Consumer durables co V-guard promises value in coming years

Beta 0.35

Institutional holding 4.42%

Dividend Yield 3.72%

P/E 11.56

M-Cap Rs 200.40 cr

CMP Rs 67.15

V-guard is a Kerala-based consumer durables company that manufacturers and markets a range of electronic and electrical products. Founded in 1977, the company started as a voltage stabiliser manufacturer and has since then diversified into new segments in the consumer durables category.

Business:

The company has maintained its dominance in the electric voltage stabiliser market while expanding its offerings in segments such as wiring cables, power and control cables, water pumps and motors, electric and solar water heaters, electric fans and uninterruptible power supply (UPS) systems for PCs and homes. V-guard follows a unique production module where it focuses on production of two of its products — electric cables and solar water heaters — and passes on the rest to anumber of small-scale industries (SSI) for manufacture. Scattered all over the country, these SSIs are actively assisted by the company in terms of R&D and production technology.

While the company has a prominent presence in the south with nearly 93% of its sales in 2008-09 from the region, it is expanding its operations in the north: the contribution of sales from the region has increased to 7% of the total sales in the last two years. V-guard’s marketing and distribution network consists of 161 distributors and 146 service centres while its products are available in nearly 8,000 retail showrooms. V-guard has also entered the business of amusement parks with Viga land, an amusement park located near Cochin.

Growth Drivers:

A growing economy will see higher capital expenditure in infrastructure, power and irrigation sectors, which will directly benefit electric cable, stabiliser and pump industries. Since V-guard is a dominant player in these markets, a big chunk of the demand is expected to go to the company.

A sustained dominance in the south Indian market has encouraged V-guard to strengthen its presence in the north: while the region accounts for only 7% of the total sales, the company plans to increase it to 12% of the topline in the next two years. The company also expects to benefit from the solar water heater market which is expanding fast. It serves both the domestic and commercial segments with a range of 23 models of solar heaters.

Financials:

In last four financial years, net sales as well as net profit have increased at a compounded annual growth rate (CAGR) of about 23% and operating profit has expanded at a CAGR of 18% during the period. For the period FY05-FY 08, the company’s cash profits grew at a compounded rate of 79%. As on March 31, 2009, the company has a total debt of nearly Rs 26 crore and its total debt-toequity ratio is 0.21. While the cash balance has declined from Rs 38.56 crore in 2007-08 to Rs 4 crore at the end of 2008-09 , the decline has been in line with the increase in fixed assets.

Valuations:

Due to a lower Beta, against a fall of 50% in the m-cap of Sensex, V-guard lost about 38% of its m-cap in 2008. At the current market price, the P/E is closer to its value at the start of the stock’s listing in the secondary market and higher than its average of 7 for the period. The share can be bought on dips as the wide product portfolio of the company and its consistent growth model makes it a rewarding buy in the consumer durables segment.