Stock Reivew: V-GUARD INDS

V-Guard's stock looks attractive after the recent correction due to a weak broader market. The company provides an investment opportunity to tap the growing comsumption story in Tier II and Tier III Indian cities.

BUSINESS

Kerala-based V-Guard is engaged in the manufacture of consumer durables for more than three decades. After initially doing business in products such as pumps, voltage stabilisers and wires , the company is diversifying into water heaters, electric fans and inverters. Traditional products contribute two-thirds of the company's revenues while the remaining comes from newer products, which are growing at a fast pace.

After reaching saturation in the South with traditional products, VGuard is introducing new products and also trying to expand geographically. It is also aggressively marketing its products in the non-southern market. For this, the company has increased its ad spend in the last few quarters and has kept an ad budget of 35 crore for this fiscal.

Recent quarterly results show that V-Guard's strategy may be working. In the June quarter, the non-southern region recorded a growth of 54% and accounted for 25% of the company's revenues.

FINANCIALS

In last five years, V-Guard's net sales have grown at a CAGR of 34%, while adjusted net profit has grown at 37.8%. For FY11, net sales were 726.3 crore and net profit was 42.6 crore. The company has set a growth target of 35% in the current fiscal with an operating margin of 9% versus 11% last year. In the June quarter, its operating margin was 9.7%. With metals and plastics prices coming down, the 9% operating margin target looks achievable.

The company's debt was 140 crore as on March 31, 2011, and its debt to equity ratio is 0.8. It will incur a capex of around 18 crore for setting up godowns and adding capacity, mainly for solar water heaters which is only 2% of total sales and for which there is good demand. However, high growth would not be a function of capacity addition as V-Guard outsources more than 85% of its manufacturing.

VALUATION

At the price of 198, V-Guard is trading at a P/E of 14 and at a FY12E P/E of 11.2, based on company guidance. This appears attractive when compared to its peers which are trading at a multiple of more than 15.