voices - motilal oswal

24 November 2015 1

Research & Quant Team ([email protected]); Tel: +91 22 6129 1522

3QFY20 | February 2020

VOICES

VOICES India Inc on Call

VOICES, a quarterly product from Motilal Oswal Research, provides a ready reference for all the post results earnings calls attended by our research analysts during the quarter. Besides making available to readers our key takeaways from these interactions, it also provides links to relevant research updates, and transcripts links of the respective conference calls.

This quarterly report contains Key takeaways from the post results management commentary for 150 companies, with links to the full earnings call

transcripts Links to our Results Updates on each of the companies included

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Automobiles ......................................................................................................... 8-18 Amara Raja ........................................................................................................................ 9 Ashok Leyland ................................................................................................................... 9 Bajaj Auto ........................................................................................................................ 10 Bharat Forge.................................................................................................................... 10 BOSCH ............................................................................................................................. 11 CEAT ................................................................................................................................ 11 Eicher Motors .................................................................................................................. 11 Endurance Tech. .............................................................................................................. 12 Escorts ............................................................................................................................. 13 Hero MotoCorp. .............................................................................................................. 14 Mahindra & Mahindra ..................................................................................................... 15 Maruti Suzuki .................................................................................................................. 16 Tata Motors..................................................................................................................... 17 TVS Motors ...................................................................................................................... 18 Capital Goods ..................................................................................................... 19-29 ABB.................................................................................................................................. 20 BHEL ................................................................................................................................ 20 Blue Star .......................................................................................................................... 21 Crompton Greaves CG ..................................................................................................... 22 Cummins ......................................................................................................................... 24 Havells ............................................................................................................................. 25 L&T .................................................................................................................................. 27 Thermax .......................................................................................................................... 28 Voltas .............................................................................................................................. 28 Cement ............................................................................................................... 30-35 ACC .................................................................................................................................. 30 Birla Corp ........................................................................................................................ 31 Dalmia Bharat ................................................................................................................. 31 Grasim Inds ..................................................................................................................... 32 India Cements ................................................................................................................. 33 JK Cements ...................................................................................................................... 34 JK Lakshmi Cements ........................................................................................................ 34 Ultratech Cement ............................................................................................................ 35 Consumer ........................................................................................................... 36-51 Asian Paints ..................................................................................................................... 37 Britannia Inds .................................................................................................................. 38 Dabur India...................................................................................................................... 39 Emami ............................................................................................................................. 40 Godrej Consumer ............................................................................................................ 42 GSK Consumer ................................................................................................................. 43 Hindustan Unilever.......................................................................................................... 43 Jyothy Labs ...................................................................................................................... 44 Marico ............................................................................................................................. 45 Page Inds ......................................................................................................................... 46 Pidilite Inds ...................................................................................................................... 47 Tata Global Beverages ..................................................................................................... 48 United Breweries ............................................................................................................ 49 United Spirits................................................................................................................... 50 Financials- Banks ................................................................................................ 52-62 AU Small Fin. ................................................................................................................... 53 Axis Bank ......................................................................................................................... 54 Bank of Baroda ................................................................................................................ 55 DCB Bank ......................................................................................................................... 55 Federal Bank ................................................................................................................... 56 HDFC Bank ....................................................................................................................... 57 ICICI Bank ........................................................................................................................ 58 Indian Bank ..................................................................................................................... 59 IndusInd Bank .................................................................................................................. 59 Kotak Mahindra Bank ...................................................................................................... 60 RBL Bank ......................................................................................................................... 61 State Bank of India .......................................................................................................... 62 Financials – NBFC ................................................................................................ 63-74 Aditya Birla Capital .......................................................................................................... 63 Bajaj Finance ................................................................................................................... 64 Equitas Holdings .............................................................................................................. 65 HDFC Life ......................................................................................................................... 66 ICICI Pru Life .................................................................................................................... 67 L&T Finance ..................................................................................................................... 68 LIC Housing Fin. ............................................................................................................... 69 M&M Financial ................................................................................................................ 70 MAS Financial .................................................................................................................. 71 Muthoot Fin .................................................................................................................... 72 PNB Housing .................................................................................................................... 72 Repco Home Fin .............................................................................................................. 73 Shriram City Union Finance ............................................................................................. 74 Healthcare .......................................................................................................... 75-83 Alembic Pharma .............................................................................................................. 76 Alkem Labs ...................................................................................................................... 76 Aurobindo Pharma .......................................................................................................... 77 Biocon ............................................................................................................................. 77 Cadila Healthcare ............................................................................................................ 78 Cipla ................................................................................................................................ 78

Dr Reddy’s Labs ............................................................................................................... 79 Glenmark Pharma ........................................................................................................... 79 IPCA Labs ......................................................................................................................... 80 Jubilant Life ..................................................................................................................... 80 Laurus Labs...................................................................................................................... 81 Lupin ............................................................................................................................... 82 Strides Pharma ................................................................................................................ 82 Sun Pharmaceuticals ....................................................................................................... 83 Torrent Pharma ............................................................................................................... 83 Media..................................................................................................................84-91 DB Corp ........................................................................................................................... 85 Jagran Prakashan............................................................................................................. 86 PVR Ltd ............................................................................................................................ 87 Sun TV Network .............................................................................................................. 88 Zee Entertainment .......................................................................................................... 89 Metals ............................................................................................................... 92-95 Hindalco Inds ................................................................................................................... 92 Jindal Steel ...................................................................................................................... 93 JSW Steel ......................................................................................................................... 93 SAIL ................................................................................................................................. 94 Vedanta ........................................................................................................................... 95 Oil & Gas .............................................................................................................96-99 BPCL ................................................................................................................................ 97 Mahanagar Gas ............................................................................................................... 97 Petronet LNG................................................................................................................... 97 Reliance Inds ................................................................................................................... 98 Retail .............................................................................................................. 100-108 Aditya Birla Fashions ..................................................................................................... 100 Jubilant Foodworks ....................................................................................................... 102 Shoppers Stop ............................................................................................................... 104 Titan .............................................................................................................................. 105 V-Mart ........................................................................................................................... 106 Technology ...................................................................................................... 109-117 Cyient ............................................................................................................................ 110 HCL Tech ....................................................................................................................... 111 Hexaware Technologies ................................................................................................ 111 Infosys ........................................................................................................................... 112 L&T Infotech .................................................................................................................. 112 Mindtree ....................................................................................................................... 113 Mphasis ......................................................................................................................... 113 NIIT Technologies .......................................................................................................... 114 Persistent Systems ........................................................................................................ 114 TCS ................................................................................................................................ 115 Tech Mahindra .............................................................................................................. 115 Wipro ............................................................................................................................ 116 Zensar Technologies ...................................................................................................... 117 Telecom .......................................................................................................... 118-122 Bharti Airtel ................................................................................................................... 118 Bharti Infratel ................................................................................................................ 120 Tata Comm .................................................................................................................... 121 Utilities ........................................................................................................... 123-126 JSW Energy .................................................................................................................... 123 NHPC ............................................................................................................................. 123 NTPC.............................................................................................................................. 124 Power Grid Corp ............................................................................................................ 124 Tata Power .................................................................................................................... 125 Torrent Power ............................................................................................................... 126 Others ............................................................................................................. 127-142 Allcargo Logistics ........................................................................................................... 127 Brigade Entp. ................................................................................................................. 127 BSE Ltd .......................................................................................................................... 128 Container Corp .............................................................................................................. 128 Coromandel Intl ............................................................................................................ 129 Gateway Distriparks ...................................................................................................... 130 Godrej Agrovet .............................................................................................................. 130 Indian Hotels ................................................................................................................. 131 Interglobe Aviation ........................................................................................................ 132 Info Edge (India) ............................................................................................................ 133 Kaveri Seeds .................................................................................................................. 133 KNR Constructions......................................................................................................... 134 Lemon Tree Hotels ........................................................................................................ 135 MCX ............................................................................................................................... 135 Oberoi Realty ................................................................................................................ 136 Phoenix Mills ................................................................................................................. 136 PI Inds............................................................................................................................ 137 Quess Corp .................................................................................................................... 137 SRF Ltd .......................................................................................................................... 138 SH Kelkar ....................................................................................................................... 139 Tata Chemicals .............................................................................................................. 140 Team Lease ................................................................................................................... 141 UPL ................................................................................................................................ 141

Contents Summary .................................................................................................................................................................................................................................. 3 Sectors ............................................................................................................................................................................................................................... 8-142

Note: All stock prices and indices are as on 19th February 2020, unless otherwise stated.

February 2020 3

Voices | 3QFY20

Voices

Mixed commentary; short-term respite not visible yet! In this report, we present detailed takeaways from the 3QFY20 conference calls as we refine the essence of India Inc ‘Voices’.

The December-quarter corporate earnings-report was in line with our expectations for both the Nifty and the MOFSL Universe. EBITDA/PBT/PAT met our estimates, supported by tax cuts. Financials drove 100%+ of incremental earnings as expected, while Metals and O&G dragged the aggregates. Nifty delivered 9% YoY earnings growth (in-line) for the quarter, even as PBT was up by 4% YoY. For FY20, our Nifty EPS estimate is revised down marginally to INR527, and we now expect 9% profit growth for the Nifty, singularly led by Financials. Retail and Utilities were the only sectors exceeding our PBT estimate in the quarter. Corporate commentaries remained mixed with very few pockets of optimism and emerging concerns around the potential impact on supply chain in the wake of coronavirus outbreak in China.

In BFSI, Banks have reported slowdown in corporate loan growth, reflecting the weak macro and the lower utilization limits by the corporates. Also, Banks are maintaining a cautious and conservative stance toward wholesale lending, while retail loan growth remains steady (ex-auto segment). A few banks like AXSB and ICICIBC have downgraded the stressed telecom account to BB & below pool, and near-term credit cost is thus likely to stay elevated. NBFC commentaries across companies were mixed. In the auto segment, sentiment is turning positive for passenger vehicles and tractors, while it still remains subdued for CVs and 2Ws. Asset quality for vehicle financiers is likely to be stable.

Consumer companies across the board were cautious on the outlook, given the weak rural scenario and the ongoing moderation in personal care products demand. Demand slowdown continued to be led by subdued consumer sentiment, liquidity crunch in channels, and weakness in wholesale. North and west India witnessed sharper slowdown compared to the rest of the country.

In Autos, OEMs expect the demand scenario to remain weak during the BS6 transition phase. They do not expect a revival before 2HFY21. Commodity price benefits are likely to ease in 4QFY20 due to an uptrend in RM prices, impacting players on the margin front. Demand trend is likely to remain volatile over the next 6-8 months due to BS6 transition-related cost inflation.

In IT, margins improved sequentially as companies work their way on cost-optimization levers, but shrank on an annual basis due to structural changes in industry. However, despite uncertain macros, companies highlighted robust deal wins, particularly INFY and TECHM.

In Capital Goods, 3QFY20 was marked by sharp slowdown in execution, implying continued slowdown in the economy. Most companies have started focusing on payments and are going slow in execution, in case of stretched working capital cycle. While National Infrastructure Pipeline was announced, the budgetary allocations proved to be a let-down.

In Cement, managements indicated that demand has started showing signs of recovery across regions, except south. The months of Jan and Feb'20 have also witnessed price hikes across regions. However, there have been roll backs in south due to poor demand and in east due to heavy supply. Industry, however, is likely to benefit from lower fuel and logistics costs, as energy prices (oil/pet coke/coal) have been on a downtrend.

Voices BSE Sensex: 41,323 S&P CNX: 12,126

3QFY20 | India Inc. on Call

February 2020 4

Voices | 3QFY20

Autos Industry volumes remained weak in 3QFY20 after some revival during the

festival season. PVs exhibited a pick-up in volumes, while 2W/CV/tractor momentum was weak. OEMs expect the demand scenario to remain weak during the BS6 transition phase and do not expect a revival before 2HFY21. Commodity price benefits are expected to moderate in 4QFY20 due to the uptrend in RM prices, impacting players on the margin front. Increased threat of coronavirus may further disrupt RM and component sourcing from China, hurting business activities. Strong pre-buying expectation has come down and OEMs have targeted to reduce BS4 inventory to zero ahead of BS6 launch. Demand is likely to remain volatile over next 6-8 months due to BS6 transition-related cost inflation.

Capital Goods

The third quarter was marked by sharp slowdown in execution, implying continued slowdown in the economy. Most companies have started focusing on payments and going slow on execution, in case of stretched working capital cycle. While National Infrastructure Pipeline was announced, the budgetary allocations proved to be a let-down. Order inflows surprised marginally, offering some comfort on execution, provided working capital does not stretch further.

Coronavirus issues need to be closely monitored. Room AC companies are to be closely watched as prolonged closure in China due to coronavirus will disrupt the supply chain. Strong summer season may lead to loss of sales opportunity in case the supply chain does not normalize. There might be scope of price hikes in the summer season in case there is supply shortage, but loss in volumes may offset any such advantage for overall revenue.

Cement

Managements indicated that demand has started showing signs of recovery across regions, except south. The months of Jan and Feb’20 have also witnessed price hikes across regions. However, there have been roll backs in south due to poor demand and in east due to heavy supply. Industry, however, is likely to benefit from lower fuel and logistics costs, as energy prices (oil/pet coke/coal) have been on a downtrend.

Consumer

Consumer companies across the board were cautious on the outlook, given the weak rural scenario and the ongoing decline in personal care product demand. Demand slowdown continued to be led by subdued consumer sentiment, liquidity crunch in channels, and weakness in wholesale. North and west India witnessed sharper slowdown compared to the rest of the country. Managements were hopeful that a combination of a possible good Rabi crop, volume growth pick-up off a low base and government measures to boost consumer sentiment could lead to growth from 1QFY21.

Financials Banks

Banks reported slowdown in corporate loan growth, reflecting the weak macro and the lower utilization limits by corporates. Also, banks are maintaining a cautious/conservative stance toward wholesale lending, while retail loan growth remains steady (excl. auto segment). Growth in CV/CE remains tepid, and banks

February 2020 5

Voices | 3QFY20

have reported an uptick in the delinquency trend in these segments. On the asset quality side, all banks reported an increase in slippages, led by both corporate/retail slippages. Corporate slippages were elevated led by a stressed HFC account, while retail slippages spiked in the auto and agri segments. Overall, the PCR ratio has improved as banks continued making healthy provisions to further strengthen balance sheet. A few banks like AXSB/ICICIBC downgraded the stressed telecom account to BB & below pool, and near-term credit cost is thus likely to stay elevated. NIM trajectory remains stable, led by an improvement in cost of deposits.

NBFC

Commentary across companies was mixed. In the auto segment, the sentiment is turning positive for passenger vehicles and tractors, while it still remains subdued for CVs and 2Ws. Asset quality for vehicle financiers is likely to be stable. In the MFI segment, recoveries have started in the flood-impacted areas. In housing finance, players remain cautious in the wholesale segment, but expect retail growth to remain steady. BAF is cautious on some segments like 2W, SMEs and B2C.

Healthcare

There has been impetus on cost-cutting initiatives by companies and re-think on strategy for the US generics segment, given the product-specific considerable investment and the uncertain timeline for potential approval. Further, companies continue working on evolving requirement for regulatory compliance. The focus is gradually shifting toward the branded generics segment in India and other emerging markets. In addition to further enhancing value of existing brands, companies are expanding their product portfolio using an in-licensing strategy, wherein competition is limited with products being under patent. Domestic formulation is likely to remain the key focus area as it is a strong-RoE business with low capex requirement. Over the near term, companies are concerned with availability/prices of RM procured from Chinese suppliers due to the ongoing shutdown on account of coronavirus issue. Companies indicated that typically they have inventory to the tune of 70-90 days which would be sufficient till 4QFY20. However, if the issue gets extended, then they could get adversely impacted by supply shortage from China.

Media

In 3QFY20, ad revenues were hit across the sector due to the lack of spending by corporates on account of the short-term dip in the consumption outlook. Broadcast companies (ZEEL/SUNTV) are quite focused and bullish in the OTT segment over the next two years. The TRAI has released a new order on bouquet pricing beginning Mar’20, which should likely impact broadcasters’ subscription revenue. PVR witnessed healthy pace of screen additions with the quarter having multiple blockbuster releases and being a festive season. Radio and print companies’ revenue declined due to weaker-than-expected ad spends from government/national players. Expect newsprint prices to fall further by INR1-2/kg.

February 2020 6

Voices | 3QFY20

Metals Steel demand has improved since November, supporting consistent price hikes

since December. Steel companies expect net steel realization (NSR) to rise by INR2500-3000/t QoQ in 4QFY20. Auto-contract prices, however, were negotiated down by ~INR6000/t for 2HFY20 which has tempered down the improvement in NSR for flat products companies (TATA, JSW). Most of the excess inventory lying with the companies has been diluted in 3Q with some of it sold in the export markets, supporting higher volumes in the quarter. On the costs front, industry does not expect any further reduction in 4QFY20 as both coking coal and iron ore prices have moved up from the lows.

Oil & Gas

Refining margin outlook for the reminder of FY20 is likely to remain weak owing lower-than-expected boost in diesel yields. OMCs expect healthy marketing margins to continue, which will offset the weakness in the refining margins. RIL’s refining margin is set to improve with the enhancement of delayed coker and distillate yields, while petrochemical cracks are likely to improve with feedstock flexibility. The company’s strong growth avenue remains in its retail business. MAHGL continues to struggle with lackluster volume growth and it expects some volume relief from development of Raigad GA. Continued higher opex challenges would normalize the EBITDA margin of MAHGL. IGL expects volume growth of ~12% from its high-growth gas, supported by government regulations. PLNG expects strong volume off-take at Dahej (on expanded capacity) from the power and CGD sector and foresees capacity utilization of 30% from ramp-up at Kochi post completion of the Kochi-Mangalore pipeline (Mar’20). For FY21, GAIL has guided for incremental volumes of ~7-8mmscmd from startup of two fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.

Retail

Increase in sales was mostly driven by new store additions during the quarter and SSSG remained weak for most companies. Retailers expect low SSSG for a few more months until the economy revives and spending gets a boost. Retailers are quite optimistic about the business in the long term and will continue with the pace of store adds (undeterred by short-term headwinds). Store-level profits remain a key parameter and companies have guided that they will close certain stores if they continue incurring losses in the foreseeable future.

Technology

Overall, the quarter saw moderation in tier 1 organic revenue growth rate (on a sequential basis) with continued pockets of weakness in two large verticals – BFSI and Retail. Margins improved sequentially as companies work their way on cost-optimization levers, but shrank on an annual basis due to structural changes in the industry. However, despite uncertain macros, companies highlighted robust deal wins, particularly INFY and TECHM. In 3QFY20, companies slowed down on headcount addition. TCS and Tech M reported a headcount decline v/s strong additions in 1HFY20.

Telecom

Bharti’s management has welcomed the recent tariff hike (in Dec’19) but emphasized that ARPU should be INR300 to have healthy balance sheet and to

February 2020 7

Voices | 3QFY20

make investment in 5G. Further, management indicated that capex could increase on an immediate basis, but overall would continue trending down as the company has many ways to increase network capacity such as spectrum reframing, TDD deployment, increased sectorization, massive MIMO and fiber rollout. Bharti Infratel’s management expects tenancy cancellation to be over by this quarter and is targeting an energy margin of 3% for FY20. In the longer term, the target is to achieve 5% energy margin. TCOM’s management is working on investment strategy for the innovation segment which should be in place by 1QFY21; growth segment should continue to grow at current pace.

Utilities

NTPC expects commercialization of 5.3GW of capacities in FY21. Transaction advisors have been appointed for NTPC’s potential acquisition of NEEPCO and THDC. PWGR has set a FY21 capitalization/capex target of INR150/105b. The company’s FY20 capitalization target of INR200-250b would also be dependent on commissioning of Raigarh-Pugalur. According to the company, it has resolved much of the RoW issues faced and remains confident of completing it in FY20. With declining capex and removal of DDT, the company noted that there is a likelihood of increasing dividends. Torrent Power noted it has paid debt of INR10b in this quarter, which should reduce interest costs. Approval for extension timelines though has not been received for its SECI-III and SECI-V projects.

February 2020 8

AUTOMOBILE | Voices

Key takeaways from management commentary

Industry volumes remained weak in 3QFY20 after some revival during the festival season. PVs exhibited a pick-up in volumes, while 2W/CV/tractor momentum was weak. OEMs expect the demand scenario to remain weak during the BS6 transition phase and do not expect a revival before 2HFY21. Commodity price benefits are expected to moderate in 4QFY20 due to the uptrend in RM prices, impacting players on the margin front. Increased threat of coronavirus may further disrupt RM and component sourcing from China, hurting business activities. Strong pre-buying expectation has come down and OEMs have targeted to reduce BS4 inventory to zero ahead of BS6 launch. Demand is likely to remain volatile over next 6-8 months due to BS6 transition-related cost inflation.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY20 New Launches

FY21 outlook: While 1QFY21 would be tough and 2Q flattish, AL is preparing for growth in 2HFY21. Exports are likely to grow by 20%, driven by a revival in Bangladesh, SL and African markets (new tender coming in). We are building in volume growth of ~11% for M&HCV and ~40% for LCV in FY21.

Cost-cutting program ‘K54-2’ is on track to deliver savings of ~INR5b in FY20. For FY21, it is targeting savings of INR6-6.5b.

9MFY20 capex at ~INR9.6b. FY20 guidance at INR12-13b.

Plans to shift entire production to BS6 by mid-Feb'20. RM prices should

increase with commodity prices rising in 4QFY20. It has resumed 3W exports to Egypt with 3-4k units. The company is holding inventory of ~5 weeks. Expecting weak 2W demand for next 2-3 quarters due to BS6 cost inflation.

Chetak (e-scooter)

The company believes that business has bottomed out and estimates 4QFY20 to be similar to 3QFY20.

Cost-reduction measures taken in India business should start reflecting in 2HFY21.

Impact of Coronavirus on business is difficult to assess currently as there is 4-6 weeks of inventory in EU and the US.

The company expects the premium segment to grow by ~5% in FY21, although 1HFY21 will be muted.

System inventory at 2 weeks. The company has already moved to BS6 variants for models like Classic,

Himalayan and 650cc Twins. It is continuing network expansion. Added seven large format stores, and will further add ~250 RE Studio stores by Mar’20.

Benefits of cost-saving initiatives may get offset by commodity cost inflation in 4QFY20. The company is ready with BS6 product line-up and will stop BS4 production by mid-Feb’20. It is holding five weeks of BS4 inventory.

FY21 PV industry outlook: PVs should grow by 2-4%, CVs by 4-6% and tractors by 5%. In FY20, tractors should de-grow by ~7-8% (although expected to grow by 5-7% in 4QFY20).

In Dec’19, auto inventory was lower than normal, but tractor inventory was at normal level.

The company plans to stop BS4 production by the third week of Feb’20.

e-KUV100 ,new Thar

Demand environment is improving, which can be gauged from inquiry improvement. Rural is now doing better than urban, and the outlook is promising based on encouraging estimates for Rabi crop. SIAM estimates PV industry growth at 3-5% in FY21.

In Jan’20, key models have seen a reduction in discounts of ~INR5-6k and price increase of ~INR5-6k. Commodity prices, which have started rising (steel, rhodium, palladium, etc.), will start reflecting in P&L from 1QFY21.

Brezza (Petrol Variant), S-presso (CNG variant)

SMP's US plant continues to progress with manufacturing ramp-up (increase of 10% QoQ); it will see further ramp-up based on Daimler's requirement.

It is yet to reach optimum utilization, which is expected in the next 3-6 months. The coronavirus outbreak can impact SMRPBV’s exposure in China in 4QFY20.

AUTOMOBILES

Ashok Leyland

Bajaj Auto

Eicher Motors

Hero MotoCorp

M&M

Maruti

Bharat Forge

Motherson Sumi

February 2020 9

AUTOMOBILE | Voices

JLR – China business is on a recovery path with continued growth in last six months. However, the coronavirus risk could have some impact in 4QFY20.

The company has already deferred reopening its CLR plant post the Chinese New Year. JLR capex guidance for FY20 has been reduced to GBP3.6b (v/s GBP3.8b earlier).

India – India M&HCV business is seeing signs of recovery with improved inquiries for replacement demand from large fleet operators and for tippers. Realizations have improved from Dec’19 level due to lower inventory and higher inquiries.

Passenger Vehicles - Altroz, Gravitas, JLR -Defender

The company expects domestic 2W industry to recover from 2HFY21 with a mild decline in 1HFY21. Dealer inventory level is at 5 weeks. Has stopped BS4 production from Jan’20 and its entire portfolio for the domestic market has been shifted to BS6.

i-Qube (e-scooter)

Amara Raja Batteries BuyCurrent Price INR 784

Exports of 4W batteries increased 20-25%, led by ramp-up in existing S.E Asian markets.

No pricing action was taken for 3QFY20 and Jan’20, though there has been some volatility in lead prices.

Commercial production for e-rickshaw batteries to start in 4QFY20, as both product and tubular battery capacity is expanded by ~0.36m units p.a.

Capex guidance maintained at INR5.5-6b for ongoing capacity expansion in (a) 2W batteries (by ~2.5m units to 17m by Mar/Apr-20) and (b) 4W batteries (by ~2m units to 14.5m by 3Q/4QFY21).

Ashok Leyland BuyCurrent Price INR 81

FY21 outlook: While 1QFY21 is likely to be tough and 2Q flattish, AL is preparing for growth in 2HFY21. Exports are likely to grow 20% led by a revival in Bangladesh, SL and African market (new tender coming in).

Focus on inventory reduction continued in 3QFY20. Total inventory (AL + dealer) reduced from ~27.5k units (Jun’19) to ~8k units (Dec’19) and further to ~6.5k units (Jan’20). Company level inventory reduced by ~5,500 units QoQ.

Cost-cutting program K54-2 is on track to deliver savings of ~INR5b in FY20. For FY21, it is targeting savings of INR6-6.5b.

Capex: 9MFY20 capex at ~INR9.6b. FY20 guidance at INR12-13b. It would continue focusing on controlling capex with maintenance capex of INR4-5b per annum in M&HCV and growth investments in LCV.

AL has walked away from deals due to very high discounts where it was losing money even at contribution level.

Sequential increase in RM cost was attributable to inventory reduction at company level (impact of INR2.5b-2.6b) and an adverse mix (higher ICVs and STU business).

Staff cost reduction for reversal of bonus provisioning of 1HFY20. Also, ~250 people have opted for VRS.

Net Debt: ~INR19b v/s INR27.4b in 2QFY20.

Click below for Detailed Concall Transcript &

Results Update

Click below for Results Update

Results Update

Tata Motors

TVS Motors

February 2020 10

AUTOMOBILE | Voices

Hinduja Leyland Finance (HLFL): AL and Hinduja family to acquire ~7% stake of Everstone at ~2x FY19 P/BV in multiple tranches over the next nine months.

Delinquencies in HLFL have gone up and there had been higher cases of vehicle repossessions during the quarter but nothing alarming yet.

Bajaj Auto NeutralCurrent Price INR 3,090

Recently launched BS6-compliant CT and Platina are not based on e-carb but on an internally developed electronic injection system. This solution works well for lighter bikes. It has passed entire cost increase of BS6/other modifications (without loading margins) through price increase of 13-20%.

BJAUT plans to shift entire production to BS6 by mid-Feb'20. It has inventory of ~5 weeks and is hopeful of clearing entire BS4 inventory by first week of Mar'20. It does expect some pre-buying ahead of BS6 transition.

For domestic 2Ws, it expects weak demand for 2-3 quarters due to BS6 cost inflation. This is based on its experience during insurance/ABS price increases. It does not expect material down-trading due to BS6.

Commodity costs are expected to go up as early as 4QFY20. 3W exports to Egypt have resumed from Jan’20 with 3-4k units shipment.

However, it is seeing some signs of stress in Iraq and Cambodia. Chetak (e-scooter) has received very good response and ~2,000 bookings. Export incentives: If there is any change or lowering of export incentives due to

WTO ruling, management believes it has enough pricing power to pass it on. Domestic 3Ws volumes are expected to be stable. 3W cargo could be a

beneficiary of high cost inflation in SCVs due to BS6.

Bharat Forge BuyCurrent Price INR 480

BHFC’s management believes the business has bottomed out; while 4QFY20 should be similar to 3Q, the normal seasonal uptick in 4Q might be absent due to the BS6 transition. Both domestic/exports should be flat QoQ.

Coronavirus impact on business is difficult to assess currently as there is 4-6 weeks of inventory in EU and the US.

Significant cost reductions should occur in India, which would reflect in the P&L in 2HFY21. This is across all major cost heads (both variable as well as fixed).

At its German subsidiary, BHFC had undertaken significant restructuring and cost reduction target (~10pp of sales). The company’s aluminum forging business has an order book of USD300m p.a. over the next 5-6 years.

Capex: In FY21, except for on-going projects’ residual capex of ~INR2.5b (plus ~INR1b of maintenance capex), the company will not invest in any new capacity addition as current utilization is ~50%.

AP plant should start commercial operations from Feb’20, with full ramp-up happening during FY22/FY23.

INR11k/t increase in steel prices in the last 2 years (2017 to now) has inflated realization and deflated margins due to pass-through impact.

Oil and Gas business revenues in 3QFY20 declined 25% QoQ. BS6: Pump housing for urea dousing is a new product under BS6, which BHFC

will supply.


Results Update


Results Update

February 2020

February 2020 11

AUTOMOBILE | Voices

Bosch NeutralCurrent Price INR 14,616

Underlying industry (relevant for BOS) declined 11.2% YoY. BOS' revenue declined by ~25.8% YoY from autos and by ~13.9% YoY from non-auto. Domestic revenue declined ~25% YoY, whereas exports fell ~10% YoY.

Aftermarket is going through transformation (which has near-term repercussions), results of which would be visible in 2020.

It is supplying EV components for recently launched TVS e-scooter iQube / Tata Nexon EV. This is in addition to order wins for Bajaj Chetak e-scooter.

It expects 1HFY21 to be muted and moderate growth in 2HFY21. For SCR used in BS6 trucks, it is partnering with vendors for components other

than dosing module and supply module (made in-house).

CEAT Buy Current Price INR 1,070

Total volume grew ~2% YoY (~4% QoQ) driven by ~8% growth in replacement and export market, despite ~8% decline in overall OEM demand, which remained weak.

OEM demand for PV segment grew 2% YoY, whereas it declined for CVs/2Ws by 25%/~10%.

Replacement market demand is sluggish, but base has turned favorable from Nov’19.

OEM business in CVs, PVs and 2Ws should benefit from new capacities/customer/model addition.

RM prices in 4QFY20 should remain similar to that in 3QFY20; however, based on spot prices, some inflation is expected in 1QFY21.

Capex: S/A project capex has been further reduced to ~INR30b from ~INR35b. Of this, ~INR19b was incurred till 9MFY20, another ~INR2.2b in 4QFY20 and ~INR8-10b will be used in FY21. Balance INR5b will not be spent in the next 2 years. This is excluding maintenance (~INR1-1.2b p.a.) and OTR capex (~INR5b, to be triggered based on certain milestones).

TBR plant is operating at 50-55% utilization of targeted capacity. Has helped to gain 1.5-2pp market share of TBR.

PCR plant will be commissioned in Feb’20 and will be ramped up by ~50% in FY21. 2W plant would also get commissioned in 4QFY20.

The company is evaluating merits of the new corporate tax regime, but is yet to take a final decision as it does not offer MAT credit.

Eicher Motors BuyCurrent Price INR 18,870 Royal Enfield

Management expects the premium segment to grow ~5% in FY21, though 1HFY21 will be slow.

Bullet X and Classic X were launched in CY19; this has made RE bikes more accessible (affordable) to buyers. Bullet X contributed ~10% to Bullet volumes in 3QFY20.



Results Update

ppResults Update


Results Update

February 2020 12

AUTOMOBILE | Voices

500cc product portfolio has not been doing well, and hence, will be discontinued in BS6, particularly since it has 650cc Twins to dilute the impact.

Network expansion continues with addition of ~7 large format stores to ~939 stores and ~250 RE Studio stores to ~500 stores. The company expects to add another ~250 RE Studio stores by Mar’20.

System inventory stands at ~2 weeks. It has already moved to BS6 for Classic, Himalayan and 650cc Twins. Given the supply chain complexity, it has moved to BS6 early, in turn losing some pre-buying opportunity as dealers were stock-out in some parts of the country in Jan’20 (BS6 was ~33% of wholesales).

Jan’20 order book was higher than dispatches. BS6 cost inflation was largely passed on to customers without loading

contribution. The company added new stores in international markets like Thailand, Brazil,

Argentina, France and the UK, increasing its total touch points to 675 outside India, including 67 exclusive stores.

‘Make your own initiative’ played out well. Soft launch of Configurator (with 600 units initially) helped to test the system.

These motorcycles are made within 24hrs from the time of order to dispatch, and has attracted customers from metros/large cities to customize their motorcycles, without increasing the complexity of manufacturing.

Export market Markets like Europe and the USA are generally slow during these months owing

to seasonality (due to cold weather); it is expected to revive from the dealer end by Feb-Mar’20.

Both Himalayan and Twin have performed well in the export market. Himalayan was a surprise win in the USA, Europe, Brazil and Columbia. It grew

3x in 3QFY20 due to increased distribution and investment efforts in those markets.

The company’s slower approach on dealer expansion to ensure profitability first (like a few in Thailand), is expected to pick up pace once expansion happens. Expect ~10 dealers to come up next year.

Well-calculated expansion plans in the international market has helped ensure dealer profitability.

Would continue to focus on winning market share in mid-size segments in those markets.

Endurance Technologies BuyCurrent Price INR 1,059 India

Aftermarket in 9MFY20 grew 9.6% to INR2,147m (incl. exports). In 9MFY20, new business wins were at INR4.6b p.a.; RFQs at INR13.2b are WIP.

New business includes new product platforms (~50%) and the replacement business (~50%), but doesn't include new orders/RFQs from the Bajaj group (incl. KTM, Husqvarna and Triumph). Peak execution of these orders would be in FY22.

Karnataka plant (front forks) for HMSI started in Sep’19; it has reached ~4,000 sets per day in Feb’20. Including the Sanand plant, it has reached a peak run rate of ~INR250m/month in Feb’20 (v/s INR30-40m/month in 3QFY20).


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February 2020 13

AUTOMOBILE | Voices

Progress of the ABS business is slower by 6-8 months, as clearance is awaited from BJAUT by 1QFY21. It has a capacity of 250k (can be ramped up to 400k/p.a) with revenue potential of ~INR750m p.a. (or ~INR1.2b on expanded basis).

With TVS, the company is in the process of getting further orders for brake, suspension as well as clutch assemblies for 2Ws/3Ws. Its current share of business on disc brakes for Apache and front forks for scooters is ~33%.

The company believes the growth decline will stop from Feb’20 due to new business on its hands.

Europe

New order wins stood at EUR22.5m p.a. from VW, FCA and Maserati. EU PV sales grew 11.5% in 3QFY20 led by 21% growth in Dec’19 due to

significant changes to CO2-based taxation for 2020. While sales grew, OEMs are cutting inventory. Jan’20 saw decline in both registrations and production.

EU outlook is uncertain as many OEMs have given profit warnings for CY20 as they are reducing prices to sell cars. Also, exports have reduced from Germany on account of the noise around trade war, which resulted in loss of ~EUR35m business from BMW, VW and Daimler. However, it does expect to grow faster than the underlying market.

Others

Consol. net debt is at INR881m. FY21 capex for both India and EU business would be very less, as focus is on

asset sweating. However, it is actively pursuing M&As.

Escorts NeutralCurrent Price INR 911 Tractors

In 3QFY20, industry declined in the North/Central regions (strong markets) by 4.2% YoY while the South/West regions (weak markets) declined 8.1% YoY.

Industry momentum has improved QoQ. In 4QFY20, ESC expects industry to grow in low single-digit. While FY21 is expected to be a tad subdued, FY22 should see full revival. FY20 saw decline of 7%, largely due to infra (70%) and agri (30%). Many infra projects have been stalled; although there has been some improvement, it is far from normal. Infra is not as bad as it was in 1HFY20, but recovery is very slow. Agri was positive for the last 2-3 months due to positive sentiment post monsoons. Recovery should start with the South/West regions, whereas the North/East/Central regions should play catch-up fast.

Tractor mix: The Farm tractor: Power tractor ratio at 39:61 improved in 3QFY20 (v/s 36:64 YoY and 41:59 QoQ). Contribution of tractors (40HP and above) in 3QFY20 stood at 54% (v/s 47% YoY).

Distribution network: Added 970+ (added 20 in 3QFY20). Will continue to add dealerships in both strong and weak markets.

Dealer inventory at 3-4 weeks, lowest in the industry (over 5 weeks). Retails for ESC have been higher than wholesales.

South: ESC has done very well in the last 18-20 months with market share increasing in all four key states (Kerala is not an important tractor market). In some of these markets, market share is inching toward 10%. The South is seeing recovery due to good monsoons, as it more heavily dependent on rainfall than other markets.


Results Update

February 2020 14

AUTOMOBILE | Voices

The Kubota JV has started exports from 3QFY20 under joint branding ‘E Kubota’. It started with compact tractors (25-26hp) but will cover the entire range (going up to 90hp). Every quarter will add new models and new countries. Positioning is different. Kubota products known for their features are power oriented. ESC products are rugged and fuel efficient. There is no material overlap in offerings.

Construction Equipment Addressable Construction Equipment Industry at 10.7% (v/s -26.1% in 3QFY20).

In 9MFY20, industry is down 22%, ESC is down 25.3%. Industry in 3QFY20 – BHL down 5.1%, Crane down 29.7% and Compactors down 20.8%.

Industry 9MFY20: Backhoe loader down 22% in 9Ms, Compactor down 23.6% and Cranes down 22.7%.

Capacity utilization at 40%, RoCE at 28.8%. Margin improvement on better product mix, price increase and cost

optimization. New product launches in the next couple of quarters in the high-value segment. Financing: Banks are now quite active with 65% contribution (v/s 40% earlier) as

against NBFCs). Railways

Order book at ~INR4.5b as of Dec’19 to be executed in the next 12-15 months. EBIT Margins down QoQ/YoY due to impact of high share of NPD products,

which have ~40% import content. Localization plans are in place, but testing and validation would take 18-24 months since it is a braking system.

Received approval for 3 new products and are in the pipeline for FY21. Primary growth would be through the new products.

Others Net Cash: INR7.2b. Released ~INR3b of cash from working capital from Mar’19 level. Capex: INR2.5b each for FY20/FY21. Commodity prices: Steel prices are increasing, which should impact the CE

business in 4QFY20 and tractors in 1QFY21. Cost cutting efforts should continue in FY21; margin guidance should be better

than FY20. Price increase of average INR5-6k for key models from 27th Jan’20 to pass on

cost increases. Commodity prices that have started rising (steel, rhodium, palladium, etc.), will

start reflecting in P&L from 1QFY21. Hero Motocorp NeutralCurrent Price INR 2,252

Cost savings and commodity prices accounted for 100bp benefits of total gross margin expansion of 220bp.

Cost-saving initiatives will continue to benefit operating margins, but commodity cost inflation including the rise in cost of precious metals may offset benefits.

Increased penetration, through deeper distribution network, resulted in strong spare sales with further growth estimated in the future.

Financing penetration was at ~45% in 3QFY20 with Hero FinCorp accounting for 50% share.


February 2020 15

AUTOMOBILE | Voices

Scooter production was stopped in Dec’19. Ready with BS6 products and plan to stop complete BS4 production by mid-

Feb’20. Out of 16 brands in the product portfolio, HFdelux, iSmart and Pleasure are

already BS6 compliant with new launches to flow in the coming months. Have been successful in passing most of the BS6 cost inflation in prior launches. In wait-and-watch mode till Apr’20 to estimate BS6 production targets. Holding BS4 inventory of 5 weeks and don’t see any heavy discounting as BS4

products are already priced cheaper by INR8-10k. The Andhra plant should get commissioned in 4QFY20 with material revenue

and profits starting to reflect post FY21 only. Export targets should remain intact despite the slow growth in markets like

Bangladesh, Nigeria and Columbia. HMCL has declared an interim dividend of INR65/share on face value of

INR2/share. Following the announcement of the Dividend Distribution Policy, no significant changes have been noted on the company’s dividend distribution.

Mahindra & Mahindra BuyCurrent Price INR 526

Inventory for Auto was lower than normal and for tractors at normal level (Dec’19). It plans to stop BS4 production by third week of Feb’20.

FY21 outlook: (a) PVs: 2-4% growth, (b) CVs: 4-6% growth and (c) Tractors: 5% growth (FY20 decline of 7% based on 5-7% growth in 4QFY20).

MM has a strong product pipeline for Auto: (a) e-KUV100 (1QFY21), (b) new Thar (1QFY21), (c) Atom (e-Quadricycle, 2QFY21), (d) W601 (crossover SUV, 4QFY21), (e) new Scorpio (1QFY22) and (f) e-XUV300 (mid-CY21). In Tractors, it plans to launch the new platform K2 (developed with Mitsubishi) in mid-CY21 with launches spanning over two years across four HP range.

Capex (incl. investment in subs): It has lowered guidance to ~INR170b over three years (v/s ~INR180b earlier) based on savings of ~INR10b already realized through Ford JV. Based on the expected further savings from the Ford JV, capex could further reduce to ~INR150b.

For BS6 petrol UVs, it has taken price hike of ~INR20k, which is for BS6 cost (incl. contribution margin). For diesel BS6, it expects cost increase of INR50-70k, but the extent of pass through would depend on competitive intensity.

SYMC has taken impairment of ~INR3.4b on certain assets. In addition, MM has taken impairment of ~INR6b for investments in SYMC (gross investment of ~INR24.5b).

SYMC's board has approved business plan targeting breakeven in CY22 based on funding of INR27-30b (through debt, equity by M&M as well as possible strategic investor). Breakeven would require increase in volumes, reduction in cost and improved efficiencies. It is targeting significant reduction in cost (negotiated compensation cut with the labor union + 3-4pp reduction in material cost). It is targeting new export markets like Russia and Vietnam. Ramp-up in Russia will happen by mid CY21 and Vietnam this year.

MUSA (Mahindra Tractor USA): Last year, it had significantly changed business model and that exercise is roughly half way through. Inventory has gone down


Results Update

February 2020 16

AUTOMOBILE | Voices

by ~20% at dealer and 40% at co. level. It expects this initiative to be completed by next year.

Ford JV: JV would be launching connected vehicle solution this week. C-SUV platform work going on and expects savings of INR10b. Similarly, B-SUV (1 yr behind C-SUV) would drive savings of ~INR10b. Further, by MM utilizing excess capacity at Ford’s plant, it would save capex of ~INR4b.

EVs: It expects 3W segment to take lead in electrification. MM sells 500 li-ion 3Ws (Trea) and 1,000 Lead-acid 3Ws (e-Alfa). Treo is already viable for owner operator, as it makes little more money than normal 3Ws. Treo is profitable at contribution level for Mahindra Electric (ME) and as volumes goes up it will break-even at PBT. For PV fleet, e-KUV100 would be commercially viable at launch price of ~INR825k (ex-showroom Delhi). e-KUV100 is not profitable currently for ME, but at monthly volumes of ~500 units, it would be positive at contribution level. Management indicated that Mahindra Electric (100% sub focused on EVs) would be EBITDA positive in FY21.

Maruti Suzuki BuyCurrent Price INR 6,756

Inquiries in Jan’20 have been good – with growth in Petrol and ~2% decline in Diesel. While rural demand is now better than urban, outlook is also promising based on encouraging estimates for Rabi crop.

BS6: MSIL’s 11 top selling models are BS6 compliant. Inventory: ~9 days as of Dec’19. Diesel is <10 days inventory. Diesel: See no scope for any material pre-buying as company plans to stop diesel

production beginning Feb’20. It has just 8,700 units of diesel vehicle inventory (v/s avg. monthly sales of ~27,000 units).

FY21 outlook: SIAM has estimated PV industry growth at 3-5% in FY21. Diesel: In 3QFY20, diesel contributed ~29% to industry volumes (lowest in

decades) and ~20% for MSIL. Post BS6, company expects industry share of diesel to decline further to 15-20%. Even in mid-sized SUVs like Hector, Creta and Venue, share of petrol is picking up. MSIL should benefit from this change due to its strength in petrol (of total 50.1% market share, ~40.2% comes from petrol and ~9.9% comes from diesel).

Discounts in Jan’20 have been reduced by INR5-7k for some models. QoQ realization decline is due to higher discounts and mix (lower diesel, higher

volumes of smaller cars, etc.). Gross margin decline of ~150bp QoQ was due to (a) higher sourcing from

Gujarat (accounting impact), (b) higher discounts (~110bp QoQ), (c) lower production (v/s wholesales; 100bp QoQ impact), and (d) 60bp benefit of lower commodity costs.

Financing: Interest rates have declined from Apr’19 by ~55bp to 7.9%. Rejection rates have also come down.

Key models have seen an average price increase of INR5-6k since 27th Jan’20 to pass on cost increases.

Commodity prices, which have started to rise (steel, rhodium, palladium, etc.), will start reflecting in the P&L from 1QFY21.


Results Update

February 2020 17

AUTOMOBILE | Voices

Tata Motors BuyCurrent Price INR 158

Defender – three months of order book with retails to start from mid-March. China business is on a recovery path with continued growth over the last six

months. However, the coronavirus risk could have some impact in 4QFY20. It has already deferred reopening of the CLR plant post Chinese New Year.

JLR’s capex guidance for FY20 was reduced to GBP3.6b (prior: GBP3.75b). Project Charge delivered savings of ~GBP0.2b in 3Q (total GBP0.7b), as well as

savings of GBP0.2b in investments (total GBP1.5b) and GBP0.4b in working cap (total GBP0.7b).

It has initiated Project Charge+ targeting further savings of GBP1.1b over the next 15 months (GBP0.4b in 4Q and GBP0.7b in FY21). Key drivers for these would be material and variable cost reduction.

India M&HCV business is seeing signs of recovery with improved inquiries for replacement demand from large fleet operators and for tippers. Realizations have improved from Dec’19 level on lower inventory and higher inquiries.

JLR: Key takeaways from management commentary Defender has three months of order book, with retails starting mid-March. New Discovery Sport would be launched by CJLR on 20th Feb. This is important

model as it contributes 40-50% of CJLR volumes. China business is on recovery path with continued growth in last six months.

However, coronavirus risk could have some impact in 4QFY20. It has already deferred reopening of CLR plant post Chinese New Year.

JLR’s capex guidance for FY20 reduced to GBP3.6b (v/s GBP3.75b earlier). Project Charge delivered savings of ~GBP0.2b in 3Q (total GBP0.7b), as well as

savings of GBP0.2b in investments (total GBP1.5b) and GBP0.4b in working cap (total GBP0.7b). Total savings under Project Charge has exceeded target of GBP2.5b by Mar’20 to GBP2.9b by 3QFY20.

It has embarked on Project Charge+ targeting further savings of GBP1.1b over next 15 months, with target of GBP0.4b in 4Q and GBP0.7b in FY21. Large part of these savings are on material and variable cost reduction, which would support EBIT margin guidance of 4-6% for FY22/23.

Warranty cost (% of sales) at 4% in 3QFY20 on like-to-like basis. Reported is ~3.6% due to GBP mark to market.

Continue to have higher marketing cost. VME worst QoQ and expected to be at similar levels in next two quarters.

VME increased from 6.6% to 7.5% (+30bp QoQ), incl. GBP25m US residual accrual for 16MY vehicles.

Tax was negative in 3Q due to recognition of deferred tax assets pertaining to 1H.


Results Update

February 2020 18

AUTOMOBILE | Voices

TVS Motors NeutralCurrent Price INR 441

Domestic 2W Industry outlook: TVS expects a recovery from 2HFY21 for domestic 2Ws after a mild decline in 1HFY21. It is still expecting GST to be reviewed by the government.

Dealer inventory levels stand at five weeks. Retails have been higher than wholesales.

It has transited its entire portfolio for the domestic market to BS6 and stopped BS4 production in mid-Jan'20 (~60% of Jan’20 dispatches were BS6).

BS6 price increase is to cover cost only (and not contribute to margins). BS6 pricing is based on overall portfolio basis (incl. exports) and cost-reduction initiatives. It expects EBITDA per unit to be similar under BS6 (v/s BS4).

RM cost declined sequentially due to cost-reduction initiatives and soft commodity prices. Cost savings contributed ~230bp YoY (60-70bp QoQ) in 3QFY20. Import content came down to 10% of RM cost from 14% in FY19. FY21 target would be ~8%.

Indonesia witnessed EBITDA breakeven in 3QFY20. Its 2W volumes grew ~55% (to 40.75k) and 3W volumes were up ~219% (to ~6k units).

Weakness in mopeds due to weak rural and high discounting in economy segment. 95% of moped volumes are from utility and 5% from commuting side.

Recently launched e-Scooter iQube is sold through 12 dealerships in Bangalore. It would be later entering several other cities like Delhi, Mumbai, Hyderabad, Trivandrum, Chennai etc. It has capacity of ~1,000 units/month for e-scooter. It is investing ~INR2b for electric vehicle program.

Financing penetration for TVSL at ~52%, of which ~45% is TVS Credit. In 9MFY20, TVS Credit has book size of ~INR91.5b and earned PBT of ~INR1.35b.

Ban on 2W & 3W taxis in Lagos city (Nigeria) on certain roads is a very recent phenomenon and as per the management it is too early to assess the impact. For TVSL, Nigeria contributes ~55% of 3W exports and 12-15% of 2W exports.

Capex planned for FY20 is at ~INR6.5b. In 3QFY20, it invested ~INR498m in TVS Motor (Singapore) and ~INR142m in PT TVS Motor (Indonesia). In 9MFY20, it has invested ~INR2.47b in subsidiaries.


Results Update

February 2020 19

CAPITAL GOODS | Voices

CAPITAL GOODS

The third quarter was marked by sharp slowdown in execution, implying continued slowdown in the economy. Most companies have started focusing on payments and going slow on execution, in case of stretched working capital cycle. While National Infrastructure Pipeline was announced, the budgetary allocations proved to be a let-down. Order inflows surprised marginally, offering some comfort on execution, provided working capital does not stretch further.

Coronavirus issues need to be closely monitored. Room AC companies are to be closely watched as prolonged closure in China due to coronavirus will disrupt the supply chain. Strong summer season may lead to loss of sales opportunity in case the supply chain does not normalize. There might be scope of price hikes in the summer season in case there is supply shortage, but loss in volumes may offset any such advantage for overall revenue.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY20 Domestic Capex Cycle Budget Impact

Near-term slowdown in industrial automation is expected to continue. However, discrete automation, robotics and electrification products are expected to do well.

Exports as an opportunity can be huge in case the global economy picks up. CY19 saw healthy growth in exports (+55% YoY).

Slowdown in industrial automation business is largely due to the muted auto sector.

ABB is leveraging opex-related spending, since capex from the private sector is still muted.

None

KKC has maintained its FY20 growth guidance for the domestic business at 3-5% YoY. Guidance for exports growth has also been maintained at 20% as the company does not see any appreciable pick up in 4QFY20.

Near-term challenges exist such as economic slowdown and liquidity crunch.

Export market continues to face roadblocks owing to prolonged muted demand.

Negative as overall capex outlay was muted in the budget.

Consumption slowdown and liquidity crunch in the real estate segment has impacted the business in 9MFY20.

Lloyd business was impacted due to sharp fall in LED TV sales on account of price erosion.

Capex-related demand has been muted. Confidence is low due to economic slowdown.

In Lloyd, the company witnessed double-digit growth in ACs, which is a key positive.

Positive – due to import duty hike on small appliances. Negative – due to import duty hike on compressors.

FY20 order inflow guidance is at 10-12%, revenue guidance is at 12-15% and EBITDA margin guidance for the core E&C business is at 10.5%. Revenue ask rate for 4QFY20 stands at 16-25%.

Outlook remains robust over the medium term with key projects expected to expedite in 4QFY20 (AP and Maharashtra).

Order inflow surprised positively as infrastructure orders were up 31% YoY.

Negative as overall capex outlay was muted in the budget.

AC continued to perform well for the company with double-digit growth in a non-seasonal quarter. Impact of coronavirus may negatively impact the company in 1QFY21.

EMPS segment performance was subdued due to poor execution and challenges in working capital cycle.

Ordering in EMP segment was strong, leading to an all-time-high order book. This gives comfort of a sharp pick-up in EMP revenues over the next two years.

Negative – due to import duty hike on compressors.

ABB

Cummins

Havells

Larsen and Toubro

Voltas

February 2020 20


ABB BuyCurrent Price INR 1,211

While customers are looking to gain higher productivity by using automation, most are looking to invest in technology.

See some risk due to weak capacity utilization. Once the investment cycle turns, ABB will be ready to capitalize its offerings. Exports – making in-roads into the Indian subcontinent. Have started leveraging robotics and motion for business outside India. ABB has received projects under smart city for distribution of water and

electrification. Continue to gain traction in Railways, announced INR2b order on 12th Feb’20. Continue to see opportunities in Data Center, Airports, and Railways. 4QCY19 results are different compared to historical trends. In CY19, distribution

of revenue was even during each quarter, which has led to 4QCY19 looking subdued on a heavy base YoY.

Lower margins on account of legacy orders in Industrial Automation. INR700m provisions taken as exceptional items relating to the Solar business. Cash balance stood at INR16b. Inter-corporate loan of INR3.4b to PG exists at result-end date; the same has

been repaid by them. Employee cost for the quarter looks higher, as earlier the actuarial-related

changes reflected in the last quarter of the financial year. From CY19, it is being evenly spread across 4 quarters.

Exports – 18% of the revenue now. Grown 55% YoY in CY19. Solar business: 7-8% sales come from Solar. Margins are very thin. Solar

business is 50% exports and 50% domestic. Over the years, ABB has diversified its product offerings to mitigate itself against

slowdowns in segments that it operates in. India being a large market, there are segments that will do well while some may not perform at all. Also, demand is led by Tier 3/4 cities and ABB is focused on these markets.

BHEL NeutralCurrent Price INR 35

For FY21, the company is looking at new project ordering as per NIP guidelines For 3QFY20, In-house production was more than bought outs. Yadadri and Udangudi projects have been put on hold by the client. The company did not receive orders from NTPC Talcher and Tanzania which

were expected in 3QFY20. Talcher received clearance from Odisha government in January. For Adilabad (1*800MW), key decisions are pending with the government.

Roughly, INR400b worth of orders have taken a backseat due to various delays from clients.

Other expenses in 3QFY20 was lower on account of: (a) lower creation and more withdrawal of provisions (INR2.86b net creation in 3QFY19 versus INR1.87b net withdrawal in 3QFY20), (b)Power, fuel and indirect material costs – INR1.25b lower YoY, (c) Currency gain of INR1.38b in 3QFY20 on account of Euro depreciation



Results Update

Results Update

February 2020 21


Receivables stood at INR003143.1b at the end of 3QFY20 (versus INR153.4b end of 3QFY19). Contract assets stood at INR237.5b at the end of 3QFY20 (versus INR222.9b end of 3QFY19). Effort is to convert contract asset into receivables.

Cash balance currently stood at INR4b. Gross margins were impacted due to increase in material costs. Receivables breakup at the end of 3QFY20 stood as - Private (12%), SEBs (48%),

Export (9%), CPSUs (31%) NIP talks of overall Thermal capacities going up, hence old power plants should

shut and new power plants should start. 48GW worth of opportunity exists. Cash flow from operations (CFO): Stood at -INR60.7b ending 3QFY19 versus -

INR29.2b ending 3QFY20, thus showing improvement. Capex till 9MFY20 stood at INR3b, and the company is expected to end FY20 with INR3.5-4b of Capex.

Out of INR1.07t order book, around INR875b is executable, while BHEL is favorably placed in around INR130b worth of orders. (INR105b in power, INR9b in industrial, INR17b in international).

Within favorable orders in Power, INR63b is for Talcher while FGD orders are worth INR42b.

Order booked in FGD stood at INR58b in 9MFY20, while Order backlog in FGD stood at INR90b.

Tax rate – the company hasn’t taken a final view and the same will be communicated in 4QFY20.

Employee headcount currently stood at 34,500. Management expects around 500-600 employee retirements every year.

Out of total expenses of BHEL (except provisions), around 75% in towards fixed cost, which the company is trying to bring down.

Blue Star NeutralCurrent Price INR 832 EMP segment

Order book stood at INR28.1b (+23.5% YoY). Order inflow - INR5.5b. Commercial AC business – Growth slowed down in 3QFY20 compared to

1HFY20. Increased market share in Chillers and VRV segment. There is a slowdown in collection from government projects, and therefore,

focus is on working capital. This may lead to delay in execution in some cases. UCP segment

Margins were impacted on account of higher ad-spends. Last year, on account of weak summer there was a cut in ad-spends, which were ramped up this year after a good summer season. The company has also roped in cricketer Virat Kohli as brand ambassador in 2QFY20; related expenses will be incurred fully in 3QFY20. This is a seasonally low quarter and therefore margins are looking subdued. For FY20, the margin guidance now stands at 8.5-9.0% v/s 9.5% earlier.

Growth picked up in end-Nov’19 after a muted festive season. Grew Room AC segment by 10% in 3QFY20 (v/s 5% for industry). It is a weak

quarter, and therefore does not have material impact on overall full-year trend. Expect industry growth at 10-12% in FY20 and 15% growth for Blue Star.

Room AC pricing in the market has been competitive for some time. Hence, Samsung coming in doesn’t change the equation. Price hikes have not happened


Results Update

February 2020 22


at industry level for the last 2 seasons and depends on how the summer season pans out. Competitors haven’t disclosed new pricing as of now. A positive though is the lack of inventory overhang, and therefore, a rational pricing strategy can be expected in 4QFY20.

Existing indicators suggest that summer should start from February-end and that would mean a normal summer season.

36% of sales through consumer finance schemes. Water purifiers – Competition is intensifying, but Blue Star continues to invest.

Have started seeing contribution from services business due to strong installation base. Expect FY20 revenue to be ~INR600m with 2% market share. This is lower than the internal target set at INR800m. Water purifiers would have 80bp negative impact on segmental margins in FY20, which should be neutral in FY21.

Mass premium AC category for Blue Star is doing well. Company is seeing strong demand; while there is a market for entry-level as well, as a strategy, Blue Star is concentrating on the mass premium segment, which has done well. From a near-term perspective, the summer season is a key monitorable.

Coronavirus impact – As a trend, stocking for India happens in advance, therefore, 4QFY20 supplies have already been received or are in transit, and should arrive in February-end and early-March. There might be an additional 10 days shutdown in China. If this is a short-term phenomenon, then there should be no issue. At least as of now, 4QFY20 is not expected to be impacted.

Others

Borrowings reduced owing to superior cash flow generation (D/E = 0.47). Deferred tax asset write-back led to higher taxes. Normalized tax rate to be at

27-28%. After a year, post consuming MAT credit (currently at INR700m) benefits, company will move to 25.2% tax rate.

Un-allocable expenses look higher as last year saw net of interest tax refunds. In 3QFY20, there was a minor one-off expense on office renovation. Broadly, the run-rate of INR240m per quarter or INR850-900m per year on un-allocable expenses continue.

Crompton Greaves Consumer Elec BuyCurrent Price INR 290 Demand scenario

Apart from very specific pockets, not seeing any slowdown. Facing slowdown in 2 categories: (1) rural business, which is primarily

agricultural pumps, and (2) B2B lighting business. Have not seen any dealer de-stocking as yet.

ECD segment

Fans volume growth stood at 8% YoY. Market share increased 80bp and stands at 27% (was 24% around 2-3 years back).

Appliances business witnessed exponential volume growth in geysers (66%) with Crompton now ranked the no. 4 player. Have 11% market share currently, helped by two back-to-back strong seasons.

Domestic Pumps continued to see volume growth momentum at 8% YoY, while Agricultural pumps were impacted by unseasonal rains.


Results Update

February 2020 23


New series of fans named as ‘Silent pro’ were introduced. It falls under Premium fans with 50% less power usage.

Entering the season for air coolers, expanding product range and offerings. Continue to increase product offerings in appliances, backed by higher ads-

pends and investments toward branding. Mixers seeing low single-digit market share. Premium fans form 20% of the fans business, up from 10% 4 years ago.

Crompton is no. 2 in the Premium segment with market share of 20-25%. Crompton defines Premium fans as INR2,500 and above.

BEE rating change – Production allowed till end-Jun’20 and sales can happen till end-Dec’20. We believe that Crompton will benefit from the rating change. Won’t have specific answer on price impact, but it can stated that not all SKUs in fans will have similar impact of price change. The company has invested and worked on cost structure and has valuable solutions.

Lighting segment

LED Panel and Battens registered 15% volume growth. Value growth continues to be negative v/s strong volume growth. LED portfolio continues to face price erosion. However, on QoQ basis, prices

were stable. In the next 2 quarters, volume growth should translate into similar value growth given no further price erosion happens.

B2B business continues to witness slowdown in Government and EESL order execution and clearance.

Market share increased by 100bp in LED Lamps. Sequentially, PBIT margins improved although not at desired level. Volume growth continues to be in double-digit, a trend that should continue

over the next few years. If price erosion gets arrested, value growth can be in double-digit as well.

Baroda factory – Investments were made earlier toward automation. Put in 7 new lines, of which 3-4 lines are already operational. While these were a part of cost cutting initiatives, it was also aimed at increasing capacity and improving quality. While margins have already improved on sequential basis, further benefits are expected to accrue in the future.

Believe Crompton is a cost leader in bulbs. Further room to do the same in other components.

GTM program

Distribution reach continues to expand in fans and B2C lighting. Making investments in systems, processes, people and data. This has significantly helped in planning prudently – from earlier 4 weeks to 1

week now, resulting in significant benefit to dealers in terms of working capital investments.

New product launches

Have done well with launch of geysers, air-coolers and mixer-grinders over the past 2 years. These 3 categories together have an addressable market of INR100b.

Objective is clear that the company will enter segments where there is a roadmap to be a meaningful player.

China coronavirus disruption in supply chain

No issues as yet with respect to supply chain.

February 2020 24


Anyways, on account of Chinese New Year, shutdown generally. Any incremental shutdown post that might have an impact, which we will have

to evaluate. Cummins India NeutralCurrent Price INR 540 Macro outlook

Slowdown in economic activity continues to affect segments like Power Generation and Construction. Management expects the slowdown impact to spill over in the next quarter before government measures start showing results.

Exports market remains challenging with demand slowdown accelerating in the Middle East and Africa the most.

Domestic revenue growth guidance maintained at 3-5% while export guidance maintained at 20% decline for FY20.

No initial signs of recovery in Jan’20 as yet. Domestic market update Power generation

Revenue at INR3.8b (-12% YoY). HHP - INR1.7b, MHP - INR1.2b, LHP - INR0.9b. LHP showed signs of recovery in 3QFY20. Market share in the different sub segments stood at:

HHP – 65% (market leader) MHP – 48% LHP – 38%

Very low HP – 18% (not a major player and lost 4% market share) Cummins India has cost advantage in medium and low horse power segment; it

forms the major supply chain for global markets. Channel has much inventory and demand is poor currently. Hence, management

is not very bullish on the near term. On an annual basis, FY20 is expected to witness a decline of 6% over FY19.

Industrial

Revenue at INR2.7b (+8% YoY). Rail business continues its strong performance and has grown 49% YoY. Even if

railways go for electrification, Cummins will be able to cater to the new demand with alternate product offerings.

Distribution

Revenue at INR4.2b (+18% YoY). Growth was mainly on account of a single contract in the bus segment for gap

engine product. The size of the order was INR700m with execution done in 3QFY20, no spill over should happen in the next quarter. The order was margin accretive.

Exports update

HHP = INR2.1b (-2% YoY). LHP = INR1.4b (-27% YoY). The Middle East and Africa were impacted the most. Rest of Asia, Mexico and

even Latin America remain weak. Exports in 4QFY20 are expected to be on similar lines of 2QFY20 and may

remain flat for the next 2 quarters. Positive impact was visible from certain markets like Egypt, but overall these markets continue to slow down.


Results Update

February 2020 25


Margins Gross margins were flat this quarter as benefits on growth in distribution

network were offset by weakness in Power Generation and export market. On cost rationalization, management has cut down on costs, such as travel,

technology, discretionary and employees. Impact on margins should be visible in FY21.

According to management, FY21 margin guidance should be at 2QFY20 level. While cost cutting measures should aid margin expansion, export market recovery will be a key monitorable.

Expect gross margins to contract sequentially in 4QFY20. On CPCB IV opportunity

CPCB IV should provide great opportunities to Cummins India and will require total revamp of products. Export potential will open up for all products and the company should see capex on the technology side.

CPCB IV is more stringent, with over 80% improvement required in NOx and hydrocarbon and also requires significant amount in after treatment. Cummins has been leading in this technology in India and the world. Peers will be required to invest in the new technology whereas Cummins has already done that.

Havells India Neutral Current Price INR 619 Macro

Infrastructure related slowdown has been impacted by industrial segments. While consumption related slowdown was also evident, the company has performed better than industrial segments.

Offshoot of improvement in consumer sentiment was seen in 4QFY20; difficult to decide whether entire growth will be recouped in 4Q as it is too early to comment.

Roughly, 70% of the business was flattish and 30% responsible for decline. Cables & Switchgears

As liquidity improves at government side, stalled projects would get completed and will result in demand coming back.

Power cable declined 20% in volume and 5% on account of commodity price correction.

Switchgears also declined on the industrial side. Sluggish real estate growth impacted the business on the consumer side.

Electrical Consumer Durables Low dealer stocking impacted revenue for the company. Management hasn’t

witnessed such low levels of inventory. Both fans and water heaters saw flat growth YoY. All the GFK reports suggest that the company will see market share gain in 2Q-

3QFY20. In water heaters, sharp destocking happened at dealers end. Also, there was a

delay in the onset of winter, so initial sales were low and picked up subsequently. January has been better and has started to catch up the loss of sales in Nov’19.

Due to the credit situation, normal channel refilling for fans, which happens November onwards, hasn’t happened.

Click below for Detailed Concall Transcript

& Results Update

February 2020 26


The management could have increased off-take by increasing credit terms and offering heavy discounting, but chose not to.

In seasonal products, few players have resorted to higher credit terms or higher discounting.

On fans rating change, management does not see any destocking in 4QFY20 as rating change is still some time away. It may happen in 1QFY21 toward the end.

Lloyd LED continues to be impacted by price erosion. Currently, the company has strong control on its supply chain as the new factory

has got operational. The company has improved distribution network with wider geographical reach

as well as increasing presence in MBOs. Hence, the brand has started to witness cost advantages in 3QFY20, which are further expected to improve in 4QFY20.

Expect margin improvement to happen over next few quarters. Focus is to regain market share; margins should follow as the company now has control over production and supply chain.

AC plant capacity is 6lacs on single shift. Total capex incurred is INR4b. Compressors will be sourced and won’t be manufactured.

AC sales witnessed low double-digit growth in revenue. In the latest GFK report, there has been an improvement in market share to some extent.

In the next 3 quarters, nearly 70% of ACs would be from own factory. For upcoming season, demand would be served from carrying inventory.

On AC pricing, the company has taken some corrective action. Management believes there is positive sentiment from the channel. Pricing is now competitive with other brands.

Lighting Decline attributable to infrastructure/government related business. In the consumer segment, company grew in low single-digit. Despite on-going price erosion, Havells has been able to maintain margins. In rural segment, lighting is doing extremely well for Havells.

Margin related Cost rationalization helped margins. As the organization grows, some amount of

excesses spending does happen, which is now at an optimal level. A&P spending cut by 15% YoY. Management views advertisements long-term

investments and will continue to spend. Discretionary related ad spend continues to happen, and as volumes pick up, ad spends will proportionately pick up.

Others 30% of the business is B2B or government related. Demand will keep on improving as liquidity situation improves. New product launch is a continuous exercise. Looking to launch heavy-duty AC

as they are largely imported and sold by few players. With own factory and R&D, such a product becomes viable.

Capex for FY20 at INR5b. Havells is expanding fast in rural distribution and reach. It has appointed 1,800

distributors and targets to take it to 3,000 in a couple of years. Rural contribution to sales would be ~INR1-1.2b on full-year basis this year.

February 2020 27


Larsen & Toubro BuyCurrent Price INR 1,281

Strong international order inflow: LT recorded INR416b of order inflows (+2% YoY), supported by ordering from the international market. Domestic order inflow declined by 20% YoY, whereas international ordering grew 64% YoY to INR179b. International orders contributed 43% of total order inflow for the quarter. For 9MFY20, 34% of order inflow is contributed by international markets.

Domestic order pipeline is healthy at INR2.51t for 4Q. Order book was up 9% YoY to INR3.06t.

FY20 guidance maintained: The company maintained its guidance for FY20 – revenue growth of 12-15%, order inflow growth of 10-12% and core E&C margin of 10.5%. Revenue ask-rate thus stands at 16-25% for 4QFY20.

Key segmental comments Infrastructure: International business drives order inflow. Strong order pipeline

in domestic market. Power: Strong order inflows have led to order book growth. Lower margin is a

reflection of job mix and stage of execution. Heavy Engineering: Healthy operating performance on account of strong order

book. Defense: Revenue growth led by artillery gun execution. Hydrocarbon: Unexecuted order book of three years of revenue. Strong revenue

growth is on account of robust order book with margin expansion on account of efficient execution. Management believes margins are sustainable at current high levels if execution too is maintained at current levels.

Others: Base had lumpy sale of commercial property. The company is witnessing improved traction of reasonably priced apartments.

Developmental Projects: Hyderabad Metro contributed INR7.8b for 9M. For 3Q, Hyderabad metro had revenue/EBITDA of INR2.3b/1.0b.

IT & TS: Mind Tree consolidation led to 65% growth in revenue. L&T Finance Holdings: Growing despite challenging environment. Loan book up

by 5% YoY. PAT de-growth of 26% owing to DTA restatement. E&A business: Revenue declined 10% YoY. Margin improvement to come in via

operational efficiencies. Working capital as a percentage of sales came at 23.5%, similar to 2QFY20 level.

Other highlights Borrowing cost at parent level at 7.5%. Tax rate lower on account of new corporate tax rates. In 2Q: Hydrocarbon segment got favorable claim of INR700-800m. A quantum of

claim was present in 3Q as well. Working capital: Receivables along with retention is down but payable has not

moved up. Higher working capital is on account of payables side rather than receivables side. Supporting vendors in liquidity crunch.

Andhra Pradesh update: Expect revenue to come back in 4Q. On the verge of restarting projects.

Possibility of one package of High Speed Rail in 4Q as the tender is out. Possibility of delay exists.


February 2020 28


Defense ordering – Positive development related to submarine order but still early days to comment on it.

E&A sales update – Taking time on transfer of different entities. Doing piece by piece. Lot of contract transfers. Expect to complete in next few months. If not in 4Q, then by 1QFY21.

Thermax NeutralCurrent Price INR 986

Ordering outlook looks positive, and hence, management expects order inflow to pick up in FY21 from FY20 levels. Our order inflow assumption of 15% CAGR over FY20-22E adequately factors in the same.

Danstoker will continue to be loss-making in 4QFY20 (as against management’s expectation of break-even in FY20). Break-even will lead to 50bp/40bp margin improvement in the Energy segment/overall margins.

There were no delays in execution and payments; however, there was no push from customers for completion of projects.

Depreciation stood higher on account of TBWES. The factory is fully operational. Taxes were lower on account of deferred tax adjustment. There has been an improvement in the cash position in recent quarters.

However, overall financing continues to be challenging as there has been no improvement in NBFC financing.

Voltas BuyCurrent Price INR 733 Unitary Cooling Products

Inverter AC accelerated – now forms 43% of total AC sales (35-36% last year). 20 producers chasing an underpenetrated AC market – hence, competition is

tough with some players cutting prices. Air coolers’ market share stood at 11.2% (No. 3). Grew 135% YTD. Commercial refrigerators also grew YoY. 120bp market share expansion in the South for ACs. AC sales by geography:

North – 40% of AC sales. West and South – 22-23% of AC sales. East – small market.

For 9MFY20, in ACs, industry grew 29% YoY while Voltas grew 35%. Concentrating on the mid-market AC segment. Impact of import duty hike in the Budget will be passed on to the customer.

Electro-Mechanical Projects and Services Slow pace of execution coupled with delayed receivables. Total order book currently stands at INR70.2b (v/s INR50b YoY), with major

orders booked in the water segment. International order book stood at INR27.2b. The company added INR1.7b fresh

orders from the international market in this quarter. Leadership transition in Oman was smooth with no major risk to business.


Results Update


Results Update

F b 2020

February 2020 29


Domestic order book stood at INR43b, while order intake stood at INR10.8b. This includes prestigious projects like RWSS (Rural Water Sewage Sanitation project) in Orissa and the Mumbai metro project.

The company wants to go for higher and bigger projects in India so that it can manage its resources comfortably. Ideally looking at Ob/revenue ratio of 2-2.5x.

Carillion order stands completed. Because of Carillion’s bankruptcy, it is taking time to get paid.

RWSS (Rural Water Sewage Sanitation) project is funded by the government and an external body.

Voltbek

Production has commenced, rollout of products ongoing. Will raise capacity to 2.5m units in due course (currently 1m units). Gained market share in Washing machines and Refrigerators. Sold 220,000+ units in 9MFY20 (Refrigerators, washing machine, microwave and

dishwashers). On Coronavirus

Adequately covered for 4QFY20 with respect to supplies, however, some impact if closure is prolonged.

Factories are expected to start by the third week of Feb’20 in China. Output ready, only unable to tie up with shippers. 15-20 days of lead time to transport goods from China.

Have some alternate plans ready, with option to go to Korea and Thailand to source products. Won’t compromise on the quality of products if importing from a different source. Have some scope to play around with in margins.

Others

Tirupati plant development is going a bit slow. Capex is of ~INR2b if the South facility is set up.

Tax rate for the company – 26.7%. .

February 2020 30

CEMENT | Voices

CEMENT

Managements indicated that demand has started showing signs of recovery across regions, except south. The months of Jan and Feb’20 have also witnessed price hikes across regions. However, there have been roll backs in south due to poor demand and in east due to heavy supply. Industry, however, is likely to benefit from lower fuel and logistics costs, as energy prices (oil/pet coke/coal) have been on a downtrend.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook FY20 Volume Growth

Capacity expansion in east is on track to contribute to FY21 volume growth. While the new clinker line (3mt) has commenced trial run, 5.2mtpa cement grinding units should be commissioned over the next 12 months.

Murli Industries: NCLAT has given a favorable order on 24th Jan’20 and shortly, the asset should be acquired.

Cement volumes were strong at 5.1mt (+14% YoY).

3QFY20 volume growth in the south was negative (while it was flat for Dalmia), and East saw single-digit growth (while Dalmia grew >10%) with Bihar and Jharkhand growing in double-digits.

A clinker unit of 8,000tpd at Mangrol and a 1mt cement grinding unit at Nimbahera have been commissioned.

The company has commissioned 1mt/1.5mt grey cement grinding unit at Mangrol (Rajasthan)/Aligarh (UP) on 3rd Feb’20.

The 0.7mt grinding unit in Balasinor (Gujarat) should get completed in the next two months

Capex – for FY20 at ~INR12b, for FY21 at ~INR7b.

In 3QFY20, grey cement volumes (incl. clinker) increased 3% YoY to 2.2mt, while white cement volumes were flat YoY at 0.35mt.

The company expects CTIL’s asset to achieve EBITDA/t of INR1,000 by 1QFY21 with utilization of 80%.

Commissioning of 10.5MW of WHRS in Nathdwara should further improve performance.

Capex guidance for FY20 is reduced from INR20b to INR16b.

East expansion of 3.4mt should be completed by Mar’21. Orders for the same have been placed.

Consol. volumes declined 4% YoY in 3QFY20.

CTIL operated at utilization of 55% for the quarter and 79% in Dec’19.

Nathdwara is operating consistently at 60% utilization.

ACC BuyCurrent Price INR 1,431

ACC remains focused on growing the premium product portfolio, wherein volumes were up 6% YoY in 4Q; RMX volume grew 8% YoY.

The company has been working on supply chain efficiencies and source mix optimization to reduce costs.

Alternative fuels consumption improved. The company also improved its electrical energy efficiency.

Freight cost/t improved in 4QCY19 due to road freight reduction and an improvement in logistics operating efficiencies. Packing material cost reduced too.

Volumes were up 4% YoY at 7.8mt, driving a 4% YoY increase in revenue to INR40.6b.

Unitary cost declined 1% YoY (-2% QoQ) to INR4,536/t. Cost reduction was a result of better source mix optimization, logistics efficiency and better supply chain management.

However, cement realization declined 5% QoQ (+0.5% YoY) to INR4,615/t (our estimate: INR4,689) due to weak pricing in its key markets.

Subsequently, EBITDA/t declined 19% QoQ (+7% YoY) to INR697 (our estimate: INR778). EBITDA of INR5.4b (+11% YoY) missed our estimate by 9%; margin was at 13.3% (+0.81pp YoY, -2.46pp QoQ).


Dalmia Bharat

JK Cement

Ultratech Cement

February 2020 31

CEMENT | Voices

Birla Corp BuyCurrent Price INR 747

Cement prices in key markets in northern and central India weakened from the September quarter. In eastern India, cement prices dropped sharply in the three months till December. BCORP operated at utilization of 87% (+5pp YoY) in 3QFY20.

BCORP was able to garner increased market share in West Bengal and Bihar by expanding its distribution reach and leveraging cross-branding from multiple plants of its own and its subsidiary, RCCPL Private Limited. In 3QFY20, BCORP’s sales in eastern India grew 27%YoY, led by premium brands such as MP Birla Cement Unique and MP Birla Cement Perfect Plus. In 3QFY20, green shoots were visible in the infrastructure sector with demand in the non-trade segment growing faster than the trade segment.

BCORP’s trade sales were impacted in the market of Madhya Pradesh due to extended monsoon. As a result, trade sales declined to 79% in 3QFY20 from 83% in 2QFY20. Growth in trade volumes was 4% YoY for the quarter.

Share of premium products increased from 37% in 3QFY19 to 41% in 3QFY20. Share of premium products in trade segment sales in the east has now touched 45% from 38% a year earlier. Share of blended cement in total sales jumped from 89% a year ago to 90.5% in 3QFY20.

BCORP has secured through auction two coal mines in Madhya Pradesh – Bikram and Brahampuri. The company has submitted the necessary compliance documents with the Union Government, completing the first step toward commercial exploitation of the mines.

Benefits of the company's investments in cost optimization have started to kick in. Waste Heat Recovery System (WHRS) and solar power units in Maihar and Chanderia are now operational. A 20-MW captive solar unit, set up in joint venture with a third party will start supplying power to the Kundanganj and Raebareli units during the current quarter.

MP Birla Perfect Wall Putty and construction chemicals, test marketed in Uttar Pradesh, Madhya Pradesh and Rajasthan, have been received well by the trade channel and end-consumers. The company is gearing up for full-scale launch of these products in FY21.

Dalmia Bharat BuyCurrent Price INR 866

3QFY20 volume growth in the South was negative (while it was flat for Dalmia), the East saw single-digit growth (while Dalmia grew >10%) with Bihar and Jharkhand growing in double-digits.

Cement demand in 9MFY20 was almost flat. It has started showing green shoots from mid-Nov’19 but the South still remains negative.

3QFY20 prices remained under pressure, particularly in the East. Price has started picking up in Jan’20, but prices in the North East are broadly stable.

The company continues to remain focused on trade (60% of sales mix) and premium sales (currently 20% of trade sales in the East and 14% overall).

Raw material cost was higher in 3QFY20 as Dalmia had to purchase some clinker since the new clinker line was being commissioned, which required Rajganjpur plant shutdown.

Net debt/EBITDA stands at 1.32x. The company has repaid INR6.2b in 9MFY20.


Click below for Results Update Results Update

February 2020 32

CEMENT | Voices

Incentives accrued in 3QFY20 were INR330m (INR1.1b in 9MFY20) and collected were at INR2.0b in 9MFY20. FY21E incentives are expected at INR1.5b (excl. Murli and Kalyanpur).

New clinker line (3mt) in Rajgangpur, Odisha, commenced trial run in Dec’19 and should be stabilized by end-Mar’20 with 75% utilization expected to be achieved by 3QFY20. As regards the planned 7.7mtpa grinding unit (GU) expansions in the East, up-gradation and debottlenecking has been completed at Bokaro GU (0.8mt) and trial-run should start by Mar’20 in Bengal GU (2.2mt) and by Sep’20 in Odisha GU (2.2mt). Bihar GU (2.5mt) should start in FY22.

Calcom’s dispute with GUARANTCO has been resolved and the petition has been withdrawn.

Murli Industries: NCLAT has given a favorable order on 24th Jan’20 and shortly, the asset should be acquired. Renewal of mines as well as incentives (of INR11b till CY32) has been approved. The mutual fund issue is nearing a resolution and the units should come back to Dalmia in 6-9 months.

The company has purchased back INR2.5b of high-cost debentures in Jan’20, which should reduce interest cost in 4QFY20.

Capex: Out of INR30b total capex for the East, INR15.4b has been spent till now, of this, INR9.4b was spent in 9MFY20. The company plans to spend INR2.5b more on the East and INR4b on Murli in 4QFY20. Capex for FY21 should be ~INR10b, which includes INR7b on expansion in the East and INR3-3.5b on upgradation at Murli.

The company plans to keep its net debt/EBITDA below 1.8-2x. Refractory business divestment is expected to be completed by Dec’20. The

demerger scheme has been filed by Dalmia and is awaiting approval from the Kolkata NCLT.

Demand should grow at 5-6% YoY in FY21 with the East at 6-8%, the North East at 8-10% and the South at +-2%.

The company has changed the method of depreciation in its north- eastern capacities from straight line to written-down value method w.e.f. 1st Jul’19. As a result, depreciation charge for 3QFY20 and 9MFY20 is higher by INR690m and INR1,530m, respectively.

Grasim Industries NeutralCurrent Price INR 757 VSF

Capacity addition of ~1.3mt in last one year in Asia. Muted demand due to weak macroeconomic conditions, US-China trade war, and sharp RMB depreciation have impacted global prices.

Domestic VSF prices may witness some improvement in the near term with improving sentiment post phase-1 of US-China trade deal and near-term supply constraints from China.

US-China trade deal (Phase-1) and lower-than-expected production of cotton led to an uptick in global cotton prices.

Share of VAP sales in total sales increased to 22% (+2% QoQ). Pulp price remained below USD650/ton in 3QFY20. Further benefit of weakening input costs (pulp prices) to reflect in the

subsequent quarters.


Results Update

February 2020 33

CEMENT | Voices

VFY profitability impacted by lower sales volume (-9% YoY) mainly due to lower exports of tyre cord yarn on account of slowdown in automobile markets in Europe.

Chemical Globally, caustic soda prices have been bearish for the last six quarters because

of lowering demand in Asia (incl. China). New caustic capacity addition and an increase in imports are resulting in a

decline in domestic caustic prices, in line with international prices. In India, ECU in short term is likely to remain depressed till new capacities are absorbed by additional demand.

Chlorine consumption in VAPs improved to 30% in 3QFY20 from 27% in 3QFY19. Zero liquid discharge plant commissioned at Rehla and under-advanced

commissioning stage at Ganjam. Expansion in capacities of VAPs and new VAP manufacturing facilities to be

commissioned by FY21, which is expected to improve margins. Epoxy EBITDA marginally higher as weakness in realization was offset by

softening of input costs. Cement

Cement demand in 3QFY20 was impacted by economic slowdown, lower government spend, and construction ban in NCR region by NGT.

Consol. net debt reduced QoQ by INR19.94b to INR186.25b in 3QFY20. Net debt/EBITDA at 1.87x.

Aditya Birla Capital Lending business raised long-term funds of INR100b+ in YTD Dec’19. Revenue and net profit after minority interest for 3QFY20 are at INR43.26b

(+14%) and INR2.5b (+17%). India Cement NeutralCurrent Price INR 75

The cement industry in the South declined 12%/8% YoY in 3QFY20/9MFY20. This was due to stalling of major projects in Andhra Pradesh and Telangana, combined with deferment of infra spending in these states, which was further fuelled by the economic slowdown. Demand weakness in the South impacted prices in the region, which remained under pressure.

Post Jan’20 demand has started to pick up, resulting in higher prices in Feb’20. Prices increased by INR25-30/bag in Tamil Nadu, by INR30-35/bag in Karnataka and Kerala, by INR30-35/bag in Maharashtra and by INR70/bag in AP/Telangana.

Capacity utilization during the quarter was 69% against 76% in 3QFY19. Term debt for the company stands at INR25b and should decline to INR23.3b byMar’20. Working capital debt stands at INR5.8b. The company has INR5b of planned debt repayment in FY21.

The company has launched ‘Coromandel Super Kings’ (CSK) in Kerala, which is sold at INR40/bag premium.

ICEM plans to set up a green-field unit in Damoh, Madhya Pradesh, which includes a 2.5mt clinker unit; there is also a split-grinding unit (Uttar Pradesh) on the cards. The company has spent INR1.4b on land acquisition for Damoh.


Results Update

February 2020 34

CEMENT | Voices

JK Cement BuyCurrent Price INR 1,462

During 3QFY20, the company commissioned grinding units of 1mt at Mangrol (Rajasthan) and 1.5mt at Aligarh (UP).

The 0.7mt grinding unit in Balasinor (Gujarat) should get completed by Mar- Apr’20.

Prices: Realizations have reduced by INR110/t QoQ in 3QFY20. Prices have increased by INR8-10/bag in the North currently compared to 3QFY20.

Capex for FY20 should be ~INR12b; for FY21, it is expected at ~INR7b The company has acquired 500 acres of land in Panna, Madhya Pradesh for

INR9b. The board will decide to put up the capacity once environment clearances are in place.

Cost savings on the new capacity should be visible only in 4QFY21 as the new capacities are on trial-run currently.

JKCE is consulting the Boston Consulting Group (BCG) to formulate market strategy for its new capacities and existing business. The consultancy fee for FY20 and FY21 should be INR500m each.

3QFY20 witnessed additional spends of INR100m on advertising and some other spends on packing costs.

The newly commissioned unit in UP should enjoy incentives of INR100m/year initially. Rajasthan plants have minimal incentives.

The difference between trade and non-trade prices in the North is INR25/bag. It is INR25-40/bag in the South.

The company expects turnaround in its UAE operations in the coming year. It has started operations in Tanzania and Kenya.

Trade forms 69% of the total mix. Import of white cement has doubled in the last two years.

JK Lakshmi Cement BuyCurrent Price INR 326

Total sales stood at 2.33mt (+1% YoY). Cement sales were up 3% YoY at 2.17mt, while clinker sales declined 22% YoY to 0.16mt.

Cement utilization in 3QFY20 stood at 66%, while clinker utilization was at 95%. JKLC has taken price hikes of INR10-15/bag in Jan’20 which have been sustaining. JKLC is planning to increase its grinding capacity in Udaipur Cement Works from

1.6mt to 2.2mt by FY21 with capex of INR600m. The company also planning 2-2.5mt new brownfield capacity in north for which

the final decision is likely to be taken by Mar’20. The newly commissioned 0.8mt Cuttack grinding unit is running at utilization of

40% with likely ramp up to 75% in FY21. RMC revenue in 3QFY20: INR390m. Trade sales in north were 56%, while those in east were 70%. Demand in north was down 3-4% in 3QFY20, while east market witnessed

growth. In FY21, the company expects north and Gujarat to report growth of 5%, and Orissa to report growth of 9-10%.

JKLC is planning to add 10MW WHRS in Sirohi which should generate ~INR250m of annual savings. Investment in WHRS will be ~INR1.5b.

Standalone gross debt stands at INR15.7b and net debt at INR11.5b. Consol net debt stands at INR16.7b.

The company plans to repay debt amounting to INR1bn in FY20 and INR3b in FY21.

Petcoke consumption stood at 85%.



Results Update

Results Update

February 2020 35

CEMENT | Voices

Ultratech Cement BuyCurrent Price INR 4,473 Demand picking up in many regions

States of Orissa, West Bengal, Maharashtra, Jharkhand, Bihar, Rajasthan, Tamil Nadu, Kerala, Telangana and Madhya Pradesh are witnessing growth.

Work on Polavaram dam and other irrigation projects has started. Work on Indore/Bhopal Metro has commenced. The Supreme Court has

approved the Mumbai coastal road project. Select markets showing signs of pick up in rural demand.

4QFY20 witnessing price hikes Prices dropped by 4% QoQ in 3QFY20. The major drop in prices was witnessed in

east, south and west Prices have started picking up with improved demand sentiment.

Expect improvement in efficiency for Century’s assets The plants operated at utilization of 55% for the quarter and 79% in Dec’19. Petcoke usage has been enhanced from 30% pre-acquisition to 69% now. Exceptional item of INR310m has been reported as part of process integration.

The company expects to record another INR300m in current quarter. Brand transition completed for ~55% of production. ~84% production to be

transitioned to UltraTech Brand by 2QFY21. Currently, production cost is higher by INR425/t, of which INR 70/t is toward

higher royalty charge and INR125/t is one-time exception. The company expects to achieve more than EBITDA/t of INR1,000 by 1QFY21 with utilization of 80%.

The Baikunth plant of 2.4mt will sell under the same old brand of Birla Gold for some time.

Nathdwara operating at EBITDA/t of INR1,500 Operating consistently at 60% utilization. Achieved cost reduction of ~INR425/t since acquisition. Have achieved EBITDA/t of INR1500. The company is in the process of disposing non-core assets. Commissioning of 10.5MW of WHRS should further improve performance.

Cost reductions to continue Spot prices of petcoke are at USD70 and of coal at USD80. Pet coke usage at

77% (3QFY19: 69%). Average pet coke price during the quarter was USD80/t v/s USD91/t in 2QFY20.

The company has achieved a consistent reduction in consumption of fossil fuel with increasing share of green power. The company expects annual savings of INR2.5b from green power. AFR usage stood at 3.5%.

The company benefitted from exemption of busy season surcharge from railways and better market plant mix.

Current WHRS capacity of 103MW and 39MW is under implementation. Limited capex going forward

Capex guidance for FY20 is reduced from INR20b to INR16b. East expansion of 3.4mt should be completed by Mar’21. Orders for the same

have been placed. Have commissioned phase 1 of Bara grinding unit (2mt capacity). Dalla Super should commission by Mar’21.

Deleveraging continues Consol. net debt has reduced from INR221b in Mar’19 to INR186b in Dec’19. Net debt/EBITDA reduced to 1.87x in Dec’19 from 2.83x in Mar’19.


& Results Update

February 2020 36

CONSUMER | Voices

CONSUMER

Consumer companies across the board were cautious on the outlook, given the weak rural scenario and the ongoing decline in personal care product demand. Demand slowdown continued to be led by subdued consumer sentiment, liquidity crunch in channels, and weakness in wholesale. North and west India witnessed sharper slowdown compared to the rest of the country. Managements were hopeful that a combination of a possible good Rabi crop, volume growth pick-up off a low base and government measures to boost consumer sentiment could lead to growth from 1QFY21.

KEY HIGHLIGHTS FROM CONFERENCE CALL Comment on demand scenario Budget Impact Outlook FY20

There has been faster growth in smaller towns and rural, same as 2QFY20. Slowdown in metros and Tier-1 cities continues.

Discounting may have gone up marginally this quarter but nothing material to call out for.

Sleek and Ess continue to be affected by slowdown in the real estate business.

International business may get affected by emerging concerns in the Middle East.

Nothing material In the near term, realization growth decline should continue.

Some increased volatility in key RM needs to be noted. Currently, the company does not see a need to raise prices, but if a further increase due to global geo-political concerns is required, it could raise prices.

Capex of INR7b for FY20 v/s earlier expectation of INR9b.

Effective tax rate will be 25% for the year.

BRIT did not focus inordinately on volumes as demand is weak.

Rural is growing much slower than urban. While urban has also been affected by the slowdown, rural has been impacted much more.

Croissants and salty snacks were in the test market, but company has not taken it national as consumer sentiment is weak and ‘consumers are not as experimental currently.’

Marginally negative as it is a potentially high dividend paying company that is impacted by the DDT abolishment which may make promoters reconsider extent of dividend.

Cost efficiency targeted at 2.1% of revenues in FY20. Targeting similar savings for FY21 as well.

Open to taking selective price increases to offset the likely impact of RM cost inflation. Price hikes will be taken in brands, which haven’t seen a price hike in 24 months.

Some fiscal benefits on new plants are boosting other operating income and this trend should continue.

Capex at INR1.9b in FY20. Further deceleration was witnessed in the

FMCG sector in 3QFY20. Demand situation continues to be worrying.

6.6% FMCG category value growth – itself a multi-year low on Nielsen data, which was 5.3% in Dec’19 – therefore, slowdown was witnessed toward the quarter-end. Moreover, Jan’20 has not offered any green shoots.

Liquidity pressure in trade remains tight. Broader level hike in telecom tariffs could be

one of the factors affecting FMCG sector growth.

Marginally negative as it is a potentially high dividend paying company that is impacted by the DDT abolishment which may make promoters reconsider extent of dividend payout.

Dabur’s own categories are not showing any green shoots. Led by low base from 2QFY21, growth should look better for three quarters in FY21.

Gross margins should expand, led by low RM costs in 4QFY20, but company will invest in ad spends. Therefore, EBITDA margins are unlikely to expand in the domestic business. Agri commodity basket is nevertheless witnessing some inflation in 4QFY20.

Urban growth has moderated but rural growth has slowed down even further (at 0.5x urban growth during the quarter).

Delayed onset of winter affected skin care sales, while personal wash pricing actions impacted Beauty and Personal Care sales.

Parts of Punjab, Haryana, UP, West Bengal and Bihar are witnessing faster slowdown, while the southern market has still done better.

Near-term demand outlook is challenging.

Nothing material Management expects 5-6% price increase in soaps over the next few months. This effectively means reversal of the 5-6% decrease it had taken in Sept-Oct when commodity prices were soft.

GSK merger: The next date of the NCLT hearing is 3rd Feb’20.

Asian Paints

Britannia

Dabur

Hindustan Unilever

February 2020 37

CONSUMER | Voices

Overall weak demand environment in 3QFY20 led to a sharp QoQ and YoY dip in sentiment. Rural and wholesale growth was even lower. Recovery in sentiment expected by 2QFY21.

Continued to gain market share across most categories, therefore, lack of growth is largely a category-specific issue. However, reverse migration from branded to loose in case of hair oils is happening in rural. Pricing intervention by the company is likely to arrest the trend.

Marginally negative as it is a potentially high dividend paying company that is impacted by the DDT abolishment which may make promoters reconsider extent of dividend payout.

New brands - ‘Parachute Aloe Vera’ and ‘Hair and Care Dry Fruit Oil’ have scaled up nicely and are likely to report revenues of INR1.2-1.5b sales next year.

Expect to sustain international business sales momentum.

May see mild inflation in Copra costs in FY21. Witnessing inflation in edible oils. Will take a price increase in Saffola.

Full-year tax rate will be 24.5-25%. Demand conditions remain subdued. Smaller towns and rural areas grew faster than urban areas for PIDI in 3QFY20. Remains cautious on credit to channels if it senses any risk to payments.

India subsidiaries: Nina, Percept and Cipy - operating environment remains tough in these businesses.

West and north were relatively slow in C&B sales compared to the rest of the country in 3QFY20.

Not material

PIDI is taking initiatives to achieve 15% value growth. Expect demand scenario to improve FY21 onward.

Striving to grow faster in rural markets.

Full year A&P at 3.5%-4% of sales. Tax rate for 4QFY20 expected at

23%. VAM costs continue to be stable in

4QFY20 as well.

Asian Paints SellCurrent Price INR 1,886 On sharp realization decline

While there is greater focus on economy segment, cumulative price reduction YTD is now above 1%. The company has also recently introduced 2 new economy products (15-20% lower price v/s erstwhile product portfolio), both of which have done well. There has also been faster growth in smaller towns and rural as was the case in 2QFY20. Slowdown in metros and Tier-1 cities continues.

In the near term, the realization growth decline should continue as well as some of these factors as well.

Discounting may have gone up marginally this quarter but nothing material to call out for.

Gross margins are not significantly different (in economy/other segments), therefore, margin impact has not been as severe as realization impact. Soft TiO2 prices have also helped.

Factors to consider incrementally Some increased volatility in key raw materials needs to be noted. Currently, the

company does not see a need to raise prices, but if a further increase due to global geo-political concerns is required, it could raise prices.

International business may get affected by emerging concerns in the Middle East.

Lower-than-expected capex

Capex of INR7b for FY20 v/s earlier expectation of INR9b. Other matters

Management is not sure if GST implementation has led to faster gains from the unorganized segment in the economy category due to absence of data.

The company’s definition of rural is outside of the top-100 towns. Overall urban rural mix is around 50:50 by value.


& Results Update

Marico

Pidilite

February 2020 38

CONSUMER | Voices

65,000-70,000 shops across the country are served by a sales force of 2,000 and aided by 140 depots, which is increasing every year. Management continues to believe that in terms of product quality and service provided, they are still superior to peers. Effective tax rate will be 25% for the year.

International and other businesses

Indonesia green-field plant has led to a healthy pick-up in sales. Overall, international business performance was a mixed bag.

Sleek and Ess Ess continue to be affected by slowdown in the real-estate business.

Britannia Inds NeutralCurrent Price INR 3,081 Environment and strategy

BRIT’s YTD market share increase in biscuits has been the highest-ever for the company.

Did not focus inordinately on volumes as demand is weak. Delta between volume and value was 1% for the quarter, thus volumes are likely

to have been ~3% given the standalone sales of ~4%. Rural is growing much slower than urban. While urban has also been affected by

the slowdown, rural has been impacted much more. Focus on systems and costs to deal with the slowdown

BRIT has improved its replenishment system and distributor health, crucial factors in a weak operating environment (zero-day inventory for expensive cities to operate in). Have not increased credit days to trade.

Expanding distribution month-after-month. Direct reach is now ~2.2m outlets. Total reach at 5.5m outlets currently and targeting to increase it to 6m in 2 years. Parle is at 6.3m outlets in terms of total reach but at half of BRIT on direct reach.

18,000 rural distributors in Mar’19, which has increased to 21,000 now. Furthermore, BRIT has reduced wastages in the system and tightened fixed

costs. Cost efficiency targeted at 2.1% of revenues in FY20. Targeting similar savings

for FY21 as well. Higher inventory and commodity hedges led to raw material cost control. Not

much cover now as wheat harvest is likely to start soon. MTM gain on hedges was INR1.25b.

BRIT is open to taking selective price increases to offset the likely impact of raw material cost inflation. Price hikes will be taken in brands, which haven’t seen a price hike in 24 months.

Some fiscal benefits on new plants are boosting other operating income and this trend should continue.

Ad-spends have been flattish YoY in absolute amount. Innovation and new categories

Innovation: Croissants and salty snacks were in the test market, but company has not taken it national as consumer sentiment is weak and ‘consumers are not as experimental currently as they are in a more normalized environment.’


& Results Update

February 2020 39

CONSUMER | Voices

Croissants will be taken national in 3-4 months. Salted snacks’ will be launched nationwide in 5-6 months. Wafers and milkshakes are available across the country.BRIT is the third largest player in cream wafers already.Of the 4% growth achieved in 3QFY20, BRIT has achieved ~2% growth from the base business, 1% from innovation in the base business and 1% from new categories.

Sustainability BRIT has already reduced 12% laminates on a tonnage basis. 20% of the plastic is now recyclable. Targeting 100% recycling by 2024. Biscuits are now 100% transfat-free, 46% of products are now fortified with micro nutrients. 5% sugar and sodium reduction targeted by 2021.Targeting 50% usage of renewable power by end-2021 from 28% currently.Have rainwater harvesting across their plants now.

Other points Modern trade and e-commerce is 10-11% of sales.Inter Corporate Deposit - no major movements and is within the limits that they had set for themselves.

For its Middle East operations, production has been shifted back to the region from India.

Capex at INR1.9b in FY20 v/s INR2.5b in FY19. Dabur Neutral Current Price INR 508 Operating Environment

Further deceleration was witnessed in the FMCG sector in 3QFY20. Demand situation continues to be worrying.

6.6% FMCG category value growth – itself a multi-year low on Nielsen data, which was 5.3% in Dec’19 – therefore, slowdown was witnessed toward the quarter-end. Moreover, Jan’20 has not offered any green shoots, so far.

If one strips out foods Dec’19 FMCG value growth, it was even lower, especially in personal care.

Dabur’s own categories are not showing any green shoots. Led by low base from 2QFY21, growth should look better for 3 quarters in FY21.

There has been a sharp slowdown in India’s oral care category, but it has gained 30bp share in 3QFY20 with 8.5% sales growth. Down-trading is rampant in oral care category (lower-unit packs). December month actually witnessed decline in sales in the oral-care category.

Continued sharp slowdown in juices category also led to decline in category sales for Dabur.

Rural sales for Dabur grew 400bp ahead of urban in 3QFY20, aided by increased village reach. Overall domestic sales growth was 5% YoY with 5.6% volume growth.

Domestic Margin outlook

Gross Margins should expand, led by low RM costs in 4QFY20, but company will invest in ad-spends; therefore EBITDA margins are unlikely to expand in the domestic business. Agri commodity basket is nevertheless witnessing some inflation in 4QFY20.


& Results Update

February 2020 40

CONSUMER | Voices

Key category details

Juices and nectar - 63% over 500bp gain in market share but the category continues to decline (11% dip according to Nielsen numbers).

(1) Slowdown in consumption, (2) higher price points for Dabur brand and multiplicity of options in lower-price drinks, and (3) milk-based beverages is leading to lower category sales. Company has launched INR10 coolers and PET bottles. At the same time, company is launching few more products in the premium segmen ts as well to check margin dip as a result of LUPs.

Power brand strategy is helping healthy sales growth in the Healthcare segment. Because it is more resilient to slowdown, sales have not been affected compared to other segments.

Chyawanprash – 64% market share, 300bp higher. Sugar-free Chyawanprash launched 2 years ago did well, winter sales were good.

Honitus and Hajmola are doing well. Honey sales declined in 3QFY20, owing to smaller and regional players chipping

away shelf space as well as 20% growth in the base quarter 3QFY20. International business

MENA the largest segment has done well, coming off a low base. Overall growth is likely to be in mid-to-high single-digit in the international

business on steady-state basis compared to 12% in 3QFY20. Margin improvement in international business is coming from crude linked

packaging costs. Other points E-commerce is 2.9% of sales now with over 90% growth YoY. Liquidity pressure in trade remains tight. Broader level hike in telecom tariffs could be one of the factors affecting FMCG

sector growth. Direct reach at 1.2m out of 6.7m total reach is among the lowest among FMCG

peers. Complications arise from the diversity of Dabur’s portfolio; however, company is planning expansion for the next few years shortly.

INR200m provisions were made in 3QFY20 due to some rating downgrade in some of their debt investments.

Analytics will be a focus in FY21 once the basics are in place by end-FY20. Emami BuyCurrent Price INR 272 Demand environment

Rural is still under stress. Seeing no recovery at wholesale as well at retail level. Delayed winter impacted winter portfolio. Market conditions expected to stabilize in the next 2-3 quarters. Excluding seasonality, HMN clocked 13% growth in its non-winter portfolio. If

Navratna loading takes place as expected, then HMN can clock double-digit sales growth in 4QFY20.

The company is offering 12-13 days of credit, which will be reduced to 7 days once the environment improves.

Material costs and EBITDA margin Material cost is likely to remain soft going forward. Expect 50bp gross margin improvement in FY20.


& Results Update

February 2020 41

CONSUMER | Voices

Will focus on new launches and ad spends going ahead. Thus, EBITDA margins won’t be as high as 29-30%.

Domestic business Domestic volume declined 2% YoY.

BoroPlus - Delayed winters and unfavorable seasonality impacted sales. Inventory which was piled up has now normalized at distributor end. Kesh King growth is volatile due to promotions. 30% is shampoo-led growth and 15% is oil-led. Navratna – launched Navratna Garam Ayurvedic Oil.7 Oils in one (INR1b brand) is small in size and not taking away shares from big players. Pain management – season starts in the month of July.Fair & Handsome – male grooming declined due to trend among young men (20-28 years old) to keep a beard which has led to decrease in facial surface area by 25-30%. This in turn leads to lower consumption. The company is however taking corrective measures such as price cuts etc. and expects growth to come back from 1QFY21. Will be launching a lot of new brands in healthcare range. Pancharista was degrowing at 18% for 1HFY20. 65% business in healthcare comes from Pancharishta.

Sale of cement business Enterprise value is INR55b. Emami cement has INR22b debt. Promoter will be left with INR33b. Group debt is INR30b. Company will keep INR7-8b for tax purposes. Outstanding debt expected to be INR5-6b after the transaction. Deal expected to close by May-Jun’20. Need only CCI approval on the regulatory side. No other approvals required. Keeping 8% pledge with the buyer towards guarantees.

Promoter pledge to come down to ~18-20% from ~70% currently.Total pledge post the transaction would be ~25%.

International business Excluding Crème 21, international business growth was just 3.5%.Expect 15% growth in international business going forward.

Other points Going forward effective tax rate will be ~20% on a consolidated basis.Overall volume growth of -1% in 3QFY20.Ad-spends will be maintained at 17.5-18%.Expect 9MFY20 other expenses run-rate to continue for FY21 as well.MT grew by 15% and CSD by 7%.Male grooming range should revive from 1QFY21.

February 2020 42

CONSUMER | Voices

Godrej Consumer NeutralCurrent Price INR 622 Domestic highlights

Household Insecticides (HI) recovery continued in 3QFY20 and the same is expected going ahead.

HI continued to gain market share in overall category, including incense sticks (+70bp in 3QFY20).

Expect new launches on the electric side and in spray form in HI segment. Illegal incense stick growth has plateaued. Expect value and volume to converge in HI segment over the next few months. Soaps - price offs and consumer offers resulting in sales decline of 4%;

Continued focus on micro marketing initiatives and consumer offers for scaling up growth.

Broad-based growth seen in soaps - with Godrej No. 1 focusing majorly on volumes and Cinthol on value growth.

Hair color - impacted by general slowdown in hair color category due its discretionary nature and consumers stretching consumption.

Strategy to grow Hair color segment is: (1) to scale up Expert Easy shampoo nationally, (2) re-launch of Expert Crème and (3) focus on growing herbal based powder.

Expect value and volume imbalance to improve going ahead with measures such as price hike, premiumization and portfolio mix changes.

International highlights – mix performance Indonesia did well in top and bottom-line. GAUM - West and South Africa recorded healthy growth; East (Kenya business)

cluster de-grew on account of liquidity challenges and temporary impact of demonetization.

Margins in GAUM impacted due to one-off (waste water management expenses of ~70bp YoY impact) in the US. Margins should improve going ahead.

Seeing strong growth in both West and South Africa. Outlook

From industry point of view, company believes that the worst is over and things should hopefully improve post Jan.

Focus will be on volume growth and market share gains. FY21 should be much better on value growth v/s FY20. Tax rate expectations: 21-23% in FY20. Rural growth was ahead of urban for the company. Rural saliency is less than 30% for GCPL. Saw sharper deceleration in urban, especially in North and West. Indonesia - hoping to sustain topline and bottom line growth. Product rollout The initial response to the recently launched Goodknight Gold Flash Liquid

Vapouriser in South India has been encouraging, and plans to scale it nationally in 4QFY20.

Rolling out Good Knight natural range of household insecticide products on select ecommerce platforms.

Godrej Expert Easy 5 minute shampoo hair colour performing well in Southern states and has been scaled up nationally.

Re-launch of the Darling brand in the dry hair category in GAUM.


Results Update

February 2020 43

CONSUMER | Voices

Other pointsOther expenses had ~INR80-100m worth of one-time expenses.No major impact of restriction on Palm oil sourcing from Malaysia.

GSK Consumer NeutralCurrent Price INR 9,868 Volume, distribution

Domestic HFD volume growth stood at 3% for the quarter. HFD distribution reach: ~2.1m outlets now (v/s 1.8m in 3QFY19). Domestic HFD growth of 6%.

Segmental highlights Sachets are growing in double digits YoY and now contribute 12% of sales. North and west markets are growing faster than south and east. Middle East and Bangladesh slowdown led to a decline in exports sales. Exports were down 17% YoY – Bangladesh (witnessing category slowdown), Sri

Lanka (as the company has restructured formulation to make products cheaper), Malaysia (destocking due to slowdown) and Pakistan (exports stopped due to tensions between India and Pakistan).

Exports contribution stood at INR790m. RM outlook and pricing

Commodity inflation stood at 6.5% in 3QFY20. Inflation is likely to persist for a few more quarters.

The company is focusing on various trade negotiations, conversions and costsaving initiatives to offset inflation.

It would not take price increase in line with or ahead of inflation, as it can lead to a decline category penetration.

Other highlights Other income had a one-off in 3QFY19. HUL-SKB merger – reserved by the bench; now awaiting the formal order from

Chandigarh NCLT. HFD category is growing at 6%, of which volume/value growth is 3% each. Food business is not doing well (decline by 13% due to withdrawal of

unprofitable products) and thus the company is now focusing on changing the business structure.

Focus areas: Drive HFD penetration (only ~20% in India) and sachets; focus on getting more family members connected with brands (apart from kids) and increasing distribution in north and west market.

In north and west – relevance of HFD category is improving every day. On high sugar labeling, it is taking a more scientific approach in consultations

with industry participants. Hindustan Unilever BuyCurrent Price INR 2,294 Business environment remains soft – in fact worsens in 3QFY20

Urban growth has moderated but rural growth has slowed down even further (at 0.5x urban growth during the quarter).

Delayed onset of winter affected skin care sales, while personal wash pricing actions impacted Beauty and Personal Care (BPC) sales for HUVR.


Results Update


Results Update

February 2020 44

CONSUMER | Voices

Parts of Punjab, Haryana, UP, West Bengal and Bihar are witnessing faster slowdown, while the southern market has still done better. BPC category growth declined substantially, while food category growth has held on well. Palm oil, agri and dairy costs are now inching up.Near-term demand outlook is challenging.

Key points on categories Management expects 5-6% price increase in soaps over the next few months. This effectively means reversal of the 5-6% decrease it had taken in September- October when commodity prices were soft. Oral Care category slowdown: There was an increase in the number of oral care brands in household earlier, which in slowdown reverses slightly. Smaller packs usage also picks up. Very good quarter on Indulekha. Hair Oils slowdown has not affected them.

Margin expansion EBITDA margin up 335bp YoY and 210bp on a comparable basis.Cost-saving programs continue to be a factor in driving margins and so are GST led

logistics savings. There was some phasing of expenses between September and December

quarter on a YoY basis, as a result of which other expenses were higher than usual YoY in the September quarter but was lower than usual YoY in the December quarter.

GSKCH merger The next date of the NCLT hearing is 3rd Feb’20.

New launches during quarter Hellman’s brand mayonnaise in Kolkata, a test marketing activity. Comfort Deluxe. Love Beauty and Planet shampoo and conditioner, and Indulekha Neemraj Oil.

Strategic review of global tea business by parent (announced this week) The strategic review likely to conclude in six months.This review is because of the weak performance of black tea worldwide.HUVR will await the parent’s decision, but the team business is doing well for them in India.

Jyothy Labs NeutralCurrent Price INR 130 Guidance

Expect mid-high single-digit top-line growth in 4QFY20 if HI segment picks up. EBITDA margin guidance maintained at ~16% for FY20. GM led benefits will be reinvested in the brands. Effective tax rate expected at 15% on consol. basis for FY20 and FY21. JYL will focus on market share gains, distribution expansion and BTL activities.

Outlook Urban demand is stable but rural demand is weak. In order to maintain channel hygiene, despite working capital constraints, the

company hasn’t extended credit to distributors.


Results Update

February 2020 45

CONSUMER | Voices

Raw material and marginsBenign input cost environment and certain operational efficiencies are aiding gross margin expansion.

Result Reduction in revenue was primarily due to 4% one-off moderation in institutional sales (higher sales in 3QFY19) and 1.9% as a result of GT channel facing rural slowdown & working capital constraints at distributor & wholesale level.

Category highlights Fabric care

Ujala fabric whitener – Market share intact; focusing on activations in trade to drive visibility through Dangler Packs. Ujala crisp and shine – Introducing new variants to drive growth; extending the marketing mix to a new market – Karnakata. Henko – focusing on BTL initiatives.

Dishwashing In Exo, launched Exo Super Gel in Kerala.Focusing on small packs to drive growth.

For Exo brand, Rural:Urban contribution stood at 40:60. Pril delivered better growth (v/s Exo) as it is largely urban-focused and has high

market share as well. Household Insecticides (Maxo)

HI reported 5% volume growth. HI is showing signs of improvement in volume/value terms. Expect decent

growth in 4QFY20 as well. Liquids are doing better than coils. Coils:Liquid contribution is 60:40. Growing salience of Genius LV, which contributed 15% to total LV sales in

3QFY20. Personal care (Margo, Neem)

Visibility drives and trade activations across key towns. Geographical extension of Margo Glycerine in Tamil Nadu and Kerala.Margo Neem face wash was launched in West Bengal and has received positive feedback. The company has not taken price cuts in Margo.EBIT margins should revive in the personal-care segment.‘Others’ (Maya, T shine)T-shine (liquid toilet cleaner) has been re-launched with revised formulation

and packaging. Others

Dish wash and HI saw better growth.Rural contributes 40% to overall sales.Employee cost increased due to rise in sales force in order to expand retail coverage. Secondary growth was flattish at 0-1%.CSD accounts for 8-10% of total revenue. 20% contribution from MT and Ecommerce. Distributor inventory has declined from 30 to 22 days.South market is doing much better in terms of geographical mix, 40% business comes from the southern market.

February 2020 46

CONSUMER | Voices

Seeing no impact from private labels in the fabric-care business.100% of distributors are on data-based management (DMS) from 60% in FY19.

Marico NeutralCurrent Price INR 300 Environment and outlook

Continued to gain market share across most categories, therefore, lack of growth is largely a category-specific issue.

However, reverse migration from branded to loose in case of hair oils is happening currently in rural. Pricing intervention by the company is likely to arrest the trend.

VAHO has also witnessed slower growth in the mid-to-premium segments compared to the lower end, contributing to effective realization decline.

Overall weak demand environment in 3QFY20 led to a sharp sequential and YoY dip in sentiment.

Rural and wholesale growth was even lower. Recovery in sentiment expected by 2QFY21.

New brands outlook New brands - ‘Parachute Aloe Vera’ and ‘Hair and Care Dry Fruit Oil’ have scaled

up nicely and are likely to report revenues of INR1.2-1.5b sales next year. New launches in Foods - Saffola Fittify Gourmet and Coco Soul have received a

good response as well. In case of Crème Oil and True Roots, the company is going back to the drawing

board with learnings. New product contribution to total sales has increased over the past two years

although it is far below expectations. International

Expect to sustain international business sales momentum. Other points

May see mild inflation in Copra costs in FY21. Witnessing inflation in edible oils. Will take a price increase in Saffola. Will increase distribution for Saffola, even in the top-6 cities. Full-year tax rate will be 24.5-25%. 1m is direct reach and total reach is 5m.

Page Inds NeutralCurrent Price INR 22,930 Volumes decline by 2.8% YoY in 3QFY20

Volumes declined 2.8% YoY in 3QFY20, but were up 1% on a YTD basis. The Impact has been uniform across segments.

Management reckons that most apparel players have reported a decline in demand YoY in 3QFY20.

Average price for winter wear was higher, as a result of which realization growth was higher than usual. The contribution of premium products has also increased.

Demand weakness is reflected in considerably reduced walk-ins to EBO stores in the last two years.

There is not much difference between EBOs and MBOs in terms of sales growth.


Results Update


February 2020 47

CONSUMER | Voices

Investments in technology implementation and staff recruitment (mainly on tech and kids business) impacted the EBITDA margin.

Channel incentives have always been at 3.5-4% of sales and likely to remain the same going forward.

Other points

Price increase has been 4-5% this year as well. Yarn costs are at similar levels YoY compared to the earlier part of the year. The company has 4,300 distributors on rolls now. The number of distributors is

growing at 4-5% annually. VFM-focused product launches will continue but need tailwinds for growth. It has launched a wider variety of bras recently to boost sales in a segment

where its share is much lower than in men’s innerwear. Inventory days have come down to ~75 from 85 as of Mar’19.

Kids wear demand has been good

Kids wear has shown an encouraging demand trend. A 120+ member team is now headed by a separate division head.

Two exclusive stores are opened for Jockey Junior during the quarter.

Pidilite Industries Neutral Current Price INR 1,594 Demand environment

Demand conditions remain subdued. Smaller towns and rural areas grew faster than urban areas for PIDI in 3QFY20. PIDI remains cautious on credit to channels if it senses any risk to payments. India subsidiaries: Nina, Percept and Cipy - Performance is better in 3QFY20

compared to 1HFY20 but the operating environment remains tough in these businesses.

West and north were relatively slow in C&B sales compared to the rest of the country in 3QFY20.

Pricing and raw material costs

Price reduction was taken in 3QFY20, but was not material on an overall basis. VAM costs during 3QFY20 stood at USD850-900 (avg. USD875) v/s USD1,300 in

the base quarter. The prices continue to be stable in 4QFY20 as well. PIDI also stores some stock of VAM.

As of now, the company does not appear to be particularly concerned about the impact of Coronavirus on China based manufacturing of VAM but are monitoring the situation closely.

Management does not believe that passing on of benefits will yield better volume growth in the current operating environment but are willing to do so when sentiment improves to boost volumes.

Outlook

PIDI is taking initiatives to achieve 15% value growth. Expect demand scenario to improve FY21 onward.

Striving to grow faster in rural markets. Aims to expand distribution in geographies where its presence is weak. Full year A&P at 3.5%-4% of sales. It wasn’t particularly high in 3QFY20 as some

costs had bunched up in 2QFY20. Tax rate for 4QFY20 expected at 23%.


& Results Update

February 2020 48

CONSUMER | Voices

HomeLane investment

The company acquired stake in HomeLane to work in close collaboration and create mutual value with it.

This is in view of the evolving market dynamics due to technology. PIDI has interest in interior design space and wants to be part of the changing landscape due to technology.

HomeLane is growing at a strong pace of more than 100%. Pre-money valuation of HomeLane was USD100m. PIDI has acquired more than

5% stake for INR500m. Other points

ICA Pidilite: Localization of manufacturing has led to improved margins and improved top-line due to better resultant flexibility.

Premium white glue constitutes 60-65% of market, where PIDI has dominant market share. The remaining market constitutes popular, economy and unorganized segments. PIDI has introduced products in popular and economy segments as well.

Tile adhesives are doing well with the category growing fast. The product is witnessing higher market acceptance with consumers increasingly switching from cement to tile adhesives.

Tata Global Beverages BuyCurrent Price INR 383 Tea

Tea prices in India continue to be benign. Kenyan tea prices continue declining. Regular black tea category has witnessed a decline or remained flat across in key

international markets. Growth is led by non-black teas. In India, both black and non-black tea are growing categories, but growth has slowed down to ~5%.

India Business India branded tea sales grew 6% YoY in 3QFY20 and 7% YoY in 9MFY20 led by

both national and regional brands. Branded volumes grew by 7% in 3QFY20 and 8% for 9MFY20. The key national

brands are gaining market share. ‘Agni’ and ‘Spice mix’ continues to grow on high double digits, while ‘Lal Ghoda’

(LG) integrated well and is delivering as per plans. UK Business

Revenue remained flat as growth in discounters was partially offset by a decline in the grocery channel.

The company focuses on margin expansion with cost optimization. The green tea category witnessed headwinds.

The company has a 17% market share in value terms and 23% market share in volume terms.

Canada Revenue in this region is up 5% YoY in 3QFY20, driven by higher black tea sales.

The ‘Super teas’ continue to grow, achieving a 3.2% market share in the specialty tea category.

Profitability in this segment continued to improve on the back of new innovations.

The company has a 29% market share in value terms and 40% in volume terms.


& Results Update

February 2020 49

CONSUMER | Voices

US BusinessEOC K-cups and private labels coffee segment volumes grew 3QFY20, along withsome decline in bags coffee segment, due to de-listing of a large account. US coffee saw a volume decline of 2% YoY in 3QFY20. However, on a 9MFY20 basis, overall coffee volumes grew by 2%. Good Earthtea grew by double digits in 3QFY20. EOC coffee continues to face headwinds due to increased competitive intensity.

Tata Coffee Revenue grew by 25% YoY (underlying volume growth was 14% YoY) in 3QFY20,driven by Vietnam sales, partly offset by lower TCL performance. Domestic instant coffee (IC) volumes stood at 2,052MT, marking the fifthconsecutive quarter of over 2000MT in volumes. Tata Coffee launched AMA Trails with Taj Hotels (IHCL signed a managementcontract for nine heritage bungalows in Coorg and Chikmagalur). Capacity utilization for Vietnam plant is expected to be 60-70% in FY20 and 80-90% in FY21.

Others The company opened 28 new Starbucks stores, totaling to 174 stores and addeda new city, Vadodra, to its portfolio. Tata Starbucks witnessed 27% revenue growth in 3QFY20.

‘Himalayan’ brand grew both in value (+5% YoY in 3QFY20) and volume terms, leveraging its partnership with Conde Nast to build connections in the food and beverage industry.

Tata Water Plus (TWP) PET continued to grow (+3% YoY revenue growth) with distribution expansion, focusing on better product mix and hence descaling the low price pouch business (4% volume de-growth).

TGP volumes decline, mainly in the states of Odisha and AP, on account of adverse weather conditions.

The merger with Tata chemicals Limited (TCL) is in the final stages; record date to be announced shortly. EBITDA margins for international tea dipped due to elevated advertising andpromotion expenses.

The company witnessed 1% de-growth in revenue due to adverse forex movement.

United Breweries NeutralCurrent Price INR 1,286 Business environment and market share

Volumes declined 7% in 3QFY20 and would have been flat adjusted for the AP impact (which saw its volumes decline 50% for the quarter).

For 3QFY20, mild beer grew 1% and strong beer volumes declined 10%, more indicative of premiumization than state mix effect.

There has not been any improvement in the AP situation in the current quarter. Overall slowdown in consumer spending has also had an impact, leading to

subdued demand resulting in flat demand even excluding Andhra Pradesh. The company has not shared data on industry volumes for the quarter but we

believe that market share has increased 200bp over the last 12 months to ~53%.


February 2020 50

CONSUMER | Voices

Material and other costs

Have cycled higher input costs in barley and glass, and hence, GM decline YoY in 3QFY20 was lower than the earlier quarter.

For barley, we do not see any significant changes in 4QFY20 and have also secured materials for the next few months.

In case of barley, the company is awaiting the barley crop around Mar’20 before commenting on the outlook.

Glass costs are also not expected to rise over the next two quarters. INR150m one-off on reversal of license fees means that other expenses were

lower. Receivable days increasing, capex reduced slightly Overall receivable days have increased by 5 days YoY due to delays in payment

by the AP government. Capex is likely to be ~INR4b (v/s INR4.3b guided at end-1HFY20).

Premium portfolio

Amstel, Ultra and Ultra Max are doing well in the super-premium segment. The super-premium segment has seen double-digit growth in recent quarters.

Regional performance

There has been an increase in excise in Telangana/AP, resulting in MRP increase for Kingfisher Strong by INR10/INR20 for a 650ml bottle.

North – Volumes were down 4%, Delhi reported flat volumes. South – Volumes were down 13%, mainly led by AP but Karnataka and Kerala

also declined. East – Volumes increased 19%. West – Volumes declined 7%.

United Spirits BuyCurrent Price INR 730 Operating environment

Despite the impact of ongoing slowdown in demand, there was a material sequential improvement in P&A sales.

Prestige & Above reported sales growth of 8% YoY, despite a challenging base (+16% YoY in 3QFY19). This compares to flattish YoY growth in 2QFY20.

There was no material pipeline filling during the quarter. Good wedding season, Christmas/New year sales and winter are boosting P&A

demand, making up for the weaker-than-expected Diwali season. It is seeing green shoots on demand growth. Premiumization trend remains strong. Liquidity in trade which was a problem in 2QFY20 improved sequentially.

Factors aiding BIO growth A few states including Karnataka have witnessed a sharp reduction in duties in

Bottled in Origin (BIO) products. Three factors aid BIO growth: higher aspiration levels, lower customs duty and

lower state excise duty. P&A is likely to grow in double-digits and popular in low-single-digits.

Margin improvement in 9MFY20 despite intense RM pressure EBITDA margin improved ~120bp YoY in 9MFY20, despite intense material cost

pressure. There has been some softening in ENA costs over the last two months. Management believes that gross margins have bottomed out.


& Results Update

February 2020 51

CONSUMER | Voices

Continued discipline in cost management and foregoing growth to adjust for credit risks meant a control on other expenses (provisions and write offs). In FY19, there was some provisioning on credit risks which has been absent in 9MFY20. Last year witnessed INR1.4b in 9MFY19 on such provisions. In addition, there was INR460m reduction YoY in other expenses on account of Ind-AS adjustme nt, which also helped EBITDA margin expansion. Staff costs were ~7.8% of NSV in FY18, ~7% in FY19 and ~6% in 9MFY20 owing to cost savings. Ad-spend is at a four-quarter-high because December quarter is usually a high ad-spend salience quarter. Ad-spend is more than competitive when benchmarked with peers.

Regulatory environment Duty free allowance to 1 bottle is speculative and a representation has been

made against it by concerned authorities. Telangana took sharp price increase in Dec’19 (INR20 per liter) led by excise

increase. Price increase is flat irrespective of the segment. This is material from popular perspective, not so much from P&A perspective. Beyond 3-4 months category bounces back from sharp near-term down-stocking. Because of flat INR20 increase, there could also be premiumization within their portfolio.

Andhra Pradesh: 3QFY20 performance was satisfactory. There has been some impact in January though due to short-term ordering and collection issues. No alarm bells yet.

No material price increase granted by states over last 3-4 months. New launches to boost premiumization

Re-launch: Rollout of significantly enhanced mix in ‘McDowell No 1’ coming soon in several states. The re-launch not only features new and improved liquid, but also more environment friendly carton and better quality of bottle.

‘McDowell no 1 Platinum’ launched in three more states. Balance sheet factors

Management stated debt reduction and working capital continued in 9MFY20, ~INR15b assets to be monetized which provides further opportunity for debt reduction.

Full year tax rate will be 25-26%. 3QFY20 is more of an indication of tax rate going forward.

February 2020 52

FINANCIALS/BANKS| Voices

FINANCIALS/BANKS

Banks reported slowdown in corporate loan growth, reflecting the weak macro and the lower utilization limits by corporates. Also, banks are maintaining a cautious/conservative stance toward wholesale lending, while retail loan growth remains steady (excl. auto segment). Growth in CV/CE remains tepid, and banks have reported an uptick in the delinquency trend in these segments. On the asset quality side, all banks reported an increase in slippages, led by both corporate/retail slippages. Corporate slippages were elevated led by a stressed HFC account, while retail slippages spiked in the auto and agri segments. Overall, the PCR ratio has improved as banks continued making healthy provisions to further strengthen balance sheet. A few banks like AXSB/ICICIBC downgraded the stressed telecom account to BB & below pool, and near-term credit cost is thus likely to stay elevated. NIM trajectory remains stable, led by an improvement in cost of deposits.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY20 Provisioning pressure

Expect loan growth to be higher than industry at ~5-7%, driven largely by retail (20%+).

Margin trajectory to remain in the medium-term range of 3.5%-3.8%.

Cost to assets ratio is likely to be impacted by branch expansion. However, over the medium term, it expects cost to assets to reach 2%.

Guided for RoE of 18% by FY22, driven by improving credit cost, margins expansion, lower opex and higher fee income.

Management has not provided any specific guidance on credit cost for FY21. However, it guided for credit cost over the long term to reach the long-term average of 110-115bp.

The bank will focus on improving the provision coverage ratio in the coming quarters.

The bank has shortlisted candidates (global as well as internal) and the right candidate is expected to be finalized by Jul’20.

It is in an investment mode and guided for adding 600-700 branches over FY20 and similar branches in FY21.

Bank has been creating contingent provisions in certain pool of stressed accounts and provided INR7b during the quarter and thus holds total contingent buffer of INR14.6b.

Most retail segments are reflecting improving trend. It, however, sighted slight concerns in the CV and construction equipment (CE) portfolio.

Bank is not targeting any particular level of loan growth and focusing on growing the core operating profit in a risk-calibrated manner.

Margins can improve further due to asset mix change, while it does not expect incremental cost of deposit reduction in the near term.

Maintains its guidance of achieving 15% consol. RoE by 1QFY21.

Downgrades in BB & below pool will remain high over next few quarters.

Expect credit cost to sustain at 20-25% of the core PPOP in the long term.

Expect loan growth at ~20% due to slowdown in the macro.

Loan mix of 55:45 in favor of non-wholesale over next 18-20 months.

Plans to exit FY20 with total 400 branches.

The bank does not foresee any stress in the retail portfolio, including the unsecured book.

Of the total stressed exposure of INR18b, INR15b has slipped in the past two quarters with total provisions of INR7b (which is above regulatory requirement).

Credit cost to remain elevated in the near term.

Expect loan growth to be ~10%. Margins to remain under pressure given the

impact of repo based pricing/MCLR cuts. C/I ratio should improve on the back of lower

wage provisions and improved digitalization.

Expects stressed HFC account to resolve by Sep’20 and will provide more in 4QFY20. Overall, it expects the recovery rate at 40-50%.

Expects recoveries in three large accounts: Alok Textile (INR18b), Bhushan Power (INR40b) and one power asset (INR10b) and in addition recoveries from smaller account.

Guided for corporate NPL formation to moderate significantly and thus a sharp decline in credit cost trends.

Axis Bank

HDFC Bank

ICICI Bank

RBL Bank

St. Bank of India

February 2020 53

FINANCIALS/BANKS | Voices

AU Small Finance Bank BuyCurrent Price INR 1,167 P&L & balance sheet related

Drop in disbursement yields QoQ in the wheels segment was led by product mix change and discounts offered to customers during the festive season. In 3QFY20, the bank financed ~60% new vehicles and 40% used-vehicles & cash on wheels.

It will continue concentrating on reducing the cost of funds, which has declined 20bp QoQ in 3QFY20, led by focus on repayment/prepayment of high-cost grandfather borrowings.

Availed long-term refinances amounting to INR23.2b without CRR and SLR cost. AUBANK will remain cautious in lending to small and mid corporate segment.

However, retail continues to be its main growth driver. Personal loans have been disbursed to existing-liabilities customers only and not

to new-to-credit (NTC) customers. Currently, personal loans portfolio is running on pilot basis.

Housing is another focus product where the yields are between 12.0-12.5%. On the deposit side, bank is targeting customers who can deposit initial amount

of INR25k. Employee cost is stable as senior team members are in place now.

Asset quality Follows daily tagging of NPA. Overall, it has tightened credit underwriting skills. AUBANK does not witness any challenges in the collection and overall asset

quality of the vehicle portfolio. Further, the proportion of LCV and HCV is not very high in the total wheels portfolio.

Overall, GNPA movement in the vehicle portfolio is broadly flat QoQ. It has also increased margin money requirement from its customers to tighten

its standards. No targeted guidance on the PCR. Bank has an exposure of INR620m to Altico and has INR500m fixed deposits as

collateral. The court judgment was in the bank’s favor. The bank used fixed deposits for installment payments.

Others The bank is targeting disbursement growth of 25% YoY, which should give AUM

growth of 35% YoY. Overall, NIMs trajectory should remain at 5.8% in the near term. The bank will consider opening 200 new branches by FY22, mainly in the rural

and semi-urban regions. This is not expected to have major implications on its cost ratios.

Capital raise discussion will come toward the year-end. It may consider fund raise in CY21.


Results Update

February 2020 54


Axis Bank BuyCurrent Price INR 741 P&L & balance sheet related

The opportunity in the retail segment remains large and the bank has strengthened its underwriting skills in this segment.

The bank is tapping rural and semi-urban markets for growth. There is a change in LCR guidelines by the RBI which has slightly impacted the

margins. The new guidelines are applicable for all banks. Corporate fees declined 25% YoY during the quarter. The bank is investing aggressively in its branch network and staff. It expects

opex to average assets to remain high for a few more quarters before it comes down to the guidance of 2%.

SME loans declined during the quarter mainly due to the cautious stance and lower utilization limits.

Attrition rate is at 19%. The recent change in its business strategy led to this higher attrition – although it is settling down now.

Growth in PSL loans to catch up in 4Q Fee to average assets is now normalizing at 1.35% of total assets. As corporate loan growth picks up, we expect fee income trajectory to improve.

Corporate loan book is becoming granular with top-20 single borrowers accounting for 86% of tier-1 capital.

Auto: Used car market is doing quite well while new car market is facing slowdown.

Asset quality There are significant accounts for recoveries in the pipeline. However, the bank

expects credit cost to remain high in the near term as it is looking to further strengthen its provision coverage.

~INR4.1b of corporate loans got slipped due to technical reasons which got upgraded during the quarter.

Non-fund exposure on BB & below increased due to downgrade of telecom exposure, mainly on account of AGR (adjusted gross revenue) issue.

Received payment in one account from security receipt pool and thus outstanding pool reduced to INR22.3b.

All accounts in which there are signs of stress is part of the BB & below pool. There is only one corporate account which got slipped outside the BB & below

pool, mainly due to RBI directions. There are some bank guarantees which had auto renewal. Further, bank

guarantees are valid after one year of expiry period. Guidance/Others

Loan growth to be ~5%-7% higher than systemic loan growth. NIMs in the range of 3.5-3.8%. Further, NIMs for FY20 are likely to be better

than FY19. Cost to assets at ~2%. AXSB opened 131 branches during the quarter. Axis Finance: Two large accounts slipped during the quarter, which led to an

increase in the GNPA ratio to 2.2%.


Results Update

February 2020 55


Bank of Baroda BuyCurrent Price INR 81 Opening remarks by Mr. Sanjiv Chadha as new MD & CEO

Mr. Chadha will continue to focus on the initiatives taken by Mr. P.S. Jayakumar (ex-MD & CEO), such as supply chain financing on the retail assets side and many others.

Will remain focused on strengthening the risk management profile of the bank. Will work closely with NBFC players in co-origination loans.

Strong opportunities exist in the MSME space.P&L & balance sheet related

The bank has raised additional tier-1 bonds of ~INR34b during the quarter. Yields have declined QoQ mainly led by ~50bp MCLR cut. Cost of funds is improving led by increasing CASA mix, and therefore, helped

reflect better NII trends There is a one-off of ~INR2.7b in operating expenses due to ESPS scheme. The bank has strong INR200b pipeline of projects sanctioned. It expects

disbursement trends to improve in corporate lending. Focus remains on betterrated corporates.

Asset quality Slippages of ~INR45.1b were due to RBI divergences. There are interpretation

issues with the RBI on 3-4 accounts (includes 1 chemical account, 2 road projects); all these accounts are making interest payments.

The chemical account (international account) is worth INR27b approximately. The bank expects some of these accounts to be upgraded over the next few quarters.

RBI divergences of INR45.1b have come from both international and corporate slippages.

Slippages break-up – Agri-INR5.5b, MSME-INR10b, Retail-INR4.5b, International- INR33b and Corporate-INR51b.

DHFL account worth INR20b slipped during the quarter, the bank has maintained 20% provisions.

The bank expects recoveries in 2-3 big accounts in the coming months. Thus, recoveries trend should remain high in the coming quarters.

The bank has signed 20 ICA accounts so far. Reliance Home Finance slipped last quarter, the bank made 20% provisions on

that account. The bank has restructured 30k MSME accounts of ~INR13b till date.

DCB Bank NeutralCurrent Price INR 172 P&L & balance sheet related

DCBB is careful in lending to SMEs; however, vast experience of over 11 years provides comfort on the overall loan portfolio.

The bank does not have presence in credit cards, auto loans, personal loans and two-wheeler loans, and thus, loan growth in not as high as some of its peers.

It expects loan growth to pick up from 2QFY21. Opportunities are available in mortgage/SMEs, and thus, are key focus

segments.


Results Update


p

February 2020 56

FINANCIALS/BANKS | Voices Agri segment is doing well and will continue to grow due to multiple products

being offered by the bank. Processing fee and ATM fee income has started to pick up. Trade finance is static

due to strict lending toward brokers. DCBB continues to do well on the insurance side.

The concentration of Top-100 depositors has decreased from ~18% to ~8% in the past two years. This is due to increased focus toward retail deposits.

The bank plans to venture into credit cards and personal loan segment. Over 60-70% of deposits are coming from the retail segment. Employees have been added in the mortgage/SME segment, while it has

reduced in the CV segment. PSLC fee income has been growing for the bank; in the current year PSLC income

should be higher than last year. Asset quality

Slippages include one large corporate account of INR418m from packaging industry account. There were some repayments from this account in the last/current month. DCBB is the sole banker and has tangible collateral against the loan. The bank holds 25% provisions on this account.

CV industry is going through stress, resulting in elevated slippages. The bank has accelerated its efforts in the recovery process and further risk prudence underwriting.

Total exposure toward a broking account stands at INR300m; of this, half is backed by guarantees while some of the remaining portion is backed by cash margin. Thus, the bank does not see any challenge in recovery of this account.

The bank has floating provisions of INR930m as on Dec’19. The bank’s upgrades/recoveries to slippages remain at ~60% and will continue

to remain in a similar range. Provision break-up: NPA - INR520m, floating/standard - INR60m and Investment

- INR10m. Others

The bank is targeting NIMs to reach ~3.70-3.75%. The bank is targeting a fee income growth of 12-14%. The bank will add ~14-15 branches in 4QFY20; it will continue adding 14-15

branches every year.

Federal Bank BuyCurrent Price INR 84 P&L & balance sheet related

The bank consciously focused toward secured & high-rates corporates. Higher interest reversal of INR0.2b has impacted margin by ~5bp. Collection efficiency and underwriting skills in retail business has improved. The bank expects a 2% increase in opex due to wage revision. ~9-10% of the loan book is linked to T-bills.

Asset quality

Corporate slippages have largely come from two HFC accounts (DHFL and Reliance Home Finance). Excluding both these accounts, corporate slippages were at multi-year low. The bank provided 25% and 15% provisioning in these accounts.


Results Update

February 2020 57


Received payment from one large restructured account (Air India) with exposure of INR2b which is fully settled now. There is no large exposure that is alarming for the bank as of now. It has nil exposure to both the large telecom operators which are in the media names. It has insignificant non-fund based exposure to the telecom sector.

The bank targets to improve PCR (incl. TWO) to 70%. The bank has exposure to three IL&FS accounts (2 NPA & 1 is standard). All the

three accounts are making interest payments. Others

The bank expects margins to improve in the coming quarters led by lower slippages and change in asset mix. It guides to improve the margins to 3.15%- 3.20% (15-20bp overall margin improvement). The bank expects to achieve an exit NIMs of 3.1% by 4QFY20.

It expects credit growth of 15%-17% over FY20. The bank targets for an exit ROA of ~1.1% for 4QFY20 and 1.25% for 4QFY21. It has guided to add 40 branches next year.

The bank will look for capital raise in early FY21. It has guided for credit cost of ~65bp.

HDFC Bank BuyCurrent Price INR 1,226 P&L & balance sheet related

Miscellaneous income includes INR2b recovery from resolution in NCLT accounts. No impact on the flow of GNPAs.

Retail forms ~78% of the total deposits. Corporate banking: NIMs were helped by improvement in cost of funds.

Corporate lending started picking up from Nov’19. Delinquencies remain stable. RWA/total assets declined due to change in the asset mix. Market risk also

improved while favorable lending mix led to better RWAs. Fee income: Core fee income is expected at ~15% in the medium to long term.

Fees from payment products range between 30-35% while wholesale is at 15- 20%. Overall, retail contribution is at 80-85%.

Asset quality Annualized slippage ratio excluding lumpy accounts and agri stood at 1.7%. Core

slippages stood at INR38.3b while additional lumpy one-offs including agri slippages stood at INR15b (~60-65% is agri). During 2QFY20, core slippages stood at INR37.4b (1.7%) while in 3QFY19 it was INR32.9b (1.7%).

Including contingent provisions, PCR stood at 78%. The bank has made additional provisions of INR7b, largely toward certain

corporate accounts with a very small proportion toward the agri portfolio. HDB Financials: Asset quality has deteriorated led by the CV portfolio. Asset quality of retail portfolio: Most retail products are showing an improving

trend; however, there are slight concerns in the CV and construction equipment (CE) portfolio. A few bp increase in delinquencies was noted in few retail segments (CV & CE).

Unsecured segments: Overall, asset quality is holding well toward this segment. Personal loans are pre-dominantly toward salaried customers. Credit cards are witnessing an improving trend due to customer selection and cross-sell to internal employees.

Commercial Vehicle needs to be monitored carefully due to various economic parameters.


Results Update

February 2020 58


Others CEO change: Currently, the bank has shortlisted candidates (including global and

internal) and expects to finalize the right candidate by Jul’20. Post this, the candidate’s name will be submitted for RBI approval.

The bank continues to focus on branch expansion and will look for small-sized branches in semi-urban and rural regions.

It has a credit card base of 13.9m. ICICI Bank BuyCurrent Price INR 545 P&L & balance sheet related

Provisions made during the quarter reflect fully provided brokerage account, south-based company and Essar Steel recovery. Decline in the power portfolio was majorly due to write-offs during the quarter.

Around 10bp benefit on margins due to interest on NPL collection and negligible benefit due to income tax refund.

Business banking portfolio: Focus on the granular portfolio by reducing ticket size, applying credit filters, originating loans through branches and digitalization has improved customer service.

The bank is quite comfortable in lending to NBFCs and HFCs where returns are adequate and meet risk threshold levels.

Around 65%-70% of personal loans and credit cards are sourced from internal customers.

Margins can improve further due to asset mix change. However, recent MCLR rate cuts will put some pressure on yields and rapid reduction in cost of deposits will not be there in the coming quarters.

Asset quality Corporate NPA addition includes south-based group and a brokerage account.

South-based group is backed by reputed promoters and is a performing account while fully provided on the brokerage account.

Credit trends in the retail portfolio are stable. Delinquency trends in credit card & personal loans across vintage are reflecting stable trends. However, it is witnessing some deteriorating trends in the Kisaan credit card and commercial vehicle portfolio.

NPA addition in the Kisaan & commercial vehicle portfolio are high. Kisaan portfolio forms ~3% of the total portfolio.

Downgrades in the BB & below pool will remain high over the next few quarters. Downgrades during the quarter were largely from the telecom and construction sectors.

Some of the upgrades in BBB portfolio to A rated portfolio were from the retail sector.

Entire guarantee in the telecom sector is at risk for all banks. Net addition in retail slippages has come from the Kisaan credit card &

commercial vehicle portfolio. Excluding both these accounts, the trends in other retail segments were stable.

Recoveries in steel account were in the form of both cash & security receipts. Security receipts (SR) declined to ~INR20.9 due to redemption of securities in

the steel account (Essar Steel). Investments in the BB & below portfolio are around INR5-6b. Power, telecom and infrastructure accounts for two thirds of the total BB &

below portfolio.


Results Update

February 2020 59


The bank has provided for stressed HFCs a few quarters back. The bank had exposure in the form of investments.

Others Credit cost for FY20 will be in the similar trajectory as in 9MFY20.

Indian Bank NeutralCurrent Price INR 83 P&L & balance sheet related

INBK expects to continue garnering PSLC income in the coming quarters. It estimates NIM to cross 3.0% by Mar'20. NIM was impacted this quarter,

mainly by interest reversal of INR1.2b (INR430m on account of DHFL only). Merged entity numbers will be presented with effect from 1st Apr'20.

Asset quality INBK reported one-off corporate slippage of INR13.25b from DHFL during the

quarter. A few corporate accounts are expected to be resolved in the near term,including Bhushan Power & Steel (exposure: INR8.3b, ~65% provisions provided), Costal Energen (provisions made up to 65%), Jindal India (exposure: INR1.6b), Alok Industries (exposure: INR3.3b, 100% provisions made), Athena Demwe (exposure: INR2b, 100% provisions made), RKM Powergen (exposure: INR6b, ~25% provisions made) and Anrak Aluminium.

SMA-1 stands at INR80b and SMA-2 at INR38.5b. Exposure to corporate accounts above INR50m in the SMA-2 stands at INR5b.

INBK signed ICA in four standard accounts (1 - EPC, 2 - Power and 1 - NBFC) having exposure of INR15b, and in NPA accounts of INR35b.

The bank made provisions on DHFL loan exposure according to the IRAC norms. In the DHFL investment portfolio, it made provisions of up to 90% (INR1.15b provisions on investment exposure of INR1.25b).

IndusInd Bank BuyCurrent Price INR 1,141 P&L & balance sheet related

Flow of money to NBFCs has started showing signs of an improvement. It was the third consecutive quarter reflecting margins improvement post the

BHAFIN merger. Client base grew by 2m to reach 25m. The bank significantly slowed down in Assam and West Bengal. It has added only

six lakh customers during the quarter. Portfolio yields have improved led by the changing mix from the retail portfolio.

The bank has sell down corporate loan portfolio of INR15b. Asset quality

Slippages were elevated as IIB slipped a diversified group, and travel/paper company.

The rating profile of the corporate group has improved and the sub investment grade book improved by 100bp. Travel/paper company slipped from the sub-investment grade book.

DHFL is a fraud account. The bank made additional provisions of INR2.4b toward two fraud accounts.

DHFL exposure is in the form of investments and has been marked down during the quarter.


Results Update

February 2020


February 2020 60


In the fraud accounts, the bank has debited 75% from the reserves and will pass through from P&L (INR2.4b every quarter) in the remaining three subsequent quarters.

Another large HFC (Indiabulls) which is standard expects faster pre-payment. The bank maintained provision coverage on IL&FS exposure at 73% - pre write-

off. Expect one road project & tunnel project to get resolved before Mar’20. Expect

recovery rate at ~75% in the tunnel project. Recovery of INR2.5b from the diversified stressed group.

Expect credit cost at 80bp (+-5bp on either side) over FY21. Excluding ILFS, it will be 60-70bp.

NBFC exposure has come down to 3.7% from 3.2%. The bank has exposure to all three big telecom companies.

Others Change in management: The bank has already shared with the RBI and remains

on track. Kotak Mahindra Bank NeutralCurrent Price INR 1,700 Macro comments

KMB highlighted the need to do sharper underwriting skills both at the sector and specific borrowers in current turbulent times.

The bank believes that nominal GDP growth will stabilize at 10-11% over the next 12-24 months.

P&L & balance sheet related

Corporate banking slowdown was led by under-utilization of loan limits by better-rated corporates as they preferred CP markets. Further, decline in disbursements in CV/CE was mainly due to the slowdown in sales.

However, Home loan & LAP portfolio is growing well as lower cost of funds help getting better risk adjusted returns.

Overall, KMB expects loan growth in double digits between 10%-15% for FY20E The bank will continue to drive ‘811 strategy’ for long-term benefits. In credit cards business, 80% of the sourcing is from internal customers. In

personal loans, 50% of sourcing is from internal customers. There have been one-offs of INR2b in operating expenses due to revision in

annuity rates. The bank has fully provided during the quarter. Credit cost for 9MFY20 came in at ~67bp.

Asset quality

Rise in GNPA during the quarter was led by a few chunky corporate accounts, CV/CE and unsecured segments. However, GNPA in the agri segment remains stable.

Retail asset quality trends at macro level: There have been early warning signals in MFI portfolio in two key states, and alarming situation for banks in the unsecured segments. Some spike in delinquencies in unsecured segment.

The bank is always cautious in lending to the group companies.


Results Update

February 2020 61


RBL Bank BuyCurrent Price INR 307 P&L & balance sheet related

Corporate advances declined QoQ as the prevailing economic environment remained challenging Focus to return to wholesale when environment is supportive.

The bank has maintained surplus liquidity, further supported by capital raise. Daily LCR stands at 164% for the quarter.

C/I ratio to be higher than 50% in the near term. ~9.26lacs consumer loans added in the cards business in 3QFY20. Credit card spends increased due to the festive period; much of this was

converted to EMI loans. Fee income from cards break-up: Processing and loans fees at one-third loan

fee, spends based on ~33% while the remaining is insurance and other fees. Deposit growth stood flat due to lower quantum of bulk deposits. Retail plus

CASA continues strong growth. Asset quality

Total stress pool as highlighted in the previous quarter remains at INR18b. INR7.1b has slipped in the quarter with provision of INR3.4b. Thus, total NPA that slipped from the stressed pool stands at INR15.1b with total provisions of INR7b. The remaining stress will be recorded in the next quarter.

The bank does not foresee any stress in the retail portfolio, including the unsecured book.

The bank remains cautious in assessing its overall risk portfolio given the challenging environment.

Micro banking saw some stress in the eastern region; collection efficiency declined to 85%. Expect this to improve further.

Exposure toward Assam stands at ~3.97% of the micro banking book. Average ticket size stands at INR20k.

BB and below book stands at ~INR40b (~6%). SMA II book stands at 0.39bp (INR2b), excluding the stressed pool. Credit cost for cards business is ~4.6-4.7% with GNPA of ~1.6-1.7%. The bank

writes-off its credit card loans at 180 days. 35% of the credit card portfolio has self-employed customers. NPA recognition policy for credit cards, LAP and other significant products has

been moved from month-end recognition to daily recognition. Credit cost in credit cards generally declines as the vintage of customer’s

increases. Currently, bulk of the customers range between 1-2 years. Interest reversal for the quarter stands at INR200m (INR250m in 2QFY20).

Others Plans to exit FY20 with total 400 branches.

Advances growth to remain at ~20%. Looking for loan mix of 55:45 in favor of non-wholesale over next 18-20 months.


& Results Update

February 2020 62


State Bank of India BuyCurrent Price INR 320 P&L & balance sheet related

SBIN expects 4QFY20 profit to be higher than 3Q on account of strong recoveries, lower provisions, slippage improvement and subs monetization.

Tax impact: DTA of INR100b in Mar’19. There is one-time DTA reversal of ~23.4b and MAT impact of INR5b and thus a total impact of INR33.92b. Also, there is tax benefit of INR20.6b and thus net one-time hit on P&L of INR13.3b.

Essar Steel resolution: Interest income recovery of INR40b and provision write-backs of INR70b.

Corporate loan growth was muted in this quarter, mainly due to low utilization limits.

Growth trends in retail remain strong, while on the corporate side, there is a strong pipeline of sanctioned projects, which will improve growth trends in the coming quarters. SBIN expects margins trajectory to remain stable in the near term as there is very little scope for further improvement.

Increase in employee expenses was mainly account of actuarial valuations toward wage revisions.

Asset quality Total exposure to stressed HFC is INR100b (loan - INR70b + investment -

INR30b). It holds ~50% provisions toward investment exposure and ~20% toward loan exposure and thus maintained ~29% provision coverage on total exposure. The bank expects stressed HFC account to resolve by Sep’20. It will further increase provisions in 4QFY20.

Overall, it expects recovery rate at 40%-50% in stressed HFC resolution. On the ICA accounts signed, it expects additional provisions of INR11b. Expects recoveries in three large accounts: Textile - INR18b, Bhushan Power -

INR40b and one power asset - INR10b, apart from general recoveries in smaller accounts.

Wind power account: The bank has fully provided in last quarter itself. Total security receipts pool stands at INR77b. The bank restructured 70,000 SME accounts worth INR36b. There is no overlap between SMA 1/2 and ICA accounts. SBI card GNPA is 2.67%, while NNPA is 0.8%. There is one restructured account of INR7b in the total eight ICA accounts where

resolution plan is implemented. Express credit classified as unsecured is largely to salaried customers. Thus,

asset quality of this portfolio remains stable. NPA in agri is going up mainly impacted by farm loan waivers. In power accounts, it expects to resolve four accounts during the quarter (two

from OTS and two from restructuring accounts).


February 2020 63

FINANCIALS/NBFC| Voices

FINANCIALS/NBFC

Commentary across companies was mixed. In the auto segment, the sentiment is turning positive for passenger vehicles and tractors, while it still remains subdued for CVs and 2Ws. Asset quality for vehicle financiers is likely to be stable. In the MFI segment, recoveries have started in the flood-impacted areas. In housing finance, players remain cautious in the wholesale segment, but expect retail growth to remain steady. BAF is cautious on some segments like 2W, SMEs and B2C.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY20 Asset quality

It will deliver 13.5-15% RoE in the HFC subsidiary once it scales up.

It will expand into 200 new towns in 4Q. Will add 7-8m cross-sell franchise customers every

year for the foreseeable future.

It hopes to see an improvement in auto finance delinquencies over the next two quarters due to corrective actions taken by management.

Cost has been rationalized across many line items. Further reduction in expense ratio will largely come from growth now.

MMFS may increase securitization to 20% of liability mix due to weak bond markets.

Customers are paying back despite business sentiment being weak.

Of all their product segments, the biggest pressure felt in CV finance. One reason is that CV customers are delaying payments to them. Another reason is slowdown in freight movement.

Expect a good performance in tractor disbursements in FY21.

Cost of funds to be largely stable; CP share could go up 100bp in the next quarter.

‘Margins + fees’ likely to be in the range of 6.8-7.1%. De-focused book to be at INR50b by end-FY20.

Provided INR1.12b of INR1.2-1.3b portfolio in Assam MFI which was 30dpd+ during the quarter. This not part of their NPL provisions, instead they are part of their standard asset provisions.

Good collections in early buckets have led to stable asset quality sequentially.

Will use profit on sale of wealth management business to make additional provisions in the de-focused business.

Over the next six months, INR160b of debentures will mature. LICHF has INR100b of undrawn lines from banks.

Increase in LAP NPLs would be INR2-2.5b QoQ; balance slippages are from home loans and multiple account loans.

Increase in Stage 2 loans is mostly from the retail segment. Around 2,000 accounts, which were NPLs in 2QFY20,made payments in 3QFY20.

Aditya Birla Capital BuyCurrent Price INR 89 Business updates NBFC segment

Launched smaller ATS loans during the quarter to increase granularity and share of retail loan mix (%).

FY20 PAT to be the same as last year. Three corporate accounts have led to the spike in credit costs – a power

company, a textile-plastic manufacturer and an NBFC; while these are in the resolution process, ABCL has provided ~20% (INR800m) for the same. These are collateralized loans.

Resolutions in the SME business have been smoother in 3QFY20 v/s NPA spikes in 2QFY20.

HFC segment INR15b of sanctions received from NHB in Jan’20.


Results Update

Bajaj Fin

Mahindra Finance

L&T Fin.

LIC Housing

February 2020 64

FINANCIALS/NBFC | Voices

Yields: HL 9.5%, Affordable HL 10.5%+, LAP 11.5%+. ATS: HL INR1.4m (unique customers), LAP INR5.6m, CF INR180m (5% of

portfolio). AB Health Insurance

Is expected to break even in FY21-22. Most of the sourcing is done on digital platform.

AM segment Witnessed outflow in liquid funds as a year-end phenomenon. Branch expansion strategy to be the same as last year. Launched a product called ‘Next best’. This is expected to generate INR10b of

gross sales by the year-end. 85% transactions are done on digital platforms.

Guidance Credit costs are likely to decline. CoF would be largely stable and reduce marginally in the HFC. ABAMC branch expansion strategy in FY20 to be the same as FY19. Post fund raise, interest costs are likely to come down. NBFC corporate book to be stable (and not decline any further).

Others Overall credit demand (systemic demand) has been weak, only the retail

segment has seen some uptick across the industry. Total fund raise INR21b, of which INR11b has been received; this will primarily

be utilised to refinance existing debts, Holding Company Debt INR4.5b. The balance funds would be utilised to refinance existing debts and rest would be allocated to the NBFC, HFC, ARC and insurance business.

New SIP product ‘One touch’ launched. Earlier affordable home loans were given on LAN basis, these were Top-up loans

with lower ATS.

Bajaj Finance NeutralCurrent Price INR 4,877 Business updates

Consumer inquiries across key consumption categories like electronics, cellphones, etc. have picked up in January.

Company has wound down most of its broker exposures. It will expand into 200 new towns in 4Q. Across product segments, salaried customers continue to be steady, while self-

employed customers continue to be troubled. In consumer durables financing, BAF’s share of manufacturer subvention has

been absolutely steady over the past three years. Reduced disbursements by 15-17% in personal loans cross-sell. There are 55-60m untapped but eligible customers today in India (over and

above their 40m customer base). It will deliver 13.5-15% RoE in the HFC subsidiary once it scales up.

Asset quality The company took INR150m accelerated provisions on a ‘coffee conglomerate’

company in the quarter. This account slipped into NPL in 3QFY20. It hopes to see an improvement in auto finance delinquencies over the next two

quarters due to corrective actions taken by management.


Results Update

February 2020

February 2020 65


Delinquencies in auto finance are similar to that during demonetization. In its history, BAF has recovered 40-45% of the value of 2Ws it has repossessed. Regarding IL&FS, the process to sell the buildings is on. INR600m provisions

against the NPL. It also has INR300m in the escrow. Tanglin – account could get resolved in the next 30 days. Credit costs (ex of one-offs) have largely peaked, but have not started

improving. Others

Average yields in auto finance are 23-24%. ~30% of consumer durables sales are funded by BAF. Mobile phone and consumer electronics demand has been muted. Will add 7-8m cross-sell franchise customers every year for the foreseeable

future. Broker financing industry is INR220b. Gold loan business is hard to gain scale and profitability.

Equitas Holdings BuyCurrent Price INR 113 P&L and balance sheet related

During the quarter, the bank raised capital of INR2.5b through private placement.

Small business loans (secured by house property) continue to see higher growth trend.

The bank focuses only on light commercial vehicles and small CVs. In both these segments, growth was not impacted much as compared to the MHCV segment.

On the liability side, focus remains on retail deposits. During the quarter, the bank launched Equitas Elite product, which is a priority banking and wealth management program. It has enrolled ~1,700 clients within the first 2 months.

Unsecured business loan segment is running down due to repayments as no fresh disbursements have been made in the past 1.5 years. This portfolio has an exposure of INR2b at present.

Term deposits customers: ~65,000 are absolute retail TD customers of the total ~5lac customers. Overall, retail TD growth remains strong while CASA is showing moderation.

In the first two quarters, disbursements growth was impacted due to floods and elections; however, festive season has helped in disbursement growth picking up.

Used Vehicle financing: Vehicles up to 10 years are eligible for funding. Asset quality

Increase in slippages has largely come from the MFI portfolio in Maharashtra, mainly due to political disruption in three districts. Otherwise, slippage trend across segments remain largely stable.

Further, the MFI business in coastal Karnataka was also affected due to political disruption; however, the bank does not operate in these districts.

Small business loans: Lends between INR50k to INR2.5m. Avg. ticket size is INR0.6-0.7m. The nature of the business is such that GNPA remains high in this segment; however, the bank’s NPA is still lower v/s industry trend.


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February 2020 66


Used CV market is not sensitive to interest rates. These customers do not even have a CIBIL score.

Equitas is well collateralized (more than 100% collateral) on secured working capital loans.

Others Appointed Mr. Murali Vaidyanathan as President and Country Head – Branch

Banking, Liabilities, and Product & Wealth. He had earlier served at Kotak Bank. Issued 80,928 FASTags during the quarter.

HDFC Life NeutralCurrent Price INR 579 Business mix

Market share stands at 28.6% in the group segment and at 14.3% in in Individual WRP. Total number of lives insured increased by 29% YoY to 45m in 9MFY20.

The share of non-PAR business is coming down in total APE while that of PAR and ULIP is going up. It expects PAR proportion to increase further in the coming quarters.

New PAR product launched ‘Sanchay Par Advantage’ is received well by the market.

Persistency reflected a strong improvement across all products, except ULIP. ULIP margins are in single digits. Growth in annuity products tapered down mainly due to interest rates. Credit life growth also remains muted (+21% YoY). HDFCLIFE believes some level of conservatism on the protection business like

quality of underwriting, claim ratio etc. It would like to grow its protection business in a risk calibrated manner.

HDFC Bank is ~85% of the bancasurrance. Some of the peers have higher solvency ratio compared to HDFCLIFE. However,

management believes that it is still in the comfortable zone and will keep solvency in the range of 180-200%.

With HDFC Bank, the ULIP proportion will remain at 40% as a lot of its customers prefer this product.

Operating metrics Overall, fixed cost is coming down across products. The increasing proportion of PAR & ULIP has impacted margins. Further, as

interest changes, there is a lagged effect on re-pricing of non-PAR products, which also impacts margins.

Assumption changes review happens in March. New business strain is mainly a function of business growth. Further, back book

quality is sustained with higher persistency. Others

Re-insurance companies are asking life insurance players to increase premiums. HDFC Pension is doing well. The market share has gone up from 25% to 30%

currently. Strong growth opportunity is present in pension space.


Results Update

February 2020 67


ICICI Prudential Life BuyCurrent Price INR 489 Operating Matrix

Growth in VNB is predominantly achieved through protection business. The company maintained its stated guidance of doubling VNB in 3-4 years.

4P elements (premium growth, protection growth, persistency improvement and productivity improvement) continue to guiding toward growing VNB.

No assumption change in margin calculation and is mainly led by the product mix change.

Margins stand at ~21%, driven by product mix change with the proportion of protection business in total APE improving to 14.1% as on 9MFY20. Further, as this mix continues improving, there is room for margin expansion. Cost improvement in the saving business is limited as it has the best cost metrics, while there is a scope of an improvement in cost metrics on the protection side.

Over the near term, new business strain will remain on P&L as the protection business is growing strongly.

Business mix Non-linked saving products grew strongly during the quarter. Within the protection business, retail continues to dominate the mix. Retail APE forms ~90% of total APE. Decline in persistency is mainly due to weak demand of linked products, but

persistency in non-linked products is stable. Decline in ULIP sales is across industry participants. However, the company

believes that demand for ULIP products will revive at some point. It has launched a few products in the saving business to address the current market conditions.

Surrenders experience is still better compared to past years. Last year, protection mix was 60% retail and 20% credit life. However, in

9MFY20, the share of retail in protection mix has improved further. Low ticket size ULIP customers have moved to other non-linked products.

Non-linked saving products include both group funds business and non-parproducts. However, the proportion of non-par products is still very low.

It will continue to focus on the credit life as it gives great customer proposition. Protection & annuity business is less seasoned compared to ULIP. PAR products are sold through agency channel and the mix has gone up. Launched ICICI Prudential precious life product during the quarter.

Distribution IPRU has partnered with 13-14 banks with ICICI Bank and Standard Chartered Bank as its biggest distributors. However, it has not partnered with any PSU banks for distribution.

ICICI Bank is not keen to cross-sell traditional products to its customers and therefore IPRU has tied up with various distributors. However, ICICI Bank focuses on selling protection & annuity products but not comfortable selling fixed guaranteed return products.

It has partnered with Paytm for distribution of products. The focus is on adding new agents – it added nearly 18,500 agents to focus on

selling protection and non-linked products. Distribution is going deeper in the country on the protection side. Employee strength is 14,000 currently.


Results Update

February 2020 68


L&T Finance Holdings BuyCurrent Price INR 123 Rural

There have been early signs of agri revival in select geographies due to extended monsoon. Reservoir levels are 41% above long-term levels. Rabi crop should be good. Hence, expect a good performance in tractor disbursements in FY21.

Refinance to old tractors stands at 14% in 3Q; LTV is at 70%. While the festive season was good, 2W sales post the festive season were poor.

In 4Q, 2W sales would be more driven by inventory clearance before BS6 kicks in. Maintaining LTVs at 75% in this product.

Micro loans: Ventured into Punjab and Haryana for the first time this quarter. 99.9% collection rate, INR250m recovered from last year’s write off.

Pan-India rejection rate of 48% in MFI. Also, only 30-35% of 1st cycle customers migrate to the 2nd cycle.

Assam MFI: Loan book was INR7.5b in 3QFY19, with quarterly disbursements of INR2.3b. In 4QFY19, credit rejections went up to 40%, resulting in only ~INR1.7b disbursements in 4QFY19. Nine centers were put on ‘run-down’ notice. In 1QFY20, rejections went up by 20%, resulting in INR870m disbursements. In 2QFY20, disbursements declined to INR800m. In 3QFY20, disbursements were only INR340m. ATS in Assam is only INR17k.

Housing Salaried segment home loans grew 31% YoY with share up to 62% (51% last

year). 73% of the housing loans are directly sourced. Increased share of commercial finance to 17% (from 6%) – largely toward

construction finance. Wholesale finance

Solar tariffs have increased. Tariffs now range from INR2.6-3.3 per unit (v/s a low of INR2.3 per unit).

Sanctioned first two loans in the city gas distribution (CGD) segment in infra in 3Q.

Sell down in the DCM Book (except DHFL) is at comfortable levels. Sell-downs in infra have reduced compared to long-term averages. Want to reduce leverage in the infra segment.

AMC 3.6% equity AUM market share (57% of total AUM). Large individual AUM drives growth in AUM (66% of total AUM).

Asset quality Provided INR1.12b of INR1.2-1.3b portfolio in Assam MFI which was 30dpd+

during the quarter. This not part of their NPL provisions, instead they are part of their standard asset provisions.

Good collections in early buckets have led to stable asset quality sequentially. Recovered majority of money lent to a large media house. Will use profit on sale of wealth management business to make additional

provisions in the de-focused business. Supertech Exposure: There are 4-5 projects, of which 3 have a DM arrangement.

Sale of malls and hotels is taking place. Overall exposure to come down further by 4QFY20.


Results Update

February 2020 69


Guidance Expect a good performance in tractor disbursements in FY21. Cost of funds to be largely stable; CP share could go up 100bp in the next

quarter. ‘Margins + fees’ likely to be in the range of 6.8-7.1%. De-focused book to be at INR50b by end-FY20. Others In 2QFY20, there was a GST credit of INR230m in the AMC segment which

reduced opex. Productivity in the farm business improved to 11/month/person (last quarter at

8). However, it has deteriorated in 2W and business in certain eastern regions (e.g. Assam).

Avg. LTV of LAP loans is at 54%. LIC Housing Fin. BuyCurrent Price INR 366 Business Updates

PMAY: During the quarter, 16,000 loan accounts worth INR34b were disbursed (up 88% QoQ and 106% YoY).Total 40,800 loan accounts worth INR84b are outstanding.

Project loans: 260 accounts in total. 25-27% of the book is in moratorium (down from INR45b to INR25b QoQ). 5 cases in NCLT – hopeful of recovery in 2 cases. 14 accounts of INR11b have been referred to GOI’s AIF. 51.17% PCR on this book. Top 10 loans would be ~15% of total loans.

LRD book in project loans stood at INR30b. Individual LRD would be INR80b (the balance is part of the individual book).

Receiving regular repayment from homebuyers of stalled projects in NCR. New product – Principal repayment holiday up to 48 months for under

construction property purchases. ~40% of the total loan book (INR2t) would be for under construction loans. LAP book – Average ticket size is INR1.5m. 74% of this book is to salaried

customers. 30% of these customers are ex-home loan customers. Contractual duration is 10 years, but actual is 6-7 years.

Asset Quality In the retail segment, INR1.8b worth loans are up to date, but customers have

defaulted on other loans. Hence, LICHF has classified them as NPL. Individual GNPL ratio is 1.92%. Corporate GNPLs declined INR240-250m QoQ. Home loan GNPL ratio is 1.35% v/s 1.05% QoQ. LAP GNPL ratio is above 3%. Increase in LAP NPLs would be INR2-2.5b QoQ, balance slippages are from home

loans and multiple account loans. Increase in Stage 2 loans is mostly from the retail segment. Around 2,000 accounts, which were NPLs in 2QFY20 made payments in 3QFY20.

Others During the quarter, LICHF raised USD200m of ECBs. NR150b-160b of debentures due in the next 2 quarters. According to Ind-AS, loans are reported after deducting specific provisions. Less than 1% of customers have multiple sources. In 9MFY20, disbursements in HL were 80.5% of total.


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February 2020 70


In some cases, SARFAESI takes even 1-2 years. Self-employed professionals (doctors, lawyers, etc.) form 2% of the portfolio. Among salaried customers, 25-30% are from the PSU sector. Undrawn lines from banks would be more than INR100b.

M&M Financials BuyCurrent Price INR 382 Business Updates

Purchase sentiment is not picking up yet. Extended monsoon delayed farm cash flows. Infra spend yet needs to pick up.

The company is able to raise money at very competitive price. Cost of funds continued to decline.

UP, Bihar, MP and Gujarat are doing well. Maharashtra and southern states are still a bit slow.

It launched small-ticket loans to good customers (at least 12 months repayment without default). This is for temporary requirements like education, health, etc. (6-12 months tenure generally, but could extend to 18 months). Collateral is the vehicle itself. ATS is INR50-75k. Yield is 18-20%.

For the year, focus is on asset quality and on increasing provisions if required. Pre-owned vehicles will be 15-20% of total disbursements. Cost has been rationalized across many line items. Further reduction in expense

ratio will largely come from growth now. MMFS may increase securitization to 20% of liability mix due to weak bond

markets. Not reduced yields in any products. INR300m one-off provision expense due to tax dispute taken in the quarter

(taken in opex). Cost savings of INR250-300m done in the quarter, driven by process changes

and automations. Asset quality

Customers are paying back despite business sentiment being weak. Additional provisions of INR940m (classified in Stage 3; for those customers who

have not been paying longer than normal; more from south India) during the quarter.

Of all their product segments, the biggest pressure felt in CV finance. One reason is that CV customers are delaying payments to them. Another reason is slowdown in freight movement.

Collection efficiency has been largely stable. GNPL ratio should improve in 4Q. PCR: Will review at every stage. If pressure in the market sustains, then they

would have to increase PCR. HFC subsidiary – early signs of improvement in asset quality (witnessed in

December). Termination loss and bad debt recovery is INR1.4b. Provision charge: 9MFY20 – INR6.5b, 3QFY20 - INR2.59b.

Others INR200m of one-off expense related to tax settlement case. Some days of collections lost in certain geographies like J&K, North East, etc.


Results Update

February 2020 71


60-70% of total opex will be recovery-based and the rest would be business based.

~50% of car volumes would have been during the festival season. Employee count has declined by 500 QoQ due to natural attrition. Will be

replaced shortly. LTV is an outcome of dealer pressure generally and not customer pressure HFC subsidiary geographic mix- MH: 40-45%, TN: 20%, MP, Raj, Guj, AP: 5-7%

each. Just entered UP and Bihar. Digital Infrastructure built in the insurance business had led to some margin

pressures in that segment. MAS Financial Services BuyCurrent Price INR 1,039 Business Updates

Monthly AAUM for Dec’19 is at INR55b. During the quarter, 3 branches were added and tie-ups with 7-8 NBFCs were

done (in 9MFY20, total 27 branches were added). Asset Quality

Partners faced some pressure in the states of Maharashtra and Karnataka on account of floods (NPLs spiked). However, portfolio quality of MASFIN was intact (risk borne by the partners).

Certain engagements were done with NBFC partners in Rajasthan for better underwriting practices.

Liabilities and Margin INR15b sanctions in the pipeline (INR3b from PSU banks such as SBI and OBC

under PSL). Term loan ALM Profile: Liabilities maturity 36-48 months whereas Asset

Maturities are of an average maturity of 24 months. Short-term ALM profile: Month-to-month and cumulatively all buckets are

positive. Guidance

To grow at 15-20% in FY21, MSMEs to drive growth (20-25%). RoE to be at 15%. Over the next 2-3 years, operational centers (branches) should increase and

supersede the number of NBFC partners gradually. Asset Quality in FY21: GNPA to be between 1.25-1.5%, NNPA to be in 1-1.25%

range. NIMs sequential growth to be maintained in 4QFY20. Credit cost levels to be maintained between 1-1.25%.

Others No capital infusion needed in the short-to-medium term.


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Muthoot Finance NeutralCurrent Price INR 875 Business Updates

Highest-ever quarterly AUM growth (INR27b QoQ). Healthy traction in gold loan business witnessed in 4Q too. Credit costs during the quarter are higher due to high standard asset

provisioning coupled with losses from burglary (INR140m provisions and INR330m write-offs). Insurance claim has been made for the burglary.

Increased PCR in HFC and VF segments as a precautionary measure. Yields are better due to improved collections. Hence, this led to one-off income

but it was not quantified by management. Liquidity/funding

The company got global ratings during the quarter: S&P: BB, Moody’s: BA2. CRISIL revised the company’s rating from AA-Stable to AA-Positive in January. Raised INR12b from two retail NCD issuances in the quarter (average ticket size

of INR200k). Not keeping any unavailed bank limits – rather, drawing down the cash on the

BS (6-7% of BS). This trend shall continue. Incremental cost of funds at 9.1-9.2%. Guidance

Expect loan growth of 15%+ for FY21. Will open 100-200 branches a year. HFC subsidiary – will end FY20 with AUM of INR22b. Expect INR7-9b

disbursement in FY21. Target to bring RoA up to 2%. GNPL ratio should be largely stable.

Others ECBs are now trading at 4.38% (v/s 6.12% issuance cost). Other opex has an impact of INR210m from unrealized loss on hedged

instrument (ECB). Also, advertising expenses were significantly higher QoQ. ECL is 1.33% of AUM, while write off is 10-15bp of AUM. Home loans sold through own branches (10% of disbursement) and own feet on

street. They do not employ DSAs. Has increased lending rate in Jun’19. Disbursement at 70% LTV. INR80b monthly collection. INR27b portfolio in Kerala. Piloting doorstep gold loans, in line with other Fintech’s, in a few areas.

PNB Housing Finance NeutralCurrent Price INR 411 Business Updates

In the quarter, PNBHF raised INR25b via 10-year NCDs from LIC.Sold down (refinanced) INR19.6b corporate assets during 9MFY20. Excludingthis, corporate book rundown was ~15% in 9MFY20. Another INR11b will be sold down in 4QFY20. Stopped doing under-construction retail home loans in 3QFY20. Now only 20%of retail home loans are under construction (v/s 40% two years back). In 9MFY20, 60 corporates with principal of INR20.2b came out of moratorium.Even during the moratorium, these corporates paid INR4.83b principal.


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Omaxe: Had disbursed INR6.05b to 3 projects. Current exposure stands at INR4.18b. It is currently in Stage 1.

IREO paid INR490m during the quarter and now has INR1.01b outstanding. PNBHF expects to resolve this account by Mar’20.

Supertech – PNBHF got a favorable order from Haryana RERA. As a result, the exposure is bankruptcy-proof.

While PNB may not be able to participate in the capital raise (INR15-16b), it will maintain 26% shareholding in the company, and hence, would remain as the promoter. PNBHF would continue to use the PNB brand. Capital raise would be completed in FY20.

Lodha exposure – INR12.5b. INR3.85 prepayment in construction finance in 3QFY20. Exposure to IPL is a corporate term loan. PNBHF is the exclusive lender.

INR1.01b outstanding. Yield: HL – 9.52%, LAP - 10.44%, Corp – 12.15%, CF – 12.33%, Others – 10.44%.

Asset Quality

In the quarter, two more corporates slipped into NPL. Overall, there are 3 NPL accounts – IPL Gurgaon, Radius and Supertech – with a combined exposure of INR6.04b. Details of these 5 accounts as of 1HFY20 and 9MFY20 are given below.

INR8.19b is the total exposure to the 5 stressed accounts as of 3QFY20. There are 3-4 other corporate accounts, which have moved to the second

bucket of delinquency. Retail NPL up 20bp QoQ to 1.04%; similar GNPL ratio stands for home loans and

LAP.

Repco Home Finance BuyCurrent Price INR 302 Business updates

Mix between salaried and non-salaried sanctions is 50:50. Loan takeovers from banks continue and are unlikely to subside soon since

banks are very aggressive. INR25b of undisbursed bank sanctions as of Dec’19. The company has INR1.8b

liquidity on the balance sheet. In Tamil Nadu, some of the state-level issues (registrations, sand mining, etc.)

have been addressed. However, housing loan demand is low. Cost of bank loans is cheaper than that of NBFCs. Overall yields - HL: 10.88%, LAP: 13.61%, Overall: 11.4%. Disbursements in TN: 3QFY20 – INR3.63b v/s INR3.77b YoY and INR3.95b QoQ. Disbursements: HL – INR5.09b v/s INR5.32b QoQ; LAP – INR1.47b v/s INR1.7b

QoQ. Asset quality

INR1.2b worth of NPL accounts got upgraded/recovered during the quarter. REPCO has been tightening underwriting standards pan-India regarding non-

documented income. Also, it has kept a cut-off CIBIL score (was not there earlier).

In 9MFY20, the company repossessed and sold INR100-150m worth of NPL properties and settled INR700-800m worth of NPLs directly with the customer.


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Guidance Expect stable asset quality. Margins should be between 4.25-4.50% over the next year. C/I ratio may go up slightly due to higher salaries to attract talent.

Others Some NBFCs have become more aggressive (CanFin for example). Most CPs raised are of 30-90day duration. The company follows a branch banking model – no separate teams for sales,

credit, collections, etc. Will not venture into new geographies in the next one year.

Shriram City Union BuyCurrent Price INR 1,420 Business Updates

In 2Ws, SCUF financed 360k units in 3QFY20 (v/s 210k YoY). During the quarter, SCUF also disbursed INR4b to the pre-owned 2W segment (classified into auto loan/personal loan segment).

Raised INR22b in the quarter (INR18.55b via securitization with private, PSU and foreign banks). No DA done in the quarter. Also raised INR4.5b through PTC in January from SBI (through government’s PCG scheme). Will continue to securitize more (may increase to 20-25% of borrowings). There is good demand from banks. It is a long-term borrowing (50 months). Cost is 9.6-9.7%.

HFC subsidiary - INR1.31b direct assignment done during the quarter, which spiked its NII. CF is only 2% of disbursements and 5% of loan book. Disbursements should pick up and INR24b AUM is expected by Mar’20.

MSME disbursements are subdued because SCUF has moved out of the unsecured business (was earlier 20-25% of disbursements).

Liquidity on BS is INR15b. Legacy PL book (which has new-to-SCUF customers) has higher NPLs compared

to the new book (cross-sell; started in Jan’19). It should run off in the next 18 months or so.

Asset Quality Stable quarter in terms of delinquency. Expect it to improve going forward. GNPLs in gold loans are up due to a temporary blip because customers are

holding on due to higher gold prices. Will normalize in 2-3 quarters. Guidance

In 4QFY20, MSME disbursements are expected to be normal. Expect 15-18% AUM growth in FY21, primarily from MSME (20-25%) and pre-

owned 2Ws. 2Ws should grow at 12%. Others

Cut down on personal loans disbursements. ECB will be more expensive. Probably around 10.25-10.5%. Gold loan is done only in South India and in Maharashtra. All branches offered pre-owned 2W loans. Financed 100k vehicles in the

quarter. Avg. ticket size is 25-26k. 18-24 months old 2Ws. LTV is 75-80%. Around half of the customers are those who have completed one cycle with SCUF and are given a top-up. Yields are 18-26%.

60-70% of 2W disbursements come from Hero and Honda. Looking to expand the gold loan business in the North/West over next year. Unsecured MSME segment average ticket size is INR0.5m. It comprises 20-22%

of the total MSME book.


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HEALTHCARE

There has been impetus on cost-cutting initiatives by companies and re-think on strategy for the US generics segment, given the product-specific considerable investment and the uncertain timeline for potential approval. Further, companies continue working on evolving requirement for regulatory compliance. The focus is gradually shifting toward the branded generics segment in India and other emerging markets. In addition to further enhancing value of existing brands, companies are expanding their product portfolio using an in-licensing strategy, wherein competition is limited with products being under patent. Domestic formulation is likely to remain the key focus area as it is a strong-RoE business with low capex requirement. Over the near term, companies are concerned with availability/prices of RM procured from Chinese suppliers due to the ongoing shutdown on account of coronavirus issue. Companies indicated that typically they have inventory to the tune of 70-90 days which would be sufficient till 4QFY20. However, if the issue gets extended, then they could get adversely impacted by supply shortage from China.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook US business

ARBP has guided for Sandoz pending transaction to be completed by Mar’20.

By 1HFY21, ARBP would be able to convert the loss-making Apotex operation to EBITDA neutral.

With net debt down ~USD77m in 3QFY20, ARBP’s net debt stands at USD446m as on Dec’19.

30 products were launched in 9MFY20. ARBP has submitted its response for Unit 4 to the

USFDA. Further, Corrective and Preventative Action (CAPA) related to the same would be concluded by Apr-May’20. Currently, Unit 4 has 15 ANDA approvals pending over next one year.

For Unit 11, ARBP has sent response to the USFDA and has requested re-inspection. Feedback is awaited.

Cipla has guided for gross margin to sustain at 63-63.5% .

R&D is expected to be on downtrend given that g-Advair related spends ended in 9MFY20.

Study outcome of trials related to g-Advair is expected by Mar’20. Further, it would take ~2-2.5 years for review by the regulatory agency.

The US base business is at USD120-130m with top 3 products contributing 25% of US sales.

Beyond Advair, Cipla has indicated filing for another potential product by end-CY20.

Niche opportunity launches in US generics should resume 4QFY20 onward. Cipla would respond to the USFDA by end-Mar’20 for its Goa site. It has high-single-digit ANDAs pending from this site.

CDH launched Vinglyn and Vinglyn M (anti-diabetic drug) in India.

Biosimilar business – over 18 products are under development for India and EMs.

The company has filed NDA for Sarogltazar Mg with the Drug Controller General of India (DCGI) for Non-alcoholic Steatohepatitis (NASH) indication.

Shift of important products from Moraiya site to its Liva site would be completed by end-FY20.

The remediation for Moraiya will be in place by May-Jun’20, to be followed by the company inviting the USFDA for re-inspection by 3QFY21.

CDH has 110 ANDAs pending approval, of which 34 are from Moraiya.

MR strength for DF is ~5,500; the company intends

to add 300-500 MRs each year. R&D expenses would continue to be in the range

of 10% of sales.

LPC hopes to get approval for Albuterol Sulphate in 1HFY21. Solosec prescription has grown 48% QoQ. Ramp-up in Levothyroxine would be reflected in 4QFY20. LPC has guided for 15+ launches in the US market for FY21, excluding from sites under regulatory issue.

Aurobindo Pharma

Cipla

Cadila

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Alembic Pharma NeutralCurrent Price INR 671

Sartans-led opportunity is expected to continue for the next 3-6 months. R&D expense would be 12.5-13% of sales in FY20; it will likely reduce further

thereafter. ALPM incurred capex of INR5.5b in 9MFY20, of which INR1.8b was in 3QFY20. As

most sites would be ready by FY20, it would likely incur maintenance-related capex of INR3-3.5b annually. ALPM’s MR strength stands at 3,900, of which ~1,560 are deployed for the acute segment and the remaining for the specialty segment.

Gross debt stood at INR14.1b and cash at INR590m at end-3QFY20. India business is undergoing corrective actions since 4QFY19. The benefit is

likely to be reflected from 1QFY21. 3QFY20 depreciation included full-quarter impact of Aleor. ALPM received eight ANDA approvals during the quarter, taking cumulative

approvals to 110. Six ANDAs were also filed in 3QFY20. Cumulative filings now stand at 176. Also,

two DMFs were filed, taking the cumulative filings count to 104. The company targets to have 30+ filings in FY21 (more injectable expected). For the quarter, seven new products were launched in the US and 19 new

products have been launched on a YTD basis. 71 products have been commercialized on a cumulative basis till date.

Five products are likely to be launched soon, while 10-12 approved products may not be viable in the current market.

Filings from the new facility at Karkhadi (General Injectable, ophthalmic site) are likely to start from 2HFY20. Similarly, filings from Jarod (Oral solids site) are likely to start from 1HFY21 and those from Panaelav (Oncology injectable site) to start from 2HFY21.

Alkem Labs Buy Current Price INR 2,621

Gross margin expansion was mainly due to lower API prices and better product mix.

For 9MFY20, India segment saw the Acute segment grow 13% YoY, Chronic segment at 21% YoY and generics at 14% YoY.

On the domestic side, volume growth was 8% YoY, price growth was in the range of 4.5-5% YoY and new launches grew 3% YoY.

Alkem’s direct dependence on China for raw material is a mere 5%, thus, it is less affected by headwinds due to the virus outbreak in China.

As of Dec’19, Alkem received 70 final approvals of which ~50 are commercialized. The company has guided for 12-15 ANDA filings and close to double-digit launches on an annualized basis.

Alkem expects the Acute segment to grow 1.5x the market growth. The total MR strength of the company is ~10,000; of this, 7,000 MRs cater to

Acute, 2,100 to Chronic and ~550 to generics segment. Average MR productivity stands at ~INR4.8lacs. For 9MFY20, total of 650 MRs were added and management has guided for an addition of 300 more MRs in FY21.


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Alkem filed 4 ANDAs and received approval for 4 (incl. 1 tentative approval) in 3QFY20. It has 11 ANDAs filed and 15 approvals (incl. 5 tentative approvals ) received for 9MFY20.

On cumulative basis, 136 ANDAs are filed and 81 have received approvals (incl. 11 tentative approvals).

Capex spend for 9MFY20 stands at ~INR3b and the targeted capex for the year is guided at INR3.5-4b.

Expected tax rate is ~10% for FY20 and would hover ~10-11% for FY21. Aurobindo Pharma BuyCurrent Price INR 602

R&D spend are expected at 5-6% of sales, mainly toward complex product development.

EU formulation grew 19% YoY in constant currency (CC) terms. Sandoz’s pending transaction is to be concluded by Mar’20. On the regulatory front, ARBP has submitted its response for Unit 4 to the

USFDA. Further, Corrective and Preventative Action (CAPA) related to the same would be concluded by Apr-May’20. Currently, Unit 4 has 15 ANDA approvals pending over next one year.

For Unit 11, ARBP has sent response to the USFDA and has requested reinspection. Feedback is awaited.

Total 30 products were launched in 9MFY20. Capex spend for the quarter was USD44m and stood at USD150m for 9MFY20. ARBP has repaid USD77m debt this quarter, net debt now stands at USD446m. Gross Margins were impacted due to integration of the Apotex business, which

has relatively lower margins. By 1HFY21, ARBP would be able to convert the loss-making Apotex operation to

EBITDA neutral.

Biocon NeutralCurrent Price INR 306

The benefit of business from Trastuzumab biosimilar was offset to some extent by remediation measures at the Malaysia plant, increased R&D spend (+46% YoY) and deferred Pegfilgrastim biosimilar sales.

Bevacizumab BLA filed in the EU/US is under review. Aspart BLA is likely to be filed in CY20.

Gross margin is likely to improve in the coming quarters with ramp up in production of Pegfilgrastim and better traction in Trastuzumab.

BIOS incurred capex of ~INR15b for 9MFY20. Overall capex is estimated at INR20b for FY20. It is likely to incur similar capex in FY21 as well.

BIOS aims for single-digit ANDA filings annually over the next 2-3 years. BIOS is working toward remediation of its Malaysia facility and expects an

inspection at that site by end-Feb. Management stands by the target of mid-2022 launch of insulin Glargine

biosimilar. While Research Services growth was moderate, the outlook remains robust for

the next 2-3 years.


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Cadila Healthcare BuyCurrent Price INR 276

16% QoQ growth in the US business was led by (a) new products, (b) market share gain in the base business, and (c) favorable seasonality with respect to g-Tamiflu.

Price erosion was at ~2% in the US market. Net debt is at INR65.3b. About 3 products were launched in Brazil and 1 in South Africa. Also, doubledigit

growth was recorded in major brands driving the EM business in the quarter. In the domestic market, CDH grew 12% YoY beating market growth of 9% YoY. API growth is expected to be in the range of 8-10% on annualized basis. Shift of important products from Moraiya to live site is expected to be

completed by end-FY20. The remediation for Moraiya will be in place by May-Jun’20, to be followed by

the company inviting the USFDA for re-inspection by 3QFY21. Currently, CDH has 110 ANDAs pending approval, of which 34 are from Moraiya. In India, CDH launched Vinglyn and Vinglyn M (anti-diabetic drug). CDH has a target of 30 product launches in FY21. Biosimilar – over 18 products are under development for India and EMs. The company has filed NDA for Sarogltazar Mg with the Drug Controller General

of India (DCGI) for Non-alcoholic Steatohepatitis (NASH) indication. R&D cost for the quarter was at 7% of sales. In FY21, this is expected to be ~8%

of sales.

Cipla NeutralCurrent Price INR 447

Cipla’s R&D is expected to be on downtrend given that g-Advair related spends ended in 9MFY20.

Study outcome of trials related to g-Advair is expected by Mar’20. Further, it would take ~2-2.5 years for review by the regulatory agency.

Limited competition products are expected to be launched from 1QFY21. In-licensed portfolio size should be INR2.5b on annualized basis in the DF

market. Gross margin is expected to be at least 63-63.5% on steady state basis. India’s Rx (branded business) sales grew 14% YoY, while trade generics grew

+7% YoY. Chronic segment was up 13% YoY as against 11% market growth, supported by key therapies like Respiratory (+13% YoY v/s 11% market growth) and Cardiac (+14% YoY v/s 11% market growth)

The US base business is at USD120-130m with top 3 products contributing 25% of US sales.

Beyond Advair, Cipla has indicated filing for another potential product by end- CY20.

Effective tax rate would be 29-30%. Regarding the regulatory issues at Goa, Cipla would respond to the USFDA by

end-Mar’20. It has high single-digit ANDAs pending from this site.


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Dr. Reddy’s Labs NeutralCurrent Price INR 3,277

With 22 ANDA launches in 9MFY20, DRRD maintained target of 30 for FY20. USFDA has initiated an inspection at the Srikakulam API site. While Revlimid is an interesting opportunity, it would not fructify in the next few

months. Net working capital days reduced by three on a sequential basis. Growth in Russia was partly led by winning of Rituximab tender business.

PDUFA date for oral Celecoxib is in May’20. The legal process with respect to penalty on innovator for delaying g-suboxne

launch is ongoing and would take a few more months. DRRD has submitted response to all queries with respect to Duvvada and awaits

EIR for the same. The company would submit response on queries for g-Copaxone in a few

months. The balance carrying value for g-Nuvaring is ~USD42.3m and it would be

submitting response to CRL over the next few months. Glenmark Pharma NeutralCurrent Price INR 318

GNP expects 10-15 ANDA approvals annually. Gross debt stands at INR46.8b and net debt at INR36.5b as of Dec’19. MR strength is at 3,800 and will remain in this range over 12-15 months. Capex is estimated at INR7-8b for FY21. API has potential to deliver 13-15% CAGR over the next 3-5 years. India biz growth is expected to be 10-15% over the next 12-15 months. For the EU market, GNP and Celon have signed a settlement agreement,

according to which, the former is permitted to sell Salmex in certain European markets in an agreed shape of inhaler device (free from intellectual property challenge). It also allows the company to launch Salmex in big markets like the UK and Germany. The benefit of the same is expected to accrue from 1QFY21.

US sales were significantly impacted by three products: Mupirocin Cream, Atomoxetine hydrochloride and Calcipotriene cream. Further, sales were impacted sequentially due to Ranitidine. GNP expects growth to recover in the near-to- medium term on the overall portfolio.

The company is to start raising funds for ICHNOS business by 4QFY20. According to IQVIA December 2019 data, Remogliflozin (SGLT2 inhibitor) is

clocking sales of INR50m/month (~6.5% market share). GNP also launched combination of Remogliflozin Etabonate and Metformin

Hydrochloride in India. GNP filed three ANDAs and has plans to file five more in 4QFY20. 43 ANDAs are

awaiting approval as of Dec’19.


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IPCA Labs BuyCurrent Price INR 1,408

API segment is expected to grow at 15-16% YoY in 4QFY20. DF performed strongly on the back of growth in top therapies. Pain (47% of DF

v/s 45% in 3QFY19) grew by 19% YoY in 3QFY20 and 21% YoY in 9MFY20, while Cardiovascular/Anti-diabetic (18% of DF) grew by 9% YoY in 3QFY20 and 10% YoY in 9MFY20.

MR strength is ~4,600; it would add more field force in FY21. Acquisition of Nobel Explochem is made with an intention to secure

intermediates and improve the supply chain; it also has huge landbank (~1,100 acres). IPCA expects environmental clearance to take 12-15 months, post which the plant would be commercialized. The acquisition will help in backward integration and improve margins in the long term.

Remedial cost of INR25m was incurred in 3QFY20 (INR130m in 9MFY20). Management has guided for remedial cost of ~INR160m in FY20.

On branded formulations exports side, CIS grew by 18% YoY to INR1.4b. Capacity utilization of Ratlam API plant stands at 90%. 35 acres of land has been

bought at Devas and management expects 6-8 months before the site gets environmental clearance. The Devas site is to be commercialized by FY22.

Overall capex of ~INR2.5-3b expected to be incurred in FY21. Management indicated that it relies on China for key starting material (KSM) for

API. Institutional anti-malaria business is expected to clock INR1.75-1.8b of revenue

in FY20 and can sum to INR2.5b in FY21. Within international generics business, EU (ex-UK) grew 32% YoY to INR550m in

3QFY20. UK segment revenue was INR210m in 3QFY20. Australia business was up 40% YoY with revenue of INR460m. Canada portrayed strong growth with revenue at INR260m. South Africa market clocked INR430m of revenue. DF segment continues to outperform IPM growth of 9.3%. Anti- bacterial therapy (8% of DF) grew 34% YoY. Anti- malaria was down 4%

YoY because of some seasonality impact. Derma (5% of DF sales) grew 17% YoY in 3QFY19; 18% YoY in 9MFY20. Urology (3% of DF) was up 25% YoY in 3Q; 26% YoY in 9M. Top 10 brands accounting for 55% of DF grew 19% YoY in 3QFY20, while other

brands (45% of DF) grew 10% YoY.

Jubilant Life Sciences BuyCurrent Price INR 525

While Braco (JLS competitor) has taken a decision to appeal in federal circuit with respect to Rubyfill, JLS has seen improved traction in this product. The tentative timeline for litigation would be about one year.

JLS is dependent on a few KSMs in China. Site remediation activities with respect to compliance at Roorkee and

Nanjangud are on track and progressing well. Exceptional charge of INR340m is on account of prepayment of high-yield

bond/NCDs and asset write-off.


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JLS has resolved issues related to impurities in Valsartans and the outlook is promising for the coming quarters.

JLS is planning to take first product (LSD1/HDAC6) under drug discovery to clinical trials next year.

All sub-segments (Specialty pharma (INR7.7b)/CDMO (INR4b)/generics (INR3b)) in Pharmaceutical category exhibited flat-to-moderate YoY growth for the quarter.

Notably, Allergy segment witnessed better growth on higher volumes in venom and allergic extracts.

JLS indicated strong order book coupled with capacity expansion to drive better growth in CDMO business.

Deferment of off-take by customers led a muted performance in generics segment.

Specialty intermediates (INR3b) segment grew 16% YoY led by improved demand and better pricing in key products such as Pyridine, Beta and Pyridine derivatives, further supported by removal of anti-dumping duty on imports of pyridine by China.

Subdued demand for Acetic Anhydride and significantly higher prices of molasses affected life science chemical (INR4b) performance for the quarter.

JLS indicated to invest significantly to double capacities for drug discovery services business in anticipation of strong demand.

JLS is working on six projects in area of oncology/auto-immune disorders) which are in various stages of lead optimization to completing pre-clinical phase.

Laurus Labs BuyCurrent Price INR 439

Formulation unit is at maximum utilization levels. Additional capacity for formulation would be ready by Apr-Jun’20. The company has further capacity augmentation coming up in 1QFY22. Laurus has enough visibility for its formulation business from Global Fund/PEPFAR for FY21.

It has a considerable amount of dependency on China for key starting materials (KSM). Chinese Suppliers of KSM for Laurus would be starting operations from 10th Feb’20.

Capex for 9MFY20 was INR1.3b and is expected to be INR2.5b for FY20/FY21. Expect to have FCF in FY21.

Laurus has ~10% market share in DTG products. ARV-API sales declined due to lack of clarity in awards to its key customers. Also,

it is broad-based in terms of products. LAURUS continues to build its ANDA pipeline with 8-10 filings on annually. Other API business was led by Contract Manufacturing. Laurus has indicated

that this business will maintain momentum in FY21 as well. Receivable days for the tender business is less than 90 days. Laurus has guided for overall API business growth of 10% on annual basis. EU sales were driven by Pregabalin sales with Laurus gaining 10%+ market

share. Laurus expects to launch 2 ANDAs in 4QFY20.


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Lupin BuyCurrent Price INR 709

R&D expenses would continue to be in the range of 10% of sales. EBITDA margin impact was due to higher promotional activity, remediation

measures and higher R&D expense for the quarter. Management has guided to achieve EBITDA margins of 18% on an annualized basis.

Solosec prescription has grown 48% QoQ. Ramp-up in Levothyroxine would be reflected in 4QFY20. LPC has guided for 15+ ANDA launches in FY21, excluding any approvals from sites under regulatory issues.

MR strength for DF is ~5,500; the company intends to add 300-500 MRs each year.

LPC hopes to get approval for Albuterol Sulphate in 1HFY21. For 3QFY20, the US generics business was at USD182m and the branded

business was at USD4.5m. Base business in US generics has stabilized reasonably. Impairment hit is on Methergene-related lifecycle management and couple of

pipeline projects. Branded US sales were flat QoQ.

Strides Pharma BuyCurrent Price INR 505

Gross margin improvement was driven by better traction in the US, higher sales of seasonal products like Benzonatate and g-Tamiflu, increased market share of Ranitidine, and decreased business of low-margin EM business.

STR has filed 103 ANDAs, 69 approved and 40 commercialized till date in US. Management indicated to have full-quarter impact from Ranitidine sales on the

US market. STR is confident to meet the upper end of US sales guidance of USD240m. There could be an increase in working capital due to higher business in US. Branded Africa business has now turned around. Growth in this segment would

be led by new product approval under the new regime in ARV category. With the start of business from the Singapore facility, under-recovery from this

facility would be sorted over the next 2-3 quarters. Capacity utilization for the US business is at 40%, implying higher business

without any significant capex. Other regulated market growth is led by higher business post serialization, new

launches and portfolio optimization. STR expects to have 10 ANDA commercialization’s on an annualized basis over

the next 2-3 years. It expects to do capex of USD50m over the next two years. Total investment required for Biotech and CHC would be INR3b over the next

two years. STR guided for ETR to be 10-13% subject to regulation changes.


Results Update


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Sun Pharma BuyCurrent Price INR 403

Global specialty business was at USD118m for the quarter. QoQ growth was led by higher seasonal sales (Levulan/Absorica), improving sales (Illumya/Odomzo) and Cequa launch.

Absorica LD formulary coverage started after the launch of the product. Specialty R&D was 24% of total R&D spends for the quarter. SUNP has filed response against inspection by the USFDA at Halol in Dec’19. SUNP will expand its field force by 10% for better reach in the DF market. EM sales are down due to reduction in tender revenues in SA, Adj. growth is at

15% YoY. Key markets in this segment are Russia, Brazil, Romania, Bangladesh and Thailand.

SUNP has 94 ANDAs/4 NDAs awaiting approval. Overall R&D spends were at INR14.4b (6% of sales). R&D spends would be 8-9% lower than sales for FY20. Expect R&D spends to be

higher in FY21 due to clinical trials for Illumya. New launches (Febuxostat + one-time opportunities) have enabled the offset of

erosion in the base business. GM improvement has been led by higher share in India/other specialty business. USD500m net debt reduction in YTD FY20.

Torrent Pharma NeutralCurrent Price INR 2,242

With the reduction in MR strength by 200 QoQ, MR productivity stands at 7.2 lakh PCPM for the India business.

Upgradation of SOP documents led to difficulty in supplying products in Germany. Upgradation of SOPs was triggered by internal audit process.

US business is expected to be stable/decline slightly over the next few quarters till the USFDA issues at Indrad/Dahej get resolved.

The tender business is significantly reduced to 3% of Brazil sales. R&D spend is expected to be 7% of sales for FY21. TRP is implementing CAPA at Dahej; it expects inspection in mid-CY20. Re-inspection at Indrad would happen by end-CY20. TRP launched five products in India; it has about nine brands with more than

INR1b annual sales. The specialty portfolio is 70% of India sales. India business growth stands at 1.8% YoY in volume terms, 8% YoY in price

terms, 2% YoY in term s of new launches, according to the AIOCD; it is in line with primary sales growth.

On a constant currency basis, Brazil business was up 23%, largely driven by increased market share in branded as well as generic generics.

TRP is yet to ramp-up Sartans production as remediation measures are underway and they await further clarity from USFDA.

TRP spent about INR2.9b in 9MFY20 and expects capex of INR3b in FY21.


Results Update


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MEDIA

In 3QFY20, ad revenues were hit across the sector due to the lack of spending by corporates on account of the short-term dip in the consumption outlook. Broadcast companies (ZEEL/SUNTV) are quite focused and bullish in the OTT segment over the next two years. The TRAI has released a new order on bouquet pricing beginning Mar’20, which should likely impact broadcasters’ subscription revenue. PVR witnessed healthy pace of screen additions with the quarter having multiple blockbuster releases and being a festive season. Radio and print companies’ revenue declined due to weaker-than-expected ad spends from government/national players. Expect newsprint prices to fall further by INR1-2/kg.


Outlook for FY20 Budget Impact/Commentary

The company took INR6-8 rate hike on cover prices in Madhya Pradesh and some other markets, which contributed higher circulation revenue. The aim is to grow circulation copies by 0.1-0.15m every year.

Newsprint prices were down by ~16% YoY and are expected to fall by ~INR1/kg (2-3%) in 4QFY20.

State government ad spending share remained the same, but central government spending fell 15%-20% in 3QFY20. Automobile share declined by 8-10%, while real estate and education have maintained their share.

Reduction in import duty on newsprint prices (from 10% to 5%) would aid EBITDA by 2%-3%.

JAGP has decided to increase cover prices while maintaining its share according to IRS, signifying consumers are willing to pay for quality news and articles.

Newsprint prices are expected to drop 2-3% in 4QFY20 and thereafter remain stable.

Cost-efficiency measures are sustainable and will continue driving benefits. The company will continue distributing excess cash to shareholders.

Reduction in import duty on newsprint prices (from 10% to 5%) would aid EBITDA by 2%-3%.

PVR has pipeline of 30-40 screens for 4QFY20; on track to deliver the guidance of adding 90-100 screens in FY20. For FY21 guidance should be in range of 75-100 screens.

Confident about revival of earnings in southern region during 4QFY20 as films released during Pongal performed well across region; upcoming films in Feb & Mar are expected to perform well.

Debt stood at INR8.3b; management noted that debt of INR8b-INR9b should be the peak. Leverage came down at 1.2x/1.3x.

No impact

Of the guided INR1.5b OTT investment until March’21, Sun has not yet spent any amount.

Excluding the impact of high movie contribution in the corresponding quarter, revenue grew 1.5% YoY, while PAT has grown 12%.

Domestic subscription revenues expected to grow by 10-12%. Sun TV aims to gain additional 5%-6% viewership overall. There has been 7-8%

growth in viewership share for Sun TV in last few months. Sun TV aims to surpass 50% GEC share in Tamil Nadu.

No impact

FY21 ad revenue growth will be in higher-single-digit. On a status quo basis, subscription revenue is expected to grow in low double

digits, and in case new tariff orders are implemented, management is confident of witnessing a rise in subscription revenues.

Programming cost is expected to grow by 10%-12%.

No impact

DB Corp

Jagran Prakashan

PVR

SUN TV

Zee Entp.

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DB Corp NeutralCurrent Price INR 126 Key takeaways

The company took INR6-8 rate hike on cover prices in Madhya Pradesh and some other markets, which contributed higher circulation revenue. The aim is to grow circulation copies by 0.1-0.15m every year.

Newsprint prices were down by ~16% YoY and are expected to fall by ~INR1/kg (2-3%) in 4QFY20.

State government ad spending share remained the same, but central government spending fell 15%-20% in 3QFY20. Automobile share declined by 8-10%, while real estate and education have maintained their share.

Print In the print ad segment, the government’s contribution stood at 18%, whereas

total for education, automobile and government category was at ~55%. State government spending maintained its share but central government

spending declined by ~15%-20% in 3QFY20. Automobile category has declined by 8-10%; education and real estate

categories have maintained their share sequentially. Print ad revenue contribution stood at 65% and 35% for corporate and retail

category resp. (central and government clients are included in retail category). DB Corp has capacity to print ~1.5-1.8m double width copies of the total 6.8m

copies printed, whereas no other Indian print company has double width printing capacity.

Radio Radio revenue declined ~10-11% (ex-DAVP); automobile segment has seen a

huge drop in ads; FMCG and lifestyle categories saw a decline too. Electronics, real estate, education advertisements remained stable. Currently, 20-25% revenue in the radio segment is coming from activation

segment. Circulation DBCL has increased its lead in urban Rajasthan and also in Gujarat (market share

up 13% to 19%). In Bihar, it added 0.18m readers in 3QFY20. INR6-8 rate hike taken on cover prices in Madhya Pradesh and some other

markets which has contributed to the rise in circulation revenue. Circulation copies stood at 5.64m in 3QFY20 v/s 5.68m in 3QFY19. Expect budget to provide some relief on import duties of newsprint. Central government’s DAVP as measured by value was down by 40%-50% in

3QFY20. Market share in certain markets like Rajasthan has expanded QoQ. Looking to grow circulation copies by 2-3% every year (0.1-0.15m every year) in

key markets of Rajasthan, Madhya Pradesh, Bihar, Chhattisgarh, Gujarat and Punjab.

Others DBCL is poised to grow whenever there is recovery in the economy and ad

spends will rise in the markets. Newsprint prices were down by ~16% YoY. Blended price now at ~38l/MT, down

from INR45k/MT. Expect newsprint prices to fall by ~INR1/kg (i.e. by 3%) in 4QFY20.


Results Update

P

R

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According to the latest IRS survey, DB Corp is the largest newspaper group of urban India.

Since there is no M&A opportunity, the company is giving out cash as dividends. Radio companies have discussed with the government to allow free flow news

on radio channel (as earlier order allows only news form All India Radio), as it might help radio channels to better monetize their slots.

Jagran Prakashan NeutralCurrent Price INR 69 Print ad revenue

Ad spends by state/central government were flattish QoQ and down 3-4% YoY, partly attributed to high base of last year due to elections in some states.

Revenue from local advertisers increased with addition of new local advertisers. Automobile, FMCG and white goods category ad spends declined during the

quarter. Circulation business

The company has strategized well to grow the circulation business. JAGP has decided to raise the cover prices even if there is some drop in

notmeaningful circulation (circulations which led to negligible revenue realization), as far as company maintains market share.

IRS shows readership has grown across regions, even though there has been a rise in the prices of circulation copies, signifying consumers are willing to pay for quality news and articles.

Mid-Day brand too saw growth in subscription revenue with a hike in cover prices.

Three out of four brands are profitable with subscription revenue only. Jagran Punjabi circulation revenue was flat YoY and Dainik Jagran circulation

revenue fell 6-7%. Despite this, overall circulation revenue stabilized due to ‘Nayi Duniya’ and ‘Mid-Day’.

Mumbai circulation market has shrunk, but Mid-Day has managed to grow revenues in the Mumbai region.

Newsprint Prices Newsprint prices are expected to drop in Q4 and thereafter remain stable. Average newsprint prices stood at INR39/kg for the company; expected to fall

by 2-3% in next quarter. INR500-700/ton benefits could be accrued in next quarter due to a fall in

newsprint prices. Others

The company will continue to distribute excess cash to shareholders. Cost-efficiency measures are sustainable and will continue benefiting going

forward. JAGP has started working on rationalizing of employee cost. The company will grow faster than the industry when growth normalizes. Radio City has mitigated 50% of revenue shortfall (on account of downtrend in

the industry) by costs saving initiated by Radio City. Radio City has reduced operating expenses by cutting fixed costs, which is quite

commendable. Margins will see a sharp jump when the industry’s trend reverses and ad spends take a boost.


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PVR Buy Current Price INR 2,115 Key takeaways

PVR has a pipeline of 30-40 screens for the next two months. It is on track to deliver the guidance of adding 90-100 screens in FY20. For FY21, it guided to add 75-100 screens.

The company is confident about a revival of earnings in the southern region in 4QFY20 as films released during Pongal performed well across regions. Gross margin should remain in the range of 100bp from current level. Employee cost/rent/other miscellaneous expense should grow 7-8%/5%/3-4%, but revenue growth should outpace expense growth.

Net debt stood at INR8.3b; management noted that debt of INR8b-INR9b should be the peak level. Leverage came down at 1.2x/1.3x.

Hollywood and Bollywood movies performed better YoY, but regional movies showed a decline, affecting overall growth. Overall, the contribution of regional movies declined to 23% (v/s 34% in 2QFY20).

Same screen advertisement growth stood at 2% for the quarter. Contribution of off screen advertisement revenue lies in the range of 10%-15%.

Operational highlights During the quarter, Hollywood and Bollywood movies performed better YoY, but

regional movie performance weakened, affecting overall growth. Overall, the contribution of regional movies declined to 23% (v/s 34% in 2QFY20).

Despite economic slowdown, the film industry is performing well. Same screen advertisement growth stood at 2% for the quarter. Contribution of

off screen advertisement revenue lies in the range of 10%-15%. Management believes that the market share of Hindi and Hollywood movies has

increased YoY for this quarter. The company was involved in distribution of ‘Pagalpanti’ in 3QFY20. OTT is not impacting movies performance at box office. On the contrary, it is an

additional source of income for producers, thus helping the industry. Of total box office collection, Bollywood movies contributed 57-58%, regional

contributed 23% and rest is Hollywood’s contribution. On a YoY basis, Bollywood/Hollywood revenue collection increased by 13%/47%,

while Tamil/Telugu/other regional collection declined by 23%/27%/32%. Of regional collection, Tamil/Telugu movies contributed 70%.

Strategic focus Geographical diversification helped in the slowdown and in reporting healthy

operating margin, despite the weak performances in certain geographies. To maintain advertisement revenue, management is taking new initiatives.

Recently, the company has renewed partnership with Kotak. The company is running pilots on Swiggy and Zomato bookings, which is

trending well and is planning to scale up in next 6-12 months. Cancellation feature has gained good response and allow customers to book

tickets earlier – witnessed 1.5-2% cancellation. Blockbuster movies tend to enjoy marginally higher prices than other movies. Management is adding screens across the country and is looking to expand in

both existing and newer cities.


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PVR opened its first international multiplex in Colombo, Sri Lanka which has seen a good response from the market.

Outlook There is scope to increase advertisement revenue due to addition of new

screens, which are underutilized. Management is confident of showing advertisement revenue growth albeit in single-digit.

Gross margin should remain in the range of 100bp from current level. Going forward employee cost/rent/other miscellaneous expense should grow 7- 8%/5%/3-4%, but revenue growth should outpace expense growth.

Integration process with SPI is ongoing and the company has acquired certain new properties for SPI Cinemas which will strengthen the SPI portfolio.

Sun TV Network Buy Current Price INR 495 Business performance

In 3QFY19, movie revenue base was higher at INR1b (3QFY20: INR150m). Excluding impact of the high movie base, overall revenue grew 1.5% YoY in 3QFY20, PBT would have been higher by INR135m and PAT growth was 12% YoY.

SUNTV’s FCF is inching higher; cash and CE now stand at over INR3b. Connectivity charges stood at INR200m. There has been good growth in cable subscription (+17-18%) in 3QFY20. If there

is no disruption from the TRAI on channel pricing, the segment will stabilize over next few quarters.

Though ad revenues have been muted, SUNTV has not lost any ad revenue market share.

FMCG, Auto and Telecom sectors have seen a sharp drop in ad spends. OTT is merely a distribution channel, production and quality of content is still in

demand. 6% of the 300 million households have broadband connections. In 3QFY20, depreciation stood at INR220m and amortization at INR1,210m (incl.

INR154m toward theatrical rights). LCO was ~INR220m in 3QFY20 and expected to be same going ahead. Private producers had seven programs (v/s 12 programs in Dec’18) on SUNTV.

Over the next two years, the company will move from telecast model to commission model for private producer’s programs.

Viewership and Industry SUNTV GRP has grown from 900 in June’19 to 1,200 in Dec’19; GRP stands at

1,600 in Tamil Nadu and exceeded 2,000 in Chennai (an all-time record). By viewership, in Kannada, SUNTV stood at 3rd position, ahead of Zee; in

Telugu, it again stood at 3rd position. The company aims to surpass 50% GEC share in Tamil Nadu. There has been 7-8% growth in viewership share for SUNTV. The company aims to gain additional 5%-6% viewership overall. In Bangla region, SUNTV ranks 3rd by viewership with 90 GRP currently and is

expected to cross 100 soon; the feat has been achieved within a year and the company is a significant player in Bangla region.


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Broadband cost goes up to INR1200/month for a decent speed with sufficient data usage.

Average TV viewing time for southern region has been 4 hrs 12 minute, according to BARC data.

Radio industry and business have not been growing as earlier expected, which might lead to smaller players closing down their business.

TV industry ad revenue fell by 6%. OTT platform –Sun Nxt

Sun Nxt subscribers stood at 15m, and the OTT segment has turned profitable (driven by subscription revenue, and low proportion of ad revenue), post the investing phase in the last couple of years.

OTT revenue (which is included in digital segment) has started accruing from RJio in December.

Of the guided INR1.5b investment for the period from Oct’19-Mar’21, SUNTV has not yet spent any additional amount. The earlier investments toward content cost have started generating revenue from the company.

Strong line of content and movie library is in pipeline for OTT platform. Management doesn’t mind adopting A-VOD OTT business model (with low/no

subscription cost) or S-VOD model with ad-free and high quality content with high subscription fee.

SUNTV plans to tie up with an FTTH player for distribution of OTT platform. Outlook

Domestic subscription revenue is expected to grow by 10-12%. No plan for M&A with cash on balance sheet. Expect another interim dividend in March quarter to distribute excess cash; also

expect hit from new rule on DDT.

Zee Entertainment Neutral Current Price INR 252

FY21 ad revenue growth expected in high single-digit. Management is confident of beating industry growth and garnering market share gains from the launch of its new channels.

On status quo basis, subscription revenue is expected to grow in low double digits, and in case new tariff orders are implemented, management is confident of subscription revenues rising.

Programming cost is expected to grow 10-12% from FY21 as huge investments have already been made recently. This is after factoring in the launch of new movie channels and strong increase in inventory seen in the recent past.

FY21 onwards, inventory should start reducing, as witnessed in FY20 wherein there was disproportionate increase in inventories. Inventories/Receivables stood at INR60b/INR23.3b in 3QFY20 (v/s INR58b/INR24.2b in 2QFY20).

ZEE5 recorded peak DAU (Daily Active User) base of 11.4m in Dec’19 v/s 8.9m in Sep’19 (up 28% during 3QFY20); peak investments have already been made in ZEE5.

Management Update Mr. Punit Goenka will be the sole representation of the promoter family on the

board of ZEEL and Mr. Subhash Chandra will assume the position of chairman. New independent directors from the domain of media and technology will be

inducted on the board. ZEEL has appointed a global consultant to review CEO compensation and

structure.


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ZEEL doesn’t foresee any significant senior management change in the near future.

3QFY20 performance update Decline in ad revenues was on account of the higher base last year and the

economic slowdown as consumer companies reduced ad spends due to lack of new produc t launches.

Trade receivables from Dish TV and Siti Cable stand at INR7.5b, which should be cleared in12-24 months; management is quite confident of collecting the amount.

Zee has taken INR376m charge as other expense (based on time value of money) on receivables, which will be recovered from debtors and the transaction settled off.

Overdue amount stands at INR3.5b and is not expected to rise. ZEEL has launched 3 movie channels in regional languages – Zee Punjabi, Zee

Thirai and Zee Biskope – and now has the largest movie channel portfolio in India. Inventory advances stood at INR60b (v/s INR58b in 2QFY20).

Inventories stood at INR60b in 3QFY20 (v/s INR58b in 2QFY20). Receivables were down marginally to INR23.3b in 3QFY20 (v/s INR24.2b in

2QFY20). Surplus cash will be invested in high quality liquid instruments. Subscription revenue contribution from Dish TV and Siti Cable stands at 22% and

5%, respectively. CFO/FCF stood at INR2.5b each during 3QFY20. Cash and treasury balance stood at INR17.7b as of 3QFY20.

Viewership All-India viewership stood at 18.2%. Share of regional genres like Hindi GEC and Hindi movies have declined. Zee TV has lost share in the prime-time weekend slot but has maintained its

share during the weekday. Hindi movies continued to be no. 1 in pay Hindi channels. Zee has maintained its leadership in regional languages of Marathi, Bangla and

Kannada; it has improved its viewership share in Tamil Nadu and Kerela and is now a strong contender for the no. 2 position in Kerala.

ZEE5 ZEE5 recorded peak DAU (Daily Active User) base of 11.4m in Dec’19 v/s 8.9m in

Sep’19 (up 28% during 3QFY20). Released 26 original shows and movies during the quarter and is on track to release 70 original shows for FY20.

ZEE5’s investments have peaked already; it is unlikely to rise significantly. Business outlook

Management is confident of growing subscription revenue in the revised NTO regime due to its strong viewership and reach of Zee channels across key markets and regions in India.

On a status quo basis, subscription revenue is expected to grow in low double digits, and in case new tariff orders are implemented, management is confident of increasing subscription revenues.

Markets like Maharashtra, Tamil Nadu, and West Bengal have witnessed high subscription growth due to ARPU improvement post the NTO regime.

Management is committed to maintaining 30% EBITDA margins in FY20. Zee is in the process of launching 2 more channels in the next few months. In FY20, the company saw a disproportionate increase in inventories; however,

inventory should start stabilizing FY21 onwards. From FY21, over 50% of PAT is expected to get converted to cash flow, thus

improving the cash conversion ratio.

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Programming cost is expected to grow 10-12% from FY21 as huge investments have already been made in the recent past.

Launch of new Punjabi movie channel will not lead to rise in production costs as Punjabi content cost is very less.

Advertisement revenues are expected to recover from beginning of FY21. Due to losses in the Middle East/UK, Zee will shut its linear business

(broadcasting) in these markets by FY21. It will continue its focus on these markets via the ZEE5 platform, which has strong demand in these geographies.

However, linear business is performing well in other international regions like APAC.

FY21 ad revenue growth is expected in high single-digit; management is confident of beating industry growth and garnering market share gains from the launch of new channels.

INR5b of inventory will be coming up for amortization, while ~INR40b of inventory has already been amortized. Confident of regaining market share in some channels like Hindi GEC, with initiatives of launching new content.

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METALS

Steel demand has improved since November, supporting consistent price hikes since December. Steel companies expect net steel realization (NSR) to rise by INR2500-3000/t QoQ in 4QFY20. Auto-contract prices, however, were negotiated down by ~INR6000/t for 2HFY20 which has tempered down the improvement in NSR for flat products companies (TATA, JSW). Most of the excess inventory lying with the companies has been diluted in 3Q with some of it sold in the export markets, supporting higher volumes in the quarter. On the costs front, industry does not expect any further reduction in 4QFY20 as both coking coal and iron ore prices have moved up from the lows.


Outlook for FY20 Global Commodity Prices Muri alumina refinery re-started in Dec which should lower

cost in 4Q. Utkal alumina capacity expansion of 500kt to be

commissioned in Dec’20. Benchmark Tc/Rc for CY20 has settled at 15.9 cents/lb, down

23% YoY, which would impact copper margin in CY20. Capex to be INR20b each in FY20 and FY21.

-

FY20 guidance stands at 16.5mt of production and 15.8mt of sales.

EBITDA should turn positive for Europe business in 4QFY20 and for US businesses (Acero and Plate mill and pipe) in FY21.

4QFY20 steel realization to rise by INR3000/t QoQ.

Volume to be 6.5mt in FY20 and 7.5mt in FY21 led by higher production at Angul.

Net debt to reduce further by INR40-50b in FY21 after declining by INR36b in 9MFY20 to INR355b.

Angul cost of production is also expected to decline further as volume ramps up.

4QFY20 steel realization to rise by INR2000/t QoQ.

Hindalco Inds Buy Current Price INR 188

Aluminum demand and imports: Domestic demand for aluminum contracted by 14% YoY to 863kt in 3QFY20 and by 5% YoY to 2.8mt in 9MFY20; imports (including scrap) declined by 17% YoY to 505kt in 3QFY20 and by 7% to 1.6mt in 9MFY20; market share of imports declined ~150bp YoY to 38% in 9MFY20.

Copper demand and imports: Domestic copper market growth moderated to 2% YoY to 193kt in 3QFY20. Market share of imports increased to 51% in 3QFY20 (v/s 40% in 3QFY19) as imports grew 30% YoY (to 99kt) while sale of domestic producers contracted by 17% YoY (to 94kt).

Muri plant: The Muri alumina refinery restarted production in Dec’19. Despite the sharp decline in alumina price, management estimates the cost of operations at Muri to be cheaper than the landed cost of imports due to logistics cost savings. Muri shutdown resulted in an adverse impact on EBITDA of INR770m in 3QFY20 (and INR800m in 2QFY20). Projects update: (1) Utkal alumina’s capacity expansion of 500kt is on track andis expected to be commissioned in Dec’20. (2) Dumri coal block should start operations in 1QFY21 but is not expected to result in much coal cost reduction as it will only be used during the monsoons when linkage coal availability drops.

Standalone capex: INR20b each in FY20/FY21. FY20 capex split – INR8b maintenance, INR6-7b Utkal expansion and INR4b downstream capacities. Net debt: Consolidated net debt stood at INR399b (India INR156b, NovelisINR243b), implying net Debt/ EBITDA of 2.65x (v/s 2.48x in Mar’19).


Hindalco

JSW Steel

JSPL

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Benchmark Tc/Rc for CY20 has settled at 15.9 cents/lb, down 23% YoY; CY21 should see a likely increase hereon. 3QFY20 cost of production declined 5% YoY due to lower power cost on accountof better linkage coal availability at 69% of the fuel mix (v/s 60% in 2QFY20).

Pursuant to the issuance of notification by Odisha Electricity Regulatory Commission (OERC) dated 31st Dec’19, Hindalco has written back INR600m excess provision in power and fuel costs recognized during 1HFY20.

Jindal Steel & Power Buy Current Price INR 188 Indian steel operations

India sales volumes are targeted at 6.5mt in FY20 and 7.5mt in FY21. Growth will be led by higher production from the Angul DRI plant, which started operations on 14th Jan’20 and is gradually ramping up.

4QFY20 realization is guided to be higher by INR2,000/t QoQ. Additionally, there is a cost tailwind as well from lower coking coal price, which should support margin expansion in 4QFY20.

Cost of production (CoP) declined by INR2,500/t in 3QFY20, led by lower RM cost (-INR2,100/t) and opex initiatives (INR400/t).

Angul CoP has continued to decline – it is only INR300/t higher than Raigarh plant while it was INR800/t higher in 3QFY19. It is expected to reduce further in the next few quarters but will be partly offset by the start of the CGP-DRI plant which has higher CoP due to increased fuel (coal) cost.

Iron ore sourcing – 30% of the requirement is being met from its captive Tensa mines, while 70% needs to be sourced externally. The company also hopes to get access to the 12.22mt iron ore fines inventory lying with Sarda mines, which should help tide over any expected disruption in the iron ore market in FY21.

Power JPL received LoI for 315MW PPA but the contract has been terminated as NHPC

could not achieve closure; fresh bids will now be invited by PFC for the parcel. Currently, less than 30% of the capacity of 3,400MW has PPAs. JPL’s gross debt stood at INR73b in 3QFY20 v/s INR68b in 2QFY20.

Others The focus remains on deleveraging with net debt guided to reduce further by

INR40-50b in FY21; it has reduced by INR36b over 9MFY20 to INR355b in 3QFY20.

Australia cash burn rate has come down to USD2m per month from USD5m per month earlier; debt has been restructured and awaiting creditor approval.

Promoter pledge is guided to be reduced by INR4b from INR7.4b (down from a peak of INR11.5b).

JSW Steel Buy Current Price INR 281

The industry has witnessed restocking from Nov’19. The government has released funds to contractors, which has improved the on-ground situation and boosted construction activities.

Inventory has gone down to 1.08mt in Dec from 1.32mt in Sep ’19 given the restocking.


Results Update


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During the quarter, domestic sales have risen 22% QoQ with a sharp increase in Retail and OEM sales. Sales to auto have recovered with an increase of 10% QoQ.

Blended NSR for the company declined 7% QoQ as the full impact of price reduction in 1H seeped in along with the impact of re-pricing of auto contracts.

Cost of production has gone down 5% QoQ, driven by coking coal prices, captive iron supply and operating efficiencies.

Standalone EBITDA/t stood at ~INR6,000 (excluding one-time gain on consideration from vendor).

The co.’s Dolvi project will get fully commissioned between Jun’ 20 and Sep ’20 v/s earlier target of Mar’20.

Iron ore requirement of about 4.5mt will be met from captive source in FY20, and another three mines will get operationalize. This will significantly increase iron ore availability from captive sources to 7mt. Supply from captive sources will be between 4.5-7mt for FY21.

FY20 guidance stands at 16.5mt of production and 15.8mt of sales. The co. has taken price hikes in month of Nov and Dec - which has been

absorbed by the market. Net debt to equity stood at 1.35x (v/s 1.36x in 2QFY20). Net Debt to EBITDA

stood at 3.71x (vs. 3.23x in 2QFY20) Management expects its Europe business to have positive EBITDA in the next

quarter. It expects US businesses (Acero and Plate mill and pipe) to turn EBITDA positive next year.

Standalone: Lower realization seeps in Standalone steel production rose 5% QoQ (-5% YoY) to 4.02mt. Standalone sales volume, however, increased 12% QoQ (+10% YoY) to 4.03mt. There has been a one-time recorded benefit of INR2,500m as consideration

from vendor. Adjusting for this, realization decreased by INR 3,312/t QoQ to INR38,504/t as the impact of lower prices in 1H seeped in along with re-pricing of auto contracts.

EBITDA per ton was down ~INR478 QoQ to INR5,998. This was lower v/s our estimate of INR6,654/t as higher cost inventory got absorbed.

Steel Authority of India Neutral Current Price INR 42

Steel demand has improved since November; if there is progress on infrastructure projects, FY21 demand would also be good.

SAIL’s finished steel inventory is currently down to 1.3mt from peak of 2mt in September. In FY21, SAIL is targeting sales volume of 16mt.

Uptick in prices started in Dec and has continued in Jan-Feb. Price hikes taken by SAIL: Flats – INR1,600/t in Jan and INR1,500/t in Feb; Longs – INR2,000/t in Jan and INR2,000/t in Feb

SAIL’s net steel realization (NSR) was INR35,310/t in 3QFY20 (v/s INR37,382/t in 2QFY20) and higher at INR37,700/t in February.

Long products saw excess restocking by dealers and hence new buying is a bit soft currently, leading to a drop in prices in trade markets in the last few weeks.

Coking coal cost is not expected to decline in 4QFY20 as price has moved up to USD150/t currently; there is a two-month lag in realization of spot prices at plants.

Iron ore sales: Based on FY19 iron ore production of 28 MMT, SAIL can sell up to 7 MMT (25% of 28 MMT) iron ore in the merchant market in FY20. However, it


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needs approvals from state governments for the same which have not been coming through. While Odisha government has approved sale of 0.16mt of fresh ore (and auctions are about to be opened), the approval for 1mt of old fines is still awaited causing delay in the sale.

Export volumes were higher at 0.356mt in 3QFY20 (v/s 0.15mt in 3QFY19) and is expected at 0.5mt in 4QFY20; export realization is better than India on flat products but lower on long products.

All plants of SAIL made EBIT losses in 9MFY20, but at current prices all plants are making profits.

Game plan for cost reduction to improve profitability: 1) Higher volumes to improve fixed cost reduction, 2) Reduce variable costs, 3) Reduce manpower costs through VINR (4000-5000 employees retire every year).

Other income was higher in 3QFY20 due to INR200m of dividends from subsidiaries.

Debt/ EBITDA is >8x and the focus is on deleveraging. Gross debt has reduced by INR7b from peak level of INR513b in Oct’19. Debt should not increase any longer as major capex is over.

Capex guidance: INR40b each in FY20 and FY21, but FY20 may be a little higher. Indian Railways (IR), which is one of SAIL’s largest customers, has had

budgetary constraints, resulting in higher receivables and slower-than-expected deleveraging; dues from IR are at INR37b v/s normal level of INR8-10b.

Vedanta Neutral Current Price INR 143 Zinc

The ongoing mine expansions at Hindustan Zinc are on track. Underground shaft at Rampura Agucha has been commissioned and overhauling is expected to start in Feb’20, allowing it to achieve 4.5mt production.

Gamsberg is ramping up well and is likely to close at 13kt for Jan’20. Aluminum

Aluminum CoP was 9% lower QoQ to USD1,691/t on lower coal costs and higher alumina production. The Supreme Court judgment allowing it to bid for alumina from NALCO has improved domestic sourcing outlook.

Vedanta is targeting CoP of USD1,500/t on the back of ramp-up in its alumina refinery, higher bauxite production and higher coal security.

Oil & Gas According to the company, early gas production facility has been ramped up to

design capacity of 90 mmscfd. The company has planned 7-10 days of shutdown in Feb’20 at its Mangala facility. This will be used to facilitate key growth project tie-ins and enhance production.

Company expects volumes to ramp up with an exit run-rate of 225kboepd for FY20.

PSC extension has been received for the Barmer block RJ-ON-90/1 but discussions are ongoing with the government on its demand of raising the share of petroleum profit by 10%.

Power Talwandi Sabo generation was low due to weak demand owing to seasonality.

Capex The company has incurred capex of ~USD1b for 9MFY20. The company expects

capex of ~USD1.2b for FY20.


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OIL & GAS

Refining margin outlook for the reminder of FY20 is likely to remain weak owing lower-than-expected boost in diesel yields. OMCs expect healthy marketing margins to continue, which will offset the weakness in the refining margins. RIL’s refining margin is set to improve with the enhancement of delayed coker and distillate yields, while petrochemical cracks are likely to improve with feedstock flexibility. The company’s strong growth avenue remains in its retail business. MAHGL continues to struggle with lackluster volume growth and it expects some volume relief from development of Raigad GA. Continued higher opex challenges would normalize the EBITDA margin of MAHGL. IGL expects volume growth of ~12% from its high-growth gas, supported by government regulations. PLNG expects strong volume off-take at Dahej (on expanded capacity) from the power and CGD sector and foresees capacity utilization of 30% from ramp-up at Kochi post completion of the Kochi-Mangalore pipeline (Mar’20). For FY21, GAIL has guided for incremental volumes of ~7-8mmscmd from startup of two fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.

KEY HIGHLIGHTS FROM CONFERENCE CALL Oil & gas Outlook of FY20 GRMS/Subsidies Budget Commentary

The company has (volume) hedged all US cargoes for FY21. Ramagundam fertilizer/Matix plant should start from 1QFY21, together with expected gas offtake of ~4mmscmd. Expect another ~4mmscmd from Kochi-Mangalore pipeline from 1QFY21.

All CGDs on Jagdishpur-Haldia pipeline have been commissioned and the whole pipeline would be completed by Dec’22 which should further drive 8-9mmscmd of volumes.

-

Expansion of the national gas grid by 67% to 27,000 km has been proposed, increasing the penetration and adoption of gas in India.

Marketing margins to remain healthy with low oil prices and lack of interference. It will also solace the subdued GRMs.

We expect benchmark GRM to hover around USD5-6/bbl in the near-medium term led by global pressure on product spreads.

FO cracks declined steeply in 3QFY20, while gasoil cracks failed to improve despite IMO 2020 implementation approached. This translated into poor SGRM during the quarter.

Indian refiners with lower FO yield of ~2-10% v/s ~23% in SGRM resulted in better GRMs.

Petroleum subsidy allocation for FY20 revised from INR375b to INR386b. It stands higher for FY21 at INR409b.

Oil production continued to worsen with 4% YoY decline, while even gas production declined 4% YoY during 3QFY20.

Gas production is expected to get a boost from KG-DWN-98/2, which should come on-stream from Feb’20.

Incremental production of oil should largely offset oil depletion from major older fields.

No subsidy sharing for ONGC and OINL in 3QFY20.

Companies neither expect any subsidy burden nor any subsidy discussion with the government for the remainder of FY20.

Expect strong volume growth of 6-7% to continue for FY21/22 with higher adoption from Power and CGD, aiding volume growth.

The company reiterated that Tellurian is a non-binding agreement and a deal will be signed only with clear visibility of back-to-back contracts, lower landing cost of gas in India (<USD6/mmbtu), and feasible IRR.

Capex plan for the next year stands at ~INR3.5b

Increasing impetus on building gas economies in India should facilitate higher demand for LNG into the country boosting utilizations for PLNG.

RIL GRM likely to maintain attractive premium over SGRM with increase in Lt-Hv crude spread and maximization of distillate yields.

We expect ~USD10.0/USD11.0 per bbl GRM for FY21/FY22 (v/s USD11.3/9.2bbl in FY19/20E).

RJio growth momentum should slow relative to previous years.

Retail would remain among the key performers for the stock.

RIL reported GRM of USD9.2/bbl in 3QFY20. Premium over SG GRM increased to all-time high at USD7.5/bbl due to insignificant FO yield of the company.

Petchem sales volumes for the quarter increased YoY, though EBITDA/mt declined led by continued pressure on product cracks owing to huge global supply additions.

Abolishment on Anti-Dumping duty on PTA would be marginally negative for the company.

GAIL

OMCs (IOC/BPCL/HPCL)

ONGC

Petronet LNG

Reliance Inds

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Bharat Petroleum Neutral Current Price INR 476

Management guided that sale of stake in NRL and the government’s stake in BPCL is likely to happen concurrently.

There is no plan to slow down the planned capex in light of the upcoming divestment.

9MFY20 capex at INR63b; guidance of INR80b for FY20 and INR120b for FY21. Ongoing capex would not be slowed down in anticipation of the upcoming

divestment. Assam government has the first Right of Refusal for stake sale in Numaligarh

Refinery (NRL); sale in NRL and BPCL likely to happen concurrently. The company has decided not to compete on margins in order to attract auto

fuel volumes. EPC has been awarded in the Mozambique project. DWT expected to happen in another 5-6 months in Brazil for the assessment of

potential reserves. NRL GRM USD10.9/bbl without excise benefit, and USD34/bbl with excise

benefit; PAT of INR6.5b in 3QFY20. Bina refinery GRM of USD7.9/bbl; PAT of INR960m in 3QFY20.

Mahanagar Gas Neutral Current Price INR 1,137

MAHGL added 13 new CNG stations this year (4 in 3QFY20), with plans to add total ~20 stations by FY20-end.

The company has 248 CNG stations (175 owned by OMCs) in Mumbai and 13 CNG stations in Raigad.

Capex of INR3b was spent in 9MFY20; total FY20 spends are expected at INR4.5- 5b. Expect similar capex rate for FY21 as well.

Cumulative expenditure at Raigad is ~INR1b and FY21 expenditure is expected at ~INR1.5b (peak demand of 0.6mmscmd expected in 3-5 years).

The company is looking forward to the 11th CGD round (~44 GAs are up for offer) and might bid for the same once it is open for bidding.

BEST has ordered 500 new buses and ~100 have been delivered, the rest are expected to be delivered by end-FY20.

Current CNG vehicle addition stands at ~3,500 cars and ~2,500 autos per month. Petronet LNG Buy Current Price INR 266

PLNG reiterated Tellurian as a non-binding agreement, which envisages an LNG purchase contract of up to 5mmt. The contract is on behalf of PLNG or its affiliates, which can directly participate in equity investment too.

The company would enter into a definitive contract only if it gets back-to-back customers, either from its promoters or other buyers.

In the absence of any participation from the affiliates, PLNG might contract for 2mmt of LNG and limit its investment to ~USD0.5-1.0bn (company has cash of ~USD0.46b as of end-9MFY20).




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Kochi-Mangalore pipeline is expected to be completed by Mar’20, post which the company expects utilization to reach ~30% in FY21 at Kochi. The company is also evaluating ways to dispense volumes through trucks where there is lack of pipeline connectivity. We have modeled capacity utilization at Kochi at 30%/40% for FY21/22.

Re-gas tariff charges were INR51.75/mmbtu at Dahej and INR104.54/mmbtu at Kochi. However, PLNG targets to reduce Kochi tariff to INR79.14 as utilization increases and has been provisioning for the same.

The company is in advanced stages for executing contracts with CGDs and dispensing companies for setting up LNG stations (expect capex of INR6-8cr per station – INR126cr is expected to be spent on LNG ROs in FY21).

PLNG guided for FY21 annual capex of INR3.5b. The company is setting up two more tanks (capex: INR13b) at Dahej (increasing

capacity to ~19.5mtpa) and building a jetty (capex: INR10b), which are expected to commence operations by end of FY23 or early FY24.

Reliance Industries Buy Current Price INR 1,504 Refining & marketing: GRM of USD9.2/bbl

RIL guided for incremental oil demand of 1.0mnbopd in 2019, with oil demand growth forecast at 1.2mnbopd in 2020. Global refining capacity addition stood at 1.4mnbopd in 2019, and it is expected to be marginally lower in 2020 at 1.2mnbopd.

Freights rates for the quarter were higher, led by recent geopolitical uncertainties in crude industry and IMO specification change. Recent geopolitical uncertainties have created concerns about supply of heavy crude.

However, the company is better placed with flexibility in feedstock input and also has been maximizing middle distillate yields. It has launched niche grades in middle distillates and VLSFO to meet the changing market requirement.

RIL expects VGO diversion for IMO to support gasoline cracks over the near term, along with discounts on high sulfur crude. Hence, it has also been trying to use certain FO streams as feedstock to benefit from poor FO prices post IMO 2020. The company has been increasing crude desalter capacity and boosting capacity of DTA coker by 30%.

Petrochem: Volumes at 4.0mmt, aided by optimized light-feed cracking In 3QFY20, the operating performance was impacted by weak margins and

higher feedstock cost (Naphtha: +13% QoQ, Ethane: +8% QoQ). However in this challenging operating environment, RIL’s ability to optimize between feedstock and sales mix provides an edge in improving its performance.

Polyester margins were impacted by major capacity addition in PX and PTA in China and global economic slowdown. However, planned shutdowns during Chinese New Year Holidays and low Polyester stocks are likely to keep sentiment healthy in the near term.

Polymer production was up by 3% YoY, led by optimized operations of the ROGC complex. Domestic polymer demand is likely to be healthy, driven by policy push and budgetary allocation for infrastructure and agri sectors. Nevertheless, new export terminal and ethane based crackers in the US will further increase the global supply glut of ethylene.

Global demand growth for PVC sustained, despite trade wars and regional economic challenges. India also saw a revival in PVC demand post monsoon driven by the infrastructure and irrigation sectors.


p

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E&P: Three key projects under development Gas production from KG D6 stood at 1.53mmscmd in the quarter, lower than

1.87mmscmd in 2QFY20. CBM production was at 0.95mmscmd. US shale production declined 14% YoY to 23.9bcfe with higher production from new wells of Ensign/Chevron JVs.

R-cluster progress is as planned and expects first gas in 2HFY21. Drilling and ‘lower completion’ completed for all six wells; 2/6 wells successfully completed ‘upper completion’ and clean-up.

Satellite cluster - Top hole drilling for 3/5 wells completed and production is likely to commence from mid-2021.

MJ Development – First phase of drilling to commence in 4QFY20. Production to commence from mid-2022.

CBM phase II commissioning of additional gas gathering station, priority well locations and pipelines underway.

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RETAIL

Increase in sales was mostly driven by new store additions during the quarter and SSSG remained weak for most companies. Retailers expect low SSSG for a few more months until the economy revives and spending gets a boost. Retailers are quite optimistic about the business in the long term and will continue with the pace of store adds (undeterred by short-term headwinds). Store-level profits remain a key parameter and companies have guided that they will close certain stores if they continue incurring losses in the foreseeable future.


Current business scenario and outlook

Capex guidance for FY20 is INR3.5-4b, while net debt increased INR710m YoY to INR22.4b due to NWC and ESOPs. Target is to keep net debt below 3.5x.

Maintaining target to open 55-60 Pantaloons stores in FY20 (35 stores in 9MFY20) and will look to accelerate this pace in the future.

Increasing share of private label, operating efficiency and healthy SSSG should offer further room to improve SSSG.

20-quarter high restaurant openings at 47 stores, indicates management’s confidence on medium-term growth.

140-150 Domino’s stores likely to be opened (v/s 120 targeted in FY20). Company has not finalized FY21 expansion yet, but indicated strong store opening momentum in FY21 as well.

Softness in dine-in continues but metro and large towns have seen an uptick in delivery leading to healthy SSSG despite a high base. Further, momentum in delivery has been accelerating in recent quarters.

At an aggregate level, company believes that the worst is now behind them on material cost inflation. Unorganized players are facing liquidity crunch and lack of access to capital.

Jan’20 sales are tracking expectations despite activation starting a little late and demand getting impacted due to high gold prices in the first week of the month. Jan’20 witnessed only 8% growth but activation is progressing well.

Higher growth is being witnessed in the East/South compared to soft demand in the West/North. 4QFY20: Quantum of marriage days are good but demand has been volatile. Management has maintained 11-13% jewelry sales growth for 4QFY20, which is the level guided earlier

in 2HFY20. Pace of store expansion is likely to sustain in the future; most expansions (incremental) should happen

in new cities.

SHOP plans to open 23 stores in 4Q, including four department, 11 beauty and eight airport stores. Aggressive expansion will continue next year.

The company remains debt free and is opening stores from internal accruals. Capex is expected to be INR1.9b for FY20 toward renovation, new stores and IT investments.

Management expects low-single-digit SSSG in 4QFY20.

Plan to open additional 5-10 stores in 4Q. FY20 EBITDA margin would be 8%-9%. National players are too entering into the lower tier cities and in value fashion segment; but their

pricing is still higher than V-Mart’s price range. Apparel ASP was flat YoY on account of less severe winter, leading to lower sales of high price winter

merchandise; growth in non-apparel ASP supported overall ASP. 3%-4% SSSG is required to offset impact of inflation; SSSG of above 5%-6% will lead to boost in

operating leverage.

Aditya Birla Fashions Buy Current Price INR 274 Key Highlights

Capex guidance for the year at INR3.5-4b is expected to be in a similar range. Net debt stood at INR22.4b (up 710m v/s 3QFY19) due to NWC and ESOPs; ABFRL’s debt/EBITDA ratio is at >3x and management is targeting to keep it below 3.5x.


Results Update

Aditya Birla Fashions*

Shoppers Stop*

V-Mart*

Jubilant Foodworks*

Titan*

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Shift from wholesale to retail revenue has impacted profitability and may also increase the working capital of Lifestyle brands.

Share of private label is 61%/62% for 3QFY20/9MFY20; the company is planning to increase it to 75% over time. Private labels contribute ~70-75% in smaller stores and ~60-65% in larger stores.

Company is maintaining its target of opening 55-60 Pantaloons’ stores in FY20 (35 stores in 9MFY20) and will look to accelerate this pace in the future.

Operational performance The company posted good results despite the economic slowdown. Growth

came from both new and existing stores. ABFRL opened 150 stores across formats, which is highest for the company in

any quarter. Pantaloons’ LTL of 4.9% should be seen on a base of 17% growth of last year;

EBITDA grew 24% on pre Ind-AS116 to INR1.1b. Transition of PEOPLE to Pantaloons would be over in FY20 and it has been integrated in 60-70 Pantaloons stores.

Rent has increased due to increased share of sales from the retail channel and aggressive expansion of stores. Further, franchisee commission is also parked in rent, which increases with sales.

Net debt stood at INR22.4b (up 710m v/s 3QFY19) due to NWC and ESOPs. Strategic Initiative

The company has moved to a 12-season cycle by digitizing product creation and go-to-market operation through the recently launched digital tradeshow system.

With this new mode, it would deliver fresh assortment in line with market trend and will reduce design risk and potential risk of liabilities markdown.

‘Spring Summer’20’ will mark the first full season of this new model and the entire benefits would be realized over the next 12-18 months.

The company has started to use the data analytics tool to manage inventory and stock allocation.

The company has also reached new markets with viable formats. Further, the company has strengthened the assortment such as wedding-driven suit lines.

Lifestyle Brands Discontinuation of discount on Ecommerce channels has not impacted

Ecommerce sales of the company. Ecommerce business is fairly independent of EBO; serving Ecommerce customer

through EBO could be a competitive advantage and is at a nascent stage for the company.

MBO’s are facing liquidity constraints; ABFRL is supporting partner channels. Further, move to a 12-season cycle also had short-term impact on sales of these partners.

Shift from wholesale to retail revenue has impacted the profitability of Lifestyle brands; the wholesale segment was more profitable.

Opened new stores with both existing and new partners. Franchise stores contribute 75-80% to the small format stores, while 75-80% of

larger stores (Pantaloons) are owned by the company.

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Pantaloons Management maintains its guidance of opening 55-60 stores in FY20 and will

look to accelerate this pace in the future. Better understanding of customers, better merchandise, and better inventory

allocation at store level has improved Pantaloons’ profitability. Pantaloons growth has come from a combination of both healthy LTL growth

and new stores. The company is introducing fresh inventory every fortnight in its stores. In certain areas, the company is generating better profit on lower sales

throughput due to lower rent. The company has opened more proportion of stores in Tier 2/3 cities and will

continue to expand in a similar fashion, thus, store composition is likely to change marginally.

Share of Private labels is 61% for the quarter and 62% for 9MFY20; the company has plans to reach 75%. Private labels contribution is at ~70-75% to smaller stores and ~60-65% to larger stores.

The company has launched new categories and brands within private labels; it has launched a brand named ‘Candy’, which is more fashionable and has also launched sarees in the Private label.

New Acquisitions Management is transitioning ‘Jaypore’ from only online to both offline and

online. Would open few stores in 1QFY20 followed by another 8-10 stores in FY21.

The company is planning to open the first ‘Shantanu & Nikhil’ store in 4QFY20 and another 5-6 stores in FY21.

Price positioning of the company’s ethnic wear is different from competitors (such as Manyavar) and are at a premium with a different product portfolio.

Other business Innerwear growth remained strong but has a smaller contribution to overall

business. The company is well established in the innerwear segment and has found better

product traction. Outlook

Management sees good growth opportunities and will look to add more stores to penetrate deeper into the country.

Capex guidance for the year at INR3.5-INR4b should be in a similar range in the future.

ABFRL’s debt/EBITDA ratio is >3x. Management is likely to keep it below 3.5x. The company has decided to move to the lower tax regime of 25%.

Jubilant Foodworks Buy Current Price INR 1,898 Environment, expectations and expansion

Management has highlighted strong all-round performance despite a tough demand environment and cost inflation in cheese.


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20-quarter high restaurant openings at 47 stores (44 Domino’s, 2 Dunkin’’ Donuts and one Hong’s Kitchen), indicates management’s confidence on medium-term growth.

140-150 Domino’s stores likely to be opened (v/s 120 targeted in FY20). Company has not finalized FY21 expansion yet, but indicated strong store opening momentum in FY21 as well.

Pizza is now significantly more affordable compared to 4 years ago, as the company has taken very limited price increases and focused more on VFM, thus increasing the opportunity.

Softness in dine-in continues but metro and large towns have seen an uptick in delivery leading to healthy SSSG despite a high base. Some impact of the protests was witnessed on dine-in sales during 3QFY20. Infrastructure work, general consumption slowdown and some shift toward convenient delivery are other factors. Company has improved ambience in several dine-in stores with self-ordering kiosks as well; response has been very good on the dine-in momentum.

Further, momentum in delivery has been accelerating in recent quarters. Sequential market share in the food space has increased in each of the last 3

quarters, despite the impact of aggregators and cloud kitchens. Material and other costs/Outlook

Dairy prices were the highest in the past seven years. Gross margins were impacted due to higher onion and cheese costs (up 220 bp). Overall gross margin growth was restricted to 70bp due to reduction in overall discounts, wastages and a small price increase taken in the month of Jun’19.

Vegetable cost increase saw the worst impact in 3QFY20; the outlook is better in 4QFY20. At an aggregate level, company believes that the worst is now behind them on material cost inflation.

JUBI has amongst the lowest attrition (at store level) in the industry. Attrition has also declined over the past year.

Two campaigns – on ‘Masala Pizza’ and ‘Dil, Dosti, Dominos’ led to higher than usual marketing spends in 3QFY20.

Have not taken any price increase in 3QFY20. Dunkin’ Donuts and Hong’s Kitchen

Dunkin’ Donuts - Net store addition in a quarter after a long time. Both newly opened Dunkin’ Donuts’ outlets are new, smaller-format stores

(100sqft kiosks as trial-run to try and attain payback in ~1.5 years). Plans on taking this format forward will be based on the response.

Hong’s Kitchen has done well; a second store was opened in Delhi in 3QFY20. Management did not share their expansion guidance for Hong’s Kitchen.

Other points Aggregators are being questioned on their path to profitability is good news for

JUBI. In fact, some benefits are coming through in pockets as a result of lower salaries by food tech players.

Data-based opportunities are driving productivity by bringing down costs in terms of sales. Greater degree of customization and discounts for high frequency customers is being worked on. Order status with a chat bot has also been introduced.

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Currently, online forms 87% of delivery sales. Dominant portion of online orders comes from their own app.

Have multi-grain pizza and whole-wheat thin crust for the health-conscious customers. As this niche opportunity increases in salience, the company has plans to increase portfolio offerings for such customers.

Shoppers Stop Neutral Current Price INR 384 Key highlights:

SHOP plans to open 23 stores in 4Q, including four department, 11 beauty and eight airport stores. Aggressive expansion will continue next year.

The company remains debt free and is opening stores from internal accruals. Capex is expected to be INR1.9b for FY20 toward renovation, new stores and IT investments.

Management expects low-single-digit SSSG in 4QFY20. SSSG for Oct/Nov/Dec was ~15.6%/-12.9%/0%.

The focus is on opening smaller-size stores (~20-30k sq.ft. v/s ~50k average portfolio size). Such stores provide flexibility, have ~50% more productivity than traditional stores and command double-digits EBITDA margins.

Sales/sq.ft. of beauty stores is ~2.5x that of department stores; these stores are profitable and generate double-digit EBITDA margin in most cases.

Increased focus on airport stores (4x revenue/sq.ft. of city stores due to smaller size and thus higher margins).

Operational Performance SHOP added six department stores and nine beauty stores, taking the total store

count to 232 (89 department stores, 11 home stop and 132 beauty stores). In 2QFY20, it opened an iconic store in Gurgaon which houses Starbucks,

Hamleys, Mothercare and beauty stores (with a wide range of luxury brands). Added 5,200 black card customers taking total to ~11k. Revenue of personal shopper program increased 5% YoY and contributed 14% of

total revenue. Revenue of beauty segment grew 9.6% YoY. In Crossword, books contribute ~53% of sales; kids’ books contribute ~25% of

book sales. Strategic Initiative

The company took two cost initiatives: (i) worked on productivity of each employee and reduced LTL employee cost and (ii) implemented zero based budgeting (divides cost on 16/17 buckets) and worked on reducing costs.

The company closed four loss-making department stores in the quarter. This should add single-digit bp to the EBITDA margin.

SHOP expects to open stores in tier 2 cities where it received good feedback from customers.

It continues to test Arcelia by opening 4-5 new stores; would accelerate expansion if successful.

Automating the footfall measuring device; already implemented automation in 45 stores and will likely complete in the remaining 45 stores over next 2-3 months. Thus, footfall measures are not comparable.


Results Update

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SHOP exited 36 non-performing brands in this quarter and providing more space to best-performing brands. Further, ~10% of collection of certain top brands is exclusive for Shopper Stop.

Private Labels Looks to improve quality and productivity of existing brands within private

labels and add categories within existing brands. Launched new brands like Nayomi and Jones New York within private labels. The company aims for double-digit growth from private labels; In kids ethnic

wear, ~48% sales are from private brands and the company has aggressive target from kids wear in private labels.

Difference between gross margin of private and other brands should be mid-double digit.

Airport Stores Airport stores are good for brand exposure. Planning to open six new stores in Hyderabad and two in Bangalore.

Beauty Stores Of total beauty stores, two are Arcelia and 67%/33% of the remaining are

standalone stores/SIS. Outlook

Planning to open two international concept based stores. New stores should be EBITDA positive within first quarter of opening. The company’s SAP and first citizen gravity loyalty engine is expected to go

online in 1QFY21. Capex for FY20 should be INR1.9b toward renovation, opening of new stores, IT

investments, etc. Management is confident to mitigate footfall risks with other initiatives. The company expects to open new 6-8 Amazon linked stores. Management has identified new levers to grow Crossword business and, if

successful, expects a turnaround in this business post FY21. Titan Neutral Current Price INR 1,330 Jewelry - environment and outlook

TTAN continues to gain market share although industry may have declined during the quarter. Unorganized players are facing liquidity crunch and lack of access to capital.

Adjusted for institutional sales of INR2b, retail sales grew 15% YoY (this was guided in end-3QFY20 update).

Dec’19 witnessed only 4% growth. Jan’20 sales are tracking expectations despite activation starting a little late and demand getting impacted due to high gold prices in the first week of the month. Jan’20 witnessed only 8% growth but activation is progressing well.

Higher growth is being witnessed in the East/South compared to soft demand in the West/North.

4QFY20: Quantum of marriage days are good but demand has been volatile. Management has maintained 11-13% jewelry sales growth for 4QFY20, which is the level guided earlier in 2HFY20.


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Higher YoY share of studded jewelry was one of the factors propelling jewelry margin expansion of 10bp YoY.

Gold purchases on lease were very low in 3QFY20, which also aided margin growth.

Segmental changes Exchange at 42% is now slightly higher than the 40-41% levels in preceding

quarters. Wedding contribution – 23% of sales in 9MFY20. Store expansion – Jewelry Pace of store expansion is likely to sustain in the future; most expansions

(incremental) should happen in new cities. There has been no material cannibalization despite store expansion being more

aggressive this year (net 34 Tanishq store additions in 9MFY20). TTAN has sold Titan watches through the online channel in the US in recent

quarters and is evaluating taking jewelry sales online in this market. Typically, the company opens smaller outlets of ~2,000sqft in smaller towns butusually has an option of increasing the store size as sales grow.

Watches Overall, sales of watches were weak; however, performance was good in Jan’20.

Margins are also likely to improve in watches, possibly ending the year with the same margins (as last year) for this segment.

Hallmarking There will be a marginal cost implication for TTAN on mandatory Hallmarking. The infrastructure for Hallmarking in smaller cities is still weak. While the

company is welcoming the mandatory Hallmarking implementation target from 1st Jan’21, infrastructure needs to be beefed up significantly to meet the deadline and effectiveness to be witnessed.

Taneira Over the next 1-2 years, TTAN will look at generating acceptable level of gross

margins and sales per sq ft, thereby making the business potentially attractive from a franchise point of view as well.

Will continue to expand these stores gradually in FY21 by taking it to new cities and understanding what works. Beyond FY21, TTAN could potentially have an explosive growth in store openings.

V-Mart Retail Neutral Current Price INR 2,364 Competition

Consumption spend has not been as bad as highlighted by media channels, and consumers are spending in rural and lower tier cities, with youth spending being led by fashion aspirations.

The season saw several weddings, although the winter season and EOSS was not that good.

Not many regional retailers are witnessing good SSSG and some are experiencing difficulties in their business operations, leading to consolidation.

Such retailers are now struggling with their expansion carried out in the recent past and are facing difficulties.


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National players are also entering the lower tier cities and the value fashion segment, although their pricing is still higher than V-Mart.

Management believes this will aid market creation and growth of the value segment in the organized market.

V-Mart has been focusing on its business approach, customer profile, geographical segment, operations, efficiencies and prudent investment approach.

Business Performance The UP state continued to lead the growth, while the eastern markets saw

slower growth due to protests and Srinagar also remained slow due to fewer working hours.

V-Mart is opening more stores in its existing cities. Reduced promotional spend in November-December to focus on margins. 9MFY20 FCF stood at –INR20m Capex of INR410m/INR150m in 9MFY20/3QFY20.

There has been some impact of the government’s new rule on the MSMADspecter credit cycle which requires payables to be reduced from 60 days to 45 days (as 15%-20% of V-Mart’s suppliers are in the MSMAD category).

Focusing on deep data and social media advertisements and lowering reliance on traditional media ads, thus following a go-to-market strategy for approaching customers

Closed down one store in Orissa which was four years old, as V-Mart wants to run only stores that are profitable.

V-Mart will close down ~3-4 stores/year that are part of its business, as some of its stores are not profitable.

Confident of market opportunity which is still unexplored, and mid high-digit SSSG is achievable based on V-Mart’s unique business model.

Management has been planning to set foot in the North Eastern markets since the last one-two years, and opening stores in disturbed areas such as Srinagar and Azamgarh, backed by the confidence and strength of V-Mart’s business model.

There have been business losses due to protests in Delhi, Rajasthan, UP, J&K & Srinagar (operating at 50% capacity utilization in some areas), which has impacted V-Mart’s overall SSSG.

Operating Highlights Apparel ASP remained flat YoY on account of a less severe winter leading to

lower sales of high price winter merchandise. Non-apparel ASP increased (lower price non-apparel removed around festive

season to increase throughput). Added 19 stores during 3QFY20; total area under operations now stands at 2.1m

sq. ft. There has been an improvement in efficiency across all business divisions and an

increase in throughput across stores. Shrinkage was high due to provision for inventory. Gross margin was supported by upselling of merchandise, change in sourcing of

materials and consolidation of vendors.

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3-4% SSSG is required to offset the impact of inflation; SSSG of above 5%-6% will boost operating leverage.

Pre-operating expenses of new stores are capitalized in the balance sheet and not expensed in P&L; new stores generate high returns for the first three-four month on account of novelty factor.

Outlook FY20 EBITDA margin likely to be at 8-9% V-Mart is focusing on increasing its market share in the value retail space Plans to continue exploring new territories and open stores in tier 2/3/4 cities V-Mart plans to open 5-10 stores in Q4FY20. FCF will be comfortable in Q4 FY20 with no pressure from inventory of winter

sales.

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TECHNOLOGY

Overall, the quarter saw moderation in tier 1 organic revenue growth rate (on a sequential basis) with continued pockets of weakness in two large verticals – BFSI and Retail. Margins improved sequentially as companies work their way on cost-optimization levers, but shrank on an annual basis due to structural changes in the industry. However, despite uncertain macros, companies highlighted robust deal wins, particularly INFY and TECHM. In 3QFY20, companies slowed down on headcount addition. TCS and Tech M reported a headcount decline v/s strong additions in 1HFY20.

KEY HIGHLIGHTS FROM CONFERENCE CALL Revenue outlook Digital / New services Margins

Revenue growth guidance band was narrowed from 15-17% YoY to 16.5-17.0% YoY in CC terms. This was partly led by the narrowing of organic growth guidance band from 10-11% to 10.5-11.0% YoY (CC). This quarter has seen a dip in bookings because of longer furloughs. However, management has indicated that qualified pipeline is at an all-time high and they are confident of higher conversion. 9MFY20 witnessed good order booking, though there were no huge deals (>USD1b).

Mode-2’ (largely digital) contributed 18.2% of the revenuein 3QFY20, with growth of 1.1% QoQ CC.

Mode-2: EBIT margin for the segment improved by 120bp QoQ to 15.2% due to conscious decision to drop low-margin business.

Margin guidance band was narrowed from 18.5-19.5% to 19.0-19.5%.

Healthy improvement in margins was despite furlough and wage hike. Company took several measures to improve margins which are now playing out.

Company has increased its revenue guidance from 9-10% to 10-10.5% YoY CC Strength was also seen in large deal wins (58% YoY rolling four-quarter average). Growth in BFSI was impacted by higher-than-normal furloughs. While growth in European banks remained soft, North America was encouraging. Softness is expected to continue for a few more quarters, although large deal wins are led by BFSI (7 deals in BFSI out of 14 large deals signed in the quarter).

Whistleblower issue is now behind: Investigation found no evidence of wrongdoing by the company or management. Accordingly, INFO sees no necessity of restating historical financials.

While SEC investigation and class action lawsuit in the US on this matter are ongoing, the company is working in full co-operation with all the regulators.

Margin was sequentially impacted by: [1] currency (+10bp), [2] cost optimization (+50 bp) and [3] a dip in utilization (-40bp).

Cost optimization has been yielding results as INFO works on pyramid rationalization, automation and onsite-offshore mix.

Aggregate IT budgets are not necessarily shrinking v/s historical precedents. However, there is a significant focus for getting higher returns on spends. Deceleration in BFSI and Retail is a short-term phenomenon. The company continues seeing tightening of spends at large banks in the US and the UK. Insurance as a sub-vertical continues growing well. It is difficult to assign timelines on the recovery in BFSI. However, management indicated that the relative market share of TCS within BFSI vertical has only increased ~200bp.

TCS has stopped giving digital as a % of revenue. However, the company indicated that there is no slowdown in digital.

Most of the projects announced have some component of digital in it.

Currency can be a potential margin headwind. Higher growth and pyramid correction can be potential margin tailwinds. TCS remains committed to the aspirational EBIT margin guidance band of 26%-28% over the long term.

The company reiterated its focus on investing heavily in up skilling mid-level employees.

In addition, it was indicated that attrition is not being looked at as a management tool.

HCL Technologies

Infosys

TCS

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Revenue outlook Digital / New services Margins

TECHM announced strong new deal wins of USD1.2b (180% YoY). Of these, Jackson Life Insurance contract alone contributed USD900m. This deal is expected to ramp up over 4QFY20 and 1QFY21.Portfolio of clients within BFSI and Retail for the company is different from that of larger peers. Accordingly, TECHM does not share the same weak outlook on these two segments.

5G-related revenue has to wait for some time, deal wins in telecom remained tepid at USD150m.

EBIT margin contracted ~60bp QoQ to 12.2%. Adjusted for one-time provision written back in 2Q (+80bp impact) and provision made in 3Q (-40bp impact), the EBIT margin expanded ~60bp.

Next quarter revenue guidance is 0-2% QoQ CC. Overall demand environment has neither improved nor deteriorated compared to the previous quarter. WPRO sees same geopolitical risks. The company is not seeing any extended timelines in terms of deal closures.

Company is seeing increase in size of digital deals.

The company stated that any incremental savings from optimization levers like automation, AI etc. will be invested back to drive growth.

Cyient NeutralCurrent Price INR 444

FY21 is expected to be better than FY20: Revenue decline in 3Q was mainly due to the lower number of working days, coupled with high onsite deployment in Aero & Defense vertical. While Services was flat sequentially, DLM decline was attributed to the conscious decision of rationalizing low-value clients.

Cost-optimization program is on track: Expenses related to the cost rationalization exercise for the full year are ~USD9m. Of this, ~USD6-7m is recognized already, while the remainder will be recognized in 4QFY20. Post this, management expects ~250bp (v/s FY20) headroom for EBIT margin expansion.

Boeing 737 Max issue is not expected to be a further drag on growth. However, management expects only modest growth in A&D.

Growth in Communications is expected to accelerate. Management gets this confidence from the ongoing fiber rollouts in 5G area.

A one-off investment in Transportation associated with conversion of a project (from T&M to Risk-Reward) impacted growth and margins.

Investments in New Business Accelerators (NBA) will be rationalized in FY21 as few projects come to completion. However, NBA should still remain a margin overhang.

The company created a new RSU scheme for top-100 leaders in lieu of their cash bonus. This should have a slight impact on its P&L.


Results Update

Tech Mahindra

Wipro

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HCL Technologies NeutralCurrent Price INR 606

Revenue growth guidance band was narrowed from 15-17% YoY to 16.5-17.0% YoY in CC terms. This was partly led by the narrowing of organic growth guidance band from 10-11% to 10.5-11.0% YoY (CC).

Margin guidance band was narrowed from 18.5-19.5% to 19.0-19.5%. This quarter has seen a dip in bookings because of longer furloughs. However,

management has indicated that qualified pipeline is at an all-time high and they are confident of higher conversion.

9MFY20 witnessed good order booking though there were no huge deals (>USD1b).

Mode-2 EBIT margin should increase as the company scales up the segment. Organic revenue growth was 0.6% QoQ (CC), slightly lower than our expectation

of 0.7%. Incremental inorganic contribution (v/s 2QFY20) from the acquired IBM products was ~USD41m (below est. USD50m). Inorganic contribution from Sankalp semi-conductor contributed 14bp to growth. Overall revenue grew 2.1% QoQ (CC), marginally below est. 2.6%.

Despite the positive seasonality, Mode-3 reported a decline of 1% QoQ on an organic basis due to weakness in some of the IP partnerships.

Longer-than-usual furloughs and high base in the Services business due to ramp-up of large deals in 1HFY20 led to tepid sequential organic growth.

Hexaware Technologies NeutralCurrent Price INR 370

The company does not foresee any client-specific issues, except the key account within BFSI (Freddie Mac).

Challenges at Freddie Mac will be behind by 1QCY20. Accordingly, the company expects that majority of the growth will happen from 2Q in CY20.

Expect overall revenue growth of 15%-17% YoY for CY20. Assuming a revenue growth rate of 20% for Mobiquity, it should translate into weak organic revenue growth guidance of 7.3%-9.5% YoY.

Expect EBITDA margin in the range of 15%-16%. Impact of Ind-AS on EBITDA margins for CY20 is yet to be worked out.

The company has not witnessed any major spike in attrition within the leadership team of Mobiquity.

Coronavirus can pose a downside risk to client prospects within T&T. Stake sale by Barings is not imminent.


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Infosys BuyCurrent Price INR 801

Whistleblower issue is now behind: Investigation found no evidence of wrongdoing by the company or management. Accordingly, INFO sees no necessity of restating historical financials. While SEC investigation and class action lawsuit in the US on this matter are ongoing, the company is working in full co-operation with all the regulators.

Increase in DSO/unbilled revenue is not a concern: Increase in receivables/unbilled revenue is an industry phenomenon, driven by greater headroom for payments that clients are now demanding.

No material changes in decision cycles yet: The company has not seen any material change in decision-making cycles of clients over the last two quarters. The win-rate is on similar lines and the pipeline remains healthy. INFO expects some uncertainty due to Brexit and the after-effects of trade war.

Tepid organic growth in BFSI: Growth in BFSI was impacted by higher-than normal furloughs. While growth in European banks remained soft, North America was encouraging. Softness is expected to continue for a few more quarters, although large deal wins are led by BFSI (7 deals in BFSI out of 14 large deals signed in the quarter).

Growth in retail continues to be subdued: INFO expects better growth in the coming quarters, although the vertical is expected to remain volatile. IT spending in retail is directly linked to consumer spending which has been volatile.

Continuous focus on margin improvement: Margin was sequentially impacted by: [1] currency (+10bp), [2] cost optimization (+50 bp) and [3] a dip in utilization (-40bp). Cost optimization has been yielding results as INFO works on pyramid rationalization, automation and onsite-offshore mix.

ETR to be ~27%: ETR was lower in this quarter (by ~3 pp) due to one-off benefit in the US and one subsidiary in India moving to the new tax regime. Going forward, the normalized tax rate should be ~27%.

L&T Infotech NeutralCurrent Price INR 1,966

Strong growth in the top account was led by a new project. In the ongoing consolidation here, management indicated that LTI is on the positive side. The company is optimistic on continued growth momentum in this account.

It is seeing an increase in spending in the discretionary areas of BFSI. Concerns about US presidential elections have so far not come up in

conversations with clients. Pricing competitiveness exists on the legacy side of the business which is

sometimes offset by higher pricing in new-age offerings. LTI will continue to be a growth company with a focus on S&M investments. The

company sees some more headroom for operating leverage with growth. Strength in US and softness in Europe

Among the key geographies, growth was largely driven by the US. This can also be attributed to the strong uptick in growth at the top account, which happens to be an American capital markets entity. Europe remained surprisingly soft, despite the ramp up of a few large deals in this region. We assume this might be


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driven by the decline in rest of the Europe portfolio. While ROW witnessed a sharp sequential decline, India reported strong sporadic growth.

Mindtree NeutralCurrent Price INR 1,013

Margin expanded 260bp QoQ: Margin expansion was led by [i] operational improvement (140bp), [ii] currency (50bp) and [iii] some projects moving from transition stage to steady stage (70bp). The company continues focusing on improving profitability gradually. Pyramid correction and utilization improvement should be the key margin levers on the cost side, while right pricing for right services would be the key lever on the revenue front.

Top client drives growth: Top client grew 14% on an sequential basis. The company believes that engaging in multiple business lines of the top account reduces the risk of higher concentration. MTCL reiterated its intention to prune tail accounts.

Incremental focus on annuity-based deals: Historically, the company’s portfolio was more tilted toward project-based deals with shorter sales cycles. Focus is now changing toward more annuity-based deals.

Confident of deal closures in 4Q: The company reported deal TCV of USD207m (lowest over the past nine quarters). This was led by delays in decision making due to furloughs. Management remains confident on positive deal momentum and expects to close the deals in 4QFY20.

Increase in fixed-price contracts: Fixed-price contracts inched up to 58.7% during the quarter. This was led by higher annuity component in the top account. Going forward, this will continue increasing but more gradually.

Change in hedging policy: MTCL changed its hedging policy from 1 to 3 years.

Mphasis NeutralCurrent Price INR 895

BREXIT related uncertainty is now behind and European clients are planning for future investments.

Based on client conversations, IT budgets appear stable. However, budgets are being re-aligned away from the core.

Reference ability built in some large global banks is helping win deals in EU. Mphasis’ offerings have complementarity with DXC’s enterprise technology

stack, especially in the application layer. For the full year, DXC growth will be close to market growth. Expect higher growth from non-top clients over the medium term. Changes in Dividend Distribution Taxes (DDT) should not have any major impact

on the capital return policy of the company. Operationally in-line results; Flattish revenue in DXC channel

Revenue at USD318m grew 12% YoY (v/s est. 11%), EBIT at INR3,694m grew 19% YoY (v/s est. 20%) and PAT at INR2,937m grew 6% YoY (v/s est. 11% YoY).

Revenue grew 4.0% QoQ (CC) v/s our expectation of ~3.0%. Growth was driven by Direct International (5% QoQ, CC) while DXC revenues remained largely stagnant (0.1% QoQ, CC).

BFS, Mphasis’ largest vertical grew 5% QoQ, while Insurance grew ~6% QoQ. ICT and Emerging Industries grew 3% and 9% QoQ, respectively.


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Both the key geographies – the Americas/ Europe reported good growth (~3%/ 20% QoQ). Even non-core geographies like ROW made healthy contribution to growth (~16% QoQ, USD).

Top clients declined by ~1% QoQ led by furloughs. Both, top 2-5/6-10 client segments reported strong growth (~6% / 15%, QoQ).

On reported basis, EBIT margin expanded 10bp QoQ to 16.2%. While salary hike apportioning was a key headwind, increase in share of fixed-price projects and favorable currency were the key tailwinds.

MPHL announced deal wins of USD189m in the Direct channel, of this, 87% were in new generation services. These do not include renewals.

NIIT Technologies NeutralCurrent Price INR 1,882

Order intake increased sharply to ~USD218m in the quarter from the average run-rate of ~USD175m of the previous three quarters. This takes the firm business executable over the next 12 months to USD424m.

Of the four large deals won by NITEC during the quarter, three represent net new revenue.

A turnaround is expected in Insurance and BFS starting 4QFY20. It continues to expect robust and profitable growth on the back of strong order

intake during the quarter. BREXIT issue has not yet turned out to be a key concern in client discussions. EBITDA margin for the full year is expected to remain at ~18%. Revenue growth and margin in line with expectations Revenue increased 12% YoY (our estimate: +13%) to USD151m. EBIT was flat

YoY (our estimate: +4.4% YoY) at INR1,491m, while PAT grew 23% YoY (our estimate: 22%) to INR1,233m.

On a sequential basis, revenue grew 2% in CC. Among verticals, growth was driven by Travel, Transportation and Hospitality (+4.6% QoQ CC). This was largely contributed by growth in major accounts in EMEA and the US.

Despite growth in the top account in the US, the Insurance vertical reported a decline (-2.6% QoQ CC). Ramp-down within a key account in APAC translated into a revenue decline of 2.9% QoQ CC in BFS.

Revenue from recently signed large deals translated into strong growth within Others (+5.2% QoQ CC). Manufacturing, Retail and Oil & gas were the key segments driving growth within Others.

EBITDA margin contracted ~20bp QoQ due to furloughs and investments made in large deal transitions.

While utilization dipped ~140bp QoQ to ~79.3%, there was a slight moderation in attrition to ~12%.

Persistent Systems BuyCurrent Price INR 719

Decline in top client: Decline in revenue from the top account was largely led by cyclicality in the royalty business of IBM. Reseller business had good traction with revenue growing 20% sequentially. PSYS remains optimistic on the ‘Sell to IBM’ business, which also saw good growth in the quarter. Overall PSYS has a healthy deal pipeline within IBM. In addition, the company is trying to expand the service lines within IBM to boost growth in the account.


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Focus on annuity based deals: PSYS has won a few large deals during the quarter, of which some are annuity based. The company is aggressively investing in managed services. The objective is to provide managed services around project based work like complex development and product engineering.

Deal sizes on the rise: The company hinted at increasing deal sizes across the board. Incremental focus is on managed services along with the project-based work.

Contraction in gross margins: Gross margin during the quarter contracted 140bp QoQ, largely led by the decline in revenue from the top client (IP business). Normalization of one-time SG&A increase in the previous quarter led to ~100bp reduction in SG&A cost.

Positive outlook on all key verticals: During the quarter, PSYS won two large deals in BFSI. While one of these deals is in APAC, the other is in the US. In Healthcare & Life Sciences vertical, PSYS sees a strong deal pipeline in pharma, payer and provider sub verticals.

Tata Consultancy Services NeutralCurrent Price INR 2,195

Aggregate IT budgets are not necessarily shrinking v/s historical precedents. However, there is a significant focus for getting higher returns on spends.

TCS is proactively focusing on “Less is more” philosophy of clients despite the near term deflation impact it can have on volumes.

Deceleration in BFSI and Retail is a short-term phenomenon. The company continues seeing tightening of spends at large banks in the US and

the UK. Insurance as a sub-vertical continues growing well. It is difficult to assign timelines on the recovery in BFSI. However, management indicated that the relative market share of TCS within BFSI vertical has only increased ~200bp.

In Retail, strong growth is observed in sub-segments like CPG, Travel and Transportation, and geographies like the UK and Europe. However, spending pressures are seen at large retailers based out of the US.

Nature of company’s recent deal wins in both BFSI and Retail is transformative. Currency can be a potential margin headwind. Higher growth and pyramid

correction can be potential margin tailwinds. TCS remains committed to the aspirational EBIT margin guidance band of 26%-28% over the long term.

The company reiterated its focus on investing heavily in up skilling mid-level employees. In addition, it was also indicated that attrition is not being looked at as a management tool.

No certainty yet on any potential one-time costs related to BREXIT transition.

Tech Mahindra BuyCurrent Price INR 841

TECHM announced strong new deal wins of USD1.2b (180% YoY). Of these, Jackson Life Insurance contract alone contributed USD900m. This deal is expected to ramp up over 4QFY20 and 1QFY21.

Deal wins in communications vertical were weak at USD150m. The company is not witnessing any deferrals of deals due to US elections. Portfolio of clients within BFSI and Retail for the company is different from that

of larger peers. Accordingly, TECHM does not share the same weak outlook on these two segments.


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The company continues to be optimistic on margin expansion prospects. Beat on revenue growth and margins

Revenue increased 4.3% QoQ (CC) v/s our estimate of ~2% growth. Strong revenue growth was largely driven by the ramp-up of the large deal in telecom (AT&T). Telecom segment grew ~9% QoQ (USD).

Surprisingly, even the BFSI (~7% QoQ, USD) and Retail (~8% QoQ, USD) verticals have shown strong sequential growth during the quarter.

Growth was also broad based across geographies. Key geographies like the Americas (~5% QoQ, USD) and Europe (~6.3% QoQ, USD) reported strong growth. Even non-core geographies like RoW made a healthy contribution to growth (~4% QoQ, USD).

Growth across top-5 clients bucket (~9% QoQ, USD) was robust led by the large deal ramp up at AT&T. However, clients below top-5 reported sharp declines (down ~8% QoQ in top 6-10 and ~4% QoQ in top 11-20).

On a reported basis, EBIT margin contracted ~60bp QoQ to 12.2%. Adjusted for one-time provision written back in 2Q (+80bp impact) and provision made in 3Q (-40bp impact), the EBIT margin expanded ~60bp. On an adjusted basis, the EBIT margin was 30bp higher than our estimate.

AT&T deal ramp up costs and increase in sub-contractor expenses were the key margin headwinds. INR depreciation and utilization increase were the key margin tailwinds.

Tech-M announced acquisition of ~70% stake in Cerium Systems for INR2.4b (EV/FY19 sales = 3.2x). Cerium has capabilities in semi-conductor design and testing, embedded and product engineering.

Wipro NeutralCurrent Price INR 248

No material change in the demand situation: Demand environment has neither improved nor deteriorated. Macro uncertainty still remains the same as it was during the previous quarter. On the deal front, the size of the digital deals is becoming bigger. There is no material change in the time taken to close the deal (it remains 6-8 months for large deals).

Higher-than-usual furloughs led to slowdown in BFSI: BFSI remained flat during the quarter. Softness was led by higher furloughs and non-renewal of some of the SOWs.

Focus remains on growth investments: The company stated that any incremental savings from optimization levers like automation, AI etc. will be invested back to drive growth.

HPS drives growth in Healthcare: Healthcare grew 3.4% on an sequential basis. Growth in this segment was driven by HPS due to seasonality related to Obamacare enrolments. WPRO is also seeing good traction outside of HPS.

Technology vertical reports decline: Technology vertical declined 3.7% sequentially. This was led by [i] challenges in the semiconductor sub-vertical due to the US-China trade war and [2] higher furloughs in some of the top accounts of the vertical.


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Zensar Tech NeutralCurrent Price INR 145

Expect some more pain in 4QFY20: The 22% sequential decline in the Retail vertical was led by rationalization of 8 tail accounts. Most of these accounts were in the lower margin apparel sub-segment. While most of the impact from this restructuring exercise has been realized in the current quarter, some more impact will be witnessed in the next quarter.

Negative operating leverage translates into sharp margin contraction: Margins for the quarter contracted ~760bp sequentially, largely led by revenue decline and the negative operating leverage associated with it. This despite the company transferring ~300 people to offshore locations during the quarter.

EBITDA margin to reach 15% by end-FY21: During the quarter, the company announced USD170m of deal wins with 45% as net new. The company expects to deliver industry level growth, in the steady state, once the restructuring exercise is completed. O n the margin front, Zensar expects EBITDA margins to reach 15% run-rate by end-FY21 (4QFY21).

Good traction in CIS business: Both core IMS and CIS witnessed decent growth during the quarter. Zensar added 4 new logos in the CIS business and a large share of the deal wins during the quarter had either digital or next gen cloud services component in it.

Increase in other income: Higher other income during the quarter was due to reversal of contingent consideration payable on business combinations consummated in the previous year. This amounted to USD3.6m.

No plans of increasing pay-out ratio: Zensar has indicated that despite having higher cash balance (USD92m), it will not opt for any buybacks as it remains focused on acquisitions.


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TELECOM

Bharti’s management has welcomed the recent tariff hike (in Dec’19) but emphasized that ARPU should be INR300 to have healthy balance sheet and to make investment in 5G. Further, management indicated that capex could increase on an immediate basis, but overall would continue trending down as the company has many ways to increase network capacity such as spectrum reframing, TDD deployment, increased sectorization, massive MIMO and fiber rollout. Bharti Infratel’s management expects tenancy cancellation to be over by this quarter and is targeting an energy margin of 3% for FY20. In the longer term, the target is to achieve 5% energy margin. TCOM’s management is working on investment strategy for the innovation segment which should be in place by 1QFY21; growth segment should continue to grow at current pace.


Outlook for FY20 Tariff hike has provided relief to the ailing industry; however, management believes that industry

ARPU should reach level for INR300 for investment in 5G and healthy balance sheet. Capex should go down, but it could increase on an immediate basis (but lower than peak) due to

increased data users. Benefit of price hike should be realized by Mar’20. ARPU hike post FY20 could be result of three

factors – customers up-trading to 4G, an increase in post-paid customer base and another tariff hike.

Capacity utilization reached 70%-72%. Incremental capacity addition would come from 2100mhz and 900mhz band reframing; 2300mhz TDD deployment, increased sectorization, massive MIMO and fibre rollout. Thus, it may not need to spend heavily on capex.

Targeting to achieve energy margin of 3% for full year and to reach 5% in longer run. Expects tenancy cancellation to be over by this quarter.

Innovation business has couple of products (a) Move and (b) Net Foundry which is seeing healthy traction. Strategy on investment in Innovation segment will be in place by next quarter.

Targeting leverage of 2.2x-2.5x (net debt to EBITDA), but it could be difficult to achieve in the current external factors.

Growth segment should continue to grow at lower pace v/s last two years given the high base. However, operating leverage should drive accelerated EBITDA growth.

Bharti Airtel BuyCurrent Price INR 543 Key Highlights

Tariff hike has provided relief to the ailing telecom industry. However, management believes that industry ARPU will have to reach a level of INR300 to make investments in 5G and maintain a healthy balance sheet.

Capex should go down, but it could increase on an immediate basis (but lower than peak) due to increased data users.

Benefit of price hike should be realized by Mar’20. ARPU hike post FY20 could be a result of three factors: customers up-trading to 4G, an increase in postpaid customer base, and another tariff hike.

Capacity utilization was 70%-72%. Incremental capacity addition would come from 2,100mhz and 900mhz band reframing, 2,300mhz TDD deployment, increased sectorization, massive MIMO and fiber rollout. Thus, it may not need to spend heavily on capex.

Market has settled on even base, after Oct-Nov subscriber shift and SIM consolidation; IUC ratios have changed post RJio started to charge off net calls.


Results Update

Bharti Airtel

Bharti Infratel

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Operational performanceARPU increased INR7 to reach INR135; ARPU is calculated on customer centricrevenues. Exit ARPU stood at INR140. The company added highest ever 4G customers of 21m, mainly due to RJio’smove of charging off net calls; of total 138m data customers, 120m are on 4G. There is significant opportunity for growth in this number. BHARTI’s music streaming app was the most popular in Oct with highest activeusers. Digital TV’s customer base grew by 100,000; Enterprise business showed mutedperformance due to seasonality. Airtel Xtreme has gained good uptake and management is hopeful of scaling up.Net finance cost was slightly higher than last quarter as gross debt was higher,despite lower net debt. Airtel Africa reported double-digit revenue growth for eighth consecutivequarter and improving EBITDA margin. 94.5% of total customers are on prepaid.

ARPU drivers Postpaid pricing is substantially higher than prepaid, but arbitrage has comedown post-price hike; the company began to add postpaid customers in Dec-Jan post tariff hike.

ARPU increases by INR60-INR70 when a customer upgrades from 2G to 4G. The company has meaningful subscribers on the minimum recharge plan of

INR49 and looks for an opportunity to shift these customers to higher plans. Network capacity

The company added more than 4,200 sites and 12,000 MBB sites. Further, it added capacities through additional sectorization and massive MIMO.

It shutdown 3G in 11 circles and reframed those sites to 4G; capacity utilization reached 70%-72% post reframing.

BHARTI was the first operator to provide Wi-Fi over voice facility and witnessed huge uptake. Incremental capacity addition would come from 2,100mhz and 900mhz bandreframing; 2,300mhz TDD deployment, increased sectorization, massive MIMO and fiber rollout. So it may not need to spend heavily on capex.

Government and regulatory BHARTI filed a modification plea (still pending) post rejection of review petitionby SC. The government is cognizant of the problems in sector and therefore providedan option for deferment of renewal spectrum payments for two years.

Fund raise The company has raised USD2b through QIP (1.57% discount to SEBI floor price)and USD1b through FCCB at 1.5% coupon (conversion premium at 20% of QIP price). These funds would be utilized to strengthen BS and for business requirementbesides AGR liability.

Industry outlook Tariff hike has provided relief to the ailing industry, but management believesthat industry ARPU should a reach level for INR300 for investment in 5G and healthy balance sheet.

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Tariff has been always been at forbearance but it has reached at such a low levelthat the regulator has to intervene. Market has settled on even base, after Oct-Nov subscriber shifts and SIMconsolidation; IUC ratios have changed post RJio started to charge off net calls. Management believes that industry prospective would be better if VIL survives.Management expects regulatory support going forward

Outlook Benefit of price hike should be realized by March’20.Capex should go down, but it could increase on immediate basis (but lower thanpeak) due to increased data users. The company is looking to grow in SME segment in Enterprise business. BHARTIpartnered with Google cloud to boost collaboration by offering G suite to small and medium enterprise. The company would focus on chasing quality customers.ARPU hike post FY20 could because of three factors: customer up-trading to 4G,increase in postpaid customer base and another tariff hike. The company will start to provide RoCE on ARPU of INR200; at INR300 ARPURoCE would be 15%.

Management looks for growth opportunity in rural areas by moving customers from 2G to 4G.

Management might consider stake sale in its tower business post-merger completion.

At the current estimated price of INR50b for 100MHz band of 5G spectrum, the company will not bid for it.

The company began to see momentum on postpaid. It would need to wait and see the absorption of this tariff hike to ensure market share.

Bharti Infratel NeutralCurrent Price INR 225

Management is not negotiating payment terms and pricing with telcos in the current weak environment, however, it is working with operators to reduce costs, especially on energy which is a big opex.

Expect positive outcome of the SC’s verdict on telcos’ modification plea, which would be good for the sector.

Approval of DoT for FDI is still pending for the Indus merger, extending the merger completion date to 24th Feb’20.

This quarter, the company recorded exit charges of INR1.05b and should seeINR1.1b in the next quarter.

Targeting to achieve energy margin of 3% for the full year and to reach 5% in the longer run.

Operational Performance

Witnessed improved net addition with highest QoQ net tower adds in the last four years – improved financial environment should enhance growth momentum.

In the last quarter, the company took reversal of tax provision due to tax rate cuts, whereas, provisions are lower in this quarter.

RoCE pre-tax and RoE post-tax stood at 26% and 27%, respectively. Renegotiation of some longer-term contracts are impacting energy margin.


Results Update

February 2020

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Despite higher site addition, capex is lower QoQ as net tenancy addition remained lower, which allowed reuse of existing equipment and lower maintenance capex. Finance income is lower despite higher cash due to interest rate movement and small increase in Bharti Infratel’s standalone leverage – expect it to be on a downward trend. ARPT increased 10% in 9MFY20 on YoY basis.Earlier tenants got discount of INR2,000 with every incremental tenant.

Industry Developments

SC has upheld the government’s definition of AGR in its review petition. Telcos have now filed a petition for modification, which will be heard on 3rd Feb’20.

Telcos have taken price hike, which was much needed by the industry. Outlook

Management is optimistic on the future of the Indian telecom industry and hopes for government support.

The company is looking to expand its tower base. Management is confident in getting second tenants for new towers as players

are looking to increase their coverage. Sharing towers is also economical for players. Further, loading is still possible with new technology such as 5G.

Escalation of 2.5% is already happening at the base rate, except where the company has put a freeze on migration to the new scheme. Post the freeze period, 2.5% escalation on base would materialize. By FY22/FY23 all towers should unfreeze.

Tata Communications NeutralCurrent Price INR 385

Key Highlights Growth segment is likely to continue growing at a slower pace than the last two

years given the high base. However, operating leverage will likely facilitate accelerated EBITDA growth.

Innovation business has a few products (i.e. Move and Net Foundry) that are witnessing healthy traction. Strategy on investment in this business will be in place by next quarter.

TCOM is targeting leverage of 2.2x-2.5x (net debt to EBITDA), but it could be difficult to achieve amidst the current external factors.

Large enterprises prioritize SLA, quality of service and relationship over pricing. Thus given the wide array of TCOM’s services, expect limited impact from competitive intensity driven by RJio.

Growth Services Growth slowed down due to seasonally lower usage in the holiday season. The slowdown can be attributed to base effect. Also, among products, SIP trunk

has shown lower growth. However, IZO has exhibited good growth and is likely to scale much higher, improving growth prospects. Enterprises are in the journey of moving to cloud which requires them to re-architect the network. Added to that the traffic on this network is also bound to grow.

Products from hybrid cloud, IZO WAN. Market size of USD4b for growth segment business. UCC – muted growth this year, but there is still good growth opportunity in the

portfolio.


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Growth segment should see operating leverage and thus incremental EBITDAgrowth should be higher than revenue growth.

Innovation segment Over the last few months, management has taken a deeper look at theinnovation segment. Management is excited by the agility, security and performance enhancement it provides to the customers with cloud native technologies. It is still in the early stage of customer adoption and market growth. It had anticipated a faste r off take in revenue. It is taking longer to penetratecustomer portfolio; expect growth to be at the current levels in the next few quarters. The big contracts received last fiscal are not fully captured in revenues. Among the multiple products, Move has a big large success and it ensures thatthe product and service can be delivered for large auto OEMs. It is scalable. Sim connect is another usage case for Move product which is being implemented by 3-4 airlines. Net foundry is another product which has strong potential to grow. Strategy on investment in innovation segment will be in place by next quarter.

Transformation business EBITDA impacted by client-related one-time impact seen in the transformationbusiness.

Customer specification and one time client costs have impacted margin. Transformation should start seeing growth from 1Q-2Q next fiscal.

ATM business The company continues focusing on profitability. Reducing the number of ATMs

in line with strategy to exit unprofitable locations. Market condition/competition

Enterprise segment growing at healthy 10% YoY. Digital transformation is in full force. Customers are moving from standalone

platform to customized offerings. It is seeing increasing competition in the some of the accounts, but confident

that given the array of services, TCOM should be able to manage it. Large enterprises prioritize SLA, quality of service and relationship over pricing.Thusgiven the wide array of TCOM’s services, expect limited impact from competitive intensity driven by RJio.

Leverage/acquisition/hive off Targeting leverage of 2.2x-2.5x (net debt to EBITDA), but it could be difficult toachieve in the current external factors. Hemisphere listing will be after two months after the allotment of shares.Acquisition of TTSL is on status quo with no progress.

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UTILITIES

NTPC expects commercialization of 5.3GW of capacities in FY21. Transaction advisors have been appointed for NTPC’s potential acquisition of NEEPCO and THDC. PWGR has set a FY21 capitalization/capex target of INR150/105b. The company’s FY20 capitalization target of INR200-250b would also be dependent on commissioning of Raigarh-Pugalur. According to the company, it has resolved much of the RoW issues faced and remains confident of completing it in FY20. With declining capex and removal of DDT, the company noted that there is a likelihood of increasing dividends. Torrent Power noted it has paid debt of INR10b in this quarter, which should reduce interest costs. Approval for extension timelines though has not been received for its SECI-III and SECI-V projects.

JSW Energy BuyCurrent Price INR 65

Power demand: The company noted that power demand declined 6% YoY due to poor economic activities and a higher base. However, demand is recovering and is up ~2% YoY for Jan’20.

Restructuring of JPVL loan: JSWE has restructured INR7.5b of its outstanding debt with JPVL. Of this, INR3.5b has been converted at face value into equity with a current market value of INR0.6b. Of the balance INR4b, INR2.8b has been written off, while another INR1.2b is in the form of loan and has been provisioned for.

Karcham Wangtoo: The co. noted post CWC’s favorable report project capacity will go up from 1,000MW to 1,091MW. Additional capacity can be used to tie up for PPA or merchant market.

GMR Kamalanga: JSWE said discussions are in advanced stage. The co. expects to sign an SPA in a few weeks.

Ind-Barath Utkal: A number of petitions have been filed by operational and financial creditors. One of the lenders has questioned the deal value as it is said to be lower than liquidation value. NCLT approval may get delayed to June- July’20 v/s Mar ’20 expected earlier.

Telangana PPA: The co. noted while Telangana (300MW PPA) has not given any schedule since the start of 3Q, it is entitled for back-down charges at 20% of tariff. Income for the same has not been recognized.

Upcoming PPAs: JSW noted that it has signed certain short-term contracts with Maharashtra and will be dependent on it until Dolvi commissions. The commissioning of Dolvi is likely in ~1HFY21. For Vijaynagar, the visibility is lower and will be dependent on another pilot scheme.

NHPC NeutralCurrent Price INR 21

Generation for 3Q was up 7% YoY due to higher availability. PAF stood at 81.4% v/s 79.5% in the previous year.

Previous years’ expenses were impacted by regularization of pay scales. For 9M, PAF incentive stood at INR3.5b, DSM incentive at INR0.9b and

secondary energy income at INR1b. Management expects Parbati II to commission by FY22. The company would soon be making payment of >INR5b for its Dibang project.

According to NHPC, a total of INR15b of capex would be spent in the next 45 days.


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Process of acquisition of Jal Power is still ongoing and an NCLT approval is awaited.

The co. has revised its FY20 capex guidance to INR50b from INR38b previously. This is on account of higher capex at Dibang and Subansiri. Capex guidance for FY21 is INR53b.

NHPC noted the current quarter was impacted by INR0.6b on account of provisioning for PRP given incremental profits. The amount is representative of amounts for 1Q and 2Q as well.

NTPC BuyCurrent Price INR 112 Capex and capitalization:

Capex for NTPC stood at INR152b for 9MFY20. Capital outlay for FY20 is estimated at INR210b.

The company expects commercialization of 5.3GW of capacities in FY21. Under recoveries:

NTPC witnessed FC recoveries of ~INR0.7b as the availability factor for its plants improved.

Acquisition of NEEPCO and THDC: The company noted that DIPAM has appointed a transaction advisor for the

acquisition, while NTPC has appointed SBI Caps for the same. CCEA approval has been received.

One-offs: During the quarter, the company reported INR4.4b of income on prior-period

tariff orders. In addition, INR3.3b of provisions were made due to a change in the methodology of sharing of efficiency gains for the 2014-19 period.

Overdues: Overdues remain high at ~INR120b.

FGD: The company plans to install FGD at 68.9GW. Of these, 920MW has been

commissioned. 46.9GW has already been awarded, while the remaining 17.1GW is under various types of tendering.

Power Grid Corp BuyCurrent Price INR 187 Capex

Capital expenditure for the company stood at INR81.2b on a standalone basis and at ~INR105b on consolidated basis for 9MFY20.

The company aims to incur capex of INR150b/INR105b on consolidated basis for FY20/FY21. Capex target for FY21 includes INR34b on account of TBCB.

Capitalization For 9MFY20, capitalization is at INR109b, inclusive of INR2.5b of TBCB. Up to

Jan’20, capitalization stood at INR137b with commissioning of additional works of TBCB.

PWGR is targeting capitalization of INR200-250b for FY20, which is subject to commissioning of the Raigarh-Pugalur project.



p

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Management has noted that RoW issues for the project have decreased. ~60km of lines are under execution. A few challenges near Krishna river have cropped up due to water levels, but the company is hopeful of commissioning it in FY20. The project may slip but only by a couple of months.

Capitalization target for FY20 is INR150b (of which TBCB is INR12.5b). Works in hand

PWGR currently has INR610b worth work-in-hand, which is expected to get completed in the next 3-4 years.

Total order book consists of ongoing work worth INR412b, new projects of INR68b and TBCB projects of INR130b.

RE Integration Scheme PWGR has noted that of INR429b to be executed, INR147b worth has been

allocated. Another INR110b is up for allocation while INR29b has been allotted on RTM basis. Currently though the bids floated are low at just INR12.5b.

Management expects INR120b worth work to come up for bidding under TBCB within the next 3-4 months.

Dividend The company has noted that there is likelihood of increasing dividends as capex

declines and on removal of DDT.

Tata Power NeutralCurrent Price INR 51

Prayagraj: TPWR is focusing on improving availability from current levels of 70% to 80% for next year. Railway line work should be completed by Mar-end.

Divestments:

Competition Commission has approved the sale of its Cennergi business and expects proceeds from the same in 4QFY20.

Sale of its defense business has received NCLT approval and is expected to be completed in 1QFY21.

Positive discussions are ongoing for renegotiation of ITPC PPA. Arutmin: Company is receiving ~USD5m of proceeds per month from Arutmin’s

sale. Total proceeds so far have been USD205m. CESU license: TPW expects the takeover to be completed by Apr’20. According

to the company, RFP has mentioned an initial AT&C loss of ~30%. The plan calls for a reduction in AT&C loss to 23.7%/14% over 3/10 years. The company will also earn incentives for collecting past arrears.

Capex: Company expects 700MW of renewable generation to be commissioned by FY21 at capex of ~INR30b. In addition, it plans to do capex of INR20b within CESU over the next 3 years. Besides, plans are on to spend another INR6b related to FGD works at Maithon and INR4b on railway line works.


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Torrent Power BuyCurrent Price INR 317

Interest Cost: TPW has paid debt of INR10b in this quarter, which will significantly reduce interest costs. On a consolidated level, the company has reduced its gross debt by INR6.6b YTD to ~INR88b.

Capex: TPW has guided for capex of INR10.5b for FY20 (9MFY20: INR6b). For the next three years, TPW expects capex run-rate of ~INR19-20b per annum. Of this, INR15-16b would pertain to its distribution license business with another ~INR3b for its distribution franchise business.

Renewable projects: The co. has commissioned its 126MW MSEDCL project. In addition, 50MW

SECI-I was commissioned earlier this year. Approval for extension of timelines for its SECI-III and SECI-V projects has

not yet been received. TPW noted it may face a max penalty of up to INR230m in case it does not go ahead with the project.

Distribution franchise: TPW expects handover of Shil, Mumbra and Kalwa region during 4Q.


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Allcargo Logistics Buy Current Price INR 113

MTO business Total volumes grew 10% YoY to 1,85,408 TEUs in 3QFY20. The segment continued gaining global market share. RoCE stands at 26% on an annualised basis.

CFS business Overall EXIM volumes were impacted by demand contraction in the global and

domestic markets. Lower utilizations impacted margins/ Market share was maintained despite the reduction in CFS addressable market. YoY volumes surged by 14% in Mundra and 27% in Kolkata. RoCE stands at 28.39 % on an annualised basis.

P&E business Improved overall utilization of equipment segment in 3QFY20 versus last year. Decline in revenue was due to lower utilization of higher-yielding equipment. Decline in EBIT was primarily due to application of accelerated depreciation. Continued effort to free up capital from equipment segment with sale of some

underutilized assets. The order book in the project logistics segment moved to INR1.7b along with a

visible pipeline of INR5.3b. Project logistics presence in East Africa and Indian subcontinent countries

further consolidated with new orders from these countries. Brigade Enterprises Buy Current Price INR 230

Bangalore Market Update: The Bangalore market remains strong in both the residential and commercial segment. In Bangalore’s residential segment, the industry overhang is 21 months (BRGD’s inventory overhang is lower than the industry).

Impact of Union Budget on Industry –BRGD’s management believes that the Union Budget FY20-21 was positive for the AFH segment which augurs well for the company as it has a healthy mix of AFH in its product portfolio. 25% of the 1.8msf (residential) la unched by BRGD in 9MFY20 was in the AFH segment. Further, 30%+ of the company’s upcoming launch of 5.1msf is expected to be in the AFH segment as well.

Launch Pipeline – Over the next 5-6 quarters, BRGD plans to launch ~7.24msf (5.1msf in residential, ~1.8msf in leasing and 0.3msf in hospitality). Out of the launch pipeline (residential segment), 50% will be in Bangalore while the balance 50% will be in Hyderabad and Chennai.

On Debt: Consolidated net debt, as on 3QFY20, stood at INR34.2b (BEL’s share was INR2.78b) with cost of debt at 9.62%. The company has guided for a peak Debt/Equity level of 1.3-1.35x.

Residential pre-sales outlook for FY21 – Amidst the subdued real estate demand, BRGD remains confident of maintaining ~1msf/quarter run rate for

Others


Results Update


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FY21. However, it has set internal targets to grow by 20% over FY20 which will be achievable depending upon an upturn in the residential real estate cycle.

Collection break-up across segments – Residential – INR5.50b, Leasing – INR1.37b and Hospitality – INR0.44b. The collection is expected to be sustainable.

Talks for stake sale in the hospitality segment is in the advanced stages of negotiation

BSE BuyCurrent Price INR 516

Strong traction in Star MF: The platform contributed 11% of revenue in the quarter. Total number of mutual funds registered now stands at 40, with ~28m registered investors. Realizations for the platform remained flat. Despite no charges levied by competition, BSE is able to charge because of the superior services on the offer.

Listing fees: Listing income remained stable with a positive bias due to incremental listings on the exchange and an increase in fees in the current financial year. Listing income is also subject to minor periodic variations depending on change in economic factors, new listings, corp actions, etc.

Commodity: The company started gaining some market share in this segment, especially in the agri-commodities space. Market share in Guarseed stood at 32% with turnover of INR2b. Market share in cotton increased to 31% with turnover of INR1.9b.

Stake sale in CDSL: BSE has to reduce its stake in CDSL by 15% over next 3 years in order to comply with regulations. As part of this, it monetized 4% stake in CDSL in November 2019.

Container Corp BuyCurrent Price INR 554

3QFY20 was impacted by EXIM balance. While CCRI has maintained its market share in long leads, it has lost share in short leads. The company has taken a conscious decision to not participate in the pricing war or chase negative margin businesses.

Originating 3QFY20 volumes for EXIM stood at 484,816 TEUs (-5% YoY) while that for Domestic stood at 70,562 TEUs (+4% YoY).

Lead distance for 9MFY20 for EXIM stood at 721kms (706kms in 9MFY19) while that for Domestic stood at 1,352kms (1,412kms in 9MFY19).

Port-wise volume split for CCRI in 9MFY20: JNPT 32.46%, Mundra 31.26%, Pipavav 15.16%, Chennai 5.7%, Vizag 6.86%, and Kolkata 2.19%

For, 9MFY20 market share at key ports: JNPT 67%; Mundra 45%, Pipavav: 51%. Empty running charges for 9MFY20 stood at INR832.8m for EXIM while that for

domestic stood at INR693.5m. CCRI will commission 7-9 terminals this year. However, it also plans to close

some terminals. Number of double-stacking trains in 3QFY20 stood at 602 (v/s 708 in 3QFY19). Of the INR10b SEIS income claimed by CCRI, INR1.82b has been allowed by the

DGFT.


Results Update


Results Update

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Tax rate for 3QFY20 is higher as the company has reversed some benefits availed under 35AD and 80IA under the old tax rate. The new tax rate of 25% will be applicable from 4QFY20.

Coromandel Intl Buy Current Price INR 619

Agri Scenario The north-east monsoons were 29% above average. In the southern region,

rainfall was 16% higher than the 5-year average. This resulted in the country’s major reservoirs being filled to 72% of the capacity i.e. 22% higher than long period averages. Overall crop sowing is up 9% YoY, mainly on account of higher sowing of wheat crop.

The sowing in the key states of Andhra Pradesh and Telangana is up 13% YoY, led by paddy (up 28% YoY) with reservoir levels being filled up to 57% capacity, which is 17% above long-period average.

Company specific Share of unique grade remained flat YoY at 39% in 3QFY20. During 3QFY20, phosphatic fertilizer plant operated at capacity utilization of

93% and recording production of 8.2lac MT v/s 7.4lac MT in 3QFY19 (83% capacity utilization).

Phosphorus acid plant at Vizag, which was commissioned last quarter with annual capacity to produce 100kMT of phosphorus acid, has stabilized and become self-sufficient. The company expects the plant to produce 50kMT in FY20.

Revenue break-up of subsidy/non-subsidy in 3QFY20 stood at 77%/23% v/s 78%/22% in 3QFY19. EBITDA break-up of subsidy/non-subsidy in 3QFY20 stood at 73% v/s 60% in 3QFY19.

Raw material prices continue to show a softening trend. Phosphorus acid prices are finalized at USD590/MT for 4QFY20 v/s USD625/MT in 3QFY20.

Industry has passed the benefit of softer raw material prices to farmers and overall MRP has been brought down by 15%. MRP of DAP fertilizer stood at INR29,500/MT in Mar’19, which declined to INR26,000/MT in Oct’19 and further to INR25,000/MT in Jan’20.

The crop protection segment recovered from its weak performance in the previous two quarters. Crop protection biz performed well domestically, in B2B as well as B2C. However, exports witnessed pricing pressure in mancozeb, primarily due to high channel inventory.

The company plans to incur capex of INR4-4.5b for FY20, of this INR2.5b has been spent on plants in Vizag, Ankleshwar, Sarigam and Dahej. The company plans to incur capex of INR4-4.5b for FY21, mainly for de-bottlenecking and capacity expansion for key molecules.

Capacity utilization for Mancozeb stands at 65-70%. The company has launched 4 new products YTD, and will launch one more in

4QFY20. During the quarter, the company launched ‘Astra’, a new generation insecticide, which will strengthen its portfolio in the crop protection segment.

Subsidy Subsidy outstanding as on Dec’19 for CRIN was INR16.1b (includes INR3.3b of

claims filed and pending to be received, INR6.4b relates to channel stock


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pending for acknowledgement) vis-à-vis INR20b in the previous year. During the quarter, subsidy payout by the government was INR9.7b in 3QFY20 v/s INR12.7b in 3QFY19.

Gateway Distripark BuyCurrent Price INR 126

GDPL sold its entire stake in subsidiary company Chandra CFS in Chennai for INR484m in Dec’19.

Volumes for CFS were impacted by lower volumes at port. Also, the sale of the Chandra CFS in Chennai impacted volumes for the quarter, resulting in a loss of market share in Chennai.

The company entered into a share purchase agreement on 27th Dec’19 to sell shareholding in Snowman Logistics Limited for INR2.95b.

GDL partly redeemed debentures of INR500m along with interest in Jan’20 with proceeds from the sale of Chandra CFS and Snowman.

The company expects to grow Rail volumes/revenue by 8%. Margins in the business have been impacted by heavy discounts. For GDPL, discounts have increased by ~14% over last one year to INR4,000/TEU.

The company plans to incur capex of INR1.5b over the next two years, majorly toward setting up of satellite terminals in north.

GDPL would be lodging a claim for SIES income in 4QFY20. It is hopeful of receiving INR180m of SIES benefit in CFS.

On DFCC: The Rewari- Palanpur route should get commissioned by CY20, which should increase productivity of operators by 10%.

Rail business has been performing better than the market. While NCR region declined by 7% in 9MFY20, GDL witnessed growth of 2%. It also enjoys a 41% market share in Ludhaina and is the largest player there.

Impact of Ind-AS on Rail EBITDA was to the extent of INR62.7m, while that on CFS EBITDA was INR60.7m.

The company also recorded an exceptional gain of INR80m as a result of Chandra CFS sale.

It plans to sell off some land banks to deleverage its balance sheet. Godrej Agrovet BuyCurrent Price INR 532 Palm oil

Lower end product prices and lower oil content in the peak season (1HFY20), adversely impacted the 9MFY20 performance. Crude palm oil prices and palm kernel oil were lower by 16% and 32%, respectively, in 1HFY20.

FFB volume stood at 1.31lac MT in 3QFY20 (v/s 1.32lac MT in 3QFY19). For 9MFY20, volumes stood at 5.29lac MT (v/s 4.55lac MT in 9MFY19).

Palm oil prices stood at INR72/kg in 3QFY20 (v/s 55/kg in 3QFY19). Indonesia and Malaysia use palm oil for biodiesel, which has led to the increase in prices. Average price next year is expected at INR66-68/kg, as peak production months for Indonesia, Malaysia and India will collide in the next season, which will reduce prices from current levels.


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Palm oil acreage was 63,000 hectares at the beginning of FY20, the company has added 2,600 hectares in 9MFY20 and will add total of 3,500 hectares by the year-end.

Crop protection Extended monsoons resulted in delayed sowing, which impacted sales and

profitability in 3QFY20. Launch of new products in the last 9 months is expected to contribute to

nearterm growth in various categories, such as (i) herbicides – Hitweed Maxx, Bloxit, Veteran, (ii) insecticides – Prudens, Kliftan, Hanabi (a miticide to be used for teas and chillies), and (iii) fungicide – Rohelus.

The company is focusing on recovery from debtor, which in turn should aid in improving the working capital cycle over the long term; however, it has dented its revenue growth in 3QFY20.

Astec The company has taken a reversal of INR65m in 9MFY20, as the MEIS benefit,

which was initially 3%, has now been reduced to 2%. Animal feed

Price hikes taken for end products have led to significant profitability improvement.

In the chicken business, the company has no pricing power as 95-96% of the INR700b market is wet market (i.e. live chicken).

Corn and soybean prices are expected to further soften as the poultry is in a bad shape. Live bird is selling at below cost of production since the last 7-8 months.

The company does not expect maize prices to increase while higher production is expected in Rabi crops. Additionally, prices of eggs and chicken have declined, which should impact farm profitability, thereby affecting demand for maize.

Dairy Strategy in the dairy segment is to increase the share of value-added products

(VAP), which yield higher margins (VAP formed 22-23% of total dairy sales in FY19 and is expected to rise to 30% in FY20).

The company has increased milk prices by INR8-10/liter but cost has also increased by INR10-12/liter, which has impacted the performance.

Indian Hotels BuyCurrent Price INR 137

In 3QFY20, demand growth stood at 4.7% YoY exceeding supply growth of 2.5%. The company had signed record 24 hotels with an inventory of over 2,800 rooms for FY20. During the last 9 months, they have opened one hotel per month.

Out of 197 hotels and 24,223 rooms in Jan’20, 42% are through management contracts with the company on track to achieve 50%.

The company has opened 2 hotels in early-2020; Taj Fateh Prakash Palace, adding to its unmatched palace collection and Devi Ratn, Jaipur, an uber chic design hotel, a part of the SeleQtions portfolio.

The company has signed six bungalows under Ama Stays & Trails – a new concept of homestays – taking the portfolio to 19 bungalows. It has also strengthened its presence in the spiritual tourism segment with two new Taj hotels in Rishikesh and Tirupati. Signed 3 new hotels in the North-East states, demonstrating its commitment to the region (Shillong, Gangtok, Tawang).


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The company has repositioned 20% of the Ginger portfolio as lean-luxe hotels, which have a premium of 26% in ARR.

The company partnered with AB InBev, the world’s leading brewery, to exclusively launch a chain of premium microbreweries within marquee IHCL hotels across key locations in India, with the first to open at Taj MG Road, Bengaluru in Apr’20.

For 9MFY20, the company spent capex of INR3b (INR2b for standalone) and plans to spend INR5b for FY20 (for network hotels).

Taj Exotica has been the RevPAR leader in FY19. The company made investments for the enhancement of Taj Fort Aguada Resort/Taj Holiday Village Resort in Goa, as the city continues to perform well.

Revenue from management contracts is expected at INR2.34b for FY20. For 3QFY20, the company saw 9% RevPAR growth in London and 3% decline in

RevPAR for the USA (Taj Campton Palace Hotel was flat and The Pierre registered RevPAR decline of 4%). For 9MFY20, London registered RevPAR growth of 15% while the US remained flat.

The company received INR63m through sale of land in Pune, INR732m through sale of apartments and INR298m through simplification of shareholding, providing liquidity of INR1,750m, which will be used to repay debt.

The company has re-launched Chambers and added 200 global members (half through migration and half new), adding INR300m to the revenue.

The company will also go for some big box Ginger, like the property in Santacruz, Mumbai, for which the company has received an IOD (Intimation of disapproval) and will apply for a certificate of commencement.

Consolidated/standalone gross debt (pre Ind-AS) as on 31st Dec’19 was INR22,690m/INR17,080m. Consolidated/standalone net debt (pre Ind-AS) as on 31st Dec’19 was INR18,360m/INR14,380m.

Interglobe Aviation Neutral Current Price INR 1,481

INDIGO expects maintenance cost to remain high for the latter part of FY20 too as the A320ceo engines (with extended leases starting 2016) go for the second shop visit.

This cost is expected to come down significantly from FY22 as deliveries for A321neos replace the older aircraft and the share of A321neos increases in the total fleet.

However, the slowdown in the delivery of A321neo aircraft (~5-6 months to catch up the lagged supply) continues.

Looking into 4QFY20, the month of Feb-Mar is seasonally weak as people avoid travelling owing to kids school/exams. The company expects yield growth in 4QFY20 (YoY) to face challenges, led by seasonally weak quarter and higher yield base led by Jet collapse last year (in 4QFY19).

Also, metro to metro routes continue to be under pressure as domestic LCC players replaced the FSC slots of Jet Airways on those routes.

INDIGO expects utilization rate to only improve marginally from current levels after the company completes DCGA’s directive to replace A320 neo engines.

INDIGO currently flies only two flights to China and the company expects minimal impact in operations from Coronavirus. However, the spread of


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epidemic can led to a huge impact on global commutation and thus aggravate slowdown in the aviation industry.

Info Edge Neutral Current Price INR 2,853

Recruitment: Growth in Sep’19 was largely impacted due to non-IT verticals like Auto, BFS, Telecom, Manufacturing, even as IT remained stable. Dec’19 witnessed slowdown in IT and other verticals like FMCG and Retail as well.

99 acres: Real estate market continues to be tough as clients are facing liquidity issues. Growth is not expected to return anytime soon. INFOE has expanded its on-ground sales team to bring more suppliers on the platform.

Jeevansathi: Increase in marketing during the quarter helped gain market share and accelerate revenue growth. INFOE will focus on gaining market share further in the West/North India.

Zomato: Acquisition of Uber Eats has made Zomato India’s largest food-delivery player. Cash burn has been on a downward trajectory.

AIF: INFOE has set up an Alternate Investment Fund of INR1.5b, which will be used to invest in promising start-ups as a part of its investment strategy.

Weak macros translate into disappointments across the board S/A revenue/EBIT/PAT grew 14%/22%/22% YoY (v/s est. 19%/35% /37%). Recruitment grew 13% YoY (v/s est. 18%) due to soft macros. Growth in 99acres at 15% YoY (v/s est. 25%) was the weakest in the past 8

quarters given continued challenges in the realty market. EBIT margin improved 160bp QoQ to 29.8% (v/s est. 31.5%). The miss was

primarily due to higher-than-expected employee benefit expenses, which were partly offset by reduced advertisement/other expenses.

Diminution in carrying value of investment to the extent of INR30m on account of Applect was provided for.

Adj. PAT at INR911m grew 22% YoY (v/s est. 37% YoY). The disappointment was mainly on account of lower operational and other income, the impact of which was partly offset by lower-than-expected tax expense.

Overall billing growth decelerated to 10% YoY. Kaveri Seeds Buy Current Price INR 465

Cotton sales came to a halt in 3QFY20 due to sowing coming to an end after the extended monsoons stopped.

Maize acreages have now picked up considering that rainfall has come to a halt after good rains in Sep-Oct’19; maize prices also seem to be doing well.

Despite industry hybrid rice volume growth being under 8-10%, overall volumes of Kaveri hybrid rice was up 60% YoY for 9MFY20.

For 9MFY20, volumes for cotton increased 18% YoY and contribution of new products rose to 22% of the volume (from 14% in the same period last year).

For 9MFY20, maize volumes were down 3% YoY. The 12% increase in revenue was on account of better product mix and price gains.

For 9MFY20, hybrid rice volumes were up 57% YoY and contribution of new products surged to 50% of the volume (from 27% in the same period last year).


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Maize and rice area for Rabi season has already begun to rise and is expected to continue growing in 4QFY20, given good ground water table as well as stable commodity prices.

The hybrid seed market stands at 45-50KMT. Uttar Pradesh, Jharkhand and Chhattisgarh are key hybrid markets and the company has good market share in these areas.

Of total sales, cotton, paddy, maize and vegetables contributed INR740m; from this, INR540m (vs INR140m in the previous year) was from maize alone while INR70m was from vegetables.

The vegetable seed market is worth INR25-30b and is increasing each year. The company expects vegetables to generate revenue of INR250m in FY20, registering growth of 70% YoY. From FY21, the segment is expected to grow at 30-35% over the next 3-5 years.

The company expects total revenue to grow 15-20% in FY20; cotton revenue is expected to grow 10-15% and non-cotton revenues should grow 20-25%.

The cotton: non-cotto n mix for FY20 should be 50:50 and in the coming 2 years, it should improve to 40:60.

The company plans to incur capex of INR200-300m over the next 2- 3 years. Profitability in cotton is increasing as the company has implemented various

new technologies, taking per packet margin up by INR10-15. KNR Constructions Buy Current Price INR 285

Macro environment NHAI ordering has been weak till date. Execution continues to struggle owing to

low land acquisition and financing challenges. The government has launched massive NIP program. Budgetary allocation to

NHAI has been increased. Chennai-Bengaluru Expres sway should start soon. Delhi-Mumbai Expressway ordering and execution on-going.

Company related updates KNR has got appointed dates for 4/5 HAM projects. Execution of 3 HAM projects is in full swing, while appointed date for 1 HAM

project was received a couple of days ago. For the 5th HAM project, concession agreement has been signed.

Updates on BOT projects – Signed SPA for sale of Walayar project to Cube Highways for INR5.3b. Expect transaction to be completed in 2-3 months.

Barauni project – toll was down this quarter due to maintenance of a major bridge.

New ordering: Expect to garner 1 more road project this quarter worth INR10- 15b, likely on HAM basis. KNR is also targeting one irrigation project but has refrained from commenting much on it.

Interest cost was higher this quarter on account of mobilization advance for HAM projects amounting to INR60m.

Total mobilization advance stood at INR2b. Standalone debt was at INR3.3b and includes INR1.9b of promoter debt. Working capital cycle stood at 43 days


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Margins were higher this quarter on account of irrigation and HAM projects. Irrigation projects contributed 30% this quarter. For 9MFY20, it is about 20%. Believe margins will be in the range of 18-19% on continued basis.

MAT credit of INR600m is left to be utilized. So, it is not shifting to the new tax regime. For the full year, it expects the tax rate at 25%.

Land acquisition update: Magadi project – 70% land is already there. Palani project – 80% 3D don e, but waiting for 3H final figure from NHAI. Expect FC in May.

Lemon Tree Hotels Buy Current Price INR 60

ARR on a same-hotel basis was up 5% at INR4,712 in 3QFY20. For new hotels, ARR stood at INR5,620 (19% higher than same hotels). For Keys Hotels, ARR was at INR2,985 (37% lower than same hotels).

Managed rooms increased by 58.2% to 2,722, forming 34% of total room inventory in 3QFY20.

As of 31st Jan’20, the operational portfolio comprised of 79 hotels and 7,979 rooms: 4,214 owned, 978 leased and 2,787 managed rooms. The pipeline includes of 748 owned/leased and 1,925 managed rooms.

Fees from managed hotels stood at INR64m in 3QFY20. Demand from large corporates and SMEs has been impacted but the same is

more than compensated by the retail segment. Retail share was 39% (v/s 36% in 3QFY19).

The company has taken a price hike of 3-4% for large corporates, 5-6% for SMEs and 8-10% for the retail segment.

Hyderabad has seen a significant improvement in leasing and supply of office buildings. ARR of LEMONTRE’s hotels in Hyderabad grew 18% YoY in 3QFY20 and the company holds a bullish view on the market for the next four years.

The company has invested INR3b in the Mumbai airport hotel till date; total investment in the hotel will be INR8.5b. The company plans to repay INR2b of debt in two years and fund further expansion through internal accruals. Current debt is INR15b which management believes is peak.

Management expects to generate EBITDA of INR600-650m in the next 1.5 years from Keys Hotels.

Corporate expenses will drop to INR20m from Apr’20 for Keys Hotels. For 3QFY20: In LTP, Pune, ARR stood at INR4,900 and occupancy at 60%. In LTP,

Mumbai, ARR stood at INR6,700 and occupancy at 62%. For Aurika, Udaipur, ARR stood at INR15,000 and occupancy at 20%. In LTP, Kolkata, ARR stood at INR6,500 and occupancy at 44%.

MCX Buy Current Price INR 1,335

New Client Additions: Decent number of unique client codes was added during the quarter, most of these new clients were added organically. 25% of the trading volume was from new clients.

Other income: Fall in treasury income by 10% was due to mark to market losses. Total Settlement Guarantee Fund (SGF) corpus stood at INR3904.7m.



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Distribution by banks and on-boarding of customers: This remains WIP. Most banks that have been on-boarded had done a soft launch. They have gone slow as they are grappling with equity market requirements. Overall banking channels are not yet tapped to generate any significant volume gains.

Tax: Tax rate came in at 5% for the quarter due to utilization of MAT credit by the company and reversal of tax provision taken by the company in previous year. Post full utilization MCX will move to new tax regime. Going ahead ETR should remain in the range of 15-17%

New Products: MCX few new products in this pipeline such as Index futures, Potato futures and electricity futures, however they are still awaiting SEBI approvals on the same.

Oberoi Realty Buy Current Price INR 510

On real estate market: Management believes that the recent reforms in the real estate sector like RERA and key events like demonetization, GST and NBFC crisis have led to consolidation in the industry. Larger players like OBER with balance sheet strength stand to benefit going ahead.

On traction across different projects: As the projects start nearing completion, Oberoi is seeing good traction across its key projects like Enigma and Eternia (Mulund), Sky city (Borivali) etc.

On Thane Project: Thane project will be launched in 1HFY20 which will be a mix of residential (incl. AFH segment), commercial, retail etc.

Update on under construction leasing assets: The construction of leasing assets is on track. Tentative schedule for completion of these projects are:

Borivali Mall (4QFY21), I-ven Mall (4QFY22), I-ven office (3QFY23)

On Commerz I occupancy drop: One of the existing clients at Commerz I was interested in doubling up the leasing space. However, due to the lack of any additional space to lease out either in Commerz I or Commerze II, OBER lost the client, leading to a drop in occupancy at Commerz I for 3QFY20. However, the vacant space has alre ady been leased out.

Phoenix Mills Buy Current Price INR 867

Pre-leasing in under construction retail portfolio: (1) PMC Lucknow: Expected to be operational in 4QFY20; 85% is pre-leased; avg. preleasing rent at INR103 psfpm. (2) PMC Indore: 60% is pre-leased. (3) PMC Hebbal & PMC, Wakad: Anchor leasing is done. 45% of pre-leasing is expected over next two quarters. (4) Palladium Ahmedabad: 65% is pre-leased.

Pre-leasing at commercial projects: Fountain Head T1 is fully leased (avg. rent (excl. CAM) at INR80psfpm. Fountain Head T2 & T3 is expected to start leasing in 1QFY21.

Debt levels: Total debt remained largely stable at INR46b with avg. cost of borrowing down to 9.3% in 3QFY20 (v/s 9.4% in 2QFY20).

On FY21 renewals: HSP, Mumbai (16% area), PMC Bangalore (26%), PMC Mumbai (24%), PMC Chennai (20%) & PMC Pune (20%).


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Capex plans: Currently quarterly run-rate stands at ~INR1.40b/quarter. For 9MFY20 (Commercial + retail), capex was ~INR4.30b. For FY21, management has guided for capex of INR7.b+.

On long-term strategy: PHNX has a selective expansion strategy and it focuses on Tier I cities where it has a first-mover advantage.

On residential projects in Bangalore: Residential projects (Kessaku and One Bangalore West) are moving slow. However, PHNX is on track to develop sales strategy like subvention scheme to accelerate the velocity in the projects.

P I Industries Buy Current Price INR 1,548

Domestic business revenue increased 24% YoY, driven by volume growth during the quarter.

Net debt as on Dec’20 was INR2,520m. The company is targeting to complete QIP in the next 1-1.5 months. Capex to be incurred (excluding Isagra): For FY20 – INR6,000m, of which

INR5,500m has already been spent. For FY21 – INR2,500-3,000m. Fire accident at Jambusar would lead to a revenue loss of INR400-500m in

4QFY20. Currently, the plant is shut for repairs. PI is targeting to launch three products in the domestic market every year. The company is open to acquire assets located in India/outside India from the

funds raised via QIP. Three plants are set to commence operations – in 4QFY20, 2QFY21 and 4QFY21.

Capex incurred for each plant will be INR1.8-2b, and 1.5x asset turn can be expected at full capacity utilization (expected time to ramp up is 12-18 months once plant starts).

BOD has approved QIP of INR20b, which will be deployed toward: (i) organic growth, (ii) scaling up new molecules and (iii) diversifying into adjacent verticals like pharma, Nutraceuticals and others.

RM souring from China is in s ingle digit (to the total RM requirement) for PI and thus it doesn’t expect material impact due to coronavirus. The company is covered till April/May’20 for its RM requirement.

The company has guided for 20% revenue growth over 2-3 years (ex-Isagro acquisition).

Quess Corp NeutralCurrent Price INR 557

General staffing outlook for 4Q remains healthy, given the expected ramp up of some of the large deals closed in Dec’19.

Magna Infotech is going through a lean phase. Focus is on niche skills recruitment and high margins. Growth acceleration in this segment can be expected only after a few quarters.

The company restructured the sales team of Monster. This, coupled with the release of ‘Recruiter search’ feature in 4Q, should help increase the entity’s revenue run-rate.


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Contract with Quess East Bengal Club terminates in May’20, post which QUESS will not have any financial obligations. The company is already in discussion with investment bankers for monetization of its stake.

Expect a steady state EBITDA margin of 5.5% in Workforce Management. Target for cash conversion (OCF/EBITDA) is 50%.

Valuation and view – Margin pressure should remain an overhang Some of the recent changes in the organization are positive. These include (i)

the decision to divest some unrelated businesses (e.g. Quess East Bengal Club), (ii) guidance on no incremental acquisitions in the near term and (ii) higher focus on operational cash conversion.

Post the impending CEO change, we do not anticipate any major change in the company’s capital allocation, growth and margin strategy.

Strong revenue growth in general staffing should continue. However, given the challenges in other key segments (e.g. Magna, Internet, Industrials etc.), growth will likely be concentrated and led by general staffing.

Despite the consolidation of higher-EBITDA margin entities (e.g. All-Sec Technologies, EBITDA margin of ~20% v/s ~6% for QUESS), profitability should remain under pressure due to (i) lower mark-ups in the large contracts within general staffing and (ii) overhang due to loss-making/low-margin entities like Monster/Digicare.

SRF BuyCurrent Price INR 4,162 Specialty Chemicals

Segment delivered a strong performance, backed by healthy demand in agrochemicals. Brazil and other LATAM markets did well.

New products gained momentum and the newly commissioned facilities started contributing to the performance. Better absorption of fixed costs led to higher EBIT margins.

The board approved a proposal to set up dedicated facilities to produce intermediates catering to the agro-chemicals segment at an aggregate cost INR2.38b for new products and ramping up existing products (2,150 MTPA).

Agro-chemicals sector witnessed healthy traction across key global markets, and pharma continued growing at a consistent pace. We expect Specialty Chemicals to continue this growth momentum going forward.

Fluorochemicals The segment delivered a subdued performance owing to the slowdown in the

auto sector and a drop in global prices of refrigerants on account of weak demand and the normalization of chloromethane product prices from peak.

The company successfully commissioned brownfield HFC facilities at Dahej and Bhiwadi, the ramp up for which is on course.

The board approved capex of INR655m for HFC as phase 1 of future incremental capacities. Ramping up of HFC plant will drive operating leverage.

The Indian auto sector remains under pressure, with the production of passenger vehicles down ~14% compared to last year.


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The company is not contractually obligated to buy fluorspar from China, and has agreements with Russia, South Africa, Kenya, etc. Thus, it is not impacted by the disruptions from the outbreak of Coronavirus.

R22 phase out has started. Thus, price increases in molecules have been seen. The company will use R22 in other downstream products, and thus, the impact of loss in volumes is not significant.

Packaging Performance was healthy across units in 3QFY20 as demand for BOPET and

BOPP films was steady. Margin expansion was on account of improved efficiencies, expanded product

offerings and a higher contribution from value-added products. Three new BOPET lines were commissioned (two in Indonesia and one in India),

which may impact industry margins in the coming quarters. Total BOPPET capacity is 1.15 lakh MT, and the company will add another 45k

MT (in Thailand by Sept’20) Technical Textiles

NTCF segment performance was impacted by the slump in auto sector. The company suffered an inventory loss of INR60-70m in the segment.

During the slowdown, the business focused on improving overall efficiencies and reported a significant improvement in upstream process capability parameters.

Sales from VAPs and new products in belting fabrics and polyester industrial yarn segment have contributed to the overall business performance.

Production of all auto segments (passenger, commercial and 2-3 wheelers) has reduced YoY. However, sales grew slightly in the last quarter owing to the festive season. China continues to dump yarn into the US market, despite the anti-dumping duty.

Others The company declared an interim dividend, leading to cash outflow of INR485m. The effective tax rate is expected to be 26-28% from FY21. The company has already sanctioned capex of INR8-8.5b for FY21.

S H Kelkar BuyCurrent Price INR 111

Raw material exposure to China and impact of Coronavirus – SHKL sources 30% of its raw material from China. However, on account of adequate inventory position for 4QFY20, management doesn’t see any significant impact of the Coronavirus led lockdown in China currently. Further, management will review the situation by end-Feb’20 to gauge the impact (if any) for the coming quarters.

Capacity utilization: Operation at Mahad facility has ramped up and the facility now operates at 80% capacity utilization. Blended capacity utilization across other facilities is 50%.

Working capital cycle: Stabilizing market, easing raw material pressure and improved liquidity condition has led to improved working capital cycle in 3QFY20.

On debt levels: In 3QFY20, net debt reduced by INR970m. Management has guided for INR200-250m per quarter of debt reduction.

On Industrial segment: The recently added industrial segment is doing well for the company and is expected to generate INR100m in revenue for FY20.


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Management believes that the segment could be an INR2b opportunity in the future.

FY21E revenue outlook: The company has guided for double-digit growth and 17-18% EBITDA margin in FY21. The growth will largely be driven by improved product mix, strong launch pipeline and growth in the underlying industry.

Tata Chemicals BuyCurrent Price INR 765

Tata Chemicals Magadi (Africa) faced operational challenges due to which it was shut down for 12 days in 3QFY20, leading to lower sales volume. The issue is being addressed in the current quarter.

In the Nutritional Science segment, the Mambattu plant started trials and reached quality benchmark. Margins in this business were muted on account of higher marketing fixed cost.

In the Material Science segment, commercial production of non-rubber & rubber grade silica is proceeding as planned. The company continues to focus on customer approvals (tyre & non tyre OEM) through customer engagement and their specific requirements.

In the Agro Science segment, the company continues to invest in capacity expansion and registration in international markets with a focus on high-margin exports, especially to South East Asian countries.

In the Energy science segment, the company received support from the Gujarat government to set up a greenfield manufacturing facility. Land has been allotted in Dholera, Gujarat. The company is in advanced stage of discussions with potential technology partners.

Consolidate gross/net debt stood at INR61.4b/INR37.3b as on 31st Dec’19. The company will incur capex of INR8b for FY20. It plans to spend INR25b at the

Mithapur site. The pulses and spices portfolio continues to perform well with revenue growth

of 22% YoY, despite of strong competition from regional brands and unorganized market.

The company witnessed a reduction in finance cost due to repayment of ECB loans during the quarter.

It booked an insurance gain of INR60m in 3QFY20 v/s non-recurring expense of INR80m in 3QFY19.

Salt Business: Tata Salt maintained its leadership position in the branded salt segment with a market share of more than 25% in the overall edible salt market and of ~65% in the branded salt market in India.

The salt portfolio continues to go strong in the market with higher sales volumes (up 3% at 301 kts v/s 293 kts last year). Margins improved on account of lower marketing cost.

The company had announced plans to take a realization increase of USD15/mt in NA in Oct’19, but increase actually taken was ~USD4-5.

Energy cost in North America has been flat. Benefit of lower energy cost is seen in India and Kenya.

TTCH did not incur any integration cost during the quarter. Advertisement and promotion spend in 3QFY20 was lower than last year.


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TeamLease Services BuyCurrent Price INR 2,442

Weakness in the overall job market: TEAM indicated that there is softness in the job market, which is reflecting in the company’s general staffing headcount additions. Festive season-related ramp ups this time are also subdued. While there is demand in some pockets (e.g. banking, e-commerce), higher attrition in some other sectors (e.g. NBFCs) translated into weak headcount growth (~10% YoY) during the quarter.

Provisioning in general staffing led to margin contraction: The company made provision for INR13m in its general staffing segment, which impacted its reported EBITDA margins to the tune of ~10bp. Apart from that, higher salary per associate also translated into optically lower EBITDA margins in the segment (1.6% v/s 1.8% in 2QFY20).

Downbeat commentary on growth: It expects ~10% growth in general staffing headcount for FY20. This translates into headcount addition of ~2,300 in 4QFY20 (v/s 1,400 in the year-ago period), which is a seasonally weak quarter with impact of roll offs and absorptions. Anticipate overall revenue growth of ~18% for FY20.

In near term, expect steady state EBITDA margin of 2% in general staffing. Some cost-rationalization measures are underway both in general staffing and in specialized staffing (eliminating redundancies at acquired entities). It is confident on provision reversal (INR 40mn) in staffing and HR services in 4Q. IT staffing EBITDA margins should remain in the range of 10-11%.

Integration of IMSI is on track: IMSI operates in Infra staffing segment within IT staffing. The company has more than 70 clients with total headcount of 1,900. Key clients include IBM, WPRO and Cognizant etc. In 3QFY20, IMSI contributed 45 days of revenue which accounts to INR73m.

Expect gradual pick up in N ETAP: Going forward headcount additions in NETAP will not be robust, but only gradual.

UPL NeutralCurrent Price INR 585 Latin America

Brazil crop protection demand on soybeans has benefited from the US-China trade war, despite drought conditions in south. UPLL has outperformed in Brazil, increasing market share in crops like sugarcane, cotton and specialty crops.

Argentina is facing economic turmoil, resulting in higher export duties for grain crops.

North America UPLL’s strong manufacturing footprint in India is helping customers hedge

supply risks after China market disruptions earlier this year and possibly in the future (coronavirus).

Despite tough market conditions, UPLL has managed to increase market share in certain key herbicides and fungicide products.

Trade tensions between China and the US have contributed to soybean demand shift from the US to South America, depressing the crop protection market in this region.

Europe


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Tough weather conditions impacted west European farmers in 1H, increasing market channel inventory and depressing demand in 2H. Market conditions in 4Q have improved.

In Europe, it witnessed 27% de-growth as the base quarter was high due to higher sales in France.

Rest of World The company saw a good business performance in West Africa and parts of

South East Asia. The company continues expanding presence in countries like Ivory Coast, Ghana and Indonesia.

Australia was impacted by drought conditions and forest fires, putting downward pressure on demand.

India Favorable political environment toward agriculture was witnessed, along with

ideal weather and water conditions in Rabi season. Growth was driven by new launches and high-value insecticides (Ulala).

In India, it witnessed market share gains in the cotton and soybean segment. Others

The company is gaining market share in herbicides in the US and gaining market share in fungicides in Europe.

Net working capital remained at 126 days for the nine months ended Dec’20. Inventory days remained flat at 111 days. Receivable days fell to 124 from 139 last year. Payables declined to 109 days from 124 days last year.

UPLL witnessed cost synergy benefits of INR5.4b (target for FY20 is INR5.6b) and revenue synergy benefits of INR7.5b in 9MFY20. Revenue synergies are coming mainly from LATAM and Europe.

The company paid a consideration of INR316b for the Arysta acquisition, against which intangible assets stood at INR107b, tangible assets at INR106b, working capital at INR608b and goodwill at INR167b.

Company expects the gross margins to reach 40-42% in the next few years. Gross debt as on Dec’20 stood at INR316b (INR309b as on Sept’19 and INR293b

as on Mar’19). N et debt as on Dec’19 stood at INR297b (v/s INR265b as on Dec’19). Net debt increased by INR32b in 9MFY20, of which INR8b was due to forex movement.

The company maintained guidance of USD500m of debt reduction by FY20. It expects to reach net debt/EBITDA of 3.2-3.3x by FY20.

GALLERY

18 October 2019 28

Explanation of Investment RatingInvestment Rating Expected return (over 12-month)BUY >=15%SELL < - 10%NEUTRAL > - 10 % to 15%UNDER REVIEW Rating may undergo a changeNOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendationconsistent with the investment rating legend.Disclosures:The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOFSL is a subsidiary company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are available on www.motilaloswal.com. MOFSL (erstwhile Motilal Oswal Securities Limited - MOFSL) is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX) for its stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) National Securities Depository Limited (NSDL),NERL, COMRIS and CCRL and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products and Insurance Regulatory & Development Authority of India (IRDA) as Corporate Agent for insurance products. Details of associate entities of Motilal Oswal Financial Services Limited are available on the website at http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdfDetails of pending Enquiry Proceedings of Motilal Oswal Financial Services Limited are available on the website at https://galaxy.motilaloswal.com/ResearchAnalyst/PublishViewLitigation.aspx

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