V-Guard Industries Ltd (VGUARD), an electrical appliances company, is a major concern for investors in 2018, and for good reason. The company’s stock has lost over 9% of value year to date, and little is expected to reverse this trend before the end of the year.
The company’s Q2 FY2019 results show major impacts on the company’s bottom line, especially the floods in Kerala which led to a lack of seasonal demand for the company’s products. The floods led to 324 deaths, countless injuries and over 222,000 people left homeless, impacting sales for the company in the process. Low sales in the summer season also caused the company to experience just a 6% gain in total revenue year-over-year.
Still, growth is good considering the headwinds that were impacting the company.
But we also see a few key ratios that are a concern for investors. Gross margins have fallen 2.4% while Ebitda margins are down 3.3%. Net margins have also fallen 1.8% to 6.4% on the quarter on a year-over-year basis.
These metrics are all down at a time when the company is spending 1.1% less on advertisements. Promotions account for 4.6% of the company’s expenditures, down from 5.7%. Employee costs have risen 1%.
Net income should have benefited more from the favorable tax rate of 20.5%, down from 27.3% the year prior.
Given these financials, income rose less than expected, as gross profits fell 1.8% versus the same period a year prior.
Company products show a possible cause for the higher expenses and lower profits. Electronics, which often have high profit margins, saw a 2.1% decline in sales, falling to just 27% of all revenue. Electricals experienced growth of 0.6% and consumer durables 1.6%.
Stabilizer sales have fallen 12.6% year-over-year along with pumps, which also fell 3.8%. Switchgears and modular switches experienced growth of 48.8%.
Slower growth is a concern for investors, especially as expenditures seem to be rising during a tax-favorable time. V-Guard does expect to reach topline growth of 15% in the next few years, as the company plans to introduce new products and expand to markets other than the South.
Over the next five years, the company’s plan is to add 3,000 to 5,000 retailers per year to increase competitive positioning and boost market penetration.
The stock should remain a concern until positive traction leads the company closer to its goals. A cash-positive balance sheet remains a strong point, and the company is looking to expand with companies that offer synergy.
Disclosure: The author does not have any stake in the listed equities
