V-Guard Industries

Corporate Factsheet
Promoter Background

RATING
Fundamental View

MID@S

Promoted by Mr. Kochouseph Chittilappilly in the year 1977. His son Mr. Mithun Chittilappilly has taken charge of the business and is an Executive Direct\or on the board of the company 3 facilities Coimbatore, Kashipur, Uttaranchal and Rishikesh, Himachal Pradesh Guided by Mr. Kochouseph Chittilappilly, V-Guard has a strong and experienced second line of management . Senior team comprises seasoned professionals heading different functions.

Current Market Price

Rs. 196 Rs. 160-170 >35% 4th October,2010

Recommended entry price

Target IRR Date

Presence Management depth

Market Data
Market Cap (Rs.mn) Shareholding 5680 Promoters: 68% Institutions/Others: 32%

Business Corporate Structure

Manufactures and markets stabilizers, pumps, cables, water heaters, UPS under the flagship brand name V-Guard Single Company

Key Shareholders
52-week High-Low (Rs.) All time High-Low (Rs.) 3M Average Volume

Franklin Templeton MF- 4%

212.9 71.3

Revenue Model
Capacity Key Clientele Key Vendors Key Success Factors Capital History

On per product basis

All are retail products ~100 SSIs based across the country

Qty:51,454 3M 6M 1Y YTD

Stock Return (%) Household name for stabilizers in South. Issued 8mn fresh shares tor Rs.10 each o the public through IPO in Feb,2008.The issue proceeds were utilized to expand wires capacity in Kashipur and a fresh LT cable facility in Coimbatore

29.4
Correction from 52WH Rise from 52WL 11% 228% -

75.9

146.5

110.7

Credit Rating Corporate Bankers IPO Bankers Auditors SBI, Dhanalakshmi Bank, Standard Chartered, HDFC Bank Limited Anand Rathi Financial Services Limited Deloitte Haskins and Sells B.Natesan 044 43440006,natesan@sparkcapital.in

F&O Index Stock exchange list

BSE,NSE
1

Private & Confidential

V-Guard Industries (Contd)

RATING
Investment Thesis

MID@S

V-Guard could be the next Bajaj Electricals (CMP : 328; Target Price : 348; Rating : OPF ) and Havells (CMP : 418 ;Target Price : 481; Rating : OPF ) * CMP is closing price as on 12th October 2010 Promoted by Mr. Kochouseph Chittilappilly and with the distinction of being a top class stabilizer brand over the last ~ 33 years A la Bajaj Electricals and Havells V-Guard derives growth from retail demand for electrical products and appliances. We estimate Revenue CAGR of 41% for V-guard in FY1012E driven by industry growth, newer products and greater geo spread In our view, V-Guard has started evolving from being a South-focused stabilizer firm to being a national-level, multi product company; Non-South markets to contribute ~ 25% in FY12E versus ~ 5% in FY08 and stabilizer revenues to be 23% of total in FY12E versus 32% in FY08 We estimate healthy improvements in RoE, Scale and Spread (in markets and products). Renewed management enthusiasm with a hunger to grow business With ~ 68% held by promoters, we see promoters have enough vested interest to grow the business. The Promoters son Mr. Mithun Chittilappilly joining the business has resulted in a renewed enthusiasm and business focus to make V-Guard a pan India name in the consumer discretionary space . culminating in a strategy to expand its product basket (addition of cables, fans, water heaters) and increase its presence in the North through expansion of dealership network coupled with higher media publicity We like the renewed management hunger which will result in business witnessing a 35-40% CAGR growth over the next 2-3 years

Valuation discount of more than 20% (to Bajaj Electricals and Havells) might not be justified On a expected PAT of Rs.391mn (1st quarter PAT of Rs.110mn) and Rs.506mn for FY11E and FY12E,the stock, at CMP of Rs.196 trades at 14.5x and 11.3x its FY11E and FY12E EPS. We expect V-Guard to grow bottom line at a CAGR of 41% over FY10-12E and a PEG of 0.27 on FY12E appears quite attractive as an entry point Change in sales-mix to lower-margin businesses (Cables) operating margins can come down by 100 bps though the higher operating leverage (doubling of sales) over the next two years will partially offset the same. However, dampened results in 2Q and 3Q FY11E might provide good entry valuations on the stock We expect debt equity ratio to be comfortable at <1 in FY12E. Driven by higher asset turnover, we expect ROCE and ROE (aided by lower tax rate) of 18% and 26% in FY12E Its peers Bajaj Electricals and Havells enjoy valuations of 16-17x FY12E earnings. V-guard scores lower on working capital cycle, positive operating cash-flows and superior return ratios. V-guard, however, compares favourably in likely improvements to revenue-growth, product portfolio and We therefore think V-Guard should trade at valuation multiples that are at a 20% discount to Bajaj Electricals and Havells Attaching a PE multiple of 13x to its FY12E EPS, we arrive at a Target Price of Rs.230 leaving an upside 16% from the current levels. However, we like the story better from a 23 year perspective and would recommend a BUY with a three star rating implying strong business fundamentals. We would urge investors to buy the stock on any correction and believe ~ Rs.160-170 to be an excellent level to buy the stock B.Natesan 044 43440006,natesan@sparkcapital.in Private & Confidential

V-Guard Industries (Contd)

Particulars Sales (Rs. mn) EBITDA % ROE (FY10) Net WC Expected growth (CAGR next 3 yrs) Growth drivers V-Guard 4,541.0 11% 19% 70 days 40%

RATING
Bajaj Electricals 22,286.3 11% 33% 55 days 26% Havells (St. alone) 24,871.6 13% 39% negligible 22%

MID@S

(a) Increased penetration in northern region (b) High growth in LT cables and domestic wires (c) high growth in Fans and water heater over a low base (a) Targeting tier II/III towns in northern region where the competition from market leaders like BJE and havells is less (b) Leveraging the premium quality brand in stabilizer to position new verticals (c ) Corporate functioning to be restructured - separate BUs for better monitoring (in lines with what Havells and Bajaj has done). They are in talks with couple of consulting firm ( d) Brand repositioning is being done to reform it from stabilizer player to a electrical equipment player - AD expense budgeted for FY11 is Rs. 25cr but actual may cross Rs. 35 crore 70% outsourcing Stabilizer Pumps Cables & wires Elect water Heater Solar water Heater UPS Digital UPS Fans 180 distributors (around 70 in north) coupled witn 1200 direct selling agents Known as Stabilizer player (a) strong growth in topline (CAGR 40%) (b) margins to compress owing to penetration pricing in new verticals and new markets;though operating leverage to partially compensate the same (c ) Working capital to stretch owing to higher credit provided to new dealers in north and increased inventory levels. However, management targets to rationalise inventory levels (d) debt levels could increase owing rising WC (e ) Strong growth in Topline and increased utilisation levels may more than offset the adverse impact of rising WC and falling margins on capital efficiency ratio

(a) High growth across segments (b) New verticals

(a) High growth across segments (b) New verticals

Growth strategy

(a) Expanding distr network in rural to tap latent demand (b) Leveraging the versatile appliance player brand to introduce new verticals - pressure cookers, gas appliances, water purifier and microwave (c ) Introduction of new products in the existing segments

(a) Expanding distr network in rural to tap latent demand (b) Leveraging the housing electricals player brand to introduce new verticals related to housing requirement - water heater and appliances (c ) Introdiucing Havells Galaxies to directly tap retail consumers. Also to develop a direct retail network by the time it launches appliances 60% outsourcing Dom. Switchgear Indust. Switchgear Cables & wires CFL & luminaires Fans

Business Model Verticals

80% outsourcing CFL & other Lighting Fans Appliances Eng Projects

Dist. Network Brand positioning Financial summary outlook

5000 distributors - PAN india Versatile Lighting and Appliance player (a) Strong growth in topline (CAGR 26%) (b) Margins to decline in FY11 and revert back to sustainable 11% level in FY12E (c ) Interest cost to decline as debt has been reduced in FY11E (d ) stable WC - rising WC in Eng business is likely to get offset by improving WC in consumer business (e ) Debt levels to remain stable (f) capital efficiency ratios to remain stable

4500 distributors - PAN india Versatile Electrical equipment player (a) Strong growth in topline (CAGR 22%) (b) Margins to decline in FY11 and revert back to sustainable 12% level in FY12E(c ) stable WC (d ) Debt levels to remain stable (e) capital efficiency ratios to remain stable

Private & Confidential

V-Guard Industries (Contd)

RATING

MID@S

About the company V-Guard is a Kochi based company in the business of electrical and electromechanical devices and is synonymous with stabilizers in which it enjoys market leadership Was promoted in the year 1977 by Mr.Kochouseph Chittilappilly as a stabilizer manufacturing company. At present he and his family members hold 68% stake in the company From being a pure stabilizer player, the company has diversified its product portfolio across 5 verticals and has embarked on a strategy to become a pan India player in the ensuing years In February 2008,company came out with a public issue of 8mn shares at Rs.82 per share raising Rs.650mn to fund its capacity expansion Product profile Product portfolio comprises Stabilizers, Cables & Wires, Pumps (These 3 contribute 75% of revenues); UPS, Fans and Water Heaters, with a move into Green products like Solar water-pumps and opportunistic products like inverters, that could provide uniqueness benefits V-guard enjoys market leadership in Stabilizers with a market share of 15% of the organized segment; In the cables segment, the company focuses on wires and LT cables; The pumps division, markets both household and agricultural (recent product stream) pumps, and is expected to drive high-growth for V-guard in the future In 2006, the company made a foray into the highly competitive fans industry. It has a pilot manufacturing facility at Himachal Pradesh which has capacity to produce 0.6mn fans though only 10% of the capacity is being used at present Expected CAGR Growth FY10 Revenues FY12 Revenues CAGR FY010Rate in Rs. mn in Rs. mn CAGR FY08-10 12E 20% 10-15% 10-15% 20% 10-15% 30% 0.06 1,221.6 1,279.6 171.5 858.3 369.8 256.0 173.6 87.8 164.3 2064.5 2700.0 500.0 1450.5 700.0 680.0 340.0 340.0 340.0 14% 35% 314% 23% 17% 73% 2% 14% 30% 45% 71% 30% 38% 63% 40% 97% 44%

Products Stabilizers PVC LT Cables Pumps & Motors Electric Water Heaters Fans UPS Inverters Solar Water Heater

Market Size in Rs. bn Competition

10.0 60.0 60.0 40.0 8.0 35.0 20.0 40.0 4.0 Keeline, Blue Bird, Capri, Premier, Finolex, Havells Finolex, Havells, Polycab Texmo, CRI, Kirloskar & Crompton-Greaves Racold, Bajaj, Venus Crompton Greaves, Bajaj, Usha, Orient, Havells Numeric, APC, Emerson Microtek, Sukam, Luminus Tata BP Solar, Racold

Private & Confidential

V-Guard Industries (Contd)

Business strategy

RATING

MID@S

At present, the company outsources 70% of its manufacturing through a network of ~100 SSIs spread across the country. The rest is manufactured in-house across 3 locations at Coimbatore, Kashipur-Uttaranchal and Himachal Pradesh.( the company enjoys excise benefit as well 5 year tax holidays at the 2 latter locations) Incurred a capex of Rs.520mn on putting up a new wires manufacturing facility at Kashipur-Uttaranchal ,an LT cable and facility at Coimbatore and a pilot manufacturing facility for fans and solar water heaters at Kala amb, Himachal Pradesh Product Location Capacity Date of Commissioning Comments

Wires
Wires LT cables Fans Pumps Solar Water Heater

Kashipur, Uttaranchal
Chavady, Coimbatore Chavady, Coimbatore Kala Amb, Himachal Pradesh Chavady, Coimbatore Kala Amb, Himachal Pradesh

3 lac coils per month

1 lac coils per month 6 lac fans p.a 18,000 p.a 1,500 per month

Commissioned in FY10

Commissioned in FY10 Commissioned in FY10 Commissioned in FY10 Commissioned in FY10 in the pilot production stage in the pilot production stage

V-Guard has embarked on a strategy to become a pan India player on the lines of Bajaj Electricals/Havells.
Ramped up its distributor network by 75 (65 in North and 10 in South) in FY10 to a count of 200 dealers,1,800 distributors and retailer count at 12,000 with 1,200 comprising direct selling agents and rest through the distributor channels Incentives to the dealers and to the electricians. for example : an additional Rs.5 per coil is given to the electricians for pushing their products Organizing electrician meets and plumber meets to educate them on the products Media Planning being awarded to Publicis Ambience; focus on spreading the V-Guard brand name through advertisements in Hindi speaking channels. Last year the ad spends amounted to Rs. 250mn overshooting the budget of Rs. 160mn.This year the company has budgeted Rs. 250mn for the same. As a business strategy, the company will be focussing on the tier II and tier III cities for its stabilizers and cables where competition is lesser. Especially for cable wires where there is a strong competition from Finolex and Havells in metros and NCR, the company will focus on tier II/IIII cities like Bilaspur, Ranchi, Siliguri to name a few. In metros and tier 1 cities, the company will use penetration pricing with prices 5-10% lower than its competitors The higher focus on north has resulted in its share in sales shooting up from 5% in FY08 to 24% in Q1FY11. Going ahead we see north contributing 25-30% of the revenues for the next couple of years

Private & Confidential

V-Guard Industries (Contd)

RATING

MID@S

Topline to double in the next 2 years; net profit to follow suit

The topline has grown at a CAGR of 23% over the last 2 years. We expect the company to double its sales in the next 2 years driven by Stabilizers, wires and pumps each growing at a CAGR range of 35-45%.We expect overall sales to grow at 41% CAGR over the next 2 years Sales to grow at a CAGR of 41% over FY10-12
1,000 800

Product mix expected by FY12

Inverters, 3.7% Fan, 7.5% UPS, 3.7% SWH, 3.7% Stabilizers, 22.6%

Rs. mn

600 400 200 0 FY08 FY09 FY10 Sales FY11E FY12E 454.1 299.4 316.8 911.5 679.4

WH, 7.7% L.T.Cable, 5.5%

Pump, 15.9%

Stabilizers, pumps and cables will contribute 68% of the topline

Cable, 29.6%

Source: Company Presentation figure in kg

Source: Company Presentation figure in kg

The EBITDA for FY10 stood at 10.7%.Stabilizers is the most profitable segment wherein margins have been robust over the last 3 years increasing by 600 bps to 20% in FY10.Pumps have been strong at 11.8% in FY10 with margins expanding by 400 bps in the last 2 years We expect overall blended margins to come down marginally thanks to the most profitable stabilizers business reducing in proportion from 26% in FY10 to 23% in FY12E coupled with the pressure on pricing on account of entering the northern markets. On the back of a high topline growth, we expect net profit to double from Rs.250mn to Rs.515mn by FY12E

Stabilizer and pump margins rising secularly in the last 3 years

30% 20% 10% 0% -1% -10% -20% -30% Stabilizers Pump Cable -18% -24% L.T.Cable
FY08

20% 17% 14%

12% 10% 8% 9% 6% 2%

21% 17% 19% 17% 14% 15% 4%

11% 9% 0%

12% 4% 0% 0%

-2%

WH
FY09

SWH
FY10

UPS

Fan

Inverters

Source: Company Presentation figure in kg

Private & Confidential

V-Guard Industries (Contd)

RATING

MID@S

Strong Balance Sheet ; Return ratios to improve going ahead

Working capital cycle stands at ~ 70 days. Going ahead we could see working capital days stretching thanks to higher credit given to distributors in the north The company funds working capital through short term loans from banks comprising Dhanalakshmi Bank, HDFC Bank, Standard Chartered, Citibank. Working capital debt stood at Rs.700mn. It enjoys a total limit of Rs.1.4bn from these banks Debt/Equity ratio has been extremely comfortable at 0.36:1 in the last 3 years. We expect debt./equity ratio to increase to 0.7:1 by FY12E on account of a higher working Cycle Though cash flows have been on a shaky ground over the last couple of years ,we expect the company not only to be operating cash positive but also free cash positiveby FY12E

For FY10, ROE stood at 19% and ROCE at 15%.We would expect the return ratios to improve going ahead on the back of an increasing asset turnover. We expect ROE to increase to 26% and ROCE to 18% by FY12E
Dividend at Rs.3 per share for FY10 translating into a dividend yield of 1.5%

Urge investors to enter the stock at Rs.160-170 levels

Its peers Bajaj Electricals and Havells enjoy valuations of 16-17x FY12E earnings. V-guard scores lower on working capital cycle, positive operating cash-flows and superior return ratios. V-guard, however, compares favourably in likely improvements to revenue-growth, product portfolio and We therefore think V-Guard should trade at valuation

multiples that are at a 20% discount to Bajaj Electricals and Havells

Attaching a PE multiple of 13x to its FY12E EPS, we arrive at a Target Price of Rs.230 leaving an upside 16% from the current levels. However, we like the story better from a 2-3 year perspective and would recommend a BUY with a three star rating implying strong business fundamentals. We would urge investors to buy the stock on any correction and believe ~ Rs.160-170 to be an excellent level to buy the stock.

Key concerns Higher Working Capital requirements with credit terms being made easier to suppliers Volatility in copper prices and pricing pressures on products Slowdown in economy and retail purchasing intent

Likely dilution at lower prices

Private & Confidential

V-Guard Industries

RATING
Financial Summary

MID@S

P & L (Rs. mn) Total Revenue EBITDA Other Income EBIT PBT PAT Cashflows (Rs.mn) Operating Financing Investing Free-cash Balance Sheet (Rs. Mn) Networth Total debt Gross fixed assets Net fixed assets (incl. CWIP) Net working capital Investments Cash & Cash equivalents Inventories Debtors

FY09 3167.8 314.5 36.4 310.5 524.3 173.9 FY09 267.1 -230.2 -374.98 -107.9 FY09 1,264.5 263.0 901.1 712.8 487.0 113.6 40.9 358.6 487.5

FY10 4540.9 503.9 14.2 310.5 263.2 254.7 FY10 -186.9 396.9 -183.84 -370.7 FY10 1,414.8 805.1 1,379.0 1,123.0 1,079.5 45.8 74.1 985.3 756.0

FY11E 6793.9 764.0 3.6 446.6 395.1 390.7 FY11E -114.0 245.2 -100.00 -214.0 FY11E 1,718.5 1,255.1 1,479.0 1,133.0 1,840.8 45.8 105.3 991.2 1,209.9

FY12E 9115.0 966.6 5.8 677.6 574.5 502.7 FY12E 130.5 50.7 -100.00 30.5

Ratios/Valuation Sales growth (%) EBITDA growth (%) EBITDA Margin (%) EBIT Margin (%) Tax rate (%) PAT margin (%) Dividend/share

FY09 5.8 -1.1 9.9 9.3 33.9 -53.8 2.6

FY10 43.3 60.2 11.1 9.8 35.5 46.5 3.0

FY11E 49.6 51.6 11.2 10.0 32.0 53.4 3.0

FY12E 34.2 26.5 10.6 9.6 31.0 28.7 3.0

Total Debt/Equity (%)

Return on Equity (%) CMP (Rs.) EPS (Rs.)

0.21
14.2

0.57
19.0 196

0.73
24.9

0.73
26.1

6.0 31.2 16.2

8.8 21.3 12.0

13.5 14.5 9.0

17.3 11.3 7.4

FY12E 2,134.2 1,555.1 1,579.0 1,136.6 2,538.1 45.8 186.4 1,339.5 1,623.2

P/E (x) EV/EBITDA (x)

Additional Pointers The company has taken a 36 acre property on lease at Perunthurai,Erode district on a 99 year lease to enhance its solar water pumps facility. We think V-guard may choose to go in for an equity fund-raise of Rs.400mn for the same.
Is in the process of undertaking a business restructuring exercise to form separate business units for the product segments that will get independent focus on growth strategies. Also has plans to offer channel financing to its dealers in the future
Private & Confidential
8

B.Natesan 044 43440006,natesan@sparkcapital.in

RATING

MID@S

Description Mid Cap Ideas from Spark (Mid@s) is a quick-take research product from the sales desk at Spark Capital. Sector-agnostic and bottom-up in nature, output from Mid@s spells out the investment thesis in a concise format. Clearly differentiated from regular research in its approach and style of elucidation, Mid@s seeks to pitch interesting listed market possibilities, predominantly in the mid- and small-cap segments. In terms of stocks under coverage, Mid@s does not overlap with regular research output, which is more sector-driven and stays committed to routine q-o-q analysis. Unlike regular research output, Mid@s focuses more on speed and breadth of releases, without wanting to compromise on the quality of analysis.

Rating Interpretation
Strong Fundamentals and attractive price: BUY Metrics appeal, pick on correction: ADD Cause for worry, gradual exit advised: REDUCE Weak Fundamentals, price unattractive: SELL

Typically, Mid@s targets returns of 20% + on its calls and pitches stories that have a 12 month time-horizon for a play-out.
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