V-Guard Industries (VGRD) reported strong Q3FY18 results, with revenue growing by 23% adjusted for the GST while earnings grew by 41% to Rs 358 mn, largely in line with estimates. The strong performance was driven by good volume growth amidst better pricing environment. We have adjusted for the 9MFY18 numbers and factor revenue CAGR of 17% over FY18-20E. We also built in Ebitda margin improvement from 10% in FY18 to 11.8% in FY20. The company has significant optionality to achieve the same through new product launches, increase in Non-South Revenue share, gain in traction following the new upcoming brand identity, inorganic growth opportunities and supportive demand for organised players post GST. Maintain Add with a revised target price of Rs 249 (Rs 208 earlier) based on 35x FY20 earnings. FCF yield at TP is ~2% for FY20E. Broad-based growth in Q3, demand recovery seen in Q4FY18: The underlying GST adjusted revenue growth was 2.5% for stabilisers, 40% for wires and cables (23% volume growth), 13% for water heaters and 43% for fans. The wires and cables segment is expected to clock 15% volume growth in Q4FY18. The management is very optimistic about Q4FY18, which is typically a strong demand season and should see further demand recovery.
Margin improvement has further room to grow: The gross margins of the company improved by 60bps y-o-y adjusted for GST deflation. Ebitda margin also improved 125bps y-o-y. This has been enabled by the ability to pass commodity prices (especially in wires and cables), certain pricing power and new products in inverters, switches, kitchen appliances. We believe that the new product launches have significantly helped the company in stemming any margin loss from higher commodity prices. Additional 4-5% fixed cost absorption is possible through better revenue growth in Non-South market. Though the Non-South revenue share has remained at 35% for quite some time, the management remains confident of being able to ramp-up the same over the next 18 months. The new brand identity which will get rolled out in Q4FY18 will help the cause.
Continues to possess high optionality on growth: VGRD wants to organically grow the Non-South revenue share from ~35% to 50% within near future. However, inorganic acquisition remains an option. The management is hopeful that post GST, some smaller unorganised players can offer such an opportunity. Towards this end, the board has passed a resolution of raising funds of up to Rs 5 bn.We like the progress that VGRD has shown in the new product category in kitchen appliances and switches. While, it is expected to clock `1 bn of sales from kitchen appliances in FY19, brownfield expansion can provide further growth in Switch segment.