V-Guard Industries Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Demand revival glimpsed in December: Consumer sentiment improved late in the quarter, and January stayed decent, though water heater offtake lagged on warm weather.
• Gross margins surged 420 bps YoY to 33.9%: The gap that existed at the start of the year has substantially closed, and management expects the sequential climb to continue into next year.
• Sunflame arrested its decline: Revenue grew 2% QoQ after a weak first half, and a new leadership team plus operational integration are now in place.
• Electronics led with 16.7% YoY growth: Stabilizers, inverters and batteries delivered strong traction, helped by a good summer and a strategic project now underway to fix inverter and battery margins.
• What to watch next quarter: Whether the December demand uptick converts into the promised stronger summer top line, the pace of Sunflame's e-commerce ramp, and the phasing of the INR4.5 crore strategic project charge.

Demand & Revenue Performance

• Soft quarter, late revival: Consumer demand stayed soft for most of Q3, but an improvement was visible in December across most products and continued into January.
• Water heaters missed the weather: Warm conditions until the third week of December kept offtake slow, the one product category that bucked the improving trend.
• Geographic rebalancing working: South grew 10.6% YoY and non-South grew 11.2% YoY, showing progress on the strategy to scale the non-South contribution.
• Fans normalized after a messy year-ago quarter: Last year's Q3 was when V-Guard stopped selling non-star rated fans in November, so the base was not inflated by discounting of obsolete inventory, and sales have recovered faster.
• Wires business under pressure: Growth has been muted across the industry, with the B2C part impacted by inflation, poor rural demand and copper price fluctuations, while the B2B cables and underground cables part is growing well.
• Electronics reversion to trend: After disruptions from COVID and cold summers in FY21-FY23, some of the growth is reverting toward long-term trends, aided by a very good summer in South and East this financial year.

Mithun K Chittilappilly: "So for V-Guard, at least, we stopped selling of these fans in November itself. So from December onwards, our sales is primarily for the star rated fans. So in that sense, we did not have this huge overhang of discounted and obsolete products in the market bearing V-Guard's branding for a long period of time."

Segment Performance

Margins: The Gross Margin Story

• Gross margin jumped 420 bps YoY to 33.9%: The gap that existed at the beginning of the year has substantially closed, and management says gross margins will continue to move up sequentially even through next year.
• EBITDA margin at 8.7% vs 6.8% last year: The 190 bps improvement was partly muted by one-off cost items under other expenditure.
• One-off cost items: A writeback of bad debt provision of ~INR11 crores in Q3 last year created a low base; this quarter carried an INR4.5 crore provision for Extended Producer Responsibility legislation on past sales, plus INR4.5 crores accrued toward a strategic project in the Electronics segment.
• Strategic project phasing is front-loaded: The project runs 12-14 months, but the charge on the P&L will not be equal every quarter; next quarter will carry 60-70% of the INR4.5 crores, with the following quarter perhaps 10-20% lower.
• ECD margins under-indexed but improving: Fans and kitchen appliances carry lower margins due to scale and investment drag from A&P, disproportionate manpower and promotional activities for new categories, but the combined basket has gotten better this quarter.
• Kitchen factory as margin lever: The Vapi kitchen plant, commencing production in Q4, will address a lot of the margin issues in kitchen appliances.
• Water heater margin gap: V-Guard is under-indexed in the premium part of the electric water heater market, selling primarily from the mid and lower segments where margins are lower; a better product lineup is being planned.
• Full-year EBITDA margin guided to 9-9.5%: Management says this level is sustainable.

Mithun K Chittilappilly: "We are also investing in A&P, we are investing in disproportionate manpower, we are investing in a lot of other promotional activities because ECD houses a lot of the new categories. So that's also one of the reasons why our combined basket in ECD looks slightly lower margin, but we have gotten a lot better this quarter."

Sunflame: Integration & Turnaround

• Decline arrested: Sunflame grew revenues 2% during the quarter after a weak first half, with margin improvements from quick wins in transportation and packaging.
• Leadership rebuilt: Four key talents onboarded: CEO, CFO, supply-side head and HR head.
• Operational integration progressing: E-commerce, modern retail, regional specialty stores and CPC/CSD canteens are now being supported through V-Guard's operating teams over the last 3-4 months.
• E-commerce groundwork complete: Team transition, pricing and supply chain work is done; gradual traction expected from the current quarter, though it takes 2-4 months for products to gain online traction.
• South team and modern trade: A new Sunflame team has been on the ground in South since August-September; MTRSS conversations are ongoing with teams in place, and quick traction is expected.
• Systems and efficiency: SAP implemented for stronger controls and faster MIS; significant efficiency opportunities identified in transportation, packaging and sourcing.
• New integrated operating model: A project is underway to clarify which operations will be jointly handled at the back end and which will run uniquely in go-to-market; output expected by June or July, with rollout starting in H2.
• Product drivers: Gas, hoods and built-in are the three primary revenue drivers going forward; built-in will require shop-in-shop and exclusive store investments over the next 12-18 months.
• Margin ambition with a caveat: With the right volume, Sunflame should hit the 14.5% level, but management may also choose to invest more back in the brand and declined to give margin guidance.

Mithun K Chittilappilly: "Yes. I think with the right kind of volume, we should hit that. But we will also see; we will also try to invest more back in the brand. So I don't want to give out any margin guidance, so I'm just saying that we're happy with the gross margin improvement."

Fans & the BLDC Opportunity

• Fans grew well in Q3 on a normal base: Last year's Q3 was not a bumper quarter, and V-Guard avoided the industry-wide discounting of obsolete non-star rated fans by stopping sales in November itself.
• Q4 outlook positive: New launches and good market traction are expected to drive fan performance in the current quarter.
• Revenue ambition beyond INR1,000 crores: Management believes it can build the fan business past this mark in the next couple of years, driven by improved competitiveness, premium offerings, BLDC-driven market disruption, better retail visibility and display focus.
• BLDC as a leveling event: The shift to BLDC is disturbing established segmentation and offerings, creating an opportunity to establish new platforms on an even footing with incumbents.
• Backward integration progressing: 50-60% of ceiling fans are now made in-house, delivering advantages in finish, quality, differentiation and cost; this will be pursued for TPW fans as well.
• TPW factory: Expected to come up in the next financial year.

Ramachandran V: "There are some changes that are happening in the market. I think the BLDC itself is a significant change. And in this situation, the segmentation and the established offerings, right, are getting disturbed. And the new platforms are getting established in the market, right? And that presents a very good opportunity for someone to be able to enter and establish new offerings in the market because everybody is on an even footing then."

Manufacturing & Capex

• Three plants in motion: The Electronics plant at Pantnagar is performing well; the battery plant at Hyderabad and the kitchen plant at Vapi will commence production in Q4 of this financial year.
• Strategic project in Electronics: A margin improvement and sales acceleration program for inverters and batteries, discussed before COVID but delayed, is now underway to ensure the two new world-class inverter plants and one battery plant are utilized quickly.
• Capex outlook: Next year's capex will be about INR80-90 crores; no large capex is planned for wires over the next 36 months.
• Term loan repayment: The loan taken for the Sunflame acquisition is intended to be repaid over the next 4 to 6 quarters.

Guidance & Commitments

Key Metrics