Buy V-Guard Industries; target of Rs 210: ICICI Direct

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ICICI Direct's research report on V-Guard Industries

The second half of March happens to be a strong revenue booking period for V-Guard due to significant offtake of summer based products and annual closing of incentive schemes of various products. According to the company, the lockdown situation impacted revenue, EBITDA to the tune of Rs 250 crore, Rs 70 crore, respectively, in FY20. Adjusted with Covid-19 impact, FY20 revenue, EBITDA would have been up 6%, 47%, respectively. Further, the company’s improved product mix, benign raw material prices helped drive gross margin up ~330 bps YoY in FY20. It has further guided that while Q1FY21 performance is likely to be impacted by loss of sales of almost 40 days, the business recovery post relaxation from lockdown is encouraging. About ~60% of V-Guard dealers have resumed operations till date (mostly in non-containment area) resulting in sales recovery of ~70% in May compared to the same period last year. The management guided at a normal inventory at trade level by the end of June 2020, which means a relative fast recovery in primary sales for re-filing inventory. While we cut our revenue, earning estimates by 23%, 32%, respectively, for FY21E, we maintain our positive stance on the stock with expectation of a sharp business recovery from FY22E onwards and intact margin profile.

Outlook

Despite lower sales, the company has closed the year with highest ever annual gross margin, mainly due to a better product mix and supportive input prices. We believe this margin will sustain, going forward, with focus on increasing in-house manufacturing and reduction in margin gap between south and non-south regions (that is ~1.5%). Further, a strong balance sheet condition and prudent working capital management of the company would help V-Guard to tide over the rough phase. We maintain our BUY rating on the stock with a revised target price of Rs 210/share.

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