MANAGEMENT DISCUSSION & ANALYSIS 1. Economic Review & Outlook In the latest edition of the World Economic Outlook published in April 2016, the International Monetary Fund (IMF) has lowered the forecast for global growth to 3.2% in 2016 and 3.5% in 2017. Both advanced economies and emerging markets are expected to grow slower than brvious projections. In an otherwise gloomy global situation, India is estimated to remain the fastest growing major economy in the world with projected growth of 7.5% driven by rising real incomes and domestic demand. This is despite the impact of two consecutive years of unfavorable monsoon. Growth may accelerate further if this year's above average monsoon brdictions turn out to be accurate and external demand picks up. The government has undertaken several positive initiatives to boost the business climate and improve the ease of doing business. This includes simplifying business procedures and tax rules, relaxing FDI policy in many sectors, and committing more public investment and developing innovative funding avenues for infrastructure expansion. Key projects such as 'Make in India', 'Start up India', 'Digital India' and 'Skill India' seek to encourage investments and improve the ecosystem at various levels of business activity. Aggressive roll-out of the financial inclusion program has made banking services accessible to millions of brviously unbanked people. Planned consolidation has reduced India's fiscal deficit to 3.9% in 2015-16, which is expected to further reduce to 3.5% in 2016-17. Even the current account deficit has been contained at 1.1% in 2015-16, and is expected to further rationalize next year. Inflation is expected to be around 5.5% and will further decline to less than 5%. These initiatives are already resulting in improving metrics across a range of key economic parameters, including production data for electricity and cement, volumes at major ports and two-wheeler sales. As movement of goods accelerates, pick up in heavy commercial vehicles, light and medium truck sales is expected. Construction equipment sales, oil consumption, retail demand, road traffic trends and merchandise imports are moving into positive territory. Domestic consumption demand could find stronger support following the implementation of the Seventh Pay Commission recommendations and One Rank One Pension scheme that will likely increase discretionary spending. The Indian parliament's legislative backlog is expected to dissipate with clearer consensus emerging across political parties. India has also emerged as the world's foremost destination for foreign direct investment. Based on these trends and developments, it is evident that India is rising as an important beacon of hope for the global economy with the attributes for sustained growth momentum that could potentially bring vast improvements in the lives of hundreds of millions of people in our country. 2. Sector Overview In the past three years, while there have been expectations of demand turnaround, we are yet to see a pick-up in consumers' discretionary spending. FY16, mirroring this trend, was highlighted by several factors like subdued demand, including deflationary movement across commodity sectors, weak monsoon impacting rural spending, flat industrial production trends with period of fluctuating growth and another disappointment in corporate earnings expansion. Usage patterns in the segments in which the company has brsence are influenced by variables such as discretionary spending, inflation, interest rates, rural demand, agricultural growth, construction activity and weather patterns. India has the potential to become a leading global player in the electrical equipment sector depending on its ability to improve competitiveness, upgrade technology regularly, enhance skill availability, develop export markets and optimize demand potential. Demand for the company's range of stabilizers and inverter is linked to power availability in the country and spending patterns in consumer electronics. During the year 2015-16, consumers' discretionary spending remained weak as a result of a further push back to the expected economic momentum. While inflation saw a declining trend, the complete benefit in terms of interest rate transmission has taken longer and may be expected to materialize only in 2016-17. As a consequence, housing demand and construction activity remained muted with potential consumers choosing to defer their decision making cycles. Another weak monsoon was a dampener on rural demand and spending capabilities. Weather patterns, however, have been a support for demand in the company's key segments as the year 2015 has turned out to be hottest year in recorded history, and 2016 is expected to be another year of high temperatures. Power availability rebounded in a year of elections and the integration of the southern region to the national grid improved supply in the south states. The sub-par growth in agriculture, owing to two successive years of deficit monsoons, has impacted the growth of the economy. Based on the latest weather updates, the country is likely to see normal monsoons this year which will aid agricultural output and thereby rural demand. In this backdrop, the company has adopted a cautious approach to the business. The focus is on pursuing profitable growth opportunities, with working capital management and cash flow generation being important considerations. While expanding into new markets and regions, we have walked away from business that does not meet our credit benchmarks. Revenues were also impacted by weakness in commodity prices that reduced our raw material costs and were partly passed through to customers. As a consequence, topline growth at 7% was lower than our historical trends. However, these same initiatives allowed us to expand margins by 207 basis points from 7.89% to 9.96%, resulting in Rs. 131 crores of cash from operation, which was used to reduce debt by Rs. 57 crores. Revenues increased by 6.6% from Rs. 1745.92 crores to Rs. 1862.28 crores, earnings before interest, taxes, debrciation and amortization (EBIDTA) grew by 35% from Rs. 137.49 crores to Rs. 185.24 crores and profit after taxes (PAT) was higher by 58% from Rs. 70.72 crore to Rs. 111.68 crores. Revenue growth was impacted by the substantial weakness in the price of copper that had to be passed on to customers in the cables and wires segment in line with industry practice, whereas our conversion margin was maintained. The other key impact was from weak sales in the DUPS segment due to improved power supply in many regions across the country. These two segments contribute 39% of the company's revenues, therefore their impact on overall growth was significant. Here, it is pertinent to mention that the management has successfully focused on reducing revenue concentration from specific products and markets. In a weak growth environment, the company has maintained pricing discipline by leveraging customers' growing brference for the V-Guard brand. As a consequence, margin contribution from our product lines has expanded based on our ability to retain the benefit accruing from the decline in prices of other input commodities such as steel, plastics and, outside the cables and wires segment, copper as well. Now, with the brand more firmly established in many of our key non-South markets, our focus on pricing discipline has also been extended to limiting the discount brviously offered in these markets. Taking forward the focus on building a sustainable business model, we continue to invest judiciously in building our competitive strengths. During the year 2015-16, we have expanded our channel network considerably. During 2015-16, we have also expanded some of our regional offices by adding to the sales teams. V-Guard is attracting quality talent and we can see the results on the ground in terms of improving sales productivity. We have also added to the sales teams supporting our new and nascent product categories. During the year we completed the pan India roll out of ASP (Authorized service providers) network. The new system has immensely contributed in building our after sale service network and customer confidence. Though the cost of warranty has shown an increase of 26% from last year, this is to be viewed as an investment in building on our USP of strong after sales services. V-Guard's brand visibility and customer recall is supported by our sales and marketing investments. In 2015-16, advertising and promotion spend stood at Rs. 80.31 crores (4.30% of revenues) as compared to Rs. 69 crores (4% of revenues) in 201415. We expect to maintain ad spends at 3.5-4% in the foreseeable future but with the business gaining further scale over the medium to long term and the brand getting established nationwide, this percentage could reduce over time. During the year 2015-16, our business grew by 7% in south markets. While other south markets continued to expand, Kerala was impacted due to the state's close correlation with the rubber economy and expatriate inflows from the Gulf region. V-Guard is a leader in south markets and continues with the practice of launching new products in this region before their introduction into the rest of the country. Non-south market revenues grew by 6%, with western markets seeing some weakness. At brsent, non-south contributes 33% to revenues and there is scope for further expanding revenues from these markets. Some large markets outside the south still need to be penetrated deeper. We already have a large distributor base in non-south regions and the number of retailers within these markets is being expanded. Growing brand visibility and recognition is allowing us to bring pricing parity by reducing discounts. We are seeing improving profitability in non-south markets which turned to positive contribution at profit before tax level in 2015-16 for the first time. The company continues to operate in a prudent manner. Quality of revenues is viewed to be as important as revenue growth with focus on inventory and debtor management. Channel financing initiatives are already well-percolated in south markets and will be replicated in non-south markets as some of these states gain scale of operations and the V-Guard brand sees greater traction. As discussed earlier, strong cash flows generated from these initiatives have been deployed to debt repayment. As a consequence, our debt to equity ratio now stands at 0.02:1, making us virtually a debt-free company and providing the framework for more growth opportunities. 3. Dividend The Board has recommended final dividend of Rs. 2.50 per equity share for the financial year ended on 31st March, 2016, payable subject to approval at the ensuing annual general meeting. This with the interim dividend declared earlier will result in a total payout for the year 2015-16 (including dividend distribution tax) of Rs. 25.33 crores (Rs. 16.23 crore in 2014-15) translating into a dividend payout of 22.7% (compared to 22.9% in the brvious year) on consolidated net profit. V-Guard believes in maintaining a fair balance between dividend distribution and cash retention. Cash retention is required for future growth, probable acquisitions and to meet any unforeseen contingencies. 4. Segment-wise Review a. Electronics V-Guard's electronics segment comprises voltage stabilizers and UPS systems (both digital and standalone). This segment grew at 2.50% in 2015-16 and contributed 30.20% to revenues. Our sales in the electronics segment are largely dependent on the power situation in the country and the demand for consumer electronics such as air conditioners, refrigerators and televisions. V-Guard is the market leader in the voltage stabilizer segment across the country. The company competes with locally dominant players in many states and has been gaining share in the organized market. Growth has been driven by expansion into non-South markets and due to consolidation of demand to the organized sector, which may gain further momentum once GST is implemented. Another demand driver is our greater penetration into Tier II and III cities that still have less reliable power availability. Hotter weather conditions are also supporting the sales of white goods, and of voltage stabilizers. The UPS segment saw a decline in revenues in 2015-16 due to two reasons. One, the power situation in many states saw an improvement and two, we had some initial post-launch teething issues in non-south markets that have since been resolved. Sales were also impacted due to aggressive pricing tactics adopted by competition in weak market conditions. b. Electricals V-Guard's electricals segment comprises house wiring cables, LT Cables, Pumps, Electric Water Heaters, Fans, Switchgears, Induction Cooktops and Mixer Grinder. Electricals revenues grew at 8.1% in 2015-16 and contributed 66.5% to total revenues. Drivers for growth are home construction activity, weather conditions, consumption spending and interest rates. Construction activity in some of the south markets remained subdued, impacting growth in the cables and wires segment. Growth was also achieved from markets we have entered recently and which are less mature from our perspective. While pass through to customers of declining copper prices reduced value growth, volumes grew by 12% and margins were maintained. Our focus is on retail sales of wiring cables to individual home owners. Institutional sales to developers are limited. Sale of pumps is linked to agricultural activity, monsoon season and changes in the water table. Recent trend of water shortages has lead to stronger demand after a period of stagnation. In the electric water heaters segment, there was some impact of the weak winter this year. However, the launch of new and innovative models is resulting in improving acceptance among customers. Growth in the fans category has been relatively strong. V-Guard's product range includes ceiling fans as well as table, pedestal and wall fans. Currently, the company is a smaller player and ongoing growth in this category may be supported by expectations of warm weather conditions and expansion into new markets. New product categories like Switchgears, Induction Cooktops and Mixer Grinders continue to deliver growth. Combined revenue from these products increased by 16.8% to Rs. 68.81 crores in 2015-16 from Rs. 58.9 crore last year. These products now account for 3.7% of total sales from 3.0% in 2014-15. In the domestic Switchgears segment, V-Guard's strong brand and new technology adopted has allowed the category to turnaround at a relatively early stage of growth. The product has strong adjacency to key electrical segments such as wires and fans and there is an overlap with the wires distribution network, allowing positive leverage for growth. Our appliances business currently comprises two products -induction Cooktops and Mixer Grinders. Induction Cooktops were launched in Kerala initially and subsequently in Tamil Nadu and Karnataka. Mixer grinders as a category is the company's latest introduction, [currently available in Kerala and Karnataka]. The product derives leverage from a common distribution channel for Induction Cooktops. In the appliances category, we plan to introduce more products within a common distribution network after growing in existing products for a few years. Currently available in South India, we plan to extend availability to non-South geographies after attaining some further critical mass. Such a methodology has worked efficiently for the company in the past, allowing deep brand entrenchment in a highly competitive market. c. Other Products This segment comprises of Solar Water Heaters and Solar Inverters. V-Guard is focused on the market for rooftop residential solar water heaters that are sold through marketing agents. Improving technology is cutting down payback period for customers in this segment. Growing environmental concerns may also drive demand growth. Over the longer term, demand drivers could remain strong with more customers' opting for Solar Water Heaters. 5. Outlook Industry Drivers • Strong demand from housing construction activity all across the country with increased penetration in Tier II and III cities • Easy access to credit and a rising middle class population with increasing levels of disposable income will fuel the demand for the industry • Roll out of GST will enable shift from unorganized to organized and also substantially reduce warehousing and logistics costs, and facilitate faster movement of goods across the country Distribution Network • Current network of over 624 distributors and 5562 direct dealers • Plan to increase more retailers working under existing distributors, thereby increasing revenue contribution per distributor, providing significant scope for expansion of returns on existing investments • Selectively expanding distribution network for some specific products in high potential markets in non-south states Advertising Expenditure • Continued investments in advertising and marketing to enhance brand visibility in order to facilitate pan-India expansion • Advertisement spends to be maintained between 3.5-4% of revenues, with disproportionate spending to expand non-South markets Bridging Gaps in Non-South Markets • Pricing parity to be achieved across the country over next few years by scaling down of discounts and favourable payment terms • Focus on consolidating position in performing states while resolving product mismatches and adding sales manpower in underperforming states Working Capital Management • Expanding proportion of channel financing in south markets and selectively introducing similar arrangements in non-south markets going forward • Ensuring better control over the entire supply chain from procurement, planning, distribution and inventory management Financial Performance • Expect topline growth of above 15% in 2016-17 based on rebounding demand after two years of weakness in consumer spending activity marked by decision deferment • Growth to be driven by Electric Water Heater, Stabilizer, Fan, Pump and Digital UPS segments and consolidation in House-Wiring Cable • Expect EBIDTA margins to move marginally higher over the next 2-3 years, leveraging the company's growing position as a nationwide player allowing efficient absorption of overhead costs 6. Strengths, Opportunities and Threats Strengths • Strong brand equity and investments in a well-entrenched distribution network are key differentiators, in a sector influenced by intermediaries, and is aiding expansion in non-south markets In-house Manufacturing vs. Outsourcing with unique outsourcing model supplemented by new manufacturing unit • Combrhensive portfolio catering to the mass consumption market with brsence across highly scalable categories • Asset light production model enables the Company to focus on product development and utilize cash flows for brand building activitiies, resulting in reduced working capital requirement and higher return ratios Opportunities • Strong construction demand driven by Government ambitious target of housing for all by 2022 will require 111 million housing units, increase penetration into Tier II and III cities and add to the demand • Shortening renovation cycles for wires, fans and heaters segments due to increased disposable income and easy availability of credit • Roll-out of GST will accelarate a shift from the unorganized segment to organized players and drive consolidation • Further cuts in interest rates will help stimulate demand for household electricals • Perception about electrical products changing rapidly from a mere utility to an object of home decor • Non-South markets account for only 33% of the Company's current revenues providing significant scope to expand and gain market share • New product categories like kitchen appliances, switchgears and solar water heaters offer promising growth prospects Threats • Seasonality in revenues since sales of several product categories dependent on summer months • Impacted by weakness in economic cycle and slowdown in demand for consumer durables • Slowdown in the real estate market could impact sales of several product segments • Volatility in raw material prices could impact margins in case cost escalations cannot be passed on to consumers • Increase in competitive intensity with the entry of MNC players • Expanding into new markets, where success requires understanding different cultures and consumer behaviour 7. Human Resources The Company has the vision to establish a reputation for being a people-centric organization in all the regions it operates in and has provided an invigorating work environment, marked by teamwork, respect for merit and an emphasis on knowledge accretion. The Company recognizes the need for change management and talent management throughout the business and just how critical these aspects are to its future growth and success as any other element of its commercial strategy. The Company has reinforced the capabilities of its workforce through the launch of numerous in-house training programmes and job-specific training drills throughout the year. With several new products categories recently launched and the rapid expansion into the non-South markets, the Company has hired several senior and mid-level resources to support the next level of growth. As of 31st March, 2016, V-Guard had 1823 employees on its payroll as compared to 1900 a year earlier, an decrease of 4.05% year on year. 8. Audit & Internal Control System Company is committed to good corporate governance practices and have well defined systems and processes covering all corporate functions and units. The company also have an Internal Audit function to provide reasonable assurance regarding the effectiveness and efficiency of operations, safe guarding of assets, reliability of financial records and reports and compliance with applicable laws and regulations. The Audit Committee of the Board oversees the Audit function through regular reviews of the audit findings and observations and monitoring actions taken. 9. Risks and Risks Mitigation V-Guard recognizes that every business have its inherent risks and what is required is a proactive approach to identify and mitigated them in time, so that they do not impact the business negatively. We have embedded an efficient Enterprise Risk Management System (ERMS) which regularly scans the internal and external environment to identify risks and decide on possible mitigation measures and costs for overcoming them and incorporate them in company's strategic, business and operational plans. Over the years, ERMS has evolved as an important function adding value to the business. The company have developed systems and processes to map the risks across segments, products and geographies and respond effectively to counter them and achieve the organizational goals. Sustained action is taken to further strengthen the system. The major risks identified and mitigation measures taken during the year is summarized below. Risk Type -Risk Probability- Risk Impact -Risk Mitigation Seasonality in revenues since sales of few product categories dependent on summer/ winter season. Risk Probability-High Risk Impact -High Risk Mitigation -Monitoring seasonal impacts and controlling production and inventory in order to avoid stock pileup/stockout situations. Material also moved to places where demand exists. Volatality in commodity prices especially copper. Risk Probability-Medium Risk Impact -Medium Risk Mitigation Closely monitoring price movements and making appropriate correction in selling price to protect margins. Uncertinities in economic situation. Risk Probability-High Risk Impact -High Risk Mitigation -Activities planned considering the situations. Using the period to brpare for boom that may follow, building capabilities and developing new SKUs. Increase in competitive intensity with entry of new players. Risk Probability-High Risk Impact -Medium Risk Mitigation -Closely monitoring competitor activities and implementing aggressive marketing strategies. Debrciation of INR against USD - Impact on imports. Risk Probability-Medium Risk Impact -Medium Risk Mitigation -Monitoring currency movement closely. Hedging risk through forward cover. Pricing also adjusted to factor cost increase. Slowdown in construction/realty sector impacting sales of few products. Risk Probability-Medium Risk Impact- High Risk Mitigation -Closely monitoring business trends, sales and inventory for reducing impact. Focussing on products not directly linked with new constructions and on replacement demand |