Detailed Rationale

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

 

On December 9th, 2022, VGIL announced that it has signed definitive agreements to acquire 100% stake in Sunflame Enterprises Pvt Ltd (SEPL) for a consideration of Rs.660 crore. The acquisition is expected to be completed by January 2023 subject to fulfilment of conditions precedent agreed in the Share Purchase Agreement. SEPL is among the leading players in the kitchen appliances space in India and sells its products under the brand ‘Sunflame’ across wide product categories including cooktops, chimneys, pressure cooker, mixer grinder and small kitchen appliances.

 

This acquisition is in line with VGIL’s strategy to become a significant player in domestic kitchen appliances segment and is a synergistic fit. Accordingly, the acquisition is expected to bolster VGIL’s business position and product portfolio in the kitchen appliances segment, especially in the North Indian markets. SEPL recorded a revenue of Rs 350 crores in fiscal 2022. VGIL is expected to fund the acquisition through a mix of external borrowings of about Rs.350-400 crore, and balance through internal accruals/cash surpluses. The company’s strong balance sheet provides flexibility to absorb modest acquisitions without significantly impacting key debt metrics. Gearing is expected to be less than 0.3 levels and other debt metrics to be comfortable level as on March 31, 2023. CRISIL Ratings will continue to monitor the progress on the transaction, which is subject to customary closing conditions, and synergy benefits arising out of the same. 

 

VGIL’s revenue rose 36% on-year in the first half of fiscal 2023 supported by better demand for its products. However, operating profitability reduced from 10.01% in the first half of fiscal 2022 to 8.2% in the first half of fiscal 2023 due to volatile copper prices, and higher cost inventory. Further given the market pick up and normalisation of operations compared to previous covid impacted periods, advertisement, selling and general administrative expenses also rose.

 

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

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) as the entities share a common management and operate with significant operational and financial linkages. CRISIL Ratings has also amortized the goodwill on proposed acquisition of SEPL from the fourth quarter of fiscal 2023 over 10 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 (32% of revenue in fiscal 2022), stabilizers (13%) and pumps (9%) has reduced over time, while the share of in-house manufacturing has increased, driven by expansion in new product lines such as fans (12% of revenue in fiscal 2022), uninterruptible power supply (UPS) systems (10%), and recently launched kitchen products, air coolers and switch gears (together accounting for 8%). 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 these regions increased to 42% in fiscal 2022 from 15% in fiscal 2010 and is expected to rise to ~45% in the next three years. Proposed acquisition of SEPL 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 40-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 six fiscals through 2022. 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 separate team for this segment in the southern markets, and has adopted the franchise model for other markets.

 

The proposed acquisition of SEPL is expected to aid company in gaining access to the distribution network and client base of SEPL 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

VGIL 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.

 

VGIL 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). VGIL may infuse around Rs 200 crore over the next three years for setting up manufacturing facilities.

 

Acquisition of SEPL will help in scaling up its kitchen appliances segment and catapulting VGIL into league of bigger kitchen appliance players thereby driving growth and margin.

 

Healthy financial risk profile and prudent working capital management

VGIL’s financial risk profile to remain largely healthy despite partly debt funded acquisition of SEPL, due to current 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 ~0.30 times at March 31, 2023). The company is expected to generate over Rs.230 crores of accruals per annum, which can comfortable meet capex spend of Rs.75-80 crore per annum, ensuring debt metrics remain comfortable

 

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 in excise-free zones and achieving higher economies of scale to maintain the cost structure.

Liquidity: Strong

Liquidity will remain strong, driven by expected cash accrual of more than Rs 230 crore per annum in fiscals 2023 and 2024 and cash and equivalent of Rs 170 crore as on September 30, 2022. VGIL also has access to fund-based limit of Rs 190 crore, which was utilised sparingly over the 12 months through October 2022. Further, annual net cash accruals will suffice for meeting the long term repayment obligations of Rs.100 crore per year (pertaining to debt taken for acquisition) along with the annual capex spend of ~Rs.75-80 crore/annum and additional working capital requirement.

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 2022, the company derived 14% of its revenue from voltage stabilisers, 32% from PVC insulated wires and low-tension power cables, 9% from pumps, 13% from water heaters, 12% from electric fans, 10% from desktop and digital UPS systems and inverters, and the balance from kitchen appliances, air coolers and switchgears.

 

In August 2017, VGIL acquired 74% stake in Guts Electromech Ltd and remaining 26% shares which was held by RBVS Arun Kumar (Managing Director of Guts Electromech) was acquired by the company during September 2022.This company has manufacturing plants in Hyderabad and Haridwar and manufactures switch gears, circuit breakers, relays and power transformers.

 

For the first six months of fiscal 2023, VGIL reported PAT of Rs 97 crore on operating income of Rs 2004 crore compared with PAT of Rs 85 crore on operating income of Rs 1472 crore during the corresponding period of the previous fiscal.

Any other information: Not applicable