V-Guard Industries’ revenue increased 14.2% to `4.95 billion (our estimate: `5.2 billion) in 2QFY17 from `4.33 billion in the year-ago period, led by strong growth in Stabilizers (+15%), UPS (+13%), Pumps (+20%), Water Heaters (+25%), Fans (+18%) and new product categories (Kitchen Appliances and Switchgears +40%). However, Cables and Wires — the largest segment — grew marginally by 3% y-o-y due to lower realisations (+3%). Non-south markets grew 16% y-o-y, while south markets rose 13.4%. Onam season offered some support with festive demand-related categories doing well.
Gross margin improved 400bp YoY to 32.7%. EBITDA grew 46% y-o-y to `533 million (our estimate: `509 million) in 2QFY17, with margins expanding 240bp y-o-y to 10.8% (our estimate: 9.8%). Management highlighted that improvement in gross margin was led by lower input costs (200bp) and supply chain initiatives (200bp) undertaken last year. Management believes that margins have scope to improve, but will largely be maintained at around 11% due to reinvestments in A&P and people. Non-south region profitability further improved, and management intends to further increase its thrust on advertising and brand building in this market to boost its share.
Due to rich valuations, we maintain our neutral rating with a target price of `215 (30x FY18E EPS).