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Not able to guard margins
* VGRD reported in-line revenues in Q3, driven by the Consumer Durables and Electronics segment, while the Electrical segment’s revenues increased only marginally (+3.2%) due to the weak performance of the Wires and Pumps segment.
* Consumer Durables segment growth was supported by strong volumes in Fans and Water heaters. The Electronics segment (+17.4%) has made a comeback after nearly four quarters of muted growth, with equal contributions from Stabilizers and UPS.
* Management remained confident on achieving 15% growth over the medium term, driven by an expansion into the non-South markets and the introduction of new product categories. However, we have blended in a 13% revenue CAGR from FY18-21E.
* We have cut our below-consensus EBITDA estimate for FY20/21 by 5.3%/4.7% as we are now factoring in our reduced margin assumptions. The rebound in revenues of Pumps as well as Cables & Wires is key in a rising competitive scenario. We maintain our Reduce rating with a target price of Rs187 (32x FY21E EPS) on rich valuations.
Revenue in line but margin disappoints
Standalone revenue grew 12.2% yoy to Rs5.9bn, driven by the Consumer Durables segment which recorded 22.6% growth yoy (Kitchen Appliances +45.1%, Fans +23.1%, and Water heaters +16.8%). The Electronics segment has made a comeback, with revenues growing 17.4% yoy ─ equally supported by Stabilizers and UPS), while the Electrical segment has disappointed with 3.2% growth yoy (Pumps and Wires flat). EBITDA declined 9% yoy to Rs450mn, while EBITDA margins stood at 7.6% (-176bps yoy). Employee and Other expenditures increased 13.9% yoy and 9% yoy to Rs492mn and Rs843mn, respectively. PAT stood at Rs337mn, down 5.8% yoy.
Increased competitive intensity has resulted in muted growth in Pumps and Cables & Wires, and has also restricted price hikes to offset the impact of higher costs. Management is confident on achieving 15% revenue growth over the next few years, driven by an expansion in non-South markets and the introduction of new product categories. However, a near-term rebound in revenue growth and margin reversal are key factors as we are already assuming 13% revenue CAGR and a 140 bps expansion in margins over FY19-21E. Increased focus on in-house manufacturing of Fans and Water heaters could provide some cost benefits over the medium term. New product launches and the ramp-up in non-South markets remain essential for sustained revenue growth. We estimate FY18-21E revenue/EBITDA/PAT CAGR of 13%/20%/23%. Our channel checks suggest that competitive intensity in South (Pumps and Cables & Wires) has increased, which has resulted to divergent trend for VGRD and competitors results. Rich valuations as well as fairly reasonable revenue growth rate and margin assumptions do not leave much room for further upside from this level.
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