V-Guard Industries Limited (532953) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the V-Guard Industries Limited Q3 FY '21 Earnings Conference Call, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harshit Kapadia from Elara Securities. Thank you, and over to you, sir.

Thank you, Steve. Good afternoon, everyone. On behalf of Elara Securities, we welcome you all for the Q3 FY '21 and 9-month FY '21 conference call of V-Guard Industries Limited. I take this opportunity to welcome the management of V-Guard Industries, represented by Mr. Mithun Chittilappilly, Managing Director; Mr. Ramachandran, Director and Chief Operating Officer; and Mr. Sudarshan Kasturi, Senior Vice President and Chief Financial Officer. We will begin the call with a brief overview by the management, followed by a Q&A session. I will now hand over the call to Mithun sir for his opening remarks. Over to you, sir.

Thank you, Harshit and Elara Securities for hosting this call. A very warm welcome to everyone present, and thank you very much for joining us today to discuss the operating and financial performance of our company for the third quarter ended 31st December 2020. During Q3 FY '21, V-Guard's financial performance rebounded sharply, driven by a strong return of consumer demand after the disruption witnessed in H1. The quarter saw a very positive market sentiment during the festive season, reflected in significant growth across all markets and other categories. Some latent demand from earlier months, restarting of distribution channels and redemption of construction activities also enabled the growth. We are running our operations with utmost priority on safety and well-being of our people and stakeholders. Our factories are working to normal efficiency with strict adherence to COVID protocols. We also -- we have also enabled all our office-based employees and stakeholders to work in hybrid modes, which ensures the safety, but also enables us to be directive. The Q3 revenues expanded by 32% to INR 837 crores. EBITDA margins expanded substantially by 420 basis points to 13.7%. And PAT increased by almost 80% to INR 77 crores. At the gross margin level, there was some impact from the recent spike in commodity prices. We continue to take pricing actions as appropriate over the next few months to compensate for the higher cost of inputs. Our revenue and profit performance was backed by strong cash flows. In the 9 months period ended 31st December 2020, we had a cash flow of INR 369 crores as compared with INR 259 crores in the previous year. Cash flow was enabled by a disciplined approach to account receivables, while we have built up some additional inventory to overcome possible future supply disruptions. Our net cash position on the balance sheet improved to INR 482 crores as on 31st December 2020 as against INR 323 crores from a year ago. Both non-South and South markets have registered strong growth, where South market has grown at 25% and non-South growing at 43% on a Y-o-Y basis. Non-South contribution to the total revenues have improved to 41%, and we are well on our way to achieve the desired geographical [ damage ].

Mr. Mithun?

Yes.

Sir, sorry to interrupt. Maybe request you to speak closer to the handset, please. Your voice is sounding a bit distant.

Okay. The growth was also broad-based across product segments. Electronics revenues were up by 35% Y-o-Y, whereas both electrical and consumer durables grew at 31% Y-o-Y. Stabilizers, wires, fans, pumps, kitchen appliances and Digital UPS categories performed well during the quarter. Relatively, water heater saw a moderate growth due to COVID-related supply disruptions at the factory, which impacted supplies during Q2 and the early part of Q3. Suppliers from the factory has reverted back to normal since then. You have also seen our announcement in January about our acquisition of a minority stake in Gegadyne Energy Lab or GEL for a consideration of INR 33.4 crores. GEL is a startup that is developing an innovative battery technology. We foresee this technology having huge potential in our B2C businesses. The primary application in the Digital UPS business and secondary application in stabilizer and other consumer durables. The collaboration will help V-Guard to strengthen its product offerings by also helping GEL to achieve its true potential. Moving into fourth quarter, we see positive momentum sustaining on the back of a rapidly recovering macro environment, higher GDP growth and increased formalization of the economy will favor strong organized players -- strong organized sector players such as V-Guard. The strategic investment in brand visibility, product development, distribution network, production infrastructure and human resources, we are well placed to gain from these opportunities to drive sustained value for our stakeholders. On that note, I would like to thank you once again for your participation and would like to hand over the floor to the moderator for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.

Sir, my first question is on this, when you saw a broad-based recovery here across your categories. I just wanted to understand one on stabilizers. So we saw a very strong recovery there, almost like 40% growth. How we should look at going ahead? Is it more a pent up, which has come in and now you're going for seasonally which weighs in Q4? So I wanted to understand in terms of supplying to, let's say, more of the AC demand, which gets -- the inventory gets collated in Q3 and Q4. If that one should look to cool off? Or do you think, no this is the underlying demand is very strong and that should continue more on the stabilizers?

See, if you look at the stabilizer business, it has grown very well in Q3. But if you look at YTD, we are still down there by 15% to 18%. So basically, what it means is some of it is the lack of sale that happened in the first quarter is getting postponed to the following quarters. That is one reason. We also have price increases happening in the month of January. COVID, some pre-buying would have happened. So mix of these two are what's happening. We are still -- and even with all this growth, we are still lower than whatever number we did last year for the first 9 months. And we think we can catch up soon because last year, March, was a washout.

Got it. Got it. And then in terms of the end market demand, you've been giving us the last 2, 3 years, there has been a slowness in the overall demand. And now we see some recovery happening. Certain categories really firing hard. Do you think it's more of also some pent-up has come from the real estate demand as well? Or do you think it's more of the pent-up in terms of whatever left, whatever was not bought in the previous quarter, that kind of a demand? Do you think there are some drivers, which you are seeing the -- which is leading to this demand from the secondary sales as well?

So I think there are 2 things that is, like, tailwinds that is helping all organized companies. One is that we are finding that smaller players are still not back to fully normal operations, and there are a lot of supplier shortages from their side, which is enabling larger players to take that share. So that is definitely very evident, and we have been feeling that for the last few months. The second is lower interest rates have started to drive demand for real estate, which was kind of subdued for the last 3, 4 years post demon. So maybe real estate sector is having some kind of revival. It's also something that we are noticing, and we are feeling. And when we talk to real estate guides, they are also talking about a broad-based improvement in sales. So I think both these are helping. On one side, we are having a construction-related demand. On the other side, there may be a lack of supply coming from smaller players. So both these are healthy.

And sir, just last question from my side. It's great to see such a strong margins. How much of the commodity impact do you think you have to take in Q4? And how much of these margins do you think is sustainable and some would be rolled back because of commodity pressure? So if you can clarify on that. That's my last question.

Okay. Sudarshan, do you want to take this, regarding the commodity prices?

Yes. Okay. Yes, even in the Q3 numbers, there has been a slight impact on the gross margin because of the commodity prices. We have covered a good portion of it through pricing, but there is some more pricing action we need to take-up in Q4. The spike in commodity prices still continues. So we will have to take pricing actions further in Q4 also.

The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.

Mithun, congratulations to you and your team on very solid set of numbers. My first question is now we have almost INR 500 crores cash on the balance sheet. As we look ahead, what are your capital deployment priorities? Do you find enough revenues to deploy that money back into the business and grow? Or at some point of time, do you think we need to return cash back to the shareholders? So just wanted to understand your priorities on capital deployment as we move forward. The second question is on the margin, continuing with the previous participant. When you look at V-Guard's journey, there has been blocks of 3, 4 years after where you reset your margins to a next level. Do you think probably, again, this is the time where you reset your margins again to a higher level than what we have been doing over the last 3, 4 years and move to a next level of margin trajectory? I'm not looking specifically for 1 or 2 quarters. But is there a reset of margins structurally going forward for the next couple of years?

So regarding the cash on book, our primary focus will be to look at opportunities. We are looking at adjacent categories. We are looking at existing categories. So -- but the thing is we will not do an acquisition for the sake of acquisition. So we will only do it if it is making economic sense. And we can ensure that the value what we take, whatever the cost of the acquisition is, we can at least show a 20% return on that in the next 3, 4 years. So that is the kind of acquisitions we are looking at. And that so we will -- our first priority will be to look for those. And definitely, if we are not finding anything attractive or we are not able to deploy the cash after a substantial period of time, we will, in one way or the other, return the cash back to shareholders. So that is the view of the Board and the management. The second question is on margins. Some of the margin improvement you're seeing today is also because we have cut our advertising and promotional expenditures. But even after we add back that, we still have managed to improve some margins. So like I mentioned earlier, in earlier calls, V-Guard was having an EBITDA margin of about 10%. Our focus and work we have done is to improve that margin. So at least every 2 years, we can increase that EBITDA by 1%. So that is the kind of trajectory we would like to have. This particular quarter may not be the right quarter to measure that because we have a below par margins last year, and we have had slightly above par margins this year because of reduction in advertisement and promotion expenditures, which we will now restart because the business is back to normal, supplies from our side is also back to normal, and we are now confident of spending money on A&P again. And that we will start to do from Q4 onwards. But even after that -- sorry.

Mithun, if I may just add one more point on cash. See, one of the reasons cash has significantly improved is also because the collections have been extremely efficient. And also, we have focused on them during the challenging times. I think over a period of time, to some degree, this could normalize. So I think there is an element of that sitting in cash. The other thing is, I think, some amount of cash will also go as we will continue our investment in manufacturing as over time, it will present an opportunity for us, right, so that we are able to make more of our business internally in-house, yes.

Okay. Great. If I could squeeze in one last question. As, Mithun, you look ahead over the next couple of years, from a growth perspective, from a demand drive perspective, what are the key things you are asking your team? You can touch upon distribution, you can touch upon geographical reach, you can touch upon product side. So can you just elaborate on all these 3, 4 pillars, where you think that over the next 2 years -- 2, 3 years, demand would be, where growth would come from?

Yes. Ram, do you want to take it?

Yes, I'll do that. Yes. So fundamentally, what will shape our future business are going to be -- it's going to be centered around 3 or 4 levers. I think one is we will be evolving the category mix and product mix more favorably than it is today. And that's going to be one focus. And towards that, we are investing deeply in building organization system and process to drive product portfolio ahead. I think that's the one theme that we are working on. Then the second theme that we are working on is to strengthen our route to market when it comes to organized channels. And that may be e-commerce, modern trade and, let us say, CSD, CPC and all that. So I think that's an area where we have been under indexed traditionally. And I think this would be the right time for us to make investments to get growth from these areas. So I think that would be the second piece. So I think the third piece is distribution and fundamentally is centered around smaller town and rural and parts of non-South, where even though we have traveled significantly over the years. And I think that there is still room for us to explore more deeply. So I think the reach is going to be -- reach would continue to be a game for us in the next 3 to 4 years. And finally, as Mithun talked about, I think significant inorganic opportunities, which create value and where we are able to see that we can create a reasonable return for the investment we make. I think then that's something also which would form part of. So I think these are 4 pillars, which will drive the growth and profitability of the organization. One more point on margin, which Mithun was talking about earlier, I wanted to make. So I think there is gross margin and there is EBITDA. And what Mithun fundamentally was saying is that our EBITDA is looking better also because marketing investment is less this year. But then that reduction is also offsetting some early business loss in the early part of the year because of COVID. But I think that gross margins are presently under pressure. You would have seen that it's about 1% lower in the last quarter, mainly because of commodity. So a bit of challenge will be there over the next 3, 4 months till we fully travel on the other side. And that's something we will know in the next 1 or 2 months as we attempt to pass the remaining input cost increases to market.

[Operator Instructions] The next question is from the line of Aditya Bhartia from Investec.

My first question is on margin expansion that we have seen from some of the non-dominant companies in the sector. So pretty much this quarter, we have seen every company reporting very high margins. Even some of the newer entrants in categories have done very well. So what has really contributed to that? And it appears that it's not only the A&P expense. And consequently, do you think these margins are going to be sustainable, especially when smaller players return back?

No, I think...

Mithun, can I take?

Yes, yes, yes. Okay. Go ahead.

Sorry. Yes, yes. Mithun, I'll take that. So 2 things, right? And as Mithun was already highlighting earlier, right, all of -- most of us have had very strong growth in quarter 3, and quarter 3 was the quarter where we have all recovered the past backlog. And therefore, the overhead cost absorption in the quarter is very efficient. I think, second thing, company to company, it is varying. But besides A&P, some companies have normalized their activity, and some others are having overhang of the input -- sorry, overhang of, what I would say, the initiatives on cost controls continuing into quarter 3. So I think these are the 2 factors which are affected. I think all companies, if you will go and look at gross margin, you would probably find that most companies will have similar impact in gross margin where you might see 1% to 2% gross margin impact, because commodity has traveled into everybody, but it's the top line growth which is reflecting favorably on the EBITDA.

Sure, sir. And in that context, when we look ahead, do you think that margins that we used to see until, let's say, 2 quarters back or 3 quarters back, those should be seen as more representative margins than maybe building slight expansion on those margins as opposed to looking at the margins that we have seen in the last 2 quarters?

Mithun?

Yes. I think maybe not the current year. You can take FY -- maybe FY '19 numbers because FY '20 also the last quarter was impacted. So FY '19 is when every company had a normalized margin structure. And like Ram said, we will still have issues of commodities for the next 3 to 6 months. But post that, I think 2 things will happen. One was price increases will be passed on. And today, the commodities are at the peak, and there could be some reduction in commodities after the peak of the cycle is achieved. And then we could see some improvement in margins. So maybe we had some slight improvement from FY '19 margins is possible and probably for most commodities.

Sure. That's helpful. My second question is on revenue growth. Do you think there would have been a major element of pre-buying on account of commodity cost increases as well as some part of benefit on account of pent-up demand? And in that context, how would you be seeing growth going forward? I understand that March last year was a complete disaster, and therefore, base is favorable, especially for V-Guard, it's even more favorable than other companies. But how would you be looking at it January, February? What kind of growth do you think overall industry can deliver? And March obviously will be helped by V-Guard.

See, for V-Guard there are 2 reasons while we have some tailwinds. So one is, like I said, one of the reasons some company -- all of us have also reported these kind of numbers as there is some level of prebuying and restocking by the trade because there is a price hike coming in the month of Jan onwards. And in some cases, even December, there was price increases. Some of us have taken some price increases in December as well. So that has also led to some increase in revenue. Having said that, we are looking to have a reasonable growth over FY '19 March because FY '20 March was a washout for us. But we are hoping to -- we feel that we can still grow at a healthy pace over the FY '19 numbers. I can't comment about the industry because, my comments, I'll be restricted to V-Guard only.

Sure. And just to add to that. Mithun, do we get any idea about how secondary sales have been? Any idea of what V-Guard secondary sales could have been in third quarter?

We are tracking secondary sales. So either -- Ram, you want to take this?

Yes. Okay. I think -- no, we are taking -- we are tracking secondary sales, and secondary sales are favorable. Of course, some -- there has been some amount of replenishment of inventory that has happened, see as in September quarter, probably the secondary was more than primary, okay? So to some degree, the -- what I would say is in December quarter, some amount of the sales has gone into inventory because of low opening inventory with trade in our business. But just to give you sense, okay, you could segment the portfolio into 2 varieties. One would be products which sell, which potentially are nonseasonal in nature, right, like wires, switches, switchgear or you can take kitchen, some of these kind of products, right? And here you will generally see that most companies have grown. And then there would be seasonal products like Mithun was talking about earlier about stabilizer or inverter or to some degree, even pump, right, where you would see that there is YTDs there is slight growth or something like that. So those I mean that is degrowth, right? And that's because the summer season is the season when the sale comes and most of us sat out through second half of March and the April and middle of through to third week of May. So I think if you keep all that in context. So I think the summer products should hopefully come back a bit more strongly than they would normally do with some element of pent up sales coming there. If one were to look at what's happening to categories which are selling around the year, where we have seen that the last year sale has come back. But I think this is something we will have to see. And again, the question is when it will materialize, whether it will metallize in March or whether it will materialize in April or May, June and anybody's guess again. So I think that's how I would put it, yes.

[Operator Instructions] The next question is from the line of Rahul Agarwal from InCred Research.

Congratulations for a great set of number. So I had 2 questions. Firstly, could you bit elaborate on your each of the segment? As and could you talk about products within each category? How did they do basically in third quarter? And how do you foresee the next 6 months going to be? For example, electronics, you can talk about maybe inverters, stabilizers going forward. Electrical, you can talk about wires and pumps. And durables, you can talk about heaters, you already said that the factory had some issues, but now it got solved. But in case of, let's say, fans and coolers, please? That's my first question.

So I think, as Ram mentioned earlier, we have the segment lead products into highly seasonal and nonseasonal. Fan although is a summer category, fan is sold throughout the year. So in the case of fan, we've actually seen pretty strong sales right after we reopened it. And if you look at other summer categories like inverter, pumps, stabilizers, they've all been heavily impacted because the sales were not that good obviously in the first quarter, and we missed sales from maybe March 10th to June. So the summer season was effectively a miss for us. So we expect quite strong growth to come back for these categories in the coming months. The other categories which are not seasonal like wires, switches, switchgears, they've all recouped their losses. So they should come back to normal trajectory. We may not see an additional sales for them because they have already recovered most of the losses, and they have started to grow for the first 9 months. So that's the one -- that's the way you can look at it. We are, like I mentioned, we are still seeing -- see for example, to give an example in a product category like modular switches, we have had very strong growth, but we were still not able to supply to the demand owing to shortages in raw materials and our own ability to produce because the demand is far outstripping supply. So there are these things also happening in the market. So companies with good manufacturing capability, companies which are strong and large in a particular category can obviously feed the market better than someone like us who is very new to something like a modular switch. So you will see a lot of this playing out in the next few months.

Okay. Okay. Got that. And secondly, to the earlier participant, I think Pankaj asked about how do you foresee your growth going forward on 3, 4 pillars of your business? Broadly -- specifically on the channel mix. If you could talk a bit more on that? I mean, I'm not really sure how much does e-commerce and model trade contribute to the overall sales, please? So if you could just specifically talk about the channel, and how will you increase your reach when you talk about smaller towns and rural markets into North South, that will really help?

Yes. Ram, do you want to take this?

Yes, yes. I think -- see, we have a progressive expansion of retail coverage across the country, which we -- which is an ongoing focus of the company over the years and which is what has helped us to travel thus far. And I think that's something that we will sustain, okay? And that's one part of it. So fundamentally, we'll be working on deepening our penetration in geographies where our reach is limited, okay -- and relatively limited. And we have been doing that, and that's something that we will continue to do. And I think every year, we have some kind of a goal and target to add 5,000 to 6,000 retailers into our fold. So I think that is...

Ram, sorry to interrupt, but could you help me like which areas are you talking about? Like where are the...

No, no. Basically non-South is where I'm talking about where our reach and penetration as opportunity to continue to grow, right, so...

But my sense was non-South -- the 2/3 of our distribution is already non-South, right?

No. So the kind of reach we have in South and the kind of reach we have in non-South, there is still a significant opportunity for us to grow in non-South in terms of distribution reach, and in terms of number of retailers whom we are addressing.

Okay. And anything on the channel, please?

Yes. On the channel side, basically, today, I think e-commerce and modern retail today for us will be between 12% to 15% of our revenue, if we exclude the wire, right, which is not a product which -- that is wires, switches and switchgear, if you exclude for the remaining business, it's about -- we are at about 14%, 15%. I think this is something we should have opportunity to grow in line with market structure, right? And that's something that we will focus and align.

The next question is from the line of Charanjit Singh from DSP Mutual Fund.

First of all, congratulations on good set of numbers. There are 2 things which I want to understand. One is in terms of the quantum of price hikes, which will have to take across product categories in the coming months. And secondly, in terms of the inventory levels at the channel, how are they at this point of time? And do you see that restocking starting again in the channel?

Okay. Sudarshan, do you want to take the first part on price hike?

Yes. On the price hike, yes, there are 2 things. One is copper and then there are other categories. So we don't have to worry too much about copper because pricing is dynamic. To give you an example, in Q3, the average copper prices are something like 15% over last year. For the other raw materials, I think, more of that impact will flow in into Q4. It varies across categories, but we will have to look at something like maybe 4% to 7% depending on how much commodity movement happens.

Okay. And sir, the inventory levels in the channel?

Shall I, Mithun?

Yes, yes.

Yes, yes. I think channel inventory is, by and large, healthy and probably lower than our historical levels, but by and large, healthy. Some of the categories like stabilizer may be a bit higher because people may have purchased -- because we had a price increase, and they may have purchased we would have seen a stabilizer growth in quarter 3. They may have advanced some bit of purchase, right? So but that's not material because quarter 4 is a huge quarter for stabilizer. So in that sense, it's not material on quarter 4. But that would be going and sitting in the channel inventory, right? So there may be in some parts of our portfolio. Some parts of our portfolio, channel inventory is very low. Like, if you look at water heater, if you look at kitchen, we are -- in some categories, our channel inventory is much lower than what we should be having here.

Okay. And sir, lastly, in terms of this acquisition, which we have done, and our thought process in terms of future gap which you want to fill. So if you can just give some inputs on that?

Mithun?

Sorry, can you -- you're talking about the distribution network or you're talking about the...

No, no, sir. The acquisition which we have done, the investment? And secondly, in terms of which are the other product gaps which you want to fill in the future?

Are you talking about GEL. Ram, you want to take this?

Okay. Yes. So I didn't understand the question vis-à-vis GEL. As far as the other categories are concerned, see, fundamentally, we are looking at acquisitions which will serve as a platform for our growth, right? So either they should help portfolio or they should help specific categories where we have, what I would say, capability gap or where we need, let's say, a quick ramp up. So of course, fundamentally, they are going to rest in categories where we need -- where we have made more recent entries, right? So there will be in the durable space. They're more likely to be in the durable space. That's what we are looking at. And I'm talking about small appliances. And as far as GEL is concerned, I think we have already said that the primary reason for the GEL acquisition, right, is because we feel that it's an interesting technology, which can bring the new consumer value and help us to grow the top line and bottom line of our inverter battery business. So it's a meaningful differentiation and value that we can bring to consumer under our portfolio. There may be other applications of that technology for our other product categories, which is something that we will explore at a later stage once we are able to commercialize this technology for inverter battery applications.

The next question is from the line of Sonali Salgaonkar from Jefferies.

Sir, my question is about the price hikes again. How many -- how -- what is the quantum of the price hikes that has already been taken? I mean you mentioned 4% to 7% going ahead probably. But what has been taken and across which segments?

So I'll just give a brief intro, and then I'll pass this to Sudarshan. So if you look at something like wire, our average prices are something like 15% to 20% higher than what it was last year. And almost entirely, it has been passed on to the market because in the case of wires, the pricing is dynamic by our branded players because of the frequent fluctuations in copper prices. Regarding other categories, Sudarshan, do you want to take this?

Yes. Ignoring wires in what the pricing, which has already been taken is -- on a company's average would be about 3%, 3.5%. That much would have traveled already.

Sure, sir. And when was this taken, in Q3 or effective Jan?

No. I'm talking about Q3.

Understand, sir. Sir, my second question is regarding the distribution. Would it be possible to give us an approximate number of dealers categorized as South and non-South?

Maybe, Sudarshan, we can share this outlook. We don't have it with us.

Retail points total of 40,000. About 17,000, 18,000 should be in South, balance, non-South.