.0
 (Net)                                                                                         ROCE                       22.3%              22.7%         24.7%     30.3%     33.0%
 Finance Cost                       -4.7           -5.1           -11.3     -15.9     -21.0
                                                                                               RONW                       13.7%              18.0%         24.8%     28.7%     29.9%
 Others                             -8.7           -10.4          -17.5     -24.1     -30.5
                                                                                               Valuation Matrix
 Net Cash flow from
                                    -23.1          38.6           -33.8     -14.0     -41.5
 Financial Activities                                                                          Market Cap                     555.2          555.2         555.2     555.2     555.2
 Net Increase / (Decrease)
                                    -34.5           3.3            -0.6      2.0       2.4     Enterprise Value               577.3          628.3         687.9     713.8     726.5
 in cash & Cash Equivalents
 Cash & Bank Balances                                                                          PER (x) Basic                  32.0           21.8          13.0       9.4       7.5
                                    38.8            4.4            7.7       7.1       9.1
 (Opening)
                                                                                               PER (x) Diluted                32.0           21.8          13.0       9.4       7.5
 Cash & Bank Balances
                                     4.4            7.7            7.1       9.1       11.5
 (Closing)                                                                                     P/BV                            4.4            3.9           3.2       2.7       2.2
                                                                                               EV/EBIDTA (x)                  16.5           12.1           8.8       6.2       5.0

                                                                                               EV/Sales (x)                    1.8            1.4           0.9       0.7       0.5
                                                                                               Mcap/Sales (x)                  1.8            1.2           0.8       0.6       0.4
                                                                                               Leverage Ratios
                                                                                               Debt/Equity                     0.2            0.6           0.8       0.8       0.7
                                                                                               Interest coverage               0.2            0.1           0.2       0.1       0.2
                                                   DISCLAIMER

This Document has been prepared by Vertex Securities Limited (A subsidiary of Transwarranty Finance Limited
Ltd). The information, analysis and estimates contained herein are based on Vertex Securities Research
assessment and have been obtained from sources believed to be reliable. This document is meant for the use of
the intended recipient only. This document, at best, represents Vertex Securities Research opinion and is meant
for general information only. Vertex Securities Research, its directors, officers or employees shall not in any way
be responsible for the contents stated herein. Vertex Securities Research expressly disclaims any and all liabilities
that may arise from information, errors or omissions in this connection. This document is not to be considered as
an offer to sell or a solicitation to buy any securities. Vertex Securities Research, its affiliates and their employees
may from time to time hold positions in securities referred to herein. Vertex Securities Research or its affiliates
may from time to time solicit from or perform investment banking or other services for any company mentioned
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