On a scorching Thursday afternoon, as people queue up to cast their vote in Kochi’s Venala suburb, passers-by may be excused for thinking that the area houses the regional headquarters of either the CPM or the state Congress. In truth, Venala houses the headquarters of one of Kerala’s most successful consumer electrical appliances companies, namely, V-Guard Industries. The company was founded in 1977 as a sole proprietorship by the now philanthropically inclined Kochouseph Chittilappilly with a seed capital of ₹1 lakh gifted to him by his father, an agriculturist. Chittilappilly, a postgraduate in physics, originally wanted to be scientist. “However, that didn’t work out and I joined the R&D department of an inverter manufacturing firm at a pitiable salary. In 1977, at age 27, I decided to start out on my own.”
Thus was born the company out of a tiny rented tin shed with two workers producing one or two stabilisers a day. In 1983, the company spread to other parts of the state and started its first branch at Coimbatore, Tamil Nadu. Pump sets became part of the repertoire a decade later and in 1996, V-Guard was converted into a private limited company. In 2008, the firm went in for an IPO that brought in ₹65 crore. “I joined the company in 2006, when we were at ₹200 crore in turnover,” says Chittilappilly’s son Mithun, a postgraduate in finance from Melbourne University, who took over as managing director in 2012.
V-Guard’s five segments account for more than 80% of its sales
Today, the over ₹1,500 crore-firm is a dominant player in the consumer electrical appliances space in south India, clocking a revenue and profit CAGR of 37% and 32%, respectively, over FY10-FY14. “The quality of the brand and our quick and efficient after-sales service has also played a role in our success,” says Chittilappilly. As on date, V-Guard boasts of an expanded product portfolio that includes uninterrupted power supply units, inverters, pumps, house wiring cables, electric and solar water heaters, fans, switchgears and induction cookers. “We consciously adopted a strategy of diversifying into other product categories for three reasons. One, with abundant power supply, stabilisers may become redundant. Two, stabilisers as a product category is only a ₹2,000-crore market with intense competition. So, our growth prospects here are not very good. Three, with very small investments, we were able to grow the other product categories and this gave us confidence. The idea was to diversify risk and invest in products that had a future,” says Mithun. That meant growing the wires and pumps business by disproportionately investing in product development, branding and advertising in these verticals. The result: where stabilisers earlier contributed 60% of V-Guard’s sales, that figure is down to 18%.
Till 2006, V-Guard was primarily a southern player based out of Kerala, with a dominant presence in Karnataka and Tamil Nadu and a minuscule presence in Andhra Pradesh. Its only non-south markets were Delhi and Pune, which contributed ₹6-7 crore, or hardly 3%, of the then-₹200 crore turnover. Initially, the company was satisfied being a southern player — it kept introducing new products and as they showed good traction, and never felt the need to grow anywhere else. “But with the southern market getting saturated, we realised that further growth will only come by venturing into new geographies,” he adds.
Between 2007 and 2009, the company opened 13 branches and 15 sales offices across the country, hiring 250 sales and marketing people to staff them. With its IPO funds, V-Guard also set up three plants, two of which were in tax-free zones in north India. A plant for wires and cables was started at Kashipur, Uttarakhand, one for pumps at Kala Ambh, Himachal Pradesh, and one for solar water heaters at Perundurai, Erode district. “We introduced only four products in the non-south market — stabilisers, pumps, wires and electric water heaters — as they did well for us in the south,” adds Mithun. While stabilisers became popular almost immediately, the other products took longer to show traction. So, most of the capex for this geographical expansion was spent on building up capacity and following that up with investment in brand-building. Currently, 30% of revenue accrues from the non-south market, which is growing at 50% annually. The management estimates that share of revenue from this market should increase to 50% in the next three years. That’s critical if V-Guard is to realise its ambition of becoming a ₹4,000-crore company by FY18. To achieve that, the company is focusing on scaling up its visibility and reach. From 120 distributors focused on south India in 2006, it now has 300 distributors evenly split between the south and non-south markets and 3,000 channel partners, some of whom are multi-product partners in tier 2 and 3 cities, as the volumes don’t justify hiring single product channel partners. It also caters to 22,000 retailers and aims to add 4,000 retailers every year going forward.
It hasn’t been easy going all through, though. In 1987, labour unrest, something Kerala is infamous for, meant that its sole factory in Kochi had to be shut and the company started outsourcing its production. But what started out as a compulsion soon became a moat for the company as, apart from wires, it never really had to invest in capacity in a major way. The outsourcing strategy has two components to it. Stabiliser manufacturing is outsourced to 70 SSI units, while other products are outsourced to OEM vendors. The company has a team that does the product development and prototyping and it owns the designs. For procurement of most of its products, including electric fans, water heaters, digital UPS, batteries, mixer grinders and stablisers, it has an arrangement with most vendors, many of whom are located in tax-free zones. This arrangement helps it keep costs under control as it saves on overheads and can have vendors near the market, saving on transportation cost. It can then focus on product development, branding and distribution instead of manufacturing all products in-house. More importantly, it has helped the company improve it return ratio over the years.
Going forward, the management is betting on the wires and cable segment and solar water heaters acting as growth drivers; these have shown maximum traction so far. The wire business has grown nine-fold from ₹50 crore in 2007 to ₹480 crore in FY14, whereas the market for wires in India has at best doubled over the same period. The product is also gaining acceptance in other south Indian states and the non-south market. Also in the firm’s favour is the fact that rather than relying on real estate developers for sales — where there’s no payment or order guarantee — it gets the bulk of its orders from retailers. Of its total revenue of ₹1,360.21 crore in FY13, ₹460 crore came from retail sales. “We made sure that our distributors and retailers earned handsomely and that our entire value chain survives. We also made sure that instances of dumping and bad debt came down. There has also been a shift among consumers to move to quality branded products in the last 10 years. All this has helped,” says Mithun. He adds that though the share of wires as a percentage of sales may come down, relative to other products it will continue to be a key driver. Today, wires and cables account for 31.5% of revenue.
V-Guard also has ambitions for the solar water heater business. Its ₹20-crore plant at Perundurai, Erode, is the largest of its kind in India with a capacity of 90,000 units and contributes ₹250 crore to the topline. “The current market for solar water heaters is ₹500 crore and we have invested in a plant worth ₹150 crore of revenue. That is the belief we have in this product. The market has doubled in five years and we expect solar heaters to overtake electric water heaters in the next five. We will be one of the major players in this space,” points out Mithun.
For a company that makes relatively commoditised products, V-Guard believes strongly in the power of advertising and promotions. “The majority of our investment is happening in A&P. We want to build the brand across India the way we did in the south,” says Mithun. In the past 24 months, V-Guard has been a heavy advertiser, from the IPL on Sony Max to election-related programming on various news channels. From ₹43 crore in FY13, advertising and promotion spend went up to ₹60 crore in FY14 and will be further hiked to ₹80 crore this year. “Advertisement alone is not enough,” says Mithun. The company, as a pilot, is setting up a team for south India that will focus exclusively on retail activation. That involves branding, product placement, kiosks and shop-in-shop promotions in 400 stores in the region over the next year, to promote its electric water heaters. Later, V-Guard plans to replicate this model across India in other product categories.
Out of its comfort zone
V-Guard is derisking its growth by moving out of its core market
The final tenet of V-Guard’s growth approach is to expand market share across product categories, specially in the non-south markets. Let’s take the help of an example to understand this better. In 2006, the company achieved ₹8 crore of revenue in the electric water heater business of a total market size of ₹600 crore. Today, it has attained ₹140 crore in the same category out of a total market size of ₹1,000 crore, or nearly 14% market share. The company is looking at 25% market share in key categories. For this, the management is following a three-pronged approach. Firstly, in most product categories, the company is launching premium advanced products. Secondly, it is also focusing on product differentiation. For instance, a new type of tank with similar polymer coating has been introduced, which will lower its cost, increase its life and deal with the dreaded issue of hard water. Thirdly, focusing on seasonal sales is on the agenda. For instance, in summer, the focus is more on selling inverters and stabilisers, whereas in the July-December period, the focus is on selling wires and water heaters. Lastly, with the past three years bringing tough times and severe competition, smaller players have fared poorly and several exits by these players have helped V-Guard consolidate its market share.
Taking it on the chin
However, ambitions have come with their share of troubles. The firm’s profitability has taken a hit of late. Adding 20 branches and increasing headcount to 2,000 meant that rising costs have eaten into operating margins, as have tough demand conditions, in the past two years. Also, the fact that it had to offer its products at a discount in non-south markets meant margins took a hit. To overcome this, the company has made sure that average operating costs cannot be more than a certain percentage of revenues. In the past two years in southern markets it has stopped supplies to defaulters, ensuring that its debtor days have come down from 60 to 40 days. In another two-three years, it expects to command similar pricing and margins as in the south and an improvement in operating margins.
“V-Guard is likely to face intense competition as it ramps up in the non-south market, as there are a plethora of players. Havells and Bajaj Electricals are dominant in the north and west regions. Though rural spending is on the rise, increasing market share will be difficult,” opines Sanjay Manyal, research analyst at ICICI Securities. “Whether margins improve from the current 7.5% depends upon whether they capture enough marketshare, given that there are already several players, many of whom are building their brand in a similar way.” Further, achieving a turnover of ₹4,000 crore over the next four years looks a bit stretched for a company which has been growing at 37% CAGR, for it would then have to grow at 70% over the next three years. “V-Guard has introduced several new products like switchgears, induction cookers etc. in a short span of time. Every six months they have introduced a new product, incurring unsustainable ad expenditure and taking a hit on margins, whereas the focus has to be on consolidating existing products,” points out Manyal.
Price to pay
Aggressive pricing in non-south markets is impacting margins
While revenue grew 41% over FY13, sales growth in FY14 have fallen to 10% and so have Ebitda margins to 8.4%. While the management has given a guidance of 20% sales growth in FY15 and FY16 and an improvement in Ebitda margins to 9% by cutting spending, analysts feel that demand slowdown could continue for the first half of FY15 at least. To be fair, the company has cut costs. It is not participating in advertising in the IPL this year, a substantial reduction in costs that could translate in the bottom line. But will that help? As Manyal puts it, “Over the next five years, I doubt growth will be robust. It is competing in product segments that are highly competitive and where there is not much room to grow as it expands pan-India.” Though the stock has recovered from its low of ₹408 in March 2014 following a strong Q4FY14 quarter, given the challenges of a foray into northern markets and weak demand, the outlook is far from rosy. At ₹586 a share, the valuation of 20 times estimated FY15 earnings of ₹29 a share is not cheap. Rather than being caught off guard, investors can wait for better entry levels.