V-Guard Industries Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Mixed quarter, wires weigh: Revenue growth was pulled down by the wire segment, the largest category, which degrew on commodity volatility; non-wire businesses showed resilience led by electronics at 28% growth.
• Sunflame integration progressing, margin drag persists: Sunflame grew well in GT and e-commerce but CSD channel overstocking and elevated staffing/consulting costs kept consolidated EBITDA margin at 8.2%, 50 bps below last year.
• Gross margin story intact: In-house manufacturing share rose, cost-saving initiatives continued, and the premium portfolio shift sustained gross margin improvement, with more benefit yet to come as factories mature.
• Operating leverage delayed, not denied: The quarter lacked operating leverage because the largest category degrew; management expects plants to start contributing over the next 2-3 years as utilization rises.
• What to watch next quarter: Whether January wire up-stocking sustains into Q4, the summer season's strength across fans and cooling, and any stabilization in kitchen appliances demand.

Category Performance

• Wires: commodity-driven drag. Wire performance is linked to copper price moves; when prices fall, down-stocking hits, and when they rise, up-stocking returns. South region growth moderated considerably because a large share of wire revenue still comes from that market.
• Water heaters: winter delayed. October and November were warmer than expected, so winter category sales were weak while summer category sales were good, an unusual split within the quarter.
• Kitchen appliances: third year of challenges. The hypothesis is COVID drove a strong kitchen cycle that is now moderating; small kitchen appliances are the highest-penetrated durables category, and stress in the lower-income segment with damaged household balance sheets may be lengthening replacement cycles.
• Electronics: the standout. The segment grew 28%, with RACs driving stabilizer demand in Q1 and Q2, and inverters, batteries, and solar rooftop solutions also performing well. Inverters skew toward rural and suburban areas with power issues.
• Switches and switchgear: mixed. Switches showed some sluggishness; switchgear did well as V-Guard is seen as a go-to option. Fans have done well with new ceiling fan launches in the last 3-4 quarters.

Ramachandran V: "So I think, see, our hypothesis is that probably in the COVID period, people spent a significant amount of time at home. I think that is also the period when the growth in kitchen was very, very strong. And possibly post-COVID and as the country came out of it, I think that we are seeing a moderation in demand."

Sunflame: Integration Gains, Channel Hiccups

• GT and e-commerce growing well. The Diwali quarter was strong for general trade; ex-CSD, Sunflame would have grown in high single or double digits. The endeavor is to grow the business in mid-teens to high teens.
• CSD channel correction underway. Canteen Stores Department had issues from prior-period over-ordering, new brands and SKUs getting approved, overstocking, and inventory correction. Management believes the sluggishness is temporary.
• Margin structure still building. Post-acquisition, Sunflame needed professional staffing in NPD and design, functions previously handled by the promoter. The sales team was thinly staffed and worked only with super stockists. Consulting expenses for integration projects, delays in price increases, and clearing out older platforms all weighed on margins. The Sunflame team also now contributes to V-Guard.
• A&P spend stepped up. Sunflame had Diwali activity this year versus last year when the focus was on integration and product refresh, so the comparable quarter carried lower marketing spend.

Mithun K Chittilappilly: "We are not very worried about what's going to happen in the next 1 or 2 years. We believe that kitchen will continue to grow."

Manufacturing & Capacity Build-Out

• In-sourcing ambition: 70-75% over 3-4 years. The battery plant near Hyderabad is fully online and producing. The stabilizer and inverter plant benefits have largely come through, with some more optimization possible in battery.
• TPW and ceiling fan plant approved. The board approved ~₹100 crores investment in a Hyderabad facility producing both TPW and ceiling fans, funded in phases through internal accruals. Ground-breaking happened a few weeks back; first phase commercial production expected in 18 months. Capex phasing: ₹50 crores in the next financial year, then in phases over the following two.
• Fan capacity logic. By the time Hyderabad ceiling fan manufacturing starts, the Roorkee facility is expected to be fully breaching its maximum capacity on liquid-painted fans; powder coating has spare capacity. The strategy is also defensive: management does not want to keep importing because it expects BIS regulations will eventually block Vietnam-sourced fans as well.
• Kitchen plant near inauguration. The Vapi kitchen plant will be inaugurated next month and will take time to stabilize. Consumer Durables still have scope for operating leverage benefits to flow through.

Mithun K Chittilappilly: "We don't want to keep importing stuff because we do believe the government will bring in BIS and then they will eventually block out Vietnam as well."

Margins: The Narrowing Gap

• Gross margin improving, operating margin lagging. Gross margin sustained on higher in-house manufacturing share, cost-saving initiatives, and a gradual shift to the premium portfolio. Most manufacturing investments are over, and some margin improvement is yet to come as factories mature. EBITDA margin, however, declined 50 bps YoY to 8.2% because of higher A&P spends and employee costs.
• Employee cost spike explained. Last year Q3 had a ~₹25 crores variable pay reversal because targets were not met; this year the company is on track to achieve AOP and is paying variable pay, so no reversal. Additionally, the first year of a new ESOP grant added a ~₹7 crores delta versus last year. The ESOP cycle for the bulk of employees starts in Q3, so the delta appears in that quarter.
• Unallocated corporate expense normalized. The jump from ₹5 crores to ~₹30+ crores was partly due to a ₹17 crores revaluation gain in Gegadyne in the base quarter. The current level of ~₹33-₹36 crores per quarter is the normative run-rate.
• The gap versus leaders has shrunk. Five years ago, V-Guard's EBITDA margin was 9% versus market leaders at ~14%, a 4-5% gap. Today the gap is ~1%, primarily because industry profitability has been under stress post-COVID, not because V-Guard's absolute margin has risen dramatically.
• Operating leverage: missing this quarter, coming later. The quarter lacked operating leverage because wires, the largest category, degrew and pulled down overall growth. In the next 2-3 years, operating leverage from plants should kick in and provide some benefit.

Mithun K Chittilappilly: "If you look at 5 years back, the difference between V-Guard and market leaders in terms of EBITDA was 4%-5%. V-Guard's margin was 9% and market leaders were at about 14-odd percent. Today, the gap has come down to 1% or 2%, not even 2%, I think 1% or something like that."

Demand Signals & Near-Term Catalysts

• Wire up-stocking has restarted. Copper prices increased in January, a round of price increases was announced in the market, and that has restarted up-stocking for wires, at least in January.
• Summer season setup. Management looks forward to the upcoming summer season with an expectation to deliver robust performance. Winter category sales were weak, so a normal summer is important for the full-year mix.
• Inflation not a worry. Management does not expect high inflation from here on, which supports the gross margin trajectory and limits further input-cost shocks.
• End-user demand question left open. When asked whether end-user wire demand is healthy, management gave a general answer about real estate and FMCG slowdown but did not directly confirm or deny underlying demand strength.

Mithun K Chittilappilly: "So yes, I think there has been an increase in copper prices in January. And there has been a round of price increases that has been announced in the market, and that has restarted the up-stocking for wires, at least in January."

Guidance & Commitments

Key Metrics