MOSL: V-GUARD INDUSTRIES (Neutral)-Margins to face near term pressure-Growth intact

​V-Guard Industries: Margins to face near term pressure; Growth intact

(vgrd IN, Mkt Cap USD1.2b, CMP INR184, TP INR167, 9% Downside, Neutral)

• EBITDA and PAT below estimates: VGRD reported revenue of INR6.23b (est. INR5.64b) in 4QFY17 as against INR5.13b in 4QFY16 marking a YoY growth of 21.4% led by strong growth in products like Pumps (up 28%), stabilizers (up 18%) and fans (up 17%) on the onset of a strong summer season. Non-south markets grew robustly by 30.8% YoY while south grew by 17%. EBITDA margins declined 290bp in 4QFY17 to 9.5%, whereas EBITDA stood at INR594m (est. 695m) in 4QFY17 vs INR634m in 4QFY16. Sharp rise in raw material prices impacted margins. Consequently adj. PAT stood at INR415m (est. INR451m) in 4QFY17 vs INR420m in 4QFY16. For FY17, revenue grew 15.5% to INR21.5b, EBITDA margins increased 40bp to 10% and adj. PAT grew 34% to INR1.5b.
  
• Higher GST rate to put pressure on margins: EBITDA margins in 4QFY17 declined 290bp to 9.5% majorly because of high raw material costs. However, the upcoming implementation of GST rates would put incremental tax burden of ~6-7% (current effective indirect rate tax stands at ~17% which would rise to ~24%) which would gradually have to be passed on to the market, hence the expansion in margins would be challenging.
  
• Improvement in working capital days: The working capital cycle stood at 68 days in 4QFY17 vs 70 days in 4QFY16, led by 12 day YoY improvement in creditor days to 54 days. With growing presence in non-South regions, VGRD’s pricing power in non-South markets is also increasing as a result of which debtor days are expected to improve further. VGRD expanded its dealer network to 445 nos in FY17 vs 408 in FY16 in non-South region. The management has also hinted at reducing cash conversion cycle through other initiatives as well.