| V-Guard Industries Limited | ||
| Rating reaffirmed at 'CRISIL A1+ ' | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper of V-Guard Industries Ltd (V-Guard).
Revenue rose 28% on-year in fiscal 2022 as the operating performance turned around sharply in the second half of the fiscal driven by pent-up demand post lifting of lockdown restrictions. Periodic price hikes in most product categories to pass on higher cost also aided the revenue growth. Operating margin declined to 9.8% in fiscal 2022 from 11.5% in the previous fiscal on account of steep rise in raw material prices and freight charges, which could not be fully passed on to customers. Selling and general administrative (SGA) expenses (pertaining to sales promotion, advertisement and publicity, travelling and conveyance), which had decreased in fiscal 2021 on account of Covid-19, returned to normal, contributing to the decline in profitability.
Over the medium term, company is expected to register annual revenue growth of 10% driven by steady demand due to increasing urbanization, gradual recovery in the economy, and new product launches supported by strong brand recall and large market share in key segments. The operating margin is expected to remain around 10% driven by higher capacity utilisation and adequate pricing flexibility. The proposed acquisition of Simon Electric Pvt Ltd (SEPL) for Rs 27.30 crore through issue of fresh equity shares will help V-Guard enter the modular switches segment. V-Guard will leverage the established clientele of SEPL to improve market position in the modular switches segment.
The financial risk profile remains healthy driven by healthy networth and negligible debt. The company is likely to generate annual cash accrual of over Rs 250 crore over the medium term, which will more than suffice to fund incremental working capital requirement as well as modest annual capital expenditure (capex) of around Rs 75 crore.
V-Guard’s management may consider medium-sized acquisitions to enhance product portfolio and geographical presence to propel growth. The company’s strong balance sheet provides flexibility to absorb modest acquisitions without significantly impacting key credit metrics. The management’s stated intent of capping gearing at 1.0 time in the event of acquisitions supports the credit risk profile.
The rating continues to reflect V-Guard’s diversified product portfolio, strong brand equity, established marketing network, and 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 healthy operating efficiency, 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 V-Guard and its subsidiary Guts Electromech Ltd as both the entities are under a common management and have business linkages.
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 The company 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.
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. The company 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.
Leading position in the voltage stabiliser segment, and improving market position in other electrical and consumer durables segments V-Guard is the 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 may infuse around Rs 200 crore over the next three years for setting up manufacturing facilities.
Healthy financial risk profile and prudent working capital management The financial risk profile is supported by healthy cash accrual and strong capital structure (networth of Rs 1,392 crore and negligible debt as on March 31, 2022). Expected annual cash accrual of over Rs 250 crore should be sufficient to fund internal requirement, leading to low reliance on debt and continued strong credit metrics. Besides, liquidity should remain strong—working capital bank line of Rs 190 crore was utilized sparingly and the company had cash surplus of ~Rs 65 crore as on March 31, 2022.
While acquisitions are a possibility and could result in a slight moderation in the currently adequate credit metrics, leverage should remain comfortable driven by the management’s demonstrated track record of maintaining leverage at comfortable levels, driven by its stated intent to do so. Hence, any material weakening in credit metrics is expected to be temporary.
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 250 crore per annum in fiscals 2023 and 2024 and cash and equivalent of Rs 65 crore as on March 31, 2022. V-Guard also has access to fund-based limit of Rs 190 crore, which was utilised sparingly over the 12 months through May 2022. The company has negligible long-term debt obligation and may undertake capex of around Rs 75 crore per annum which can be funded entirely through internal accrual. Incremental working capital requirement is expected to be nominal and met through internal accrual. |
Rating Sensitivity factors Downward factors:
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About the Company V-Guard 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.
V-Guard 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, V-Guard acquired Guts Electromech Ltd for Rs 6.2 crore. This company has manufacturing plants in Hyderabad and Haridwar and manufactures switch gears, circuit breakers, relays and power transformers. |
Key Financial indicators
For the first three months of fiscal 2023, V-Guard reported PAT of Rs 54 crore on operating income of Rs 1,015 crore compared with PAT of Rs 25 crore on operating income of Rs 565 crore during the corresponding period of the previous fiscal. |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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Criteria Details
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