V-Guard Industries Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Subdued demand, margin recovery underway: Consumer demand was weak across discretionary categories, yet gross margin improved 450 bps YoY to 33.8% as commodity prices softened, with management targeting a further 100 bps to reach pre-COVID levels.
• Electricals dragged down by B2C wires: The electrical segment, where wires is the largest constituent, grew only 9-10% because V-Guard's conscious B2C focus excludes the large infrastructure projects that are currently driving industry wire demand.
• Consumer durables margin recovery delayed: EBITDA in consumer durables is stressed because growth has been inadequate to cover investments; price increases in fans and water heaters have not been fully taken, and market leaders are resisting timely increases or discounting.
• Sunflame decline to be arrested, not reversed: The kitchen appliances industry is degrowing sharply; management does not expect a full-year sales increase for Sunflame but hopes H2 will at least match last year's numbers, helped by a low base.
• What to watch next quarter: Whether the festive season and winter actually deliver the promised H2 topline recovery, whether water heater inventory clears to allow margin improvement, and whether Sunflame's internal fixes translate to numbers.

Demand Environment

• Broad-based consumer slowdown: Subdued demand has been visible since September/October of last year, strongly in fans and kitchen appliances, and lately also in water heaters where extended summers in the East and South pushed the season later.
• Festive season so far mixed: Fans are getting traction with new launches; water heater general trade sales have not really started, though e-commerce saw some pre-Diwali sales. Other categories are largely doing okay.
• Volume-led, not price-led: Hardly any pricing actions were taken; growth is almost entirely volume-driven. Pricing gaps still exist in ceiling fans and electric water heaters, with the industry yet to fully pass on cost increases.
• Water heater inventory overhang: V-Guard is sitting with old inventory produced last season; once that starts getting offloaded, management is hopeful of a margin increase. The commodity transition timing has been a problem for V-Guard relative to the market.

Ramachandran V.: "There are no fundamental issues here that come to my mind. Some of the categories will roll over. I think a bit of challenge on water heater synergy, the commodity transition happens for us that part of it is bit of a problem for us compared to the market."

Segment Performance

• B2C wires choice constrains participation: V-Guard made a conscious choice years ago to be in the B2C space, exiting EPC and UK system supply businesses. The retail consumer part of the wires business has been slow across the industry, not just for V-Guard.

Mithun K Chittilappilly: "Many years back V-Guard made a choice to be in the B2C space so we exited whatever we used to have businesses that was supplying UK system to bank ATMs which we shut down. We had businesses that were supplying large underground cables to big EPC contractors which we shut down."

Margins & Cost Structure

• Gross margin recovery progressing: Gross margin improved 450 bps YoY to 33.8%, moving closer to pre-COVID levels. Management believes another 100 bps improvement is achievable.
• Pricing transmission lagging: Because of market slowness and intense competition, pricing transmission has been impacted. Gross margins improved but another 3-4% recovery still has to happen.
• Employee cost step-up: Variable pay provision swung by ₹20 Cr; additional headcount from Simon Electric (120 people), VCPL, and staffing for new factories (Pantnagar, battery plant, kitchen plant) where people were hired and trained before commissioning.
• Other expenses elevated: Travel costs increased significantly with no restrictions and hotel price inflation. Outsourced manpower costs sit in other expenditure; some increases reflect the transition from outsourcing to in-sourcing, making base-year comparisons unreliable for another two to three quarters.
• Consumer durable EBITDA stressed: Growth has been weaker in H1 versus the last two years and versus plan, inadequate to cover investments made to scale up the business. Management wants to increase ECD margins by at least one percentage point, with most of that increase (2-3%) coming from consumer durables, but demand sluggishness and market leader pricing behavior will delay recovery.

Manufacturing & Capacity Build-Out

• VCPL Pantnagar at planned output: The first plant has reached its planned output; the battery and kitchen products unit will be commissioned in Q3 and scaled up in Q4.
• Kitchen plant timeline: Likely to come by end of December.
• Electronics margin recovery path: More benefits expected in the next 6 months to 1 year from the manufacturing facility for batteries and the commenced factory for inverters and stabilizers.
• Tax rate benefit deferred: The new manufacturing entity operates under approximately 17% tax; a reduction in effective tax rates may start to be visible towards the end of next year as that entity scales up, though it is still small relative to the overall tax outgo.

Gegadyne Investment

• Further ₹20 crore investment approved: The Board approved additional funding to scale up the pilot plant, improve product specifications, and prepare for Series B fundraising.
• Fair valuation gain of ₹10 crore: Recognised because two years had passed since the initial investment; accountants marked-to-market annually and felt the technology development agenda progressed further with pilot plant commercialization, reflecting improved valuation. The current value of Gegadyne is ₹293 Crores.
• Strategic, not financial: V-Guard's focus is on moving the idea from lab to pilot plant and from pilot plant to the mother plant; a couple of V-Guard people work closely with Gegadyne. Management declined to comment on any exit timeline.

Ramachandran V.: "Gegadyne is not a financial investment for V-Guard, it is a strategic investment for V-Guard."

Pricing & Competitive Dynamics

• Ceiling fan pricing incomplete: The industry has still not fully passed on cost increases, partly because of a major shift from traditional fans to BLDC fans; older models are not finding takers, which is one reason some companies have not fully passed on increases.
• Water heater pricing gap: Price increases required to offset raw material increases have not been fully taken. Market leaders are refusing to take timely price increases or resorting to discounts, delaying margin recovery for the category.
• Recovery timeline: Management hopes to take pricing increases in ceiling fans and electric water heaters in the next 6-9 months. Fan margins hopefully recover in the next 3 to 9 months; water heater margins should partly recover in the upcoming quarter, with full recovery to pre-COVID levels taking slightly longer.

Mithun K Chittilappilly: "Ceiling fans we believe that the industry has still not fully passed on everything primarily because there was also a major shift from the traditional fans to BLDC fans. So the older models are not finding takers and that is also one of the reasons why some companies have not fully passed it on."

Guidance & Commitments

Key Metrics