V-Guard Industries Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Revenue crossed ₹1,000 crores for the first time, growing 23.7% YoY despite the third COVID wave disrupting January and February, with a strong March and even stronger April-May summer pickup.
• Margins compressed sharply to 10.6% from 12.9% YoY as sustained commodity inflation in Consumer Durables kept pricing actions perpetually behind cost increases, though management believes the worst is over.
• Inventory was deliberately built up to avoid a repeat of FY21, when ₹250-300 crores of revenue and ₹100 crores of gross margin were lost to stockouts; normalization is promised from June onward.
• Water Heaters regained all lost share and the Fans business is repositioning into the mid-segment with three new platforms from the own Uttarakhand factory, setting up the next 12-18 months of growth.
• What to watch next quarter: Whether commodity prices actually plateau or decline as expected, the pace of inventory normalization and its cash flow impact, and whether the April price hikes stick in a competitive market.

The Quarter in Context

• A milestone quarter with an asterisk: Revenue crossed ₹1,000 crores for the first time, with 23.7% YoY growth, but the headline was powered by a very strong March after a weak January-February when trade was unwilling to stock summer categories due to COVID uncertainty.
• Channel inventory was near zero entering summer: For three consecutive years, trade bought summer inventory only to face lockdowns (FY21 April, FY22 May) and couldn't sell out, so this year they waited for real summer demand to materialize before stocking.
• Summer has since broken strongly: In the 45-50 days through April-May, summer demand was very strong, particularly across North and West, with Electronics categories recovering to normal growth rates and non-summer categories growing even faster.
• Housing demand is a structural tailwind: Low interest costs and EMIs are driving housing demand, which feeds Electricals categories; even with price increases, decent volume growth is visible in Wires and strong growth in Switchgears and Modular Switches where price hikes are lower.

Mithun Chittilappilly: "In the last three years, every year when we sold inventory into the trade, in the summer it was either a lockdown or COVID... They were not willing to up stock this time and they waited for the real summer to happen. Thus, basically, the channel inventory was almost nil as we entered summer this year."

Margin Pressure & the Commodity Cycle

• Consumer Durables bore the brunt: Sustained increases in aluminum, crude derivatives and packaging costs meant that by the time one round of price corrections landed, the next round of hikes was already needed, creating a constant margin drag.
• Two specific drags quantified: Compared to steady-state operations, the new factory on-cost will be about 2% in the current year, and there are pricing gaps of about 3% still to be closed, requiring an aggregate 2-5% price hike depending on category.
• Commodity prices appear to have plateaued: Barring aluminum, management sees commodity prices stabilizing, with copper already starting to decline; the view is that prices have reached a level beyond which customers are unwilling to pay.
• A copper decline is a double-edged sword: Falling copper would expand margins across categories but contract Wires revenue on the sales side as retailers destock, a pattern last seen after 2014/2015.
• Employee costs had a one-off benefit: Q4 employee costs fell QoQ due to writebacks on incentives and variable pay of ~₹5.5 crores and a ₹4 crore one-off in Q3, flattering the cost line.
• Tax writeback boosted PAT: Migration to the new tax regime retrospectively from FY21 resulted in a ₹13 crore tax writeback, lifting PAT to ₹90.6 crore; the go-forward tax rate is expected at 25.2% as VCPL will take time to generate profits.

Mithun Chittilappilly: "I think that the problem with Durables has been that there have been sustained increases in commodity prices. By the time we correct commodity prices and move on, the next round of hikes are required to be taken. Thus, it has been a constant challenge. The good news is that barring aluminum, the rest of the commodity prices seem to have plateaued."

The Inventory Bet

• A deliberate, strategic build-up: Inventory days rose ~15 days on average, not to arbitrage commodity prices but to ensure V-Guard never again suffers the FY21 outcome, when it lost ₹250-300 crores of revenue and ₹100 crores of gross margins because it couldn't supply, losing share, face and retailer goodwill.
• The FY21 scar tissue is deep: In FY21, V-Guard lost about 20% of revenue for want of supplies, and in other categories where business recovered, it could not participate in growth because inventory norms were far tighter than competitors'.
• The call was taken in October-November: Management decided then to restore normal inventory levels, but the seasonal nature of summer categories means stocking naturally rises ahead of the season as factories produce in advance.
• Normalization is promised from June: Inventory will progressively reduce through the September quarter, driven by normative planning based on sales forecasts plus safety stock; input cost pass-through is disconnected from how inventory norms are set.
• Cash flow impact: Some cash will return to earlier levels, but part will go into CAPEX; adding back CAPEX, the company should ideally return to prior cash levels.

Mithun Chittilappilly: "First of all, we are not stocking raw material because we think that the price will go up and so we can have an arbitrage; we are stocking raw materials because we were very badly hit in FY21. In fact, we would have lost nothing less than Rs. 250-300 crores of revenue and maybe Rs. 100 crores of gross margins in FY21 because we did not supply due to this we lost share, we lost face and the retailers were upset with us. Hence, we said that we are not going to put ourselves in that place ever again and that is why we are stocking up raw materials."

Segment Performance

• Geographic diversification is working: South grew 25.4% YoY and Non-South grew 21.5% YoY, creating a more balanced nationwide revenue profile.
• Water Heaters is the crown jewel: A 25-year-old category where V-Guard is one of the largest players in the country with very high EBITDA margins; the own plant in Sikkim is expected to touch ~85% capacity utilization this year, with OEM vendors in India tied up for risk management.
• Fans is being repositioned: V-Guard's presence in Ceiling Fans was poor because it played neither the super-economic nor the premium segment; the Uttarakhand plant now enables play in the mid-segment Decorative range, with Glado, Romanza and BLDC offerings driving growth for the next 12-18 months.
• Kitchen Appliances is still nascent: Steadily improving presence but still a very small player; focus is on improving product capability, market addressability and portfolio competitiveness rather than just GTM expansion.

Mithun Chittilappilly: "Consumer Durables is a combination of various categories and various mix of the states, for example, Water Heaters, are probably the most important category for us in Consumer Durables. It is a 25-year-old category for V-Guard. We are one of the largest players in the country. Our EBITDA margins are very high. However, we also have a lot of new categories where we are losing money. I think it is always going to be difficult because we are always going to launch new products and some of them may come in Consumer Durables."

Manufacturing & Capacity Build-Out

• VCPL is coming online in phases: The wholly owned manufacturing subsidiary has received ~₹60 crores total investment; the first plant in Uttarakhand manufacturing Stabilizers and Inverters has commenced operations, with the full range expected by August-September.
• CAPEX guidance held at ~₹200 crores over the next three financial years, with projects spread across multiple years and factories starting in a staggered manner through FY23 and FY24.
• Fans plant is delivering: Three platforms launched so far (Glado Prime, Romanza, BLDC), enabling V-Guard to play in the mid-segment Decorative range for the first time; these offerings are expected to drive growth for the next 12-18 months.
• Water Heaters plant nearly at capacity: The Sikkim plant, commissioned just as COVID hit with engineers from China and Turkey on site, is now expected to touch ~85% capacity utilization this year.
• Gegadyne Energy pilot plant: Machinery for the pilot plant is produced but stuck waiting to be shipped from China; operations expected to commence by August-September, after which sample battery packs will be supplied to V-Guard for testing and evaluation before any commercialization decision.

Demand Resilience & the Consumer

• Ticket sizes are small, penetration is low: Management does not expect demand to drop off because most categories are not high-ticket, penetration is still low, and replacement cycles are short in Consumer Durables.
• Three consecutive bad summers are reversing: After FY21, FY22 and the early part of this year, summer has picked up strongly from April, with power cuts driving Inverter demand and strong air-conditioning demand pulling Stabilizers.
• Electronics should deliver a much better year: The combination of strong April demand, power cuts and air-conditioning season creates a favorable setup for the Electronics division after a moderate Q4.
• Price hikes in April: Taken in Water Heaters and Fans, though the exact quantum was not available as price lists land in phases depending on geography and market.

V. Ramachandran: "We are not expecting, because the ticket sizes are small. We are not expecting demand to drop off... most of the categories that we are into, they are not of a high-ticket size and the penetration is still quite low, and the replacement cycles are short. So, we should be okay there."

Guidance & Commitments

Key Metrics