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Market outlook and stock tip:V-Guard Industries Ltd
Saturday, February 4, 2012
Scripscan:V-Guard Industries Ltd
Story:Another India consumption story which is set to get re-rated very soon.Check out the 5 points which would vindicate my stand:-
1)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.The company provides an investment opportunity to tap the growing comsumption story in Tier II and Tier III Indian cities.
2)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 Rs 35 crore for this fiscal. Recent quarterly results show that V-Guard's strategy may be working.
3)Given that consumer durables segment is growing 20% pa, the industry’s prospects seem bright.Customs duty cuts and the government’s thrust on agriculture, irrigation and rural electrification augur well for growth in its segment.Likely pickup in construction and housing industry is likely to benefit the cables business.VGuard gets significant tax breaks — solar water heaters are exempt from excise duty, while its cables plant in Uttaranchal enjoys excise duty exemption for 10 years and I-T exemption for five years.All these provides a "moat" to the company which gives a lot of comfort from the investment perspective.
4)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 Rs 726.3 crore and net profit was Rs 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.With metals and plastics prices coming down, the 9% operating margin target looks achievable.The company's debt was Rs 140 crore as on March 31, 2011, and its debt to equity ratio is 0.8. It will incur a capex of around Rs 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.
5)The FII'S have taken a great fancy to the stock off late with their stake being increased to nearly 7% in december 2011 from a mere 2% in 2010 december.The stock is currently trading at a price earnings multiple of 8 its fy13 earnings.Which is quite attractive if we compare it with its closest peers like Havells India which is trading at over 18 times expected fy13 earnings and Bajaj Electricals is trading around 15 times fy13 earnings. Considering its diversified product portfolio and the company’s penetration in northern markets with the virtues of its outsourcing model,I have valued V-Guard 13 odd times its FY13E EPS of 24.A strong buy altogether.
Todays update:In just a matter of 5 months, the company has hit a high of 329rs recently(superior to the target price of 325rs),which is up by over 65% from its recommended level of 193rs and looks good for even more.Enjoy the ride members.
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