Key takeaway: VGRD’s Q3FY22 sales (+16% year-on-year) were driven by Appliances (+28%) and Electricals (+19%). While festive momentum was positive, Covid impacted offtake thereafter, especially in East. Sharp cost escalation dragged gross margin (-200 bps year-on-year). Basis Q3 margin miss, we cut FY23-25e eps by ~5%. VGRD took notable price hikes (9MFY22 average +12%) and foresee further hikes in coming months as well. Higher inventory days could normalise by end-May, post summer. Retain ‘buy’ with a target price at Rs 280.
Healthy topline: VGRD’s Q3FY22 revenue growth (+16% year-on-year) was driven by traction in Durables and Kitchen Appliances (+28%) and Electricals (+19%), whereas Electronics posted a minor decline (-4%). While demand momentum was positive in festive season, the third Covid wave impacted offtake thereafter across key markets, especially East India. Sharp escalation in input costs impacted gross margin (-200 bps year-on-year). While VGRD resorted to price hikes to offset a major portion of cost inflation, manaGEment foresees further pricing action to follow in coming months.
Rising costs; inventory: Ebitda margin declined by ~490 bps year-on-year to 8.8%. Apart from higher RM costs, operating costs rose year-on-year as well. Ad-spend is now at 1.8% of sales (0.9% year-on-year). Factory-related costs rose with commencement of manufacturing in Roorkee and Sikkim. Other expenses such as travel and freight escalated, as branch operations normalised. In Q3 VGRD maintained higher inventory days to overcome possible supply disruptions. However, management foresees inventory days to normalise by end-May, post key summer season.
Business update: Q3 witnessed unseasonal rainfall as well as slowdown in select rural markets. However, in Q4, summer trends could influence margins, as a stronger summer could pave way for further price hikes. VGRD management expects Fans gross margin to normalise to 25-26% by Q1FY23 vs. ~20% in Q3. In 9MFY22, blended average price hike for VGRD was +12% (ex- cables & wires). South / Non-South markets grew by +15% / +18% year-on-year, respectively. Non-South now accounts for ~42% of revenue mix, indicating progressive diversification.
Market Share: VGRD has sustained its share in organised market across key categories, namely 42-45% in Stabilisers, 14-16% in Water Heaters, 6-8% in Wires and 3-5% in Fans.
Investment: In Q3, VGRD further invested Rs 191 million in its wholly owned subsidiary V-Guard Consumer Products (VCPL). Total investment now at Rs 446 million. VPCL’s first manufacturing project is now under implementation, with a few more in pipeline. These projects are likely to reduce reliance on imports / OEMs and deliver efficiencies over time.
Outlook; Buy: Factoring Q3 margin miss, we lower FY23-25e eps by 5%, whereas FY22 eps is cut by 7%.
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