Rating Rationale
November 30, 2020 | 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
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of V-Guard Industries Limited (V-Guard).
 
The sporadic lockdown in key markets especially Kerala as well as temporary supply disruptions in the value chain has led to decline of 23% in revenues during the first six months of fiscal 2021 (vs. comparable period of last year). Operating margins during this period also declined to 8.1% (compared to 11.5% last year) due to lower volumes which was partially offset by cost reduction measures and improving operating efficiencies. CRISIL expects growth to be stronger during the second half of fiscal 2021 driven by healthy demand across product segments, thereby limiting the decline in revenues to an estimated less than 10% and operating margins at about 9% for fiscal 2021.
 
Over the medium term, V-Guard is expected to sustain its healthy business risk profile supported by strong marketing initiatives, improving penetration in non-South markets and increasing acceptance of new products.  This will aid the company to grow at about 10% over the medium term with strong rebound anticipated across product categories in fiscal 2022. Further, operating margin should also sustain at around 9-11% given the narrowing price differential between southern and other markets, increasing scale of operations and improving cost efficiencies.  Thus, company is likely to generate annual cash accruals in excess of Rs 150 crore over the medium term, which will more than suffice to fund modest annual capital spending (~Rs 75 crore per annum) 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 (negligible debt and liquid surplus of around Rs 450 crore as on September 30, 2020) 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 less than 1.0 time in the event of acquisitions.
 
The rating continues to factor in the benefit of V Guard's 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.

Analytical Approach

For arriving at the ratings, CRISIL has consolidated the business and financial risk profiles of V-Guard along with its subsidiary, Guts Electromech Limited since both entities have business linkages.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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 (28% of revenue in fiscal 2020), stabilizers (19%) and pumps (10%) has gradually reduced over a period of time along with higher share of in-house manufacturing. This is driven by expansion in new product lines such as fans (10% of revenue in fiscal 2020), UPS (uninterruptible power supply) systems (12%), and more recent launches in kitchen products, air coolers and switch gears (together account for 7%). Further, the increasing share of online sales (about 7% of revenues) is expected to further support the stability in revenues. To better diversify its geographic presence, the company is consolidating its position in markets outside South India as well. Contribution from these regions has increased to 40% of total revenue in fiscal 2020 from 15% in fiscal 2010; it is expected to increase further to ~45% in the next three years.
 
* Strong brand equity and established marketing network
The V-Guard brand has a strong recall among customers, given its 40 -year old vintage in South India. Besides, the company is also gradually improving its footprint in the non-South markets as revenues from this region has more than doubled in the last 6 years ending fiscal 2020. Complementing its strong brand equity is an established marketing network of over 600 distributors, 5,500 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.
 
* 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 ~50% 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, 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
Financial risk profile is marked by healthy cash generation and strong capital structure (networth of Rs 989 crore and negligible debt as on March 30, 2020). Expected annual cash accruals of over Rs 150 crore should be sufficient to fund internal requirements thus leading to low reliance on debt and continued strong credit metrics. Besides, liquidity should remain strong; working capital bank line of Rs 180 crore was sparsely utilised and company additionally had healthy cash surplus of over Rs 450 crore in September 2020.
 
While acquisitions are a possibility and could result in a moderation 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
* 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.
 
* 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, part of the increase in input prices needs to be absorbed or passed on with a lag, thus limiting increase in margins. However, to partly counter this 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.
Liquidity Strong

V-Guard enjoys strong liquidity driven by expected cash accruals of more than Rs. 150 crore per annum in fiscals 2021 and 2022 and cash and cash equivalents of more than Rs. 450 crore as on September 30, 2020. V-Guard also has access to fund-based limits of Rs. 300 crore, which have been sparingly utilized over the last 12 months ended September 2020. The company has negligible long-term debt obligations. Capex is expected to be around Rs. 75 crore per annum which can be fully met through internal accruals. Incremental working capital requirements are also expected to be nominal and met entirely through internal accruals.

Rating Sensitivity Factors
Downward Factors
* Steep decline in revenues or sustained deterioration in margin to less than 8%, impacting cash generation
* Higher than expected debt funded capex or acquisition leading to deterioration in credit metrics; for instance, gearing exceeding 1.2 times, on a sustained basis.

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 2020, the company derived 19% of its revenue from voltage stabilisers, 28% from PVC insulated wires and LT power cables, 10% from pumps, 13% from water heaters, 10% from electric fans, 12% from desktop and digital UPS systems and inverters, and the balance from kitchen appliances, air coolers and switchgears.
 
In August 2017, V-Guard acquired GUTS Electromech Limited for a total consideration of Rs 6.2 Cr. This company has manufacturing plants in Hyderabad and Haridwar and manufactures switch gears, circuit breakers, relays and power transformers.
 
For the first six months of fiscal 2021, V-Guard reported PAT of Rs 54 crore on operating income of Rs 1023 crore compared with PAT of Rs 109 crore on operating income of Rs. 1321 Cr during the previous corresponding period.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 2506 2,594
Profit After Tax (PAT) Rs crore 188 168
PAT Margins % 7.5 6.5
Adjusted debt/Adjusted networth Times 0.01 0.02
Interest coverage Times 68 137

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Complexity levels Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 150 Simple CRISIL A1+
 
Annexure - List of Entities Consolidated
Name of entity Extent of consolidation Rationale
Guts Electromech Limited Full Subsidiary; business linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  150.00  CRISIL A1+      04-11-19  CRISIL A1+  14-11-18  CRISIL A1+  11-12-17  CRISIL A1+  -- 
Short Term Debt (Including Commercial Paper)  ST                  06-10-17  CRISIL A1+  CRISIL A1+ 
                    13-07-17  CRISIL A1+   
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Consumer Durable Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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