Rating Rationale
December 11, 2017 | Mumbai
V-Guard Industries Limited
Rating Reaffirmed 
 
Rating Action
Rs.150 Crore Commercial Paper* CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Earlier STD (Including CP)
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of V-Guard Industries Limited (V-Guard).

V-Guard's revenues grew by about 8% (on y-o-y basis) in first six months of fiscal 2017 driven by positive growth across all product segments. Healthy double digit growth was seen across kitchen appliances (21%), switchgears (20%) and UPS (16%) segments while other segments such as pumps (9%), stabilizers (7%), water heaters (7%), cables (5%) and fans (3%) posted steady growth. Operating margins which declined to 5.8% in the first quarter of fiscal 2018 due to GST implementation impacting volumes, recovered sharply to about 12% in the second quarter.

V-Guard is expected to register healthy double-digit revenue growth over the medium term, driven by steady demand across categories, growing penetration in markets outside southern India, increasing acceptance of new products (kitchen cooktops), and an additional business line in relays and switchgears (following the acquisition of GUTS Electromech). Its operating margin is also expected to be sustained at 9.5-10.0% for fiscal 2018, given the narrowing price differential between southern and other markets, and improving cost efficiency.

Annual cash generation is expected to exceed Rs 150-160 crore, which will more than suffice to fund modest annual capital spending (Rs 40-50 crore) and incremental working capital requirements.

To propel growth, V Guard's management could consider medium-sized acquisitions to enhance its product offerings as well as geographical presence. The company's currently strong balance sheet provides the flexibility to absorb modest-sized acquisitions without significantly impacting key credit metrics. Also, CRISIL takes comfort from V-Guard management's stated intent of capping gearing at around 1 time in the event of acquisitions.

The rating on V Guard's debt instrument continues to benefit from its diversified product portfolio, strong brand equity, established marketing network, and leading position in the organised market for voltage stabilisers. The rating also factors in a gradually strengthening market position in other electrical and consumer durable product segments, and healthy operating efficiency. Complementing its improving business risk profile is the company's healthy financial risk profile and liquidity. These strengths are partially offset by partial vulnerability of its operating margin to volatile input prices, intense competition in key product segments, and limited pricing power in a few segments such as pumps, fans, and cables.

Key Rating Drivers & Detailed Description
Strengths
* Diversified product profile and growing geographic expansion, providing revenue stability
The company has regularly launched new products and variants to grow its revenue and reduce dependence on a particular product. The share of established products such as cable and wire (29% of revenue in fiscal 2017 against 35% in fiscal 2012), water heaters (8% of revenue in fiscal 2017 vs. 10% in fiscal 2012), and pumps (12% of revenue in fiscal 2017 vs. 15% in fiscal 2012) has reduced over a period of time thus reducing V-Guard's dependence on revenue from established products. This has been compensated by relatively new product lines such as fans (9% of revenue in fiscal 2017 vs 6% in fiscal 2012), digital UPS (uninterruptible power supply) systems (10% of revenue in fiscal 2017 vs 7% in fiscal 2012), and recently launched kitchen products that have scaled up besides ensuring revenue growth. To better diversify its geographic presence, the company is consolidating its position in markets outside South India. Contribution from these regions has already increased to 33% of total revenue in fiscal 2017 from 15% in fiscal 2010; it is expected to increase further to 40-42% in the next four years.

* Strong brand equity and established marketing network
The V-Guard brand has a strong recall among customers, given its 30-year old vintage in South India. Complementing its strong brand equity is an established marketing network of over 624 distributors, 5562 channel partners, and around 25,000 retailers. The company focuses on after-sales service and has a separate team for this segment in the southern markets; it adopts a franchise model for other markets. Currently, it has 260 service centres.

* Leading position in the voltage stabiliser segment, and improving market position in other electrical and consumer durable product segments
V-Guard is the market leader in the voltage stabiliser segment with a 51% share, and has increased its market share in most product categories, including water heaters, fans, cables, and pumps recently. Most of the business segments are highly fragmented and intensely competitive. Hence, while revenue has been improving, it is difficult to significantly increase the market share in these product segments, especially fans, low-tension (LT) power cables, polyvinyl chloride (PVC) insulated cables, and motor pumps. The strong brand equity will help strengthen the market position in the electrical and consumer durables segments over the medium term.

* Healthy financial risk profile and prudent working capital management
The financial risk profile is supported by steady revenue growth and cash accrual, and comfortable gearing and key debt protection metrics. With a sustained operating margin of around 10%, healthy cash generation will continue (estimated at over Rs 150-160 crore annually). Moderate capex plans and continued prudent working capital management will also support the financial risk profile and key credit metrics over the medium term. Cash flow from operations were positive in the past three fiscals.

V Guard's liquidity remains strong. Working capital bank line of Rs 180 crore was utilised negligibly. Besides, the company had healthy unencumbered cash surplus of over Rs. 100 crore in September 2017.

While acquisitions are a possibility and could result in a deterioration in currently comfortable credit metrics, CRISIL takes comfort from the V-Guard management's demonstrated track record of maintaining its leverage at comfortable levels, driven by its stated intent to do so. Ergo, any material deterioration in credit metrics, is expected to be temporary.

Weaknesses
* Susceptibility to volatility in commodity prices and increasing competition
The prices of key inputs such as copper and aluminium are highly volatile. Because of intense competition in most product segments, part of the increase in input prices needs to be absorbed or passed on with a lag, limiting increase in margins. There is intense competition in most of the business segments due to the presence of a large unorganised market. The company has been continuously rationalising its cost structure by adopting an asset-light production model, setting up of manufacturing units in excise-free zones, and achieving higher economies of scale to maintain the cost structure.

* Limited pricing power in segments such as pumps, fans, and cables
The cable and wire, geyser, fan, and pump segments are highly fragmented and have several unorganised players, limiting the pricing power of organised players. Furthermore, players face intense competition from cheaper imports from China. This is reflected in relatively low gross margins in these product categories, despite healthy revenue growth.
About the Company

V-Guard belongs to a Kochi-based industrial house, promoted by Mr Kochouseph Chittilappilly. The promoter has business interests in the entertainment, hosiery and construction sectors through group companies, Wonderla Holidays Pvt Ltd, V Star Creations Pvt Ltd, and Veegaland Developers Pvt Ltd, respectively.

V-Guard commenced operations with stabilisers and pumps, and gradually diversified into related products. In fiscal 2017, the company derived 18% of its revenue from voltage stabilisers, 28% from PVC insulated wires, 1% from LT power cables, 11% from pumps, 5% from electric water heaters, 3% from solar water heaters, 9% from electric fans, 10% from digital UPS systems and inverters, and the balance from desktop UPS systems, kitchen appliances, and switchgears.

For the first six months of fiscal 2018, PAT was Rs 69.75 crore on operating income of Rs 1,119 crore against a PAT of Rs 80.2 crore on operating income of Rs. 1,034 Cr during the previous corresponding period.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs crore 2,151 1,862
Profit after tax (PAT) Rs crore 152 112
PAT Margins % 7.1 6.0
Adjusted debt/Adjusted networth Times - 0.02
Interest coverage Times 108.78 20.75

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Commercial Paper* NA NA 7-365 days 150.0 CRISIL A1+
*Earlier STD (Including CP)
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  150  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  09-12-14  CRISIL A1+  CRISIL A1 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt

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