The India Meteorological Department has indicated a 56 percent probability of below-normal rainfall in the south-west monsoon season this year. If you need one stock to bet on the weak monsoon, it may be V-Guard Industries. The company makes water pumps (both domestic and agricultural), voltage stabilizers and digital UPS systems apart from cables, fans and water heaters. It has grown its revenues at a compounded annual rate of 38 percent in the last five years. Profits have grown at 32 percent. The stock had fallen out of favour in recent times because of the poor show in the June, September and December quarters. In the first nine months of FY14, V-Guard’s profits were down eight percent. The short summer and bountiful rains saw a drop in demand for power back-up solutions and pumps. However, the last quarter of the financial year (January-March 2014) was extremely good. The company’s revenue was up 13 percent and net profit was 129 percent higher over last year. This was thanks to higher sales volume across segments and a three percentage point improvement in operating profit margins.
Now, at Rs. 490 per share, the stock trades at a valuation of 17 times its expected FY-15 earnings. Havells, the company’s peer, trades at 20 times its expected earnings for FY-15. The financial year 2014-15 may be a much better one for V-Guard. Sub-normal monsoon could drive demand for water pumps. Demand for air-conditioners and thus, air-conditioner stabilizers is also likely to rise on an intense summer. Pumps and stabilizers put together make up almost 33 percent of the revenues for V-Guard.
V-Guard’s other large segment - cables - may also do well with the demand in this segment likely to benefit from the pickup in housing and commercial real estate. An NDA win in the election is expected to give an impetus to the real estate sector. The BJP manifesto promises to build new cities and start an affordable housing programmes for the poor.
There is potential for V-Guard to expand beyond the southern markets. The share of non-south markets in the company’s revenue has increased from 15 percent in FY-10 to 30 percent now. The company intends generating almost half of its revenues from markets outside South India in the next five years.
This, the management says, will be done through an aggressive marketing campaign and expansion of the dealer network.
In FY-15, the company may also see some improvement in operating margins. Stabilizers are the highest margin generating products for the company.
This year, if stabilizer sales increase on a low base, on a revival in demand for air-conditioners and refrigerators, margins may receive a boost. The operating margin for this product division is 19-20 percent. Also, with copper prices in the international market on a downtrend, V-Guard stands to benefit. Though the company may have to bring down wire prices in line with the fall in copper price in the international market, it may not reduce the price of other products where copper is a key input.