ICICI Direct has a hold call on V-Guard Industries with a target price of Rs 168.The current market price of V-Guard Industries is Rs 182.70.Time period given by the brokerage is one year when V-Guard Industries price can reach the defined target.View of the brokerage on the companySlow demand recovery of flagship products: Though the revision in GST rate in wires and water heater (from 28 per cent to 18 per cent) and simultaneous price cuts would benefit V-Guard in long run, its flagship products (like stabilisers, pumps) demand would be lower.
These products are considered to be highly seasonal in nature and recorded a muted performance in H1FY19 with a decline in top line by about 4 per cent YoY.
We believe rising competition would weigh on the future performance of these products, which contribute about 30 per cent to topline.
On the geographical front, the southern region that contributes about 60 per cent to topline has remained a laggard with topline growth of mere about 3 per cent YoY in H1FY19.
We believe rising focus of competition such as Havells and Crompton Greaves Consumer towards southern markets would restrict any price-led growth for V-Guard, going forward.
On a conservative basis, we model revenue CAGR of 13 per cent in FY18-20E led by about 17 per cent revenue CAGR of consumer product category backed by new products categories.Higher raw material prices, rupee depreciation keeps margin under check: Higher raw material prices coupled with rupee depreciation had negatively impacted the gross margin of the company in Q2FY19.
Though the company is confident of passing on raw material prices to its customers by taking a price hike (by about 3 per cent), we believe rising competition along with expansion in newer geographies (may lead to higher advertisement expenditure) would restrict EBITDA margin expansion to the tune of about 150 bps over the next two years.Richly valued; maintain HOLD: We believe an addition of new capacity and dealers across India coupled with the launch of premium products would help in revenue, earnings CAGR of 12 per cent, 24 per cent for FY18-20E, respectively.
However, expansion in new geographies coupled with rising competition would keep EBITDA margin expansion under check.
We believe that at the CMP the stock discounts near-term positives of lower working capital requirements and positive free cash flows.
At the CMP, the stock is trading at 48x FY19E and 37x FY20E earnings.
We value the stock at 35x FY20E earnings and maintain 'HOLD' rating on the stock with a revised target price of Rs 168.