Markets
Muted demand tones down V-Guard’s glow in March quarter
Summary
V-Guard’s management said that high inflation is hurting demand but it expects some turnaround in the September quarterShares of V-Guard Industries Ltd have dropped 3% in 2023 so far. Investors looking for meaningful triggers ahead may be disappointed as demand outlook remains subdued.
In the March quarter earnings call on Wednesday, V-Guard’s management said that high inflation is hurting demand. It expects some turnaround in the September quarter, but analysts have already slashed earnings estimates. “March quarter was in-line with Jefferies estimates. But weaker demand scenario warrants caution and leads us to cut FY23-26E earnings per share by 2-4%," said analysts at Jefferies India in a report on 31 May.
“Although the March quarter results were in line with our projections, the weak demand outlook prompts us to proceed with caution," the analysts noted.
Despite a 7.6% year-over-year surge in revenue for V-Guard in Q1, performance across sectors was uneven. The electronics and electricals division saw a revenue spike, while the consumer durables sector suffered a revenue drop.
The overall gross profit margin increased year-on-year. But this did not translate into an expansion at the Ebitda (earnings before interest, tax, depreciation, and amortization) level owing to an increase in advertisement expenses. As a percentage of revenue, advertisement/promotional expenses rose to 1.6% in the March quarter versus 1.2% in the same period last year. Thus, V-Guard’s Ebitda margin fell by 192 basis points year-on-year to 8.65%. One basis point is one-hundredth of a percentage point.
V-Guard completed the acquisition of Sunflame Enterprises Pvt. Ltd in January. Excluding the revenue and cost related to the acquisition of Sunflame, the company reported an Ebitda margin of 8.2% versus 10.6% in Q4FY22.
“We believe V-Guard’s aspiration of clocking 15% organic growth in FY24 looks stretched, given (1) weak consumer demand; (2) disrupted summer season sales; and (3) single-digit growth in the south market (55% of sales) as V-Guard is fully indexed there," said analysts at HDFC Securities in a report on 1 June.
To be sure, there are levers for margin expansion such as softening of input costs. But key catalysts for profitability would be driven by Sunflame integration and synergies thereof. Improvement in the market share in Sunflame and V-Guard’s core business is crucial to aid investor sentiments. Also, a rebound in demand is key to support revenue growth. As such, investors would do well to track the progress towards achieving FY24 targets.
