Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper of V-Guard Industries Ltd (V-Guard).

 

The ratings continue to reflect the healthy business risk profile of V-Guard supported by its leading position in the organised market for voltage stabilisers and gradual strengthening of the market position in other electrical and consumer durables segments. The rating also factors the company’s strong brand equity, established distribution network, its diversified product profile and healthy financial risk profile. These strengths are partially offset by vulnerability of its operating margin to volatility in input prices, limited pricing power in a few segments such as pumps, fans and cables and intense competition in key product segments.

 

V-guard registered a strong revenue growth of 18 % in fiscal 2023 driven by healthy 21% growth in Consumer durable segment and 22% growth in Electronics segment (together contributes ~56 % of total revenues) driven by steady end user demand, improving penetration in non-South markets and increasing acceptance of new products. Periodic price hikes in most product categories to pass on rise in input cost has also aided the revenue growth. Revenues registered a growth of ~17 % during the first half of fiscal 2024 on-year basis. Revenue is expected to grow at ~10-12 % over the near to medium term supported by increasing urbanization, gradual recovery in the economy, and new product launches supported by strong brand recall and steady market share in key segments.

 

CRISIL Ratings also notes the completion of amalgamation process of Simon Electric Private Limited (SEPL), the Indian business of Simon Group, Spain in March 2023 and acquisition of remaining 26% stake in Guts Electro-Mech Limited(GUTS) in Sep 2022 post which GEML has become a wholly owned subsidiary of V-Guard. GEML recorded a revenue of Rs.72 crore and PAT of Rs.3.7 crore for fiscal 2023. Also, In January 2023, V-Guard had completed the acquisition of Sunflame Enterprises Pvt Ltd (Sunflame) for a consideration of Rs.680.33 crore. Sunflame is among the leading players in the kitchen appliances space in India and sells its products under the brand ‘Sunflame’ & ‘Superflame’ across wide product categories including cooktops, chimneys, pressure cooker, mixer grinder and small kitchen appliances. The acquisition is expected to provide multiple levers of synergistic benefits across geography, portfolio and channel and is expected to bolster V-Guard’s business position and product portfolio in the recently ventured kitchen appliances segment, especially in the North Indian markets. Sunflame recorded a revenue of Rs.300 crore and PAT of Rs.9.5 crore for fiscal 2023

 

Operating Profitability have moderated to 7.6% in fiscal 2023 from 9.8% in fiscal 2022 mainly on account of increase in key raw material prices and partial absorption of the same due to weak consumer demand while holding high-cost inventories. Further higher selling and administrative expenses due to increase in Advertisement & promotion and travel expenses, increase in manpower cost due to higher inhouse manufacturing etc has also impacted profitability during the fiscal. However operating profitability has improved by 70 bps on year to 8.4% in the first half of fiscal 2024 with moderation in input costs. Operating profitability is expected to sustain at 8-9% in near to medium term with better operating leverage, and continued cost rationalisation measures, ensuring strong cash generation.

 

The financial risk profile was healthy supported by comfortable debt metrics. Gearing was at comfortable levels of 0.36 time as on March 31, 2023 despite increase in debt levels to Rs.420 crore from Rs.12 crore (at March 31, 2022), aided by steady cash accrual. Net worth was sizeable at Rs 1175 crore as on March 31, 2023 and is expected at Rs.1295 crores by end March 2024. Steady annual cash accrual of Rs 250-300 crore, moderate annual capital expenditure (capex) plans of ~Rs.90-100 crore and prudent working capital management will gradually lower the reliance on external debt over the medium term, further strengthening the financial risk profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of VGIL, its wholly owned subsidiaries V-Guard Consumer Products Ltd (VCPL) & Guts Electromech Ltd(GEL) and Sunflame Enterprises Private Limited (w.e.f January 12, 2023) as the entities share a common management and operate with significant operational and financial linkages. CRISIL Ratings has also amortized the goodwill of Rs.249.14 crore on acquisition of Sunflame from fiscal 2024 onwards over 5 years.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified product profile and growing geographic expansion, providing revenue stability: VGIL has regularly launched new products and variants to grow revenue and reduce dependence on a particular product. The share of established products such as cable and wire, stabilizers  and pumps has reduced over time, while the share of in-house manufacturing has increased, driven by expansion in new product lines such as fans, uninterruptible power supply (UPS) systems, and recently launched kitchen products, air coolers, modular switches & switch gears. The increasing share of online sales will support the stability of revenue.

 

To diversify geographic presence, the company is consolidating its position outside south India. The revenue contribution of non-south  increased to 46 % in fiscal 2023 from 15% in fiscal 2010 and is expected to remain at similar levels. Acquisition of Sunflame is expected to increase share of revenue from kitchen appliances and further improve the already diversified product portfolio.

 

• Strong brand equity and established marketing network: The V-Guard brand has a strong recall among customers, given its 45+ year-old vintage in south India. VGIL is expanding its footprint and the proportion of revenue from outside south India more than doubled in the five fiscals through 2023. The strong brand equity is complemented by an established marketing network of over 600 distributors, 5,500 channel partners, and ~50,000 retailers. The company focuses on aftersales service and has a team of authorized service providers catering to markets across India.

 

The recent acquisition of Sunflame is expected to aid company in gaining access to the distribution network and client base of Sunflame which enjoys strong market positions across North Indian markets.

 

• Leading position in the voltage stabiliser segment, and improving market position in other electrical and consumer durables segments: V-Guard is the domestic leader in the voltage stabiliser segment with around 45% market share, and has increased its market share in most product categories, including water heaters, fans, cables and pumps recently. Most of the business segments are highly fragmented and intensely competitive. Hence, while revenue has been increasing, it is difficult to significantly increase the market share in these product segments, especially fans, polyvinyl chloride (PVC) insulated cables, and motor pumps. The strong brand equity will help strengthen the market position in the electrical and consumer durables segments over the medium term.

 

V-Guard incorporated a wholly owned subsidiary (V-Guard Consumer Products Ltd) in fiscal 2022 to manufacture some products in the consumer electricals segments in-house (previously outsourced). V-Guard has infused around Rs 121 crore as on 31st Mar 2023 and plans to further infuse Rs.150-200 over the next two to three years for setting up manufacturing facilities.

 

Acquisition of Sunflame will provide V-Guard access to its manufacturing facility in Faridabad, Haryana and  aiding in scaling up its kitchen appliances segment and catapulting VGIL into league of bigger kitchen appliance players thereby driving growth and margin Amalgamation of SEPL and Acquisition of GUTS will give access to their existing manufacturing facilities, leverage their existing client network and enable them to achieve meaningful scale in accelerated time frame in the newly entered Switch & Switch gear division and to stabilise their market position.

 

• Healthy financial risk profile and prudent working capital management: V-Guard’s financial risk profile is supported by modest debt, sizeable net worth of Rs.1175 crore as on March 31, 2023 and healthy cash generating ability, translating into healthy return on capital employed (RoCE, 18.4 % in fiscal 2023), and debt protection metrics. Financial risk profile is expected  to remain largely healthy despite partly debt funded acquisition of Sunflame, due to low debt and strong net worth. Debt metrics should remain comfortable driven by the management’s demonstrated track record of maintaining leverage at comfortable levels (gearing is estimated at below ~0.40 times at March 31, 2024).

 

Weaknesses

• Limited pricing power in segments such as pumps, fans, and cables: The cable and wire, geyser, fan, and pump segments are highly fragmented and have several unorganised players, limiting the pricing power of organised players. Furthermore, players face intense competition from cheaper imports from China. This is reflected in relatively low gross margins in these product categories, despite healthy revenue growth.

 

• Susceptibility to volatility in commodity prices and increasing competition: The prices of key inputs such as copper and aluminium are highly volatile. Because of intense competition, part of the increase in input prices has to be absorbed or passed on with a lag, thus limiting increase in margins. However, to partly counter this company has been continuously rationalizing its cost structure by setting up of manufacturing units and achieving higher economies of scale to maintain the cost structure.

Liquidity: Strong

Liquidity will remain strong, driven by expected cash accrual of Rs.250-300 crore per annum in fiscals 2024 and 2025 which can comfortably meet capex spend of Rs.90-100 crore per annum, repayment obligations(debt taken for acquisition) of Rs.0 crore and Rs.137 crore in FY 24 & FY 25 respectively and additional working capital requirement. Further company maintains liquid surplus of Rs.99 crore as on September 30, 2023.

 

V-guard also has access to fund-based limit of Rs 760 crore, which was utilised sparingly over the 10 months through September 2023.

Rating Sensitivity factors

Downward factors:

• Steep decline in revenue or sustained fall in the operating margin impacting cash accrual.
• Larger-than-expected, debt-funded capex or acquisition leading to deterioration in debt metrics; for instance, gearing exceeding 1.2 times on a sustained basis.

About the Company

VGIL belongs to a Kochi-based industrial house, promoted by Mr Kochouseph Chittilappilly. The promoter has business interests in the entertainment, hosiery and construction sectors through group companies Wonderla Holidays Pvt Ltd, V Star Creations Pvt Ltd, and Veegaland Developers Pvt Ltd, respectively.

 

VGIL commenced operations with stabilisers and pumps, and gradually diversified into related products. In fiscal 2023, the company derived 24% of its revenue from Electronics segment, 44% from Electricals and 31% from Consumer Durables.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs.Crore	4130	3503
Reported profit after tax (PAT)	Rs.Crore	189	228
PAT margin	%	4.6	6.5
Adjusted debt/adjusted networth	Times	0.36	0.01
Interest coverage	Times	20.45	44.52

For the first six months of fiscal 2024, VGIL reported PAT of Rs.123 crore on operating income of Rs 2349 crore compared with PAT of Rs 97 crore on operating income of Rs 2005 crore during the corresponding period of the previous fiscal.

Any other information: Not Applicable