imited CPORT CREDIT RATING RC Cre
CREDIT RATING REPORT
December 2017
V-Guard Industries Limited
Instrument Rated
Rs 1.5 Billion Commercial Paper * CRISIL A1+ (Reaffirmed)
*Earlier STD (Including CP)
Rating History
Date Long-Term Fixed Deposit Short-Term Rating Watch/Outlook No rating Changes in the last three years
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Rating drivers:
Supporting factors:
Stable revenue profile, backed by diversified product portfolio and geographic expansion
Strong brand equity and established marketing network
Leading position in the voltage stabiliser segment, and improving market position in other electrical and consumer durable product segments
Healthy financial risk profile and prudent working capital management Constraining factors:
Susceptibility to volatile commodity prices and increasing competition
Limited pricing power in segments such as pumps and fans Rating sensitivity factors
Copper and aluminium price trends
Capital expenditure (capex) and acquisition plans and their funding
Working capital management
Economic conditions, power situation, and monsoon levels
Recent developments and performance update:
Recent developments
Acquisition of GUTS Electromech Ltd (GUTS)
In August 2017, V-Guard acquired GUTS for a purchase consideration of Rs 62 Million funded through existing cash surplus. This company has manufacturing plants in Hyderabad and Haridwar and manufactures switch gears, circuit breakers, relays and power transformers.
Performance update
Operating performance for first half of fiscal 2018 was impacted due to GST implementation
Sales in the month of June 2017 was particularly affected as dealers and retailers resorted to destocking in the wake of GST implementation effective July 1.
However business performance recovered in the second quarter with the company reporting about 13%
sales growth compared to corresponding quarter of previous year. Further, operating margins which declined to about 5.8% in the first quarter of fiscal 2018 improved sharply to about 12% in the second quarter.
Company overview
About the company:
V-Guard Industries Limited, incorporated in 1996, 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.
The company commenced operations with stabilisers and pumps, and gradually diversified into related products. Products include voltage stabilisers, inverter and inverter batteries, electric water heaters, solar water heaters, domestic pumps and motors, agricultural pumps, domestic switch gears, house-wiring cables, induction cooktops, mixer grinders, solar inverters, fans, and gas stoves. In fiscal 2017, 18% of the revenue was derived from voltage stabilisers, 28% from polyvinyl chloride (PVC) insulated wires, 1% from low-tension (LT) power cables, 11% from pumps, 5% from electric water heaters, 3% from solar water heaters, 9% from electric fans, 10% from digital UPS (uninterruptible power supply) systems and inverters, and the balance from desktop UPS systems, kitchen appliances, and switchgears.
Ownership Structure:
Shareholding pattern as on September 30, 2017
Shareholder particulars %
1 Promoter and promoter group 65.17
2 Foreign Institutional Investors 11.36
3 Mutual Funds / UTI 11.09
4 Public 9.19
5 Non Resident Indians 0.88
6 Bodies Corporate 0.45
7 Others 1.82
8 Financial Institutions / Banks / Insurance Companies 0.04
Key credit factors:
Industry risk profile:
The consumer durables industry in India is estimated at Rs 600 Billion at end-fiscal 2017 and is expected to grow at a compound annual rate of 13% between fiscals 2005 and 2020. Around two-thirds of the total revenue is generated from urban population while the balance is generated from rural population. Demand for consumer durables in India has been growing on the back of rising incomes; this trend is set to continue as other factors such as rising rural incomes, increasing urbanisation, and changing lifestyles aid demand growth in the sector.
Growth will be driven by better affordability, shorter replacement cycles, multiple ownership (in case of colour television sets) and low penetration levels (in case of other appliances). Significant increase in discretionary income and easy financing schemes have led to shortened product replacement cycles and evolving life styles where consumer durables, such as air conditioners (ACs) and LCD TVs, are perceived as utility items rather than luxury possessions.
Profitability is determined by changes in raw material costs and players' ability to either pass on cost escalations or retain the benefit of a decline in costs. The cost of most raw materials declined sharply in fiscal 2016, driven by fall in prices of oil and other commodities. As a result, operating margins of players in most of the segments are estimated to have improved by 40-80 basis points (bps). However, hardening input costs have put some pressure on margins of the players in fiscal 2017. Competitive pricing by smaller players and new entrants is pressurising larger players to revise prices downwards, thus impacting their operating margins.
In addition, as India happens to be an assembly base rather than a manufacturing centre, players here enjoy high return on capital employed (RoCE) vis-à-vis their global counterparts. Product innovation and heavy research and development investment are key factors driving the scale of operations of established players. In fiscal 2018, overall demand is expected to grow at faster pace than the previous fiscal, supported by better consumer sentiment and stability in prices.
Business risk profile:
Diversified product profile and growing geographic expansion provides revenue stability
V-Guard has a presence across consumer electronics and electrical products. The range includes voltage stabilisers, inverter and inverter batteries, electric water heaters, solar water heaters, domestic pumps and motors, agricultural pumps, domestic switch gears, and house-wiring cables. In the past five years, the company further diversified into kitchen appliances such as induction cooktops, mixer grinders, solar inverters, fans, and gas stoves.
The diversity lends stability to revenue, even as most products are prone to demand risk. For instance, growth in stabilisers is linked to demand for consumer durables; and during times of economic slowdown and lower disposable incomes, there will be a slump in demand for these products. Dry weather affects demand for heaters and good/extended monsoons affect pump sales. PVC wires and cables are dependent on residential
in revenue over the seven fiscals through 2017. However, during an economic slowdown, the annual growth rate had moderated to13% in fiscal 2009, 12% in fiscal 2014, 15% in fiscal 2015, and 7% in fiscal 2016. While any substantial slowdown in the economy impacts revenue growth, business remains buoyant in an economic upswing.
The slowdown in the pace of growth between fiscals 2014 and 2016 is attributed to reduction in input prices which were partially passed on, and increased competition in PVC cables, LT cables (which the company has recently exited), and water heaters. These segments were also impacted by weak offtake by the real estate sector, especially in southern states. Besides, an improved power situation across India has impacted demand for UPS systems. On the other hand, there has been healthy revenue growth in solar water heaters, pumps, electric fans, and switchgears in fiscals 2016 and 2017, resulting in double-digit growth in revenue.
Geographical diversity too has improved in the past 5-6 years by expanding into non-south markets;
contribution from these markets has gradually risen to 35-36% in fiscal 2017 (15% in fiscal 2010) with management’s strong focus on increasing penetration in them. Benefits of product diversity and focus on consolidating position in new products and markets are likely to continue over the medium term.
Strong brand equity and established marketing network
Products are sold under the V-Guard brand that has strong recall among customers given its track record of 30 years in South India. Moreover, there is an established marketing network with two main channels of distribution: hardware shops and consumer durable stores. With increasing product diversity and expansion into newer markets, the dealer network has also been enhanced across India.
The company has 624 distributors, 5562 channel partners, and around 25,000 retailers. It focuses on after- sales service and has a separate team for this segment in the southern markets; it adopts a franchise model for other markets. Currently, there are 260 service centres. Furthermore, 4-5% of revenue is spent on advertising and 10-11% towards commissions and incentives for dealers and distributors, which strengthens brand equity among users of the products and relationship with distributors. V-Guard’s initiatives towards improving its brand image, distribution strength, and market reach will enable it to sustain its market share despite intense competition in all its product segments.
Leading position in the voltage stabiliser segment, and strengthening market position in other electrical and consumer durable product segments
V-Guard is the national leader in the stabiliser segment, and has an established and gradually improving presence in the pumps, water heaters, electric fans, and building wires segments (especially in southern states). Most of the business segments are highly fragmented and intensely competitive. Hence, while revenue has been growing, there has been limited improvement in market share in these segments, especially fans, PVC insulated cables, and motor pumps.
The company is likely to maintain its market leadership in stabilisers, while gradually improving market share in the other segments, over the medium term.
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 in most product segments, part of the increase in input prices needs to be absorbed, which puts margins under pressure. Furthermore, given the moderate operating margin of organised players and the limited differentiation in the quality of their products, marketing strategy plays a major role in increasing or protecting market share. V- Guard’s advertising expenditure to sales ratio is much higher than that of its peers, which also affects the margins. Besides, decreasing discounts in non-south markets resulting in better pricing parity have helped improve the operating margin. Benefits from economies of scale and excise concession for the newly established unit in Sikkim should continue. Operating profitability, at 7-8% between fiscals 2013 and 2015, has improved to 10% in fiscal 2017 and should stabilise to 9.5-10% over the medium term, barring the first quarter of fiscal 2018 as performance was temporarily affected in June 2017 because dealers and retailers were destocking in the wake of the goods and service tax (GST) implementation. The impact was temporary and performance has recovered from the second quarter.
Nevertheless, the operating profitability will remain susceptible to volatility in commodity prices and inherent competition in the business, over the medium term.
Limited pricing power in some segments, such as pumps, fans, and cables
The wire, geyser, fan, and pump segments are intensely competitive, limiting the pricing power of players.
Furthermore, players face intense competition from cheaper imports from China. V-Guard has even recently discontinued its operations in the LT cable segment given the pricing pressure and stretched payment cycles.
Though the domestic electrical and consumer durables market is becoming more quality conscious, competition from unorganised players and imports will continue to put pricing pressures on these segments, limiting significant improvement in operating profitability over the medium term.
Financial risk profile:
Healthy financial risk profile and prudent working capital management
Financial risk profile is healthy, supported by steady revenue growth and cash accrual, with comfortable gearing and key debt protection metrics.
V-Guard’s asset-light business model restricts the need for significant capital spending and also enables prudent working capital management. It follows a dynamic production model; products such as stabilisers, UPS systems and inverters, and a large share of water heaters and electric fans are outsourced, while products such as electric cables and wires, where sustenance of high quality is of prime importance, and are manufactured in- house. Compared with its peers in similar business segments, the high level of outsourcing by V-Guard leads to its relatively lower working capital requirement, besides yielding a healthy return on capital employed (RoCE) of over 20% since fiscal 2010. Nevertheless, the operations are moderately working capital intensive as the company has limited flexibility on its creditors because it sources mostly from small industries and self-help groups.
Cash flow from operations in fiscal 2017 moderated due to increase in debtors and inventory; gross current assets increased to 114 days as of March 2017 (101 days as of March 2016). However favourable payment terms with creditors stemmed incremental working capital to an extent and debt levels were at Rs 20 Million as of March 31, 2017 and gearing was at 0.01 time (0.44 time in fiscal 2015). Over the medium term, in the absence of major debt-funded capex and working capital needs, the company will become debt-free. The debt protection metrics are healthy, with interest coverage ratio expected at 227.09 times, and net cash accrual to total debt ratio at 17.61 time in fiscal 2019.
While to propel growth, V Guard’s management could consider medium-sized acquisitions, its currently strong balance sheet provides the flexibility to absorb modest-sized acquisitions without significantly impacting key credit metrics. Also, CRISIL takes comfort from V-Guard management’s stated intent of capping gearing at around 1 time in the event of acquisitions.
Imports and exports are negligible for the company and it does not have foreign exchange debt. The company does not hedge on commodities exchange as it does not see any benefit in the long run.
Strong financial flexibility
Liquidity position current and expected over the next one year:
V Guard’s liquidity continues to be strong. Its working capital bank line of Rs 1800 Million is utilised sparsely.
Besides, the company has healthy unencumbered cash surplus of about Rs 1200 Million as of August 2017.
Rs Million Consolidated
Cash surplus as on September 2017 Rs 1000 Million Bank lines available as on March 2017 Rs 1800 Million Utilisation of bank lines (past 6 months) 1-2%
Expected NCA for fiscal 2018 Rs 1500-1600 Million Working capital requirement Marginal
Regular maintenance capex for fiscal 2018 Rs 400 Million Long-term debt repayment for fiscal 2018 Rs 20 Million
Base case assumptions for fiscal 2018 and 2019
Revenue growth Revenue growth of 10%-15% for next two years
EBITDA margin 9-10.5%
Dividend (as a percentage of PAT) 25%
Regular maintenance capex Rs 400 Million in fiscal 2018 and Rs 250 Million in fiscal 2019
Management Strategy:
Organisation structure
Name Designation Name Designation
Mr Kochouseph Chittilappilly
Chairman Mr Mithun K Chittilappilly Managing director
Mr Cherian N Punnoose
Vice chairman Mr Ramachandran V Director and chief operating officer
Mr Sudarshan Kasturi
Chief financial officer Ms Jayashree K Company secretary
Professional management with moderate risk appetite
The promoters have been in the consumer electrical and electronics business for over 30 years. The company has developed its technology in-house with very little external help and holds patent rights for all its products.
Management has been proactively diversifying the product portfolio, embracing new technologies, and expanding into non-south markets. The dynamic business model, coupled with a good relationship with suppliers and distributors, helps the company to remain strong in a competitive landscape.
The management team consists of qualified and experienced professionals. The company has managed to meet the changing requirements of the Indian consumer appliances market and has been ably adapting to the shift in trends over the years. It has remained focused on maintaining product diversity and consolidating its non-south market continually.
The management has been fairly conservative as observed in low leverage and stated intent of keeping the gearing under 1 time, even in the event of acquisitions. In recent years, the company has streamlined its working capital requirement, which has enabled higher cash flow from operations and led to a sizeable build-up in liquid surplus (was Rs 1000 Million as of September 2017). Financial flexibility is also adequate with the ability to raise capital when needed at attractive rates. With growing cash balances, the company will be looking for inorganic growth to expand its distribution network in newer markets and augment its product
capabilities/mix in the existing markets. Also, V-Guard may look for share buy-backs, though no firm decision on the same has been proposed.
Key financial indicators (Consolidated)
As on/ For the year ended March 31 2017 2016 2015
- - Actual Actual Actual
Net sales Rs Million 21506 18499 17304
Operating income Rs Million 21506 18624 17458
OPBDIT Rs Million 2150 1790 1331
PAT Rs Million 1518 1117 697
Net cash accruals Rs Million 1331 1017 689
Equity share capital Rs Million 425 301 300
Adjusted networth Rs Million 5975 4650 3709
Adjusted debt Rs Million 25 104 1647
OPBDIT margins % 10.0 9.6 7.6
Net profit margins % 7.1 6.0 4.0
ROCE % 39.0 33.0 22.7
PBDIT / int. & finance charges Times 108.78 20.75 6.67
Net cash accruals / adjusted debt Times 54.04 9.79 0.42
Adjusted debt / adjusted networth Times - 0.02 0.44
Adjusted debt / PBDIT Times 0.01 0.06 1.21
Current ratio Times 2.58 2.56 1.85
Cashflow from operations Rs Million 534 1844 413
TOL/ ANW Times 0.51 0.52 0.93
Operating income/gross block Times 8.92 8.31 8.17
Gross current assets Days 112 101 113
Debtor days Days 53 55 51
Inventory days Days 52 44 59
Creditor days Days 54 41 27
YTD section (standalone)
- Unit 30 - Sep - 2017 30 - Sep - 2016
- - 6 Months 6 Months
- - Actual Actual
Operating income Rs Million 11,195 10,340
OPBDIT Rs Million 997 1,157
Net profit Rs Million 697 802
Net cash accruals Rs Million 790 880
OPBDIT margin % 8.9 11.2
Net margin % 6.2 7.8
Interest cover Times 119.61 109.29
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufacturing and service sector companies CRISILs Criteria for rating short term debt
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