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
Research & Quant Team
(Gautam.Duggad@MotilalOswal.com); Tel: +91 22 6129 1522
Investors are advised to refer through important disclosures made at the last page of the Research Report.
24 November 2015
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Contents
Summary
..................................................................................................................................................................................................................................
3
Sectors
...............................................................................................................................................................................................................................
8-142
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
Note:
All stock prices and indices are as on 19th February 2020, unless otherwise stated.
 Motilal Oswal Financial Services
3QFY20 | India
| 3QFY20
Voices
Inc. on Call
Voices
BSE Sensex: 41,323
S&P CNX: 12,126
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.
February 2020
3
 Motilal Oswal Financial Services
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
4
 Motilal Oswal Financial Services
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
5
 Motilal Oswal Financial Services
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
6
 Motilal Oswal Financial Services
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
7
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Key takeaways from management commentary
AUTOMOBILES
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
Ashok Leyland
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.
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.
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.
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.
New Launches
Bajaj Auto
Chetak
(e-scooter)
Bharat Forge
Eicher Motors
Hero MotoCorp
M&M
e-KUV100
,new
Thar
Maruti
Brezza (Petrol Variant), S-
presso (CNG variant)
Motherson
Sumi
February 2020
8
 Motilal Oswal Financial Services
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.
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.
Tata Motors
Passenger Vehicles -
Altroz,
Gravitas, JLR -Defender
TVS Motors
i-Qube (e-scooter)
Amara Raja Batteries
Current Price INR 784
Click below for
Results Update
Buy
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
Current Price INR 81
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
February 2020
9
 Motilal Oswal Financial Services
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
Current Price INR 3,090
Click below for
Detailed Concall Transcript &
Results Update
Neutral
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
Current Price INR 480
Buy
Click below for
Detailed Concall Transcript &
Results Update
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.
February 2020
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 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Bosch
Current Price INR 14,616
Click below for
p
Results Update
Neutral
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
Current Price INR 1,070
Click below for
Detailed Concall Transcript &
Results Update
Buy
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
Current Price INR 18,870
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
February 2020
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 Motilal Oswal Financial Services
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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
Current Price INR 1,059
Buy
India
Click below for
Detailed Concall Transcript &
Results Update
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).
February 2020
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 Motilal Oswal Financial Services
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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
Current Price INR 911
Neutral
Click below for
Results Update
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.
February 2020
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 Motilal Oswal Financial Services
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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
Current Price INR 2,252
Neutral
Click below for
Results Update
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
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 Motilal Oswal Financial Services
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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
Current Price INR 526
Click below for
Results Update
Buy
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
February 2020
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 Motilal Oswal Financial Services
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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
Current Price INR 6,756
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
February 2020
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 Motilal Oswal Financial Services
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Tata Motors
Current Price INR 158
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
February 2020
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 Motilal Oswal Financial Services
AUTOMOBILE | Voices
TVS Motors
Current Price INR 441
Click below for
Detailed Concall Transcript &
Results Update
Neutral
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.
February 2020
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 Motilal Oswal Financial Services
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
Near-term slowdown in
industrial automation is
expected to continue. However,
discrete automation, robotics
and electrification products are
ABB
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).
KKC has maintained its FY20
growth guidance for the
domestic business at 3-5% YoY.
Cummins
Guidance for exports growth has
also been maintained at 20% as
the company does not see any
appreciable pick up in 4QFY20.
Consumption slowdown and
liquidity crunch in the real estate
segment has impacted the
Havells
business in 9MFY20.
Lloyd business was impacted
due to sharp fall in LED TV sales
on account of price erosion.
FY20 order inflow guidance is at
10-12%, revenue guidance is at
12-15% and EBITDA margin
Larsen and
Toubro
guidance for the core E&C
business is at 10.5%. Revenue
ask rate for 4QFY20 stands at 16-
25%.
AC continued to perform well for
the company with double-digit
growth in a non-seasonal
Voltas
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.
Domestic Capex Cycle
Budget Impact
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
Near-term challenges exist such as
economic slowdown and liquidity
crunch.
Export market continues to face
roadblocks owing to prolonged
muted demand.
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.
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.
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 as overall capex
outlay was muted in the
budget.
Positive – due to import duty
hike on small appliances.
Negative – due to import duty
hike on compressors.
Negative as overall capex
outlay was muted in the
budget.
Negative – due to import duty
hike on compressors.
February 2020
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 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
ABB
Current Price INR 1,211
Buy
Click below for
Results Update
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
Current Price INR 35
Neutral
Click below for
Results Update
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
February 2020
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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
Current Price INR 832
Neutral
EMP segment
Click below for
Detailed Concall Transcript &
Results Update
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
February 2020
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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
Current Price INR 290
Buy
Demand scenario
Click below for
Detailed Concall Transcript &
Results Update
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.
February 2020
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 Motilal Oswal Financial Services
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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
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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
Current Price INR 540
Neutral
Macro outlook
Click below for
Detailed Concall Transcript &
Results Update
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.
February 2020
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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
Current Price INR 619
Click below for
Detailed Concall Transcript
& Results Update
Neutral
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.
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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
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Larsen & Toubro
Current Price INR 1,281
Click below for
Results Update
Buy
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
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 Motilal Oswal Financial Services
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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
Current Price INR 986
Click below for
Detailed Concall Transcript &
Results Update
Neutral
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
Current Price INR 733
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
28
F b
February 2020
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
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
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 Motilal Oswal Financial Services
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
Cement volumes were strong at 5.1mt
FY21 volume growth. While the new clinker line (3mt)
(+14% YoY).
Dalmia Bharat
has commenced trial run, 5.2mtpa cement grinding
3QFY20 volume growth in the south was
units should be commissioned over the next 12 months.
negative (while it was flat for Dalmia),
Murli Industries: NCLAT has given a favorable
and East saw single-digit growth (while
order on 24th Jan’20 and shortly, the asset should
Dalmia grew >10%) with Bihar and
be acquired.
Jharkhand growing in double-digits.
A clinker unit of 8,000tpd at Mangrol and a 1mt cement
In 3QFY20, grey cement volumes (incl.
grinding unit at Nimbahera have been commissioned.
clinker) increased 3% YoY to 2.2mt, while
JK Cement
The company has commissioned 1mt/1.5mt grey
white cement volumes were flat YoY at
cement grinding unit at Mangrol (Rajasthan)/Aligarh
0.35mt.
(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.
The company expects CTIL’s asset to achieve EBITDA/t
Consol. volumes declined 4% YoY in
of INR1,000 by 1QFY21 with utilization of 80%.
3QFY20.
Commissioning of 10.5MW of WHRS in Nathdwara
CTIL operated at utilization of 55% for
should further improve performance.
the quarter and 79% in Dec’19.
Ultratech
Capex guidance for FY20 is reduced from INR20b to
Nathdwara is operating consistently at
Cement
INR16b.
60% utilization.
East expansion of 3.4mt should be completed by
Mar’21. Orders for the same have been placed.
ACC
Current Price INR 1,431
Click below for
Results Update
Buy
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).
February 2020
30
 Motilal Oswal Financial Services
CEMENT | Voices
Birla Corp
Current Price INR 747
Buy
Click below for
Results Update
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
Click below for
Results Update
Current Price INR 866
Buy
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.
February 2020
31
 Motilal Oswal Financial Services
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
Current Price INR 757
Neutral
VSF
Click below for
Detailed Concall Transcript &
Results Update
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.
February 2020
32
 Motilal Oswal Financial Services
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
Current Price INR 75
Click below for
Results Update
Neutral
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 by
Mar’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.
February 2020
33
 Motilal Oswal Financial Services
CEMENT | Voices
JK Cement
Current Price INR 1,462
Click below for
Results Update
Buy
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
Current Price INR 326
Click below for
Results Update
Buy
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%.
February 2020
34
 Motilal Oswal Financial Services
CEMENT | Voices
Ultratech Cement
Current Price INR 4,473
Buy
Click below for
Detailed Concall Transcript
& Results Update
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.
February 2020
35
 Motilal Oswal Financial Services
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
Asian Paints
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.
Budget Impact
Nothing material
Outlook FY20
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.
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.
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.
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.
Britannia
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.
Dabur
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.
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.
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.
Nothing material
Hindustan
Unilever
February 2020
36
 Motilal Oswal Financial Services
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%.
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.
Marico
Pidilite
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
Asian Paints
Current Price INR 1,886
Click below for
Detailed Concall Transcript
& Results Update
Sell
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.
February 2020
37
 Motilal Oswal Financial Services
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
Current Price INR 3,081
Click below for
Detailed Concall Transcript
& Results Update
Neutral
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.’
February 2020
38
 Motilal Oswal Financial Services
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
Current Price INR 508
Neutral
Operating Environment
Click below for
Detailed Concall Transcript
& Results Update
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.
February 2020
39
 Motilal Oswal Financial Services
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
Current Price INR 272
Click below for
Detailed Concall Transcript
& Results Update
Buy
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.
40
February 2020
 Motilal Oswal Financial Services
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
41
 Motilal Oswal Financial Services
CONSUMER | Voices
Godrej Consumer
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 622
Neutral
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.
42
February 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Other points
Other expenses had ~INR80-100m worth of one-time expenses.
No major impact of restriction on Palm oil sourcing from Malaysia.
GSK Consumer
Current Price INR 9,868
Click below for
Detailed Concall Transcript &
Results Update
Neutral
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
Current Price INR 2,294
Click below for
Detailed Concall Transcript &
Results Update
Buy
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.
February 2020
43
 Motilal Oswal Financial Services
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
Current Price INR 130
Click below for
Detailed Concall Transcript &
Results Update
Neutral
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.
February 2020
44
 Motilal Oswal Financial Services
CONSUMER | Voices
Raw material and margins
Benign 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
45
 Motilal Oswal Financial Services
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
Current Price INR 300
Neutral
Click below for
Detailed Concall Transcript &
Results Update
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
Current Price INR 22,930
Click below for
Results Update
Neutral
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.
February 2020
46
 Motilal Oswal Financial Services
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
Current Price INR 1,594
Neutral
Demand environment
Click below for
Detailed Concall Transcript
& Results Update
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%.
February 2020
47
 Motilal Oswal Financial Services
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
Current Price INR 383
Click below for
Detailed Concall Transcript
& Results Update
Buy
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.
February 2020
48
 Motilal Oswal Financial Services
CONSUMER | Voices
US Business
EOC K-cups and private labels coffee segment volumes grew 3QFY20, along with
some 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 Earth
tea 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 fifth
consecutive quarter of over 2000MT in volumes.
Tata Coffee launched AMA Trails with Taj Hotels (IHCL signed a management
contract 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 added
a 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 and
promotion expenses.
The company witnessed 1% de-growth in revenue due to adverse forex
movement.
United Breweries
Current Price INR 1,286
Neutral
Business environment and market share
Click below for
Results Update
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
49
 Motilal Oswal Financial Services
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
Current Price INR 730
Buy
Click below for
Detailed Concall Transcript
& Results Update
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.
February 2020
50
 Motilal Oswal Financial Services
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
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 Motilal Oswal Financial Services
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
Management has not provided any specific guidance on credit
range of 3.5%-3.8%.
cost for FY21. However, it guided for credit cost over the long
Cost to assets ratio is likely to be impacted by
term to reach the long-term average of 110-115bp.
branch expansion. However, over the medium
The bank will focus on improving the provision coverage ratio in
term, it expects cost to assets to reach 2%.
the coming quarters.
Guided for RoE of 18% by FY22, driven by
improving credit cost, margins expansion, lower
opex and higher fee income.
The bank has shortlisted candidates (global as
Bank has been creating contingent provisions in certain pool of
well as internal) and the right candidate is
stressed accounts and provided INR7b during the quarter and
expected to be finalized by Jul’20.
thus holds total contingent buffer of INR14.6b.
It is in an investment mode and guided for
Most retail segments are reflecting improving trend. It, however,
adding 600-700 branches over FY20 and similar
sighted slight concerns in the CV and construction equipment
branches in FY21.
(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.
Downgrades in BB & below pool will remain high over next few
Margins can improve further due to asset mix
quarters.
change, while it does not expect incremental
Expect credit cost to sustain at 20-25% of the core PPOP in the
cost of deposit reduction in the near term.
long term.
Maintains its guidance of achieving 15% consol.
RoE by 1QFY21.
The bank does not foresee any stress in the retail portfolio,
Expect loan growth at ~20% due to slowdown in
including the unsecured book.
the macro.
Of the total stressed exposure of INR18b, INR15b has slipped in
Loan mix of 55:45 in favor of non-wholesale over
the past two quarters with total provisions of INR7b (which is
next 18-20 months.
above regulatory requirement).
Plans to exit FY20 with total 400 branches.
Credit cost to remain elevated in the near term.
Expects stressed HFC account to resolve by Sep’20 and will
provide more in 4QFY20. Overall, it expects the recovery rate at
Expect loan growth to be ~10%.
40-50%.
Margins to remain under pressure given the
Expects recoveries in three large accounts: Alok Textile (INR18b),
impact of repo based pricing/MCLR cuts.
Bhushan Power (INR40b) and one power asset (INR10b) and in
C/I ratio should improve on the back of lower
addition recoveries from smaller account.
wage provisions and improved digitalization.
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
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 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
AU Small Finance Bank
Current Price INR 1,167
Buy
Click below for
Detailed Concall Transcript &
Results Update
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.
February 2020
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FINANCIALS/BANKS | Voices
Axis Bank
Current Price INR 741
Click below for
Detailed Concall Transcript &
Results Update
Buy
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 strateg