V-Guard Industries

Investors with a medium-to-long term horizon can buy the stock of V-Guard Industries (V-Guard) due to the high potential of the consumer durables business and the discounted valuation of the stock. At Rs 84, the stock trades at 12 times its trailing one-year earnings. Comparable peers in both cables and consumer durables trade at 13-20 times.
From manufacturing voltage stabilisers, V-Guard has diversified into agricultural pumps, water heaters, UPS, fans, domestic wiring cables and low-tension (LT) power cables. Increasing presence in the semi-urban and rural markets has helped it record a robust 24 per cent five-year compounded annual sales growth. With rising copper prices, the company is considering price hikes to maintain margins.
Last April, the company commenced commercial production at two new power cable facilities, one of which is in Uttaranchal. It plans to expand capacity by setting up a factory in the South, land for which has already been acquired.
Strong revenue growth
For the nine months ended December 2009, the company reported a 35 per cent growth in sales, buttressed by a 41 per cent growth in the electro-mechanical division (PVC insulated and low-tension power cables, water heaters and fans) .
About 30 per cent of the company's revenues (domestic wires: LT power cables- 5:1) are from the cables division. V-Guard now concentrates only on the retail segment (domestic wiring for individual houses and small and mid-sized projects) for its power cable sales; hence, there is no need to worry about the slow pick-up in capex activities in the core infra sectors.
The company's commissioning of the cable factory in Kashipur, Uttaranchal, is expected to give it a presence in the northern market. This factory makes building wire cables (two lakh coils per month at optimum capacity). V-Guard has also begun work in the newly set up LT cable factory at Coimbatore last year. The company had by December-end spent close to Rs 40 crore on these two projects (a total of Rs 44.78 crore was the estimated outlay on these projects at the time of the initial public offer).
V-Guard brand fans and water heaters are well recognised in the consumer markets of the South. The company's stabiliser sales come mainly from the semi-urban regions where the demand for voltage stabilisers is still high due to frequent power outage and voltage fluctuations. Though there is a risk of the new-age electronic items with in-built stabilisers slowly eating into the market, the company's focus on the Tier-II and Tier-III cities and diversified product lines will help sustain sales growth over the long term. The company has a network of 170 distributors and over 200 service centres pan-India.
An eye on margins
Copper is the main raw material . Sharp price corrections in copper in 2008 impacted the company's operating profit margins and in the December '08 quarter, the company's OPM dipped to a low of 5 per cent (on inventory devaluation and fall in realisation). However, the company booked all copper-related inventory losses in that quarter and has been seeing margins improving ever since.
For the nine-months ended December '09, operating margins stood at 12 per cent, up from the 9 per cent reported in the same period last year. From its lows of $2810/tonne on the London Metal Exchange in December '08, copper's price has risen to $7367/tonne now, a 162 per cent rally (still 17 per cent below its July '08 peak). Prices look likely to remain firm on tight supply conditions and rising Chinese imports.
The company's margins are susceptible to sharp price shifts in copper. Over the short term, however, margins may be held around the prevailing levels or may rise, with the company considering price hikes following similar moves by the competitors.
Financials
Net profits (before considering taxes and exceptional items) fell 16 per cent in FY-09 over the previous year. This was mainly on copper prices peaking in the mid-year and bottoming out in December. Sharp price shifts over a short period saw margins crumble as realisations could not match up with costs. However, for the nine months ending December '09, the company's net profit grew close to 70 per cent at Rs 19.38 crore on a sales growth of 35 per cent. The debt-to-equity ratio stands at a low 0.2, giving the company leeway to leverage for expansion plans.
via BL