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CD Equisearch
V-Guard Ind (Reduce)
CMP: ₹927.20
Target: ₹770
V-Guard has to punch above its weight to set things in order for its earnings fell short of our estimates by some 16 per cent last fiscal. Poor pump sales and decline in realisations of housing wiring cables due to sharp fall in copper prices capped increase in sales. High overheads (mainly employee and warranty expenses) in non-south markets and write down of copper inventory inflicted much of the damage on operating profit margins. Yet aggressive ad spend in non-south markets last fiscal helped V-Guard to post 27 per cent growth in revenues in that region.
V-Guard faces gargantuan task of scaling up operating margins, which has dipped to the lowest level in over a decade. In fact, margins plunged to as low as 5.5 per cent in the third quarter of last fiscal when the company wrote off copper inventory, spent aggressively on promotions (4.9 per cent of sales vs the historical norm of 3.5-4 per cent) and booked lower sales. Despite cutback in discounts in non-south markets, odds still not stack up in favour of a smart rebound. We expect margins to flat line at 7.6 per cent over the next two years.
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