1. SUMMARY:
V-Guard: The future blue chip!
Sustained strong growth with immense potential: V-Guard has been able to grow at a strong
48% CAGR (vs. 8% industry CAGR) in FY2008-12. The company is expected to grow its profits
at c30% consistently in the next 3-4 years as a result of its exposure to new growth sectors,
increase in market share from existing local fragmented players, expansion into newer
geographies and margin expansion. Having started out as a pure stabilizer company, V-Guard
now caters to a wide panorama of products in the Indian electric and electronics space (like PVC
Cables, Pumps & Motors, Electric/Solar Water Heaters, Digital UPS, Fans, Power Cable,
Switchgears and Induction Cook-tops) where each of these markets has a total long term
potential size of USD20-40bn!
Focus on quality & after service sales in a fragmented industry: The Company has the
advantage of being an established brand in South India for years and expects to leverage this
brand equity to newer products and geographies by cross/up selling. The USP of V-guard has
been its quality & after service sales, which is setting V-Guard apart from the other local players.
The risk of competition from local/Chinese players(in some product lines) is overrated as their
product quality is much below required standards and consumers would avoid them as this is an
industry where there is not much compromise on safety and durability (eg. Inverter, Stabilizer,
PVC cables etc.)
Long term vision with excellent corporate governance: The Company is known for its
transparency, excellent corporate governance and honest management team. The company has
been investing holistically into technology, manufacturing, branding and distribution channels with
a long term vision for the company rather than just short term profits - the perfect sign for a blue
chip! Company also plans to list its entities V-Star and Wonderla in the future.
Valuation & Risks: The Company currently trades at a forward P/E (FY13) of 14-15x, however
the company is in its high growth phase currently and assuming a consistent bottom-line growth
rate of 30% for next 3 years, current price would imply a paltry PE of 6x by FY15, thus
highlighting the long-term upside in the stock. Company is focusing on cutting its costs too with -
more value re-engineering which is reflected in its increasing RoE / RoA. RoE is increasing every
year consistently and is now at 28% (FY12) from less than 13% (4-5 years back).
The company’s main downside risks are - a) lower profitability with higher commodity prices (as
Copper is the chief input material), mainly if the company is unable to pass the price hikes on to
customers b)seasonal nature of sales of some of its products c)dependence on macro and
industry growth rate for some of its products d) Entry of a large player with deep pockets, growing
inorganically and cutting prices to gain market share e) Underinvestment in branding would be a
big negative for the stock
DETAILED NOTE:
Broadly, the below sections address the following issues:
1) What is the potential for growth in the long term?
2) Can the company win market share and exploit this growth? If yes, how?
3) A look at the financial highlights, stock catalysts, valuation & risks

2. Company Overview:
V-Guard is not just a pure electrical industrials player (as was considered a few years ago), but
over the years has managed to gain substantial exposures to agriculture, housing, consumer
durables, electrical & many other related industrial sectors. The key highlight is that each of the
sectors is growing at a rapid pace (minimum 20%) Also, geographically there is much to cover as
currently only c25% of group revenue comes from North India.
Segment
Existing Rev wt Sector growth in
Products in FY12 Driver FY12 Major risks Future Company strategy
Entry to sub-urban and rural markets,
Realty/ measures for improved profitability, better
PVC 28% 36% Slowdown in realty
Construction inventory management, doubling production
capacity in Kashipur
Introduction of newer models, reducing cost of
Consumer
Stabilizer 20% 20% Macro, inflation production, storage space expansion in Kochi,
electronics
Bangalore, Palakkad
Ad campaigns, increased number of dealers,
Stiff competition,
Pump 14% Agriculture 25% improved rating of models, value engineering
unfavorable climate
activities, increased number of Models
Special pricing strategy, aim to improve ranking
Power tariffs, power from 4th largest brand in India, focus on
Water
7% Industrial 44% failures, load immersion heaters, strengthening of
heaters
shedding, Late winters production unit of Electric Water Heater and
Fan at Kala Amb
Realty/ Increasing network branches, quicker
Digital Uninterrupted Power
7% Consumer/I 236% expansion before power situation improves,
UPS Supply in India
T Infra own manufacturing units, tier 2 + 3 city focus
Const./ Differential pricing strategy – premium,
Power
6% Power 39% Industry growth Increasing installed capacity, presence in
cable
industries newer markets
Electric Rural
6% 20% - -
fan demand
Solar road shows, increased direct dealer network,
Realty/
water 3% 21% High installation costs timely subsidy to the customer, Govt proposal
Demand
heater to make it mandatory would also help them
Others 9%
Growth is happening in 3 dimensions:
a) From Current Portfolio: Company is able to gain market shares rapidly from local players,
leveraging on its brand and better quality products. For example – improved models of
agricultural pump and stabilizers are continually being introduced, keeping in track the customer’s
specific requirements, helping V-Guard to increase penetration and win market share.
b) From Current portfolio in newer geographies: Geographically, only 25% of revenues come from
North India (from less than 10% a few years back). It is only a matter of time before V-Guard’s
products become a trusted household name in the North as its products have already been tested
and proven in the South. Apart from expanding to the North, the company also has plans to
export to foreign markets.
c) From Newer products: It has consistently and quickly been able to increase the number of
products in its portfolio based on the need of the market. Only recently did V-Guard begin to

3. produce PVC cables but now it has started to contribute 28% of top-line! Similarly realizing
demand for Digital UPS, the company has accelerated production of Digital UPS thus ultimately
increasing its contribution to topline to 7% from 2% over past two years. This shows the
company’s ability to dynamically realign based on the “demands/needs” of the sectors it operates
in.
Recent/ New Products launched/expected in
FY13
Solar Photovoltaic Charge
Induction Cook-top
Domestic Switch Gears
With further investments in capacity, we expect higher profits as the company has been able to
increase its RoCE every year for more than past 5 years!
Immense Potential – A look at the potential market sizes for a few product lines:
Each of above tabled sectors is rapidly beginning to expand in India, with the Govt’s focus on
infrastructure, power and solar energy in India.
Stabilizer: (c20% of top line)-Regular electricity in India has always and will be a problem(at least
for another 10-15 years) with demand exceeding supply by 20-30%. Just a back of the envelope
calculation of 200m households using 3 voltage stabilizers, for 3 basic electrical appliances of TV,
Fridge, A/C of average price INR3000 per household shared by 5 competitors with a small 30%
margin would create value worth cUSD2.2bn for V-Guard alone (market size USD36bn).
According to the company the strategy is to capitalize on the stabilizer market for LCD/LED TVs,
refrigerators, air conditioners, tread mill and washing machine.
Digital UPS/Inverters (c7% of top line):-While inverters in a mid income household are common in
Kerala, it is only gradually picking up in other states and is yet to attain such mass usage. The
company has been able to aggressively advertise and capitalize on the recent power shortage.
Taking a rough estimate of the total market as just half of the Indian households & calculating
demand for inverters of a modest 15k, the total available market size to exploit comes at
USD45bn, which is far below the current sales.
Solar heaters(3% top line) - As a result of power shortage and high costs of power, Govt of
India(GoI) is incentivizing companies to utilize renewable sources of energy like solar energy. GoI
has unveiled an USD19b (till 2020) investment plan in the sector thus helping companies in this
space. The product is gaining mass acceptance gradually partly due to mandatory installment of
Solar devices and subsidies. According to vikapla, current market size for agricultural pumps is
USD0.5bn and is expected to grow to USD20bn by 2025. Similarly, current market size for the
solar heater space is north of USD25m and is expected to grow by 500-600% by 2022!
All of these above numbers signify the immense potential in the sector.
Why is V-Guard a player for the long term?
Fundamentally strong: Most of the small caps are linked to its “one path breaking” product
which is both vulnerable in terms of the growth of its specific industry and breakthrough in that
technology by its competitors. V-Guard was no exception, and this risk phase is over as V-Guard
has already established its brand “V-Guard”, in the South and plans to paint its name in the North
in a big way too. It also does not rely on any single product to carry them into the next phase. V-
Guard rightly has identified focus on advertising on “quality of a very trusted reliable household
brand” across all their products and not just one specific product. Thus the company is able to
spread its branding costs across its products and at the same time able to increase the number of
revenue drivers.

4. Excellent Corporate governance: One of the key attributes for a small cap company is its
corporate governance and the whole management team runs by this vision of honesty and
transparency.
Holistic investment into branding, distribution channel, and technology: This is the attribute of a
company which is eyeing for becoming a mass player. Every investment is kept taking into long
term focus into account. In an industry which is highly fragmented with small competitors across
various locations, the company is perfectly poised on its way to create a Pan-India player with
one trustable brand called “V-Guard”. The company invests in technology, which is not a common
trait among its peers and ultimately it is able to develop new products and market them really fast,
helping them to gain rapid market share.
Where are its levers / stock catalysts?
 Improvement in net margins as a result of the rapid cost cutting measures introduced by the
company
 As the global economy slows down, commodity prices are expected to go softer enabling them
to save on the costs
 A successful addition/launch of a new product to its portfolio of products would push the stock
up. Past history tells us that every new venture has been immensely successful and the company
has been able to eat into the market share of the leader
 The company plans to spread its wings both in terms of increasing production capacity and
also dealer/distributor presence, each of which should also start generating a new stream of
revenues. Any successful launch would be a boost to the stock
 Cutting dividends to grow: Any focus on cutting dividends to increase spends (on mainly
branding ) would be a catalyst as the value created by its FCF would be more if the company re-
invests than distributing to the company shareholders as the dividend yield is only 1-2%
 Listing of V-Star, Wonder-la
Financial highlights
-> RoE has been increasing every year consistently to 28% (FY2012) from less than 13% (5
years back)
-> The top-line has seen 48% CAGR in past 4 years
-> The margins (both net and importantly cash margins) have been increasing despite the
increasing commodity prices
-> Company operates with a debt to equity ratio of only 9%
-> Currently the company boasts of 28 branches, 200 service centres, 2700 channel partners
and10000 dealers (from even less than 50% of what was available a few years back)
-> Having been in the industry for many years, the company is beginning to look much healthier
with leaner inventories & working capital management (reflected in its recent quarterly
performance)
(Annual basis) FY09 FY10 FY11 FY12

5. Op margin 9.4% 10.7% 9.7% 9.5%
RoE 13.7% 18.0% 22.8% 24.3%
Current Ratio 1.1 0.9 0.9 1.1
Interest Cover 6.6 8.8 6.0 5.1
Topline growth 13.7% 43.7% 59.9% 37.7%
Valuation:
Recently the stock saw a steep increase of 100% based on the stellar quarterly results (+67% y/y
net profits in 1QFY13), and currently the company currently trades at a forward P/E (FY13) of 14-
15x (below some of its peers like TTK, Havells). Also, the company is in its high growth phase
and is expected to see 30% bottom line growth in the next few years (helped by organic growth
and margin expansion). Assuming a consistent growth rate in net profit of 30% for next 3 years,
current price would imply a paltry 6x by FY15, thus highlighting the long-term upside in the stock.
Company is focusing on its costs too with value re-engineering in its operations and is reflected in
the increasing RoA & RoE. RoE has been increasing every year consistently to 28% (FY12) from
less than 13% (5 years back). P/B is not a correct measure as the company has asset-light
operating model, where only 40% of sales are manufactured in-house vs. rest being outsourced.
Downside Risks
The company has the risks of
a) Lower profitability with higher commodity prices (chief input material- Copper), if the company
is unable to pass them on to customers
b) Seasonal nature of sales of some of its products
c) Dependence on macro and industry growth rate for some of its products
d) Entry of a large player with deep pockets, growing inorganically and cutting prices to gain
market share
e) Underinvestment in branding would be a big negative for the stock