In this edition we explain how a uniquely Indian problem of voltage fluctuations led to the rise of a fast-moving electronic company (FMEG) and talk about all the stories this week.

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The Story

India might be 100% electrified, but power fluctuations and outages are still rampant. Often, you’ll see the lights flicker, the fan turns slower than usual, and the TV might switch off and on by itself. In fact, when Niti Aayog conducted a survey of consumers across India, they found that 28% of people were unhappy with the quality of the electricity supply to their homes. And this is in 2023!

Now imagine India in the 1970s. The power fluctuations would’ve been significantly worse right?

Well, a young man named Kochouseph Chittilappilly smelled a business opportunity in 1977. The then 27-year-old borrowed a princely sum of ₹1 lakh from his father, took up a shed in the city of Kochi, hired a couple of high-school dropouts and began making voltage stabilizers. To protect the refrigerators and TV sets.

It was a uniquely Indian business proposition to meet a uniquely Indian problem.

And the timing couldn’t have been better. See, Kerala was just beginning to see the big Gulf Boom. Non-Resident Indians (NRIs) who were slogging away in the desert were bringing back electronics like TV sets. They wanted to up the standard of living of their families back home. But the state power department’s issues with voltage were atrocious. And if you’ve shelled out good money on your electronic appliances, you’ll be worried sick. What if a power fluctuation destroys your expensive devices in the blink of an eye? V-Guard promised to safeguard these devices and positioned itself front and centre to capture the market.

But labour union problems were rampant in Kerala. Chittilappilly realized that he couldn’t shut down business operations when trade unions caused a ruckus. So he reached out to women’s societies in rural Kerala and taught them the manufacturing process. He outsourced most of it instead of spending crores of rupees in setting up his own factories. It was a smart decision. Because labour unions hadn’t spread their tentacles to this segment yet. And V-Guard even got exemptions on excise duties by hiring these women’s groups.

But that was all before the turn of the millennium. You can’t run a business solely selling stabilizers, no? The revenue was still a puny ₹100 crores in 2000 and everything came from stabilizers.

So V-Guard decided to transform itself. While the power situation was still in favour of V-Guard, everyone knew that things would only get better. Even companies that manufacture air conditioners and refrigerators began to proudly claim that their appliances come with built-in stabilizers. That you may not need a separate unit.

So, from a single-product company, it began its diversification spree. It manufactured switches, water pumps, ceiling fans, and even kitchen appliances like grinders. These were higher-margin products too. That meant more money going straight to the bottom line.

But it also realized that the south of India alone couldn’t drive its future. The reliance on the south to drive 95% of its revenues had to change. V-Guard needed geographical diversification. They hired fresh sales teams for every product line. They ramped up advertising to around 5% of revenues. They wanted everyone to know about the company.

The end result?

Stabilizers only contribute to around 20% of its revenues today. And the share of the south has dropped to 60%.

It’s even making acquisitions that meet this dual goal — of product and geographical diversification. Like Sunflame Enterprises. You know, the folks that make stovetops and chimneys. As per ICICI Direct, just this purchase alone could mean that kitchen appliances will contribute to 10% of V-Guard’s revenues. And it’ll increase its revenue pie from the north since that’s where 80% of Sunflame’s revenues come from. Oh, it’s a higher-margin business too.

So you can see where V-Guard is trying to take its business.

Anyway, if you were someone who had reposed faith in the company during its IPO in 2008 and bet on how it would change its fortunes over the past couple of decades, you would be sitting on an eye-watering 5,000% return today. Or to break it down, nearly 30% annually.

Everything seems to be going well for the company.

But it’s not without its hiccups too.

There’s the recent rough patch when nothing seemed to be going right for the company and it suffered its lowest EBITDA margin in the past 10 quarters.

Part of this is because new star ratings were introduced for fans and the company had to resort to discounting the old stock. Its water pumps didn’t have too much demand because apparently, the groundwater levels have been strong down south and no one needed to pump it up. And the weather gods didn’t help — winter was delayed and its water heater business turned into a damp squib.

But these are just niggles. Short-term hiccups. In the slightly longer term, there are hurdles too.

One theory is that its fortunes are heavily linked to real estate. As per HDFC Securities, nearly three-fourths of its products that make up 80% of its profits depend on the growth of products like ACs and appliances. So if discretionary spending drops and people aren’t building and buying new homes as such, they won’t need too many new appliances. So that’s a constant threat.

Then there’s their age-old strategy of outsourcing manufacturing. While that has worked in the past, to compete with players across India, V-Guard has slowly been ramping up its in-house manufacturing capacities — From just 43% in FY19, it is currently at 60% and is being ramped up to nearly 75%. Sure, it’ll lead to improved efficiency and margins in the long-run but in order to get there, V-Guard will have to pump in more money to set up manufacturing units.

And finally — V-Guard is no Havells. See, Havells is entrenched in the minds of most customers, especially in the north of India. For V-Guard, its diversification strategy basically means taking on an incumbent on its own turf. It’s tough. V-Guard might have to spend even more on advertising. Sweeten the pot for distributors. And all of that costs money.

We’ll have to see how it turns out.

Anyway, despite all the changes in the past 4 decades, V-Guard’s DNA hasn’t changed. Sure, the contribution from stabilizers is just one-fifth of its revenues now. But the company that Chittilappilly set up in 1977 still commands a whopping 51% of the organized stabilizer market in the country. It’s quite interesting what a business born out of the inefficiencies of India’s power sector has become, no?

Until then…

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Weekly Wrapup

Also, here's a quick recap of all the things we covered this week. On Monday we talked about tech layoffs. On Tuesday we talked about the Microsoft Activision merger. On Wednesday we talked about lithium. On Thursday we talked about the Oreo copycat and finally we talked about the RBI Sandbox