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Gross margins continue to expand; upgrade to Hold
* Although VGRD missed revenue and EBITDA estimates, the company delivered gross margin of 33.2% (+319bps yoy), driven by price increase, product mix and benign commodity prices. The expansion in gross margin restricted the EBITDA miss to 16%.
* Challenging consumer demand and sluggish festive season sales led to subdued revenue growth. South remained a drag on revenue, with just 4.0% growth vs. non-South growth of 7.9%. Seasonal products like Fans, Electric water heaters and Pumps performed well.
* Considering the slow growth in 9MFY20, we estimate revenue growth of 6% (9% earlier) for FY20E. Distribution expansion through new channels and new product launches in non-South over the next 12 months should aid revenue growth in FY21 and FY22.
* Though there was lower revenue growth, sustained gross margins are restricting us to cut EPS only by 2%/4% for FY21/22E. The valuation roll-over to FY22 is resulting in a rating upgrade to Hold, with a revised TP of Rs219 (32x FY22E EPS), with EW stance in EAP.
Revenue disappoints but margins improve: Standalone revenue grew 5.4% yoy to Rs6.3bn, driven by the Consumer Durables segment which recorded 9.9% growth, while the Electricals and Electronics segment delivered subdued growth of 5% and 0.8%, respectively. EBITDA grew 32% yoy to Rs594mn with EBITDA margins of 9.5% (+192bps yoy). EBITDA margin expansion was driven by a 319bps increase in gross margins. Employee and Other expenses stood at Rs584mn and Rs902mn - growth of 19% and 7% yoy, respectively. RPAT stood at Rs429mn, up 27% yoy on higher EBITDA.
Outlook: V-Guard missed revenue estimates for the third-consecutive quarter while outperforming on the gross margin front, which can be attributable to price increase and favorable product mix. Management remains confident on sustaining gross margins at current levels, with improving product mix. Strong growth in the existing category along with new product launches in the non-South region should steer low-double digit growth in FY21 and FY22. In our view, the rebound in revenue will be gradual going forward. We have cut revenue estimates by 2%/4%/5% for FY20/21/22, largely due to heightened competition in South and slower traction in the non-South market. However, higher gross margin assumption is restricting the reduction in our EBITDA estimates. Our FY19-22E revenue/EBITDA/PAT CAGRs stand at 10%/19%/20%. We believe that competitive intensity in South is expected to remain high as many companies are expanding their reach beyond their regional strongholds and are under-cutting in terms of prices to gain volumes. Valuations at 37x/32x on FY21/22E EPS are factoring weak revenue growth while re-rating hinges on revenue outperformance and sustained improvement in gross margins. Key risks: weaker-than-expected revenue growth, sustenance of margin expansion, improved margin trajectory in non-South and a moderation in competitive intensity in the South region.
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