Strategy
India Strategy
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Refer to our Jun’20
Quarter Preview
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1QFY21 Results Review: Beats muted expectations
Earnings breadth positive; Nifty EPS revised up marginally
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The June-quarter (1QFY21) corporate earnings for our coverage universe were better
than our muted expectations. Sales were impacted by the COVID-led lockdowns;
however, Corporate India undertook stringent cost control measures to protect their
bottom line and arrested the decline in operating profit. Healthcare, Utilities, Private
Banks and Technology sectors reported YoY profit growth, while Autos, Retail, Metals
and Telecom posted losses. Overall, management commentaries indicated MoM
improvement in demand during the quarter after easing of the lockdown restrictions.
Nifty sales declined 29% YoY (v/s est. -30%), while EBITDA/PBT/PAT declined
6%/30%/26% YoY (v/s est. decline of 11%/39%/35%). While >50% of Nifty-50
companies reported a beat on our PAT estimates, results of some key index
heavyweights like Reliance, TCS and ITC were below expectations.
MOFSL Universe’s sales/EBITDA/PBT/PAT declined 30%/10%/36%/35% YoY (v/s est.
decline of 31%/16%/45%/43% YoY). Six sectors posted YoY profit growth – Healthcare
(27%), Utilities (16%), PSU Banks (10%), Life Insurance (4%), Private Banks (1%) and
Technology (1%). Automobiles, Metals, Retail and Telecom posted losses in line with
expectations. Capital Goods, Cement, Consumer, Oil & Gas (O&G) and NBFCs posted
YoY PAT declines of 86%, 38%, 20%, 11%, 10% (v/s est. YoY declines of 86%, 67%, 29%,
10%, 19%).
Out of the 18 sectors that we track, 9/8/1 sectors delivered PAT above/in-line/below
our estimates.
Sectoral Highlights – Healthcare and Technology stood out: MOSL Healthcare universe
had a spectacular run this quarter with PBT/PAT growth of 29%/27% YoY (v/s est.
decline of 6%/5% YoY). Three aspects drove the outperformance: (a) Strong revenue
and better operating leverage by API companies, (b) Sharp margin improvement due
to cost savings in the domestic formulation (DF) segment, offset by (c) High base of the
past year and company specific reasons impacting performance of the US segment.
Our Technology Universe posted in-line PAT growth of 1% YoY, despite a miss by TCS.
Commentary remains stable, while deal wins and deal pipeline are encouraging for
most IT companies
.
11 out of 13 companies under our coverage have seen upgrades in
FY21 PAT estimates.
Private Banks’ performance was in line with expectations – PBT declined 13% YoY
while PAT was flattish YoY. All banks reported declines in the moratorium book. Our
NBFC Universe’s performance was above expectations as PAT declined 10% YoY (v/s
est. -19% YoY). Consumer Universe posted 20% YoY PAT decline (v/s est. -29% YoY) as
Britannia, Marico, HUL, Pidilite and Asian Paints beat expectations, driven by their
focus on cost rationalization (ad spend reduction and benign input cost). Results of our
Cement Universe were above expectations (38% YoY decline in profits v/s est. 67%
YoY decline). Despite the 30% YoY volume decline, EBIDA margins remained flat YoY
led by sharp cost cuts and benign fuel prices. Out of 10 companies, 9 reported PAT
above expectations. Capital Goods universe posted a muted, but in-line performance
with PAT decline of 86% YoY.
Automobiles Universe posted PBT/PAT losses of INR79b/INR95b, dragged by lower
volumes and consequent lack of operating leverage. Tractor segment outperformed.
Out of 17 companies under our coverage, 9 posted losses. Metals Universe posted a
loss of INR30b (v/s est. INR23b loss). O&G Universe’s PAT declined 11% YoY (v/s est.
10% YoY decline). Utilities posted 16% YoY profit growth (v/s est. decline of 21%),
largely led by NTPC and Power Grid.
Gautam Duggad – Research Analyst
(Gautam.Duggad@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
August 2020
1
 Motilal Oswal Financial Services
Strategy
MOFSL Universe – 63% companies reported YoY PAT declines while 16% posted YoY
profit growth >30%.
Our FY21/FY22E Nifty EPS estimates have been marginally revised upwards by
2.1%/2.7% to INR477/INR664 (prior: INR467/INR647). We now expect FY21 Nifty EPS
to grow 2.4% YoY.
Breadth of earnings revision was positive – 84 companies in the MOFSL Universe saw
upgrades of >5% while 40 witnessed downgrades of >5% for FY21.
MOFSL Universe at sectoral level – Metals/Healthcare/Cement/Utilities/NBFCs
/Technology/Consumer have seen earnings upgrades for FY21 of
21%/12%/11%/8%/8%/6%/2% YoY.
Top upgrades (FY21E): Hindalco (49%), Asian Paints (41%), UltraTech (21%), Cipla
(19%), Tech Mahindra (17%), Britannia (16%), HCL Tech (14%), and Infosys (11%)
Top downgrades (FY21E): Grasim (-10.3%), Kotak (-9.7%), Titan (-9.2%), Gail (-8%), RIL
(-8%), and ITC (-5%).
The 1QFY21 corporate earnings came in above our muted expectations. Cost control
and cash preservation were effectively deployed as tools to offset the headwinds from
the lockdown induced volume declines. Just 6% EBITDA decline in the Nifty (despite
30% revenue decline) is a testament to the ability of India Inc. to drive cost control
when needed. Healthcare and Technology earnings stood out – both in absolute and
relative terms – and we expect these sectors to show continued strength ahead. Rural
India outperforming urban clusters is a consensus commentary from all sectors. As the
lockdowns are eased and demand recovery takes shape gradually, we expect the
commentaries to improve. However, after the 50% rally from Mar’20 lows, we believe
some of this recovery is priced in. At 20.5x 1-year forward P/E, the Nifty is now trading
at a premium to its LPA and is not offering a lucrative risk-reward proposition, in our
view. Further upside hereon, in our opinion, hinges on demand/earnings
normalization and abatement of the spread of COVID-19 pandemic.
Exhibit 1: Preferred Large-cap ideas
Company
Reliance Inds.
Hind. Unilever
Infosys
Bharti Airtel
St Bk of India
Titan Company
Dabur India
Divi's Lab.
M&M
ICICI Pru Life
MCap
(USD b)
180.2
68.6
58.5
39.0
23.4
13.6
11.6
11.2
10.1
8.7
MCap
(USDb)
6.7
5.3
4.5
3.4
3.0
2.8
2.2
2.0
1.4
1.1
CMP
(INR)
2,096
2,187
955
526
195
1,127
493
3,189
612
439
CMP
(INR)
549
119
2,856
2,032
726
313
264
460
143
3,053
EPS (INR)
EPS CAGR (%)
FY20 FY21E FY22E FY20-22
67.9 67.4 111.4
28
31.2 34.3 44.2
19
38.9 41.6 48.2
11
-7.5 10.2 5.4
NM
22.1 23.7 32.5
21
17.1 10.3 22.1
14
8.6 9.0 10.6
11
48.9 69.7 86.3
33
15.0 27.0 36.4
56
7.4 8.0
8.6
8
EPS (INR)
EPS CAGR (%)
FY20 FY21E FY22E FY20-22
8.0 10.1 12.1
23
3.7
1.2
5.6
23
95.4 131.5 146.1
24
51.4 89.0 88.7
31
22.6 20.7 28.9
13
17.3 11.4 16.4
-3
7.0
6.7
8.8
13
16.8 24.0 26.4
25
-0.2 -3.0 -0.6
NM
51.3 79.3 87.3
30
FY20
30.9
70.1
25
NM
8.8
66.0
57.1
65.2
40.9
59.0
PE (x)
FY21E
31.1
63.7
23
51.4
8.2
109.4
54.7
45.8
22.7
54.8
PE (x)
FY21E
54.2
102.4
21.7
22.8
35.1
27.6
39.3
19.1
NM
38.5
FY22E
18.8
49.5
19.8
97.4
6.0
51.1
46.5
37.0
16.8
50.8
FY20
2.9
58.8
6.6
3.7
0.7
15.0
13.2
11.6
2.1
2.7
PB (x)
FY21E
2.7
10.4
5.8
4.3
0.7
14.5
12.4
9.1
2.0
2.4
PB (x)
FY21E
3.5
3.3
4.6
5.6
4.5
5.5
9.7
10.3
15.7
11.9
FY22E
2.4
10.4
5.0
4.1
0.6
12.7
11.5
7.6
1.8
2.1
ROE (%)
FY20 FY21E FY22E
10.2 9.0 13.5
86.0 28.2 21.0
25.2 25.2 25.4
-5.5 7.7
4.3
7.2
7.1
9.6
23.8 13.5 26.6
24.9 23.4 25.6
18.2 22.2 22.4
9.7
9.0 10.4
6.5 14.5 14.6
Exhibit 2: Preferred Mid-cap ideas
Company
Tata Consumer
Motherson Sumi
Alkem Lab
Ipca Labs.
AU Small Finance
Gujarat Gas
Crompton Gr. Con
ICICI Securities
Aditya Birla Fashion
Indiamart Inter.
LP: Loss to Profit
FY20
69
32
30
40
32
18
38
27.3
NM
60
FY22E
45.5
21.2
19.6
22.9
25.1
19.1
29.8
17.4
NM
35.0
FY20
3.7
3.3
5.5
7.1
5.1
6.6
11.3
12.3
10.2
20.3
ROE (%)
FY22E FY20 FY21E FY22E
3.3
6.9
6.6
7.5
3.0 10.5 3.2 14.6
3.9 19.7 23.2 21.6
4.6 19.2 27.3 22.1
3.8 18.0 13.5 16.3
4.5 43.6 21.7 25.9
8.1 29.8 24.6 27.3
8.7 48.1 58.4 54.3
16.7 -1.1 -36.6 -7.9
8.2 72.2 61.4 43.7
August 2020
2
 Motilal Oswal Financial Services
Strategy
1QFY21 performance above expectations on cost-cut
Sales in line for MOFSL/Nifty; EBITDA/ PBT/PAT above expectation
For the MOFSL Universe, aggregate sales declined 30.4% YoY (v/s est. -31.4%),
EBITDA declined 10.4% YoY (v/s est. -16.5%), PBT was down 36.4% YoY (v/s est. -
45.4%) and PAT declined 34.5% YoY (v/s est. -37%). 1QFY21 results were above
our muted expectations largely led by significant cost rationalisation across
sectors.
At PBT level, Healthcare (29.2%), Life Insurance (5.3%) and Technology (2.7%)
managed to post gains YoY. On the other hand, Capital Goods (-76.6%), Media (-
67%), Cement (-40.3%), O&G (-28.7%), Consumer (-26.2%), NBFCs (-21.5%), PSU
Banks (-15.9%), Utilities (-12.8%) and Private Banks (-12.6%) posted double-digit
PBT declines YoY. Capital Goods, Cement, Consumer, Life Insurance, NBFCs,
Healthcare, Infrastructure and Utilities have beaten our PBT expectations.
Aggregate performance decline was largely led by Automobiles, Metals and
Capital Goods, which contributed 69% of the incremental decline.
EBITDA margin for the MOFSL Universe (excluding Financials) stood at 17.6%
(v/s est. 16.4%). Margin expansion in Healthcare, Utilities, Telecom and Cement
drive 270bp YoY margin expansion. Autos, Capital Goods and Consumer sectors
saw margin contraction YoY and were better/in line with est.
EBIDTA
PBT
PAT
Exhibit 3: Earnings above muted expectations; Healthcare & Technology stood out
Sector
Sales
Var.
Var.
Var.
Chg. % Chg.
Chg. % Chg.
Chg. % Chg.
Jun-20
over Jun-20
over Jun-20
over
QoQ % YoY
QoQ % YoY
QoQ % YoY
(no of companies)
Exp. (%)
Exp. (%)
Exp. (%)
668 -52.5 -56.9 14.7
2
-98.1 -98.5 LP
-79
PL
PL
Loss
Automobiles (17)
310 -51.8 -36.0 -0.5
21 -72.9 -61.3 2.4
11 -83.7 -76.6 12.2
Capital Goods (11)
225 -30.5 -35.5 -1.1
52 -20.7 -35.4 18.7
31 -17.9 -40.3 85.4
Cement (10)
422 -7.4 -15.4 7.0
95 -12.7 -26.3 6.4
92 -12.5 -26.2 9.2
Consumer (15)
1,034 -4.9 10.6 5.1
740
1.9 21.2 5.2
290 35.2 -14.8 0.0
Financials (26)
443
3.2 18.3 3.7
390
9.1 23.2 2.1
177 43.2 -12.6 -4.8
Banks-Private (11)
335 13.2 13.7 7.8
224 -5.1 27.7 7.1
43
31.0 -15.9 2.0
Banks-PSU (2)
113 -46.2 -11.0 6.7
9
-14.9 10.6 73.3
8
67.1 5.3 30.3
Life Insurance (2)
144 -5.9 2.9
2.1
117 -4.2 5.7
9.2
63
16.6 -21.5 11.6
NBFC (11)
458 -0.7 6.6
1.0
112 25.0 22.9 24.7
88
39.8 29.2 38.1
Healthcare (18)
11 -45.5 -21.6 33.9
2
-53.1 -11.7 110.1
1
-50.4 -4.0 17,240
Infrastructure (2)
19 -28.6 -38.3 14.5
6
189.7 -52.6 501.5
4
LP -67.0 1,877.2
Media (2)
751 -20.7 -25.8 5.9
83 -46.6 -52.0 -2.7
-17
PL
PL
Loss
Metals (5)
2,515 -42.4 -47.5 -1.3
325 13.5 -13.2 -7.2
183 72.0 -28.7 -13.3
Oil & Gas (12)
1,126 -38.4 -43.7 -22.9 187 -25.4 -27.1 -22.8
90 -41.3 -49.0 -42.6
Ex OMCs (9)
64 -55.9 -57.5 -5.9
-7
PL
PL
Loss
-12
PL
PL
Loss
Retail (6)
1,167 -2.9 4.7
-0.3
275 -2.4 11.2 4.9
254 -2.1 2.7
2.4
Technology (13)
425 -2.3 6.6
1.4
173
1.2 18.2 6.4
-39
Loss Loss Loss
Telecom (4)
446 -13.0 -5.8 -5.3
200 -5.9 7.1 17.4
69 -30.5 -12.8 30.4
Utilities (5)
263 -34.2 -30.3 -9.2
26 -53.1 -66.9 -24.2
-9
PL
PL
PL
Others (21)
868 -13.4 -36.4 16.4
MOFSL Universe (167) 8,776 -29.4 -30.4 1.4 2,104 -10.8 -10.4 7.3
6,585 -28.6 -29.4 1.0 1,773 -9.6 -5.6
6.4
775 -12.8 -29.6 15.0
Nifty (47)
4,220 -21.2 -20.5 -5.4 1,518 -10.5 0.0
2.2
699 -18.4 -22.8 0.8
Sensex (29)
Var.
Chg. % Chg. %
Jun-20
over
QoQ YoY
Exp. (%)
-95
Loss
PL
Loss
4
-92.1 -85.8 4.6
22
-30.0 -37.9 89.2
68
-17.9 -19.5 13.1
227
24.4 -0.3
2.1
136
42.7
1.5
-2.9
33
-18.7 10.0
6.7
7
50.4
4.1
33.1
51
21.9 -10.5 10.5
66
32.3 26.6 32.7
1
-53.0 -3.1 16,900
4
LP
-49.6 2,748.6
-30
PL
PL
Loss
158 -18.7 -11.1 -1.4
90
-30.4 -26.8 -25.6
-9
PL
PL
Loss
190
-6.2
1.2
1.2
-50
Loss Loss Loss
67
-1.9 15.8 46.9
-14
PL
PL
Loss
609 -29.3 -34.5 14.9
549 -26.0 -25.5 13.7
529 -16.2 -14.1 3.5
August 2020
3
 Motilal Oswal Financial Services
Strategy
Exhibit 4: MOFSL Universe sales decline 30% YoY
14
11 11
15 15
23 25 22
12
7
-2 -1 -4
20
7
19
16 15 18
13
4
18
13 15
Exhibit 5: MOFSL Universe EBIDTA declines 10% YoY
27
16
8
2
5 3
-4
5
-4 -5 -4
-1
4
8
11
-30
-8
-10
Exhibit 6: MOFSL Universe PAT was down 35% YoY
13
15
0
11 10
6 8
16 16
22
10
1
-4
-21
2 2
15
Exhibit 7: EBITDA margin (Excl. Financials) expanded 270bp
YoY to 17.6%
6
-7
-3
-35
.
.
Sector performance: Sales decline for fourth consecutive quarter; Autos,
Metals and Capital Goods dragged aggregate PAT
Retail, Autos, O&G, Capital Goods and Metals sales declined 57.5%, 56.9%,
47.5%, 36% and 25.8%YoY, respectively, dragging aggregate sales performance
of the MOFSL Universe, which declined 30.4% YoY (fourth successive decline).
12 out of 18 sectors posted YoY sales decline. Private Banks (+18.3%), PSU Banks
(+13.7%), Healthcare (+6.6%), Telecom (+6.6%), Technology (+4.7%) and NBFCs
(+2.9%) were the major sectors to show reasonable top line growth.
EBITDA decline of 10% YoY was the worst in the past 5 years as the lockdown
impacted sales and operating leverage. However, cost rationalization measures
implemented by companies across sectors helped in arresting the decline.
Utilities, Telecom, Technology, O&G and Healthcare sectors reported YoY
increase in margins. PSU Banks (+27.7%), Private Banks (+23.2%), Healthcare
(+22.9%), Telecom (+18.2%), Technology (+11.2%), Life Insurance (+10.6%),
Utilities (+7.1%) and NBFCs (+5.7%) reported EBITDA growth YoY.
Profit was dragged by sectors like Autos (loss of INR95b), Metals (loss of
INR30b), Retail (loss of INR9b), Capital Goods (-85.8%) and Cement (-37.9%) YoY.
Healthcare (+26.6%), Utilities (+15.8%), PSU Banks (+10%), Life Insurance
(+4.1%), Private Banks (+1.5%) and Technology (+1.2%) managed to post some
gains YoY.
August 2020
4
 Motilal Oswal Financial Services
Strategy
Exhibit 8: Key highlights – Operating margins
June-19 (actual)
June-20 (actual)
36.7
22.9 22.9
9.3
0.3
11.2
6.8
25.9
22.5
21.1
24.4
17.1
11.0
7.8
12.9
22.2 23.6
40.7
39.5
44.9
August 2020
5
 Motilal Oswal Financial Services
Strategy
Nifty: 1QFY21 performance highlights
Cost cuts help beat profit estimates
Nifty sales declined 29.4% YoY (v/s est. -30%), while EBITDA/PBT/PAT declined
5.6%/29.6%/25.5% YoY (v/s est. -11.2%/-38.8%/-34.5% YoY).
Nifty EBITDA declined 5.6% YoY – the worst decline since Jun’17.
Nifty PAT declined 25.5% YoY, dragged by Autos, Telecom, Metals and certain
heavyweights like TCS, Reliance Industries and ITC.
Britannia, HCL Tech, Dr. Reddy’s, Cipla, BPCL, SBI, ICICI Bank, NTPC & Power Grid
posted 20%+ YoY PAT growth.
EBITDA of 27 Nifty-50 companies and PAT of 26 Nifty-50 companies were above
expectations. Only 8/9 companies reported EBITDA/PAT below expectations.
24 out of the 47 Nifty-50 companies that reported 1QFY21 results so far saw
earnings upgrades of >5% for FY21 EPS, while 9 companies saw downgrades of
>5%.
th
Exhibit 9: Nifty sales decline YoY for 4 consecutive quarter
23 25 23
3
-7 -8 -6
-1
5
8
15
11 12
14 15
11
7
-2 -1 -4
Exhibit 10: Nifty EBITDA decline of 5.6% YoY – worst since
Jun’17
28
16
6
16
19 18
22
16
4
18
18
10
4
8
3 5
-2
17
13
-29
-7
-6
Exhibit 11: Nifty PAT declines 25% YoY vs. est. of 35% YoY
decline
24
9
14
6
1
14 16
7 7 7 5
0
-16
6 5
2
6
3
17
Exhibit 12: Nifty EBIDTA margin (excl. Financials) expanded
by 330bp YoY (%)
-6
-25
August 2020
6
 Motilal Oswal Financial Services
Strategy
Exhibit 13: 26 Nifty-50 companies posted YoY PAT decline
Var.
Jun Chg. % Chg. % over
2020 YoY QoQ Exp.
(%)
Sales
Company
High PAT growth
Britannia
34
26.7 19.3 3.8
7
BPCL
388 -49.2 -43.8 19.7
40
State Bank
266 16.1 17.0 9.4
181
Bajaj Finserv
142 15.7 6.8
0.4
142
ICICI Bank
93
19.9 4.0
6.4
108
HCL Technologies
178
8.5
-4.1 -0.2
46
Dr Reddy’ s Labs
44
14.9 -0.3 -0.6
11
NTPC
243 -1.8 -16.6 -3.2
85
Power Grid Corp.
94
6.6 -12.1 12.3
83
Cipla
43
9.0
-0.7
4.1
10
HDFC Bank
157 17.8 3.0
1.8
128
Med/Low PAT growth
HDFC
33
9.7
-5.9
2.6
32
Infosys
237
8.5
1.7
2.3
61
Nestle
31
1.7
-8.3 -5.0
8
UPL
78
-0.9 -29.7 -9.3
18
Hind. Unilever
106
4.4 17.2 5.4
26
HDFC Life Insur.
57 -11.3 -45.3 4.3
3
Shree Cement
23 -23.4 -27.7 -2.9
7
Tech Mahindra
91
5.2
-4.0
1.1
13
Wipro
150
1.6
-4.9 -0.4
33
Negative PAT Growth
Kotak Mahindra Bank
37
17.4 4.6
-0.8
26
Sun Pharma
75
-9.6 -7.6 -9.1
16
TCS
383
0.4
-4.1 -2.5 100
Reliance Inds.
883 -43.8 -35.3 -26.0 169
Axis Bank
70
19.5 2.6
7.2
58
Bajaj Finance
33
10.3 -12.2 -1.6
30
Bharti Infratel
35
-5.6 -3.3
6.0
18
ITC
89 -21.2 -17.8 6.9
26
Ultratech Cement
76 -33.2 -29.0 0.0
21
Hindalco
258 -15.3 -13.2 16.2
26
IOC
624 -52.6 -47.3 33.2
55
Bajaj Auto
31 -60.3 -54.8 6.5
4
IndusInd Bank
33
16.4 2.4
4.4
29
Asian Paints
29 -42.7 -37.0 63.6
5
Zee Entertainment
13 -34.7 -32.8 19.9
2
GAIL
121 -34.0 -31.9 -8.5
6
Hero Motocorp
30 -63.0 -52.4 8.0
1
Larsen & Toubro
213 -28.3 -51.9 2.5
16
Mahindra & Mahindra 56 -56.4 -37.9 -2.0
6
Titan Company
20 -61.6 -58.0 -5.3
-3
Maruti Suzuki
41 -79.2 -77.4 13.8
-9
JSW Steel
118 -40.5 -34.1 -4.0
13
Tata Steel
243 -32.4 -28.1 1.0
5
Eicher Motors
8
-66.0 -63.4 3.3
0
Grasim Industries
19 -61.1 -54.9 -6.7
-1
Bharti Airtel
239 15.4 0.9
2.2
104
Tata Motors
320 -48.0 -48.8 25.7
6
Nifty Universe
6,585 -29.4 -28.6 1.0 1,773
Note: PL: Profit to Loss; LP: Loss to Profit
Var.
Jun Chg. % Chg. % over
2020 YoY QoQ Exp.
(%)
81.7 57.8 29.8
84.9 570.7 57.8
36.3 -2.2 12.8
15.6 6.8
0.4
71.4 45.8 9.4
34.1 -3.3 11.1
53.1 18.3 15.4
22.8 -6.8 38.9
4.8
-8.6
9.0
15.9 65.6 47.8
15.1 -1.0 -2.6
5.0 -10.1 5.5
18.8 7.8 10.1
5.0
-5.3 -0.8
7.3 -18.0 -3.7
-0.1 28.0 11.4
-33.1 85.0 -19.2
-22.3 -35.1 0.8
-1.0 -3.5
9.4
11.4 2.5 15.0
9.4
-9.2
-0.1
-20.8
-0.8
24.7
-6.8
-42.0
-29.7
-26.0
-33.3
-65.9
13.0
-58.2
-66.7
-72.4
-90.7
-51.2
-68.0
PL
PL
-63.9
-90.6
-99.4
PL
25.7
-78.8
-5.6
-3.7
17.7
-8.7
-23.4
-0.1
-7.3
4.0
-36.4
-15.0
-29.7
88.0
-67.4
2.5
-43.7
LP
-74.8
-83.6
-68.4
-53.3
PL
PL
-54.9
-89.1
-99.1
PL
2.4
-73.2
-9.6
-3.4
6.6
-4.2
-18.7
-2.9
11.5
21.7
-19.4
18.8
-7.6
65.3
78.6
5.7
166.2
LP
-67.2
LP
-11.8
35.7
Loss
Loss
3.4
-51.1
LP
PL
3.1
LP
6.4
EBITDA
Var.
Jun Chg. % Chg. % over
2020 YoY QoQ Exp.
(%)
7
29
56
26
32
39
9
33
28
8
89
29
58
7
9
25
5
5
13
31
17
14
95
82
14
13
9
31
13
3
26
7
7
3
1
4
1
7
0
-4
-3
-6
-34
0
-3
4
-62
775
81.0
116.5
36.8
14.0
14.0
31.6
54.2
-12.0
-13.4
20.6
4.7
6.4
12.1
-0.9
6.4
-1.1
3.3
0.1
-0.4
0.8
-20.2
-13.3
-10.7
-42.7
-31.3
-29.3
-14.7
-35.0
-30.6
-76.3
-51.1
-56.8
-69.0
-68.4
-92.2
-82.0
-92.7
-74.8
-96.4
PL
PL
PL
PL
-97.7
PL
LP
Loss
-29.6
61.1
LP
11.9
224.6
123.7
0.0
64.6
-33.4
-35.8
121.9
-2.6
2.4
5.4
-6.7
-21.2
23.4
58.6
-27.7
8.6
4.4
-1.0
39.8
-9.6
-39.2
LP
2.5
8.9
-30.7
-10.0
-79.4
LP
-60.4
60.6
-54.0
LP
-86.1
-87.8
-84.2
-94.5
PL
PL
PL
PL
-96.8
PL
LP
Loss
-12.8
33.0
124.7
61.1
35.7
-9.1
15.0
29.1
66.8
6.0
85.1
-0.8
7.1
10.5
-2.9
11.5
9.0
26.8
57.4
28.8
13.1
-5.6
17.8
-9.3
-38.3
-3.7
10.4
1.6
-9.7
71.5
-5.0
LP
20.4
-32.8
902.5
LP
-78.5
LP
-20.0
LP
Loss
Loss
Loss
Loss
LP
Loss
LP
Loss
15.0
PBT
Var.
Jun Chg. % Chg. % over
2020 YoY QoQ Exp.
(%)
5
21
42
12
26
29
6
33
28
6
67
25
42
5
6
19
5
4
10
24
12
11
70
84
11
10
7
23
9
5
19
5
5
2
1
3
1
1
0
-3
-2
-6
-44
-1
-2
-4
-84
549
105.4
93.1
81.2
43.7
36.2
31.5
30.4
22.7
21.4
20.9
19.6
17.2
11.5
11.1
10.4
7.0
6.2
2.1
1.4
0.4
-8.5
-13.2
-13.5
-17.4
-18.8
-19.5
-20.7
-26.2
-29.3
-40.9
-46.9
-53.1
-64.4
-67.4
-69.2
-80.2
-90.3
-94.8
-95.8
PL
PL
PL
PL
PL
PL
Loss
Loss
-25.5
45.7
LP
17.0
525.0
112.8
-7.3
1.4
0.7
-5.7
110.4
-3.9
12.8
-2.0
-6.6
-19.9
27.5
44.7
-37.0
20.9
2.8
-1.7
55.2
-12.9
-12.5
LP
1.5
8.3
-38.3
-31.7
-58.5
-68.8
-59.7
61.9
-54.3
LP
-93.3
-90.1
-97.7
-87.9
PL
PL
PL
PL
PL
PL
Loss
Loss
-26.0
30.8
139.0
62.3
58.8
-2.3
10.5
6.4
66.8
40.4
82.4
-0.3
6.2
9.9
-2.6
-5.6
9.1
35.2
56.9
31.9
11.4
-5.6
23.3
-12.6
-16.1
0.3
8.2
1.3
-6.1
73.8
99.3
LP
20.7
-31.5
1,482.3
LP
-83.7
LP
-74.6
LP
Loss
Loss
Loss
Loss
Loss
Loss
Loss
Loss
13.7
PAT
August 2020
7
 Motilal Oswal Financial Services
Strategy
Over three-fifth of MOFSL Universe reported YoY profit decline
63% companies from the MOFSL Universe reported YoY profit declines.
Only 16% companies reported profit growth of more than 30%.
>15-30%
>0-15%
7
17
-7
26 35
27
20
-9
-4
-3
-11
-13
-4
1
18
<0%
20
3
10
9
30
35
Ex OMCs (%)
-21
4
8
11
22
6
6
2
Exhibit 14: Distribution of PAT growth – Two-thirds of covered companies posted declines
Earnings Gr.
22
26
24
9
13
31 34
24 19
11
4
42 40
16 13
>30%
18
11
9
6
0
-3
8
12
9
-19
-38
30 27 25 24
10 20 18 18
22
21
18 23
31 38 39
27 17 16
42 40 37 38 45 36
17 22
18
19 24
18 14
16
22
38 47 36 39 37 35 32 34 45 47 32
18
17
22
18 16 20 22
19 19 15
20 18
25
18
23
16
20
33 34 38 38 35 35
21 24
18 23
15
15
17 15 13
17
21 23
66 63
11
25 25
17 15
21 15
38 32 39 35
10
9
12 16
41
32 35
31 26 26 26 32 26
8
21 21 24 25 25 28 26 24 19 26 24 19 20 26 18 21 22 21 26 26 29 30 29 23 19 25
15 16
24 25 18 22 17 17 19 16
20 22
23 16 13
26 13 19
PAT Growth Ex OMCs (%)
Exhibit 15: Sector estimates revision from preview
Sector
Automobiles
Capital Goods
Cement
Consumer
Financials
Banks-Private
Banks-PSU
Life Insurance
NBFC
Healthcare
Infrastructure
Media
Metals
Oil & Gas
Excl. OMCs
Retail
Technology
Telecom
Utilities
Others
MOFSL Universe
NIFTY EPS (INR)
PAT (INR B) -
PREVIEW
FY21E
FY22E
97
325
120
169
114
164
349
428
1,137
1,503
665
862
221
318
24
27
228
296
243
295
4
6
18
22
99
237
832
1,165
589
832
14
40
763
883
-220
-183
269
327
70
156
3,910
5,537
467
647
PAT (INR B) - REVIEW
FY21E
96
117
126
357
1,147
658
218
26
245
273
4
21
120
820
541
12
810
-133
291
22
4,085
477
FY22E
340
163
172
435
1,545
876
322
28
319
319
6
31
271
1,214
864
39
941
-145
322
148
5,802
664
% Upgrade /
Downgrade
FY21E
FY22E
-1.2
4.5
-2.4
-3.4
10.8
5.1
2.1
1.5
0.9
2.8
-1.0
1.6
-1.1
1.2
7.5
4.4
7.7
8.0
12.5
8.0
10.5
1.9
16.7
38.0
21.3
14.5
-1.4
4.2
-8.1
3.8
-12.8
-2.1
6.2
6.6
-39.7
-21.1
8.4
-1.6
-69.4
-4.7
4.5
4.8
2.1
2.7
Growth YoY (%)
FY20
-51
6
29
16
40
24
643
-2
5
13
3
-22
-57
-13
6
7
3
Loss
18
-1
-1
-4
FY21E
-38
-23
-14
-3
12
19
7
8
0
30
-27
-8
-11
13
-1
-56
2
Loss
4
-79
4
2
FY22E
254
39
37
22
35
33
47
11
30
17
37
44
126
48
60
213
16
Loss
11
589
42
39
August 2020
8
 Motilal Oswal Financial Services
Strategy
Marginal increase of 2.1%/2.7% in Nifty FY21/FY22E EPS
Nifty EPS expected to stay flattish YoY in FY21
Our Nifty EPS estimate has been marginally increased by 2.1% to INR477 (prior:
INR467) for FY21 and by 2.7% to INR664 (prior: INR647) for FY22E.
We expect Nifty EPS to grow 2.4% in FY21. Financials, Telecom, Oil & Gas and
Healthcare should contribute to the incremental growth in Nifty profits in FY21.
On the other hand, Autos, Capital Goods, Cement, Metals and Utilities sectors
are expected to drag. Excl. BFSI, we expect Nifty FY21 profits to remain flat YoY
on the back of 13% decline in FY20.
Top upgrades (FY21E):
Hindalco (49%), Asian Paints (41%), UltraTech (21%),
Cipla (19%), Tech Mahindra (17%), Britannia (16%), HCL Tech (14%),Infosys
(11%).
Top downgrades (FY21E):
Grasim (-10.3%), Kotak (-9.7%) and Titan (-9.2%), Gail
(-8%), RIL (-8%), ITC (-5%)
EPS UPGRADE /
DOWNGRADE (%)
FY21E
FY22E
579.1
-5.5
48.8
37.1
41.0
9.8
40.6
84.3
32.4
10.4
21.5
10.7
19.0
14.1
17.3
17.2
15.7
3.3
14.4
11.8
12.6
4.6
12.4
10.1
12.4
0.7
12.1
-0.7
12.0
5.8
10.7
12.1
10.7
3.9
10.7
7.2
9.5
2.7
8.7
2.9
7.5
-4.5
7.0
5.5
5.5
5.8
5.4
6.6
2.5
-11.3
2.2
4.2
2.0
2.3
1.6
1.8
0.6
2.4
0.6
-2.5
-1.7
1.3
-2.0
-2.8
-2.4
2.7
Exhibit 16: Nifty EPS revision since preview
Company
Bharti Airtel
Hindalco
Asian Paints
Zee Entertainment
IOC
Ultratech Cement
Cipla
Tech Mahindra
Britannia
HCL Technologies
Maruti Suzuki
Axis Bank
Power Grid Corp.
BPCL
Wipro
Infosys
HDFC Life Insur.
Dr Reddy’ s Labs
Sun Pharma
Hero MotoCorp
NTPC
Bharti Infratel
Eicher Motors
State Bank
JSW Steel
HDFC
Bajaj Auto
Hind. Unilever
HDFC Bank
Nestle
TCS
Shree Cement
Bajaj Finance
Current EPS (INR)
FY21E
10.2
17.2
25.5
9.4
14.7
135.5
28.6
42.6
81.3
44.4
152.1
21.8
23.1
36.3
17.3
41.6
6.9
165.0
19.0
151.9
14.3
16.7
510.1
23.7
8.4
55.0
168.3
34.3
55.0
221.9
83.9
408.5
73.9
FY22E
5.4
25.1
31.2
15.1
21.4
195.5
32.6
52.4
79.7
51.0
242.0
39.0
24.4
42.5
18.7
48.2
7.9
178.2
23.3
176.2
15.8
17.7
822.0
32.5
22.4
60.5
183.2
44.2
65.2
254.4
99.1
578.7
120.7
EPS GROWTH (%)
FY20
Loss
-29.2
25.5
-66.6
-45.4
62.9
4.8
-5.9
21.8
11.1
-25.8
-66.9
10.2
-41.6
8.5
5.1
1.3
15.4
8.7
-9.7
19.2
31.1
-17.8
759.6
-71.6
10.8
13.3
11.1
21.2
15.8
3.7
34.3
26.7
FY21E
LP
-1.5
-12.1
71.9
43.1
-8.0
45.7
-7.1
38.6
9.0
-19.1
261.6
9.3
43.3
3.8
6.9
8.2
35.9
15.7
-0.7
3.9
-6.5
-23.8
6.9
-7.0
11.8
-10.1
10.0
14.4
7.3
-2.7
-6.1
-15.8
FY22E
-47.2
45.7
22.4
60.7
45.8
44.3
13.9
22.9
-1.9
14.8
59.1
78.7
5.4
16.9
8.5
15.8
14.3
8.0
23.0
16.0
10.4
6.3
61.1
37.3
167.0
10.0
8.8
28.6
18.5
14.7
18.2
41.6
63.3
August 2020
9
 Motilal Oswal Financial Services
Strategy
EPS UPGRADE /
DOWNGRADE (%)
FY21E
FY22E
-3.1
-5.1
-3.9
-5.6
-5.3
-0.6
-7.4
1.5
-8.1
-5.7
-8.2
4.8
-8.3
-0.2
-9.2
11.7
-9.7
-10.5
-10.3
-2.7
-15.5
-17.8
Loss
31.9
Loss
PL
2.1
2.7
Company
Larsen & Toubro
IndusInd Bank
ITC
ICICI Bank
UPL
Reliance Inds.
GAIL
Titan Company
Kotak Mahindra Bank
Grasim Industries
Mahindra & Mahindra
Tata Steel
Tata Motors
Nifty (50)
Current EPS (INR)
FY21E
53.1
62.7
10.6
16.1
37.2
67.4
11.8
10.3
41.4
39.4
27.0
-8.7
-34.4
477
FY22E
69.6
84.4
12.6
24.3
43.9
111.4
15.3
22.1
51.5
66.8
36.4
58.1
5.9
664
EPS GROWTH (%)
FY20
7.1
25.3
22.2
135.0
11.2
8.1
17.3
8.9
19.0
1.8
-64.9
-89.8
Loss
-3.7
FY21E
-21.9
-8.8
-14.6
31.0
3.6
-0.8
-28.1
-39.7
-7.9
-41.5
80.2
PL
Loss
2.4
FY22E
31.2
34.6
19.2
51.2
18.2
65.3
29.8
114.3
24.6
69.5
35.0
LP
LP
39.4
August 2020
10
 Motilal Oswal Financial Services
Strategy
Exhibit 17: Nifty FY20-22E free float PAT CAGR at 21%
Sales (INR b)
FY21E
Company
High PAT Gr. (20%+)
Bharti Airtel
Axis Bank
Tata Steel
JSW Steel
Mahindra & Mahindra
IOC
ICICI Bank
BPCL
Cipla
Reliance Inds.
Hind. Unilever
Zee Entertainment
Bajaj Finserv
ONGC
Dr Reddy’ s Labs
State Bank
Hindalco
IndusInd Bank
Medium PAT Gr. (0-20%)
Sun Pharma
Bajaj Finance
HDFC Bank
Britannia
Shree Cement
Ultratech Cement
HDFC
Adani Ports
Titan Company
Maruti Suzuki
HCL Technologies
HDFC Life Insur.
Infosys
Nestle
Eicher Motors
UPL
Kotak Mahindra Bank
Hero MotoCorp
Power Grid Corp.
TCS
NTPC
Tech Mahindra
Wipro
Asian Paints
Coal India
Larsen & Toubro
ITC
PAT de-gr. (<0%)
Grasim Industries
Bharti Infratel
Bajaj Auto
GAIL
Tata Motors
Nifty (PAT free float)
FY20
FY22E
25,697 23,141 27,805
875
999
1,123
252
285
325
1,398 1,291 1,481
726
668
884
952
1,004 1,119
4,844 3,760 5,120
333
376
435
2,846 2,075 2,586
171
188
208
5,959 4,882 6,115
388
439
507
81
72
86
172
168
203
4,250 4,216 4,590
167
196
217
981
1,093 1,205
1,181 1,298 1,456
121
130
145
12,985 12,966 14,842
323
331
369
135
145
177
562
646
734
116
137
149
119
110
131
421
378
446
127
139
154
119
121
141
211
170
245
757
650
787
707
742
828
322
348
409
908
982
1,111
124
135
153
91
86
104
358
378
411
135
149
168
288
301
338
394
406
435
1,569 1,587 1,805
1,143 1,096 1,276
369
381
426
613
608
644
202
195
227
961
886
1,052
1,455 1,419 1,631
456
440
491
3,961 3,707 4,368
186
140
186
146
144
149
299
276
311
719
594
735
2,611 2,553 2,986
42,643 39,814 47,015
Sales EBIDTA Margin (%) EBITDA
CAGR %
CAGR %
FY20 FY21 FY22
20-22
20-22
4
17
20
21
16
13
42
45
47
20
14
93
92
93
14
3
12
12
16
17
10
15
17
20
26
8
13
14
15
15
3
3
9
8
57
14
84
95
83
13
-5
4
8
7
30
10
19
23
23
21
1
15
18
21
20
14
25
26
27
20
3
20
19
25
15
9
71
74
83
17
4
14
11
14
1
14
21
25
25
23
11
69
68
68
10
11
12
11
12
12
10
90
88
89
9
7
28
29
30
10
7
20
22
23
15
15
83
87
87
17
14
87
87
89
16
13
16
19
18
19
5
31
30
32
6
3
22
24
25
9
10
98
97
97
9
9
50
62
63
24
8
12
10
12
9
2
10
8
12
12
8
24
25
25
12
13
3
3
4
26
11
25
26
26
14
11
23
24
24
12
7
24
22
26
12
7
21
22
23
11
12
74
74
74
11
8
14
14
14
11
5
88
90
90
6
7
27
27
27
8
6
32
32
33
7
8
16
15
17
12
2
21
22
23
8
6
21
20
21
6
5
23
15
23
6
6
11
11
12
8
4
39
36
39
3
5
12
12
15
18
0
12
7
12
-4
1
50
52
52
3
2
17
18
18
5
1
12
13
14
11
7
9
9
13
29
5
20
22
23
14
PAT (INR b)
FY20
1,275
-41
16
10
22
18
94
79
50
16
431
67
9
34
168
20
198
39
45
2,251
39
53
263
14
16
43
96
38
15
57
111
13
166
20
18
27
86
31
111
324
137
40
97
28
167
89
153
115
44
33
54
74
-91
1,928
FY21E FY22E
1,521
56
62
-10
20
32
135
104
71
23
427
81
9
26
162
27
211
38
45
2,202
46
44
301
20
15
39
115
40
9
46
121
14
177
21
14
28
82
30
121
316
142
37
99
24
99
68
130
35
26
31
49
53
-124
2,018
2,332
29
110
67
54
43
197
157
84
26
706
104
15
51
251
30
290
56
64
2,694
56
72
357
19
21
56
128
50
20
73
139
16
204
25
22
34
102
35
127
374
157
46
107
30
178
91
155
222
44
33
53
69
23
2,814
PAT Contbn to
CAGR %
Delta %
20-22
35
66
LP
4
160
6
153
3
58
2
56
2
44
6
41
5
29
2
29
1
28
17
24
2
24
0
23
1
22
5
21
1
21
6
20
1
20
1
9
28
19
1
17
1
17
6
17
0
15
0
15
1
15
2
15
1
14
0
13
1
12
2
11
0
11
2
11
0
11
0
11
0
9
1
7
0
7
1
7
3
7
1
7
0
5
1
4
0
3
1
1
0
1
0
39
7
0
0
0
0
-1
0
-3
0
Loss
7
21
100
August 2020
11
 Motilal Oswal Financial Services
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Sector-wise: Highlights / Surprises / Guidance
AUTO: Demand recovery strong, supply chain catching up; Tractors/2Ws least hurt by op. deleverage
Supply chain constraints restrict demand recovery:
Large part of the quarter (festive and marriage season
during Apr-May’20) remaining under lockdown (excl. tractors), low BS6 inventory and supply chain constraints
resulted in volume decline of 55%/63%/83%/13% YoY in 2Ws/PVs/CVs/Tractors. The demand recovery surprised
OEMs and dealers alike; however, production and supply chain constraints restricted wholesale numbers. Total
revenue for our Auto universe stood at ~INR667.6b (v/s est. INR582.3b). EBIDTA could just reach above break-
even level at ~INR2.1b (v/s est. loss of ~INR44.3b). Recurring loss stood at ~INR117.7b (v/s est. INR94.7b). While
some green-shoots were visible – evident from the sustained demand in Aug’20 – we believe it is pent-up
demand along with market acceptance of the BS6 price hike.
Other expenses surprise positively across Auto industry:
All companies reported substantially lower other
expenses, driven partially by deferment of certain expenses (SG&A, maintenance, etc.) and cost cutting (fixed as
well as variable). This was one of the biggest factors, which drove the beat to our estimates across auto
companies. Most company managements have indicated that large part of these costs would gradually
normalize, though cost cutting initiatives targeted toward fixed cost should drive 10-20% savings.
Tractors/2Ws maintain positive EBITDA; PVs/CVs report EBITDA losses:
Tractor/2W OEMs were able to
maintain positive EBITDA, despite very low utilization (particularly for 2Ws) due to relatively lower fixed costs
and other expenses. Despite higher realizations (due to higher non-vehicular sales) and lower-than-estimated
other expenses, PV/CV OEMs reported EBITDA losses owing to the high fixed cost nature of the business.
Demand recovery and lower other expenses lead to upgrades:
We are upgrading volume estimates for
FY21/FY22E across segments as well as factoring in partial sustenance of lower other expenses. Hence, we have
upgraded FY22E EPS estimates across OEMs – with highest for TTMT, AL (+14%), EIM (+6%), TVSL (+5%) and ESC
(+7%). Component players too are recovering in line with the demand revival. Our earnings estimates for FY22E
have increased for BOS (+7.2%) and BHFC (+4.8%), while it has been cut for CEAT (6%) to factor in the higher
interest cost.
Valuation and view:
We prefer companies with higher rural exposure as well as segments with low competitive
intensity. Also, we prefer plays on global PVs due to stronger recovery owing to support from governments. Our
top picks among large-caps are M&M and EIM. In midcaps, our top picks are MSS and ENDU.
Positive surprises:
BJAUT, BHFC, CEAT, EIM, ESC, HMCL, M&M, MACA
Negative surprises:
EXID
Guidance highlights:
MSIL:
Increase in entry-level car/second-hand car demand and first-time buyers confirms the trend of a shift
toward personal mobility. With continuous ramp-up in production, it should be able to meet the current and
upcoming festive season demand.
M&M:
Tractors are expected to grow in FY21 (subject to supplies); however, actual auto demand recovery and
its sustainability remains to be tested as supplies are still just 50-60% of normal. Rural growth story remains
intact due to high government spends on agricultural and rural sector. Continued focus remains on capital
allocation and the company has decided to not bid for vehicle orders from USPS.
TTMT:
JLR –
JLR Project Charge delivered total savings of GBP1.2b (cost savings of GBP0.5b). It has increased
FY21 target further from GBP1.5b to GBP2.5b. It launched the
Defender
across markets and has strong order
book of over 30k units. The
Defender
is expected to be a volume driver with annual volumes expected at >100k
units. India M&HCV business is the worst hit with ~20% utilization level and no expectation of recovery before
3QFY21.
BJAUT:
Domestic motorcycle demand in Jul’20 stood at 80-85% of levels seen in Jul’19, with no down-trading
across segments. Inventory is less than 30 days of current retails. 3W demand is 20% of normal levels, although
Cargo 3W is faring relatively better. Export demand for motorcycles is back at 80-85% of Jul’19 levels. 3W
exports are at 70-75% of normal levels. Supply side is slowly ramping up with manufacturing levels at 65-75%
capacity utilization. Outlets for motorcycles (95%) and 3Ws (85%) are operational.
August 2020
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HMCL:
Demand does not constitute only pent-up demand and the recovery seems sustainable. Rural is seeing a
V-shaped recovery, while urban is lagging behind due to sporadic lockdowns. It is quite confident of market
share gains in 1QFY21 sustaining, driven by rural buoyancy, response to BS6 products, a refreshed portfolio
(Passion, Glamour), and the plugging of product gaps (scooters and premium).
TVSL:
Management expects demand recovery in 2HFY21, with TVS performing better than industry on the back
of its portfolio. It expects premiumization to continue, albeit with a possible delay by 1-2 quarters due to COVID.
This should benefit
Apache
and
Ntorq.
EIM:
Bookings are almost back to pre-COVID levels and inquiries are also higher. Bookings have sustained at pre-
COVID levels for the last 6-8 weeks, making management believe that it is not just pent-up demand. Bigger cities
are below average and smaller cities are above average. Supply chain constraints continue to affect production.
It expects to have normal production by end of Aug-Sep’20 (assuming no further impact of COVID). New product
launch is expected in Aug-Sep’20. Future product launches are on track and timelines have not changed for
them.
VECV
acquired Volvo Bus India for INR1.05b, completing its product portfolio of buses.
Motherson Sumi:
Gradual ramp-up has been witnessed in plants globally with 84% plants running at more than
50% capacity. Strong demand is expected for 2QFY21 as it is not seeing any major delays in any programs. Losses
at green-field plants further reduced (to EBITDA loss of EUR16m), driven by manpower reduction, improving
efficiencies/reducing scrap and other structural improvements. The US plant has slashed manpower by 800
people and expects further reduction as it is working on trimming absenteeism. It expects to reach pre-COVID
revenues by Sep’20. Currently, revenues are at 80% of last years’ levels.
BHFC:
Revenue should decline in 2QFY21 on YoY basis. However, domestic revenue should be flat with growth in
industrial, PVs, mining and tractors to cover for the expected 67% decline in CVs. Export revenue (excl. Oil and
Gas) should also remain flat in 2QFY21 YoY. The Oil and Gas business will be lower, however, Brent sustaining
above USD42/barrel can drive demand recovery. Net ordering trend has been positive for US class-8 trucks over
the last two months and has seen slow traction toward increased demand.
Volumes ('000 units)
1QFY21
YoY (%)
QoQ (%)
443
-64.5
-55.3
563
-69.4
-57.8
267
-71.1
-57.8
77
-81.0
-80.1
95
-56.3
-37.2
25
-81.8
-75.3
65
-44.8
-47.6
4
57
2
1,534
-90.4
-68.8
-84.0
-69.4
-85.0
-64.8
-81.7
-59.6
EBITDA margins (%)
1QFY21
YoY (bp) QoQ (bp)
13.3
-220
-510
3.6
-1,080
-690
-3.4
-1,140
-1,040
-21.0
-3,140
-2,950
10.3
-380
-340
-26.2
-3,260
-2,180
3.5
-70
-120
2.0
-290
-180
-51.2
-6,060
-5,600
0.2
-2,570
-2,060
-11.2
-1,680
-1,300
0.2
-2,570
-2,060
-4.0
-1,560
-1,270
Adj PAT (INR M)
1QFY21
YoY (%)
QoQ (%)
5,280
-53.1
-59.7
613
-90.3
-90.1
-1,391
-197.7
-240.1
-2,494
-117.4
-119.3
390
-95.8
-87.9
-21,406
2,305.5
-4.5
-648
66.7
22.0
-84,420
135.5
21
-3,876
-259.2
3,177.6
123
-97.5
-96.4
-1,200
-416.3
199.1
-552
-112.2
-118.1
-23,435
-148.2
-238.2
Exhibit 18: Key operating indicators
BJAUT
HMCL
TVS Motor
MSIL
MM
TTMT (S/A)
TTMT (JLR) *
TTMT (Cons)
Ashok Leyland
Eicher (RE)
Eicher (VECV)
Eicher (Consol)
Agg. (ex JLR)
JLR in GBP million; Source: MOFSL, Company
Exhibit 19: Positive surprise in other expenses – biggest factor for the beat in estimates
INR b
BJAUT
HMCL
TVSL
MSIL
MM
TTMT (S/A)
TTMT (Consol)
AL
EIM
1QFY21
2.7
3.9
2
13
6.2
6.6
57.3
2.1
1.2
1QFY20
6.4
8.1
5.1
29.9
14.5
20.5
109.8
6.7
2.7
YoY (%)
-58
-52.4
-61.1
-56.5
-57
-67.8
-47.8
-68.4
-53.9
4QFY20
5.6
8.2
4
30.4
12.7
18.5
116.1
5.2
2.9
QoQ (%)
-52.2
-53
-51.2
-57.2
-51.2
-64.2
-50.6
-58.9
-57.7
August 2020
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 Motilal Oswal Financial Services
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Exhibit 21: …due to EBITDA loss in PVs/CVs (EBITDA
margins, %)
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
Exhibit 20: Aggregate EBITDA margin declined YoY…
18
11
4
-3
-10
Aggregate (excl JLR)
2W
Source: MOFSL, Company
Cars
CVs
Source: MOFSL, Company
Exhibit 22: Revised EPS estimates
Bajaj Auto
Hero MotoCorp
TVS Motor
Eicher Motors*
Maruti*
M&M (incl MVML)
Tata Motors*
Ashok Leyland
Escorts
Amara Raja
Bharat Forge*
BOSCH
Ceat
Endurance Tech*
Exide Industries
Mahindra CIE *
Motherson Sumi *
Rev
168.3
151.9
10.3
510.1
152.1
28.2
-34.4
-0.4
62.4
33.8
2.9
368.8
63.2
30.0
8.9
1.9
1.1
FY21E
Old
165.0
139.9
10.1
483.8
152.1
25.9
-31.9
-0.3
57.2
32.7
2.7
323.4
63.5
30.0
9.3
-0.6
1.2
Chg (%)
2.0
8.6
1.8
5.5
0.0
9.1
-7.8
13.8
9.0
3.5
5.6
14.0
-0.5
0.0
-4.5
415.8
-4.8
FY22E
Rev
Old
Chg (%)
183.2
179.2
2.3
176.2
171.6
2.7
17.5
16.7
5.0
822.0
776.8
5.8
241.8
242.0
-0.1
35.3
34.3
3.0
5.9
2.2
163.2
2.3
2.0
14.0
71.6
67.1
6.8
39.1
37.8
3.5
15.1
14.4
4.7
460.4
429.4
7.2
75.6
80.5
-6.1
46.1
46.1
0.0
11.0
11.2
-1.4
9.7
9.4
2.5
5.5
5.5
0.4
* Consolidated estimates; Source: MOFSL, Company
CAPITAL GOODS: Cost-saving measures lead to earnings surprise; growth inching toward normalization
Note: Our analysis excludes BHEL and IRB Infrastructure as they are yet to report their earnings.
Revenue growth in line with our estimates:
Overall revenue for our Capital Goods coverage universe declined
36% YoY and was in line with our estimates. However, the aggregate revenue is ex-BHEL, which has generally
underperformed the sector over the past few quarters. The revenues of short-cycle businesses such as ABB,
Siemens, and Cummins declined by 43%, 59%, and 63% YoY, respectively. Conversely, L&T, Thermax, Bharat
Electronics (BEL), and Engineers India declined 20–50%. This clearly indicates the impact of the COVID-19-led
shutdown was higher on short-cycle businesses v/s order book-driven companies. Companies in the Consumer
Durables segment were impacted disproportionately by the COVID-19-led lockdown as almost 45 days of peak
season sales were lost in 1QFY21, with revenues declining by 45–60% YoY. BEL and L&T demonstrated strong
execution capabilities, with revenue declines limited to 21% and 28% YoY, respectively. Despite the shutdown
impacting execution by 30–40 days, Ashoka Buildcon (ASBL) reported 35% YoY decline in sales. The biggest
surprise came from KNR Constructions (KNR), which reported a 3% YoY increase in revenue v/s our expectation
of 35% YoY decline.
Cost rationalization stands out:
Operating profit plunged by 60% YoY, but came in above our expectations.
Ex-
L&T, the decline stood at 72% YoY v/s our expectation of 87% decline.
L&T’s core E&C margins surprised at
3.9% (v/s our est. of 2.4%) in spite of 46% YoY decline in E&C core revenues. As expected, higher fixed costs,
coupled with loss of sales, came down heavily on operating performance. Sharp decline was reported in
August 2020
14
 Motilal Oswal Financial Services
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operating profit by: ABB (-81% YoY), Blue Star (-99% YoY), Cummins (-98% YoY), Engineers India (-85% YoY), and
Voltas (-77% YoY). On the other hand, decline was limited to 48–58% in BEL, Crompton, Havells, and L&T. Lower
fixed cost absorption led to losses at the operating level in Siemens and Thermax. Stringent cost measures led to
higher-than-estimated EBITDA for ABB, BEL, Blue Star, Crompton, Havells, and Voltas. Consumer durable
companies demonstrated higher agility to sales decline by cutting down on ad spends as they formed 3–5% of
total sales in the pre-COVID-19 era. EBITDA decline for ASBL stood at 25% v/s our est. of 65% YoY as one-time
release of contingencies aided operating profit.
Adj. PAT beats muted expectations:
Aggregate decline in PAT stood at 83% YoY and was 33% ahead of our
subdued expectation.
Losses from L&T Finance Holdings hampered consolidated PAT for L&T, which declined
by 95% YoY and stood 75% below our expectation.
Ex-L&T, adj. PAT across our coverage universe declined 40–
80%, with Blue Star, Siemens, and Thermax reporting losses. The cost-saving measures helped the bottom line as
well, resulting in an earnings surprise on an aggregate basis. Note that the absolute level is a low base and hence
the beat seems higher in percentage terms. Adj. PAT for ASBL and KNR was significantly higher than our
expectation.
Order inflow remains weak amid uncertainty:
Order inflow declined 36% YoY and 54% sequentially, weighed by
an uncertain macro environment, coupled with shutdown, which affected ordering activity.
Ex-L&T, decline in
order inflow stood lower at 21% YoY and 18% sequentially.
For L&T, order inflow declined 39% YoY, with core
E&C order inflow declining 55% YoY. BEL bucked the trend, reporting a ~70% YoY increase in order inflow, partly
aided by the lower base effect. BEL reported strong orders for ventilators, advanced torpedo defense systems
and smart city projects. Overall, management commentaries indicate some revival in ordering activity toward
2HFY21 as businesses fully assess the impact of the COVID-19-led disruption. However, ordering activity should
remain subdued for FY21. Most businesses are expected to exercise caution when bidding and keep an eye on
working capital requirements and liquidity availability.
Working capital, liquidity, and staggered return of labor remain challenges:
Most project sites are at 50–70%
occupancy levels with 70–90% of the migrant workforce slowly returning to work. However, execution is yet to
commence full throttle. Also, companies are expected to witness some elongation in working capital cycles due
to payment delays and extended support measures to vendors. Liquidity challenges persist for the sector as
banks continue to be averse to financing the sector. This is reflected in the fact that bank credit to the
Infrastructure sector has declined from peak levels.
Top picks:
L&T is our top pick in the Capital Goods sector,
given: (a) its better domestic execution, (b) control
over working capital cycle, and (c) leaner balance sheet on account of non-core asset divestments.
ABB
is our
preferred pick to play the Automation and Digitalization theme. In the Consumer Durables space, we like
Voltas,
given its strong UCP (Unitary Cooling Product) revenue trajectory and market leadership in the AC category. In
Infrastructure,
our top picks are
KNR
and
Ashoka buildcon,
given their: (a) ability to execute projects in a timely
manner and (b) healthy balance sheets.
Positive surprises in 1Q:
ABB, Bharat Electronics, Crompton, Engineers India, Ashoka Buildcon, KNR
Constructions, and Voltas
Negative surprises in 1Q:
Cummins, L&T, Siemens, and Thermax
Guidance and management commentary highlights:
L&T:
Management expects the current working capital situation to be at peak levels on an absolute level,
although it stands higher as a percentage of sales. Labor availability at 190k is sufficient for the upcoming
monsoon season.
ABB India:
The velocity of orders and revenues has been encouraging currently, with ABB witnessing double-
digit YoY growth on a like-to-like basis.
Cummins:
CPCB4+ norms are likely to be deferred by nine months (v/s the earlier timeline of Jul’21). This may
open up potential exports to the developed markets of the US and China. However, it is difficult to quantify the
opportunity currently.
Havells:
Channel inventory is now lower than before as channels have turned cautious and are working with
optimum inventory. The intensity of recovery was slower in the second half of July due to intermittent
lockdowns.
August 2020
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 Motilal Oswal Financial Services
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Voltas:
Company-level inventory stood at 140 days, while that in the channel stood at 40–45 days.
Crompton:
Management expects price erosion in the B2C Lighting segment to have bottomed out. B2B Lighting
may witness some more price erosion.
Siemens:
All sites are now operating at 20–70% utilization levels. The strength of migrant labor now stands at
~60%, up from 15–20%, post the lifting of the lockdown. 10 of the 22 factories of SIEM are in Maharashtra, with
the most falling in containment zones.
Ashoka Buildcon:
NHAI has set a target to award 4,500kms of roads in FY21. ~3,200kms of ordering has already
been announced thus far. Also, to ease liquidity for infrastructure companies, NHAI has adopted a monthly
billing policy.
Exhibit 23: Book-to-bill ratio (ex-BHEL) largely stable at ~1.9x
2.7
2.5
Order book (INR b)
2.4
2.1
1.9
2.0
2.0
2.0
2.0
2.0
2.0
1.9
2.0
BTB (x)
1.8
1.8
1.8
1.7
1.7
1.7
1.8
1.8
1.8
1.9
Exhibit 24: Aggregate revenue growth (ex-BHEL and IRB
Infra)
Revenue growth (%)
11.8
12.2
6.7 9.1 8.4
18.9 18.5
9.1 9.5 9.9
Exhibit 25: Aggregate EBITDA growth (ex-BHEL and IRB Infra)
EBITDA growth (%)
14.6
26.9
16.0 13.5
28.9
20.3 22.1
3.1
15.7
-1.0 -1.9 -2.4
-59.6
3.0
-0.1
-35.6
Exhibit 26: Aggregate EBITDA margin (ex-BHEL and IRB
Infra)
12.0 11.5
9.3
13.2
10.7
EBITDA Margin (%)
12.2 11.9 12.5
11.3 10.9 11.3
12.2
Exhibit 27: Aggregate PAT growth (ex-BHEL and IRB Infra)
PAT growth (%)
29.1 30.3 21.6
-5.0
20.2 12.5 25.9
5.9 13.1 9.6 1.4
-1.9
7.1
-82.6
August 2020
16
 Motilal Oswal Financial Services
Strategy
CEMENT: Profitability improves, led by better realization and lower cost
Volumes down 30% YoY:
1QFY21 volumes for cement companies under our coverage were down 30% YoY (v/s
est. 30% YoY decline). This was attributable to nationwide lockdown and plant shutdowns in April’20. In
comparison, overall industry volumes declined 34% YoY. SRCM, DBEL, and JKLC fared better than others with
lower volume decline of 18-20% YoY, while India Cements fared the worst with a decline of 53% YoY. Realization
for our coverage universe rose 6% QoQ driven by sharp price hikes, but declined marginally YoY. As a result,
aggregate revenue for our coverage universe (excluding Grasim) declined 31% YoY to INR205.6b.
Profitability driven by cost reduction:
Most of the companies in our coverage surprised on margins as the
impact of negative operating leverage (from lower volumes) was negated through sharp fixed cost reductions
and lower fuel costs. Our coverage EBITDA/t improved 6%/24% YoY/QoQ to INR1,327/t (v/s est. INR1,071/t).
Cost/t declined 3% YoY (1% QoQ) to INR3,773/t. However, due to lower volumes, aggregate EBITDA/PAT still fell
by 26%/22% YoY to INR53.0b/INR24.2b respectively. Including Grasim, which reported negative margins,
EBITDA/PAT for our coverage universe declined 35%/38% YoY.
Top picks:
Given the sub-optimal utilization expected across regions (due to COVID-19), the sustenance of
production discipline would be critical to prices and margins. This, we believe, would be tougher to achieve for
regions with higher capacity growth. Eastern India, with ~30% capacity growth, is the worst placed and is thus
our least preferred region. In such an uncertain demand environment, we prefer companies that: (a) are moving
down the cost curve, (b) have potential for market share gains, and (c) provide valuation comfort. Thus,
UltraTech and ACC are our top large-cap picks and JK Cement our top mid-cap pick.
Positive surprises:
DBEL, ACC, Ambuja, UltraTech, ICEM
Negative surprise:
Grasim, BCORP
Guidance highlights:
Most companies in post-results management calls reported utilization at ~70% for July, driven by strong rural/semi-
urban demand. While government projects have started to pick up, the Real Estate sector continues to face labor
issues. 2QFY21 volumes are thus expected to be better. Here are the other guidance highlights:
UTCEM:
1) Capex guidance for FY21 has been raised to INR15b, from INR10b (FY20: INR17b), as some return-
accretive projects are being accelerated. 2) Guided for fixed cost reduction (including employee costs) by 10% or
INR5.0b in FY21 (implying ~INR70/t) on a sustainable basis.
DBEL:
1) Management informed that as volumes pick up, some of the overhead costs are likely to return. 2)
Capex guidance stands at INR12.0b for FY21, including spend of INR3.5–4.0b on the Murli Industries acquisition.
3) A 3.0mt clinker line at Rajgangpur is undergoing trial runs and is expected to be commissioned in 3QFY21; the
Bengal and Cuttack grinding units would be commissioned in Dec’20 and Mar’21, respectively.
JKLC:
1) Lower profitability in the eastern region resulted in lower EBITDA/t v/s the industry. 2) Management
informed that Jun–Jul’20 sales volumes were flat YoY. 3) Cement prices declined marginally in Jul’20 (MoM) and
are expected to decline further due to the monsoons.
TRCL:
1) The Odisha grinding unit is expected to be commissioned by Sep’20. 2) The integrated plant in Kurnool
and the Jayanthipuram 1.5mt clinker should get commissioned by Mar’21, as guided earlier.
Exhibit 28: Volumes declined 30% YoY for coverage universe
Aggregate Vol (m ton)
8
2
4
8
Volume growth (%)
0
1 -13
-30
Exhibit 29: EBITDA per ton increased 6% YoY
Aggregate EBITDA (Rs/ton)
8 14 21 14 19 20 16 17 1
44 38 41 49 47 43 49 56 56 51 57 66 57 51 58 57 40
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 Motilal Oswal Financial Services
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Exhibit 30: Trend in key operating parameters
ACC
Ambuja Cement
UltraTech Cement
Birla Corporation
India Cements
Shree Cement
Dalmia Bharat
JK Lakshmi Cement
The Ramco Cements
Sector Agg.
Volume (m ton)
1QFY21
YoY (%) QoQ (%)
4.8
-33.9
-27.4
4.2
-28.6
-27.4
14.7
-31.6
-31.7
2.4
-33.8
-27.0
1.4
-53.1
-46.1
4.9
-18.6
-28.6
3.7
-19.6
-29.2
1.9
-18.2
-22.7
1.9
-28.2
-33.8
39.9
-29.8
-30.3
Realization (INR/ton)
1QFY21 YoY (INR) QoQ (INR)
5,164
34
525
5,119
159
336
5,211
-121
199
4,935
-19
47
5,301
473
950
4,717
-296
58
5,393
-182
591
4,331
-140
26
5,284
295
559
5,099
-51
298
EBITDA (INR/ton)
1QFY20 YoY (INR) QoQ (INR)
1,102
16
209
1,421
231
375
1,416
39
278
967
-90
-77
1,090
295
836
1,421
-69
-141
1,678
214
695
752
24
-67
1,283
65
328
1,327
73
258
Exhibit 31: Exhibit 4: Cement universe Realization per ton increased 6% QoQ in 1QFY21
Realization (Rs/ton)
Exhibit 32: Aggregate EBITDA declined 26% YoY in 1QFY21
Aggregate EBITDA (Rs M)
Source: MOSL
Source: MOFSL
CONSUMER: Better-than-expected results with cautious recovery; Rural the bright spot
Lockdown affects performances of most players:
In 1QFY21, cumulative sales declined 15.4% YoY (v/s est.
20.9% decline), and EBITDA/PBT fell 26.3%/26.2% YoY (v/s est. 30.8%/32.4% decline). PAT declined 19.5% YoY
(v/s est. 28.8% decline). This was at a lower rate v/s PBT on account of corporate tax cuts / tax write-backs due
to losses reported by some companies. Most of the companies in our Consumer universe beat estimates on the
volume and sales fronts. The beat was significant for HUVR, CLGT, HMN, JYL, APNT, and PIDI (the last two over
very low expectations). On the other hand, discretionaries such as ITC, UBBL, and UNSP were drastically
impacted on a YoY basis, while staples companies such as HUVR, NEST, CLGT, and JYL were relatively less
impacted. Notably, foods companies have done exceptionally well in these tough times, with BRIT and TGBL
registering strong double-digit topline growth.
Recovery seen, but managements indicate caution:
With the economy gradually unlocking since May,
companies indicated recovery has been seen in consumption. However, managements also cautioned about
sporadic lockdowns being re-imposed in different parts of the country. Rural grew faster than urban on account
August 2020
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of being less affected by COVID-19, indicating the reversal of the trend seen in the last few quarters (where
urban was growing faster). Notably, the outlook for rural is positive, supported by a good harvest, government
spending, and a good monsoon. The commodity environment is expected to continue to be benign. While
companies significantly cut their ad spends in 1QFY21, managements indicated the same would not be
sustainable going forward.
Margin performance mixed in 1QFY21:
Most of the companies that reported significant sales decline witnessed
margin compression due to operational de-leverage (barring DABUR, HMN, and MRCO). This was despite
significant cost-cutting, especially on discretionary expenses such as ads and travel. On the other hand,
companies that did register sales growth witnessed margin expansion (except HUVR). Notably, BRIT delivered its
best ever margin performance in 1QFY21. Overall, barring ITC and UBBL, all the companies reported EBITDA
above or in line with our expectations. EBITDA for our coverage universe fell 26.3% YoY (v/s est. of 30.8%
decline). The EBITDA beat (v/s expectation) was particularly strong for APNT, BRIT, CLGT, HMN, JYL, PIDI and
TGBL.
Top picks – HUVR, DABUR, MRCO:
We continue to prefer HUVR as our large-cap pick.
Particularly in the
current volatile environment,
HUVR
stands out like a beacon of light in terms of superior visibility on near- and
medium-term earnings. Moreover, after factoring the GSKCH merger and synergies, its valuations still offer
scope for reasonable upside. We also like
DABUR
as it offers the best visibility given: (a) the successful efforts by
the new CEO to boost growth, (b) its high rural dependence, and (c) the large part of its portfolio is non-
discretionary in nature. We are bullish on
MRCO
as it has a more resilient portfolio than peers to withstand the
COVID-19-led sales and earnings decline in FY21. Furthermore, the outlook on material costs is also better than
the earlier expectation of possible inflation.
Positive surprises:
APNT, BRIT, CLGT, DABUR, HMN, GCPL, HUVR, JYL, MRCO, PIDI, TGBL, UNSP
Negative surprises:
ITC, NEST, UBBL
PAG and PGHH are yet to declare their June 2020 quarter results.
Guidance highlights:
APNT:
The demand outlook for rural and lower tier cities is good. Unless the mortality rate increases due to
COVID-19, APNT does not expect the improved sentiment to reverse. However, the re-imposition of sporadic
lockdowns would lead to a demand impact in the affected pockets. The management is looking at demand on a
quarter-to-quarter basis. The predictability of demand for the festive season is weak currently. No change was
seen in pricing in 1QFY21, and change is not likely in 2QFY21 either.
BRIT:
BRIT rationalized advertisement and sales promotion (A&SP) spend in 1QFY21, with ~200bp of the 460bp
reduction in other expenses as a percentage of sales driven by A&SP. The A&SP reduction is not sustainable
going forward. Capex of INR7b over the next two years (with Dairy capex to be determined and added later)
would be significantly higher than the INR2–2.5b annual rate expected earlier.
DABUR:
Secondary sales growth was at 7–8% in Jun’20, and similar growth was seen in Jul’20 as well. Recovery
has been witnessed in all the categories that were impacted in 1QFY21, while Healthcare segment sales remain
extremely healthy. The Healthcare segment’s contribution was up 10 percentage points in the quarter. Dabur
expects this business (31% of sales last year), which is already more profitable than the rest of the portfolio, to
increase sharply for the full year as well. Foods could go back to 10% growth levels over the medium term. Rural
sales grew 1%, while urban declined 8–9% for the quarter. Expect rural growth to be higher going forward. Some
inflation is being witnessed in Ayurvedic product costs. Expect 3% inflation in the Agri product basket as well.
Project Samriddhi, the INR1–1.2b cost optimization program, is likely to be implemented in FY21. The channel
pipeline has been corrected to 16 days from 20–21 days over the last year despite various NPD additions.
Management believes a further reduction in the pipeline by another 4–5 days may be possible.
GCPL:
Rural reported better sales than urban. While rural forms 30% of India sales, GCPL believes it has the SKUs
to capitalize on the better-than-expected rural demand going forward. Expect sequential gross margin
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improvement as the mix improves and owing to some price action by the company on Soaps. A sequential
pickup in ad spends is expected in 2QFY21.
HUVR:
The company maintained that rural is witnessing green shoots, but is yet to see full-fledged revival,
despite performance v/s urban likely being better. Skin Care, Color Cosmetics, and Deodorants (15% of the
portfolio) declined 45% YoY in 1QFY21. Skin Care showed signs of improvement in Jun’20 and is likely to fare
better going forward. The Out-of-Home business (5% of the portfolio, mainly Ice-creams and Water Purifiers)
declined 69% YoY and is likely to remain weak going forward. COVID-19-related sanitization costs would be
lower hereafter, with the GSKCH integration cost also being somewhat lower.
MRCO:
The business saw smart recovery, with 3% sales growth in May and June combined, with this momentum
continuing in July as well. The company targets flattish sales for the full year, with over 20% EBITDA margins.
From around INR2b sales in FY20, the Foods business’ sales are targeted at INR3–3.5b for FY21 and INR5b for
FY22. Ad spends would decline 100–150bps YoY for FY21. Expect copra prices to see mild deflation during the
year.
PIDI:
Recovery was witnessed in June and July, although the management was unable to quantify how much of
this was pent-up demand. Near-term demand appears uncertain as consumers remain reluctant about allowing
laborers into their houses for furniture making. The company looks to tackle this problem by providing
certifications to contractors stating they are following all the prudent measures. VAM costs for the quarter were
in the USD650–700 range due to low demand. The management expects this to continue in the near term, with
the caveat that these low levels are unlikely to sustain as the demand environment improves.
UNSP:
Factories were fully operational and 80–85% of stores had reopened by end-Jun’20. However, the second
wave of localized lockdowns in Jul’20 affected both manufacturing and retail. The impact of excise increase in
May’ would be felt more in the subsequent quarters. Sentiment is improving, but cannot be extrapolated given
the volatile situation, particularly for the Alcohol business in India. Other operating income was also affected by
a plunge in franchisee income, which impacted gross margins by 160bp. Franchisee income stood at INR100m in
1QFY21 (v/s the quarterly average of INR500m in the pre-COVID-19 period). Expect ~40% decline on this front in
the coming days. ENA costs have been flattish. The Glass industry was also under lockdown, and prices are
expected to increase gradually.
1Q19
10.0
11.0
4.0
21.0
18.0
12.0
1.0
12.4
9.0
15.0
10.0
20.2
2Q19
11.0
11.0
7.0
8.1
(4.0)
10.0
6.0
6.0
8.0
5.0
5.0
11.0
3Q19
21.0
7.0
7.0
12.4
3.5
10.0
7.0
5.0
9.0
7.0
2.0
13.0
4Q19
10.0
7.0
5.0
4.3
0.0
7.0
8.0
8.0
6.0
1.0
18.0
4.0
1Q20
16.0
3.0
4.0
9.6
0.0
5.0
3.0
6.0
9.0
7.0
3.0
6.0
2Q20
14.0
3.0
4.0
4.8
1.0
5.0
2.5
1.0
(1.0)
0.0
1.0
(1.0)
3Q20
11.0
3.0
2.3
5.6
(2.0)
5.0
2.5
4Q20
2.5
0.0
(8.0)
(14.6)
(4.0)
(7.0)
(11.0)
1Q21
(35.0)
21.0
0.0
(9.7)
(28.0)
4.0
(37.0)
Exhibit 33: Quarterly volume growth
Quarterly volume growth (%)
Asian Paints (Domestic decorative)*
Britannia (Base business)
Colgate (Toothpaste)
Dabur (Domestic FMCG)
Emami (Domestic)
Hindustan Unilever (Domestic)
ITC (cigarette)*
Marico
Domestic
Parachute
VAHO
Saffola
Pidilite (Consumer bazaar)
*Our estimate
(1.0)
(3.0)
(14.0)
(2.0)
(8.0)
(11.0)
(7.0)
(11.0)
(30.0)
11.0
25.0
16.0
2.0
(3.1)
(58.6)
Source: Company, MOFSL
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Exhibit 35: Consumer aggregate EBITDA margin contracts by
310bp YoY due to operational de-leverage amid lower sales
in lockdown
Consumer aggregate EBITDA margins (%)
25.6
24.9 25.2
24.5 24.4 24.4
24.3
24.0 24.0
23.7
23.7
22.5
-6.2
-15.4
Exhibit 34: Momentum in sales growth down due to
lockdown
Consumer aggregate YoY sales growth (%)
9.5 7.2
6.8
12.1 10.9 13.7
9.1 7.4
5.5 4.8
Source: Company, MOFSL
Source: Company, MOFSL
Exhibit 36: Aggregate adj. PAT declines 19.5% YoY, majorly due to lower sales in lockdown
Consumer aggregate YoY PAT growth (%)
10.2
17.0
17.7
18.5
14.8
12.1
9.5
11.7
27.0
23.7
0.3
-19.5
Source: Company, MOFSL
FINANCIALS – BANKS: Bracing for asset quality shocks; moratorium book declines
1QFY21 was a challenging quarter for banks, and the economy as a whole, on account of the COVID-19-led
lockdown and the subsequent impact on business activity. Banks reported sharp decline in fee income, weighed
by muted business volumes. Moreover, elevated provisions at banks, led by COVID-19-related contingent
provisions, continued to drag down earnings. Higher liquidity and sharp moderation in the rate environment
resulted in margin pressure across banks and kept NII growth in check. However, strong control on operating
expenses, partly aided by lower origination volumes, helped banks offset the sharp revenue decline.
On the business front, loan growth moderated across segments (barring HDFCB, which saw strong growth in the
Corporate book), weighed by a weak macro environment. Loan growth contracted up to ~2% QoQ for large
banks and up to 4–7% QoQ for mid-sized banks. Deposit growth showed strong traction during the quarter, and
CASA ratios held largely steady despite a sharp cut in the SA rate effected by many banks.
On the asset quality front, steady decline was seen in the moratorium pool across most large banks. Under
Moratorium 2.0, most banks reported declines of 50–60%. The moratorium benefit, however, led to banks
reporting lower slippages during the quarter. As a result, they were able to make higher contingent/specific
provisions to further strengthen the balance sheet and cushion the potential surge in credit cost once the loan
moratorium has ended. Most banks in our coverage are looking to bolster their capital base and many (AXSB,
ICICIBC, YES, IDFCB, and IIB) have already raised capital as they prepare to face the spike in the NPL formation
rate once the moratorium ends.
Life insurers
reported sharp decline in total APE, largely led by a drop in ULIP sales as well as reduced
opportunities to cross-sell the Credit Life business. However, individual protection growth remained strong.
Consequently, the top life insurers (barring MAXLIFE) reported a 30–44% plunge in total APE, and absolute VNB
declined by 16–43%.
Private Banks – Business growth soft; COVID-19 provisions, sharp fee income drop impact earnings:
Most
private banks reported strong NII growth, and a drop in operating expenses helped offset the sharp decline in
21
August 2020
 Motilal Oswal Financial Services
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fee income. This therefore helped maintain modest operating profits. On the other hand, elevated provisions,
particularly toward COVID-19, impacted earnings. Banks reported moderation in loan growth across segments
(barring HDFCB, which saw strong growth in the Corporate book). Loan growth contracted up to ~2% QoQ for
large banks and up to 4–7% QoQ for mid-sized banks, while deposit growth showed strong traction. On the asset
quality front, banks such as AXSB, KMB, and HDFCB reported moratorium books of 9–11%, while the book was
marginally higher for IIB (16%) and ICICIBC (~17.5%). Furthermore, if adjusted for customers who are not paying
their dues and have also not availed moratorium, the moratorium books of AXSB and ICICIBC would stand at
~15% and ~20%, respectively. The benefit of moratorium resulted in lower slippages during the quarter, which
helped the banks further strengthen their provision coverage on existing NPLs. They were also able to build
higher COVID-19-related provisions; our coverage banks are carrying excess provisions of up to 2.5% of total
loans. BANDHAN holds the highest provisions at 2.6% of total loans, while other banks are carrying excess
provisions of 0.5–1.5%. In terms of moratorium book, banks are carrying total provisions of up to 13% of the
book.
Public Sector Banks – Strong performance by SBIN; BOB reports tepid trends:
SBIN reported a strong quarter,
led by robust NII growth, with domestic NIMs improving 30bp QoQ and controlled opex. Deposit growth also
held very strong. The moratorium book for SBIN remains one of the lowest at ~9.5%. Conversely, BOB reported a
weak operating performance, and elevated provisions led to net loss. The moratorium book remains at 21.4%;
also, the watchlist increased further to 1.9% of loans and thus remains a key overhang for the stock.
Small Finance Banks – Operating performance holds strong, although business growth moderates:
AU Bank
reported strong operating profit at 53% YoY and Equitas posted decent operating profit at 19% YoY in the
current environment. The banks continue to build COVID-19-related provisions. On the asset quality front, the
moratorium book remains higher for EQUITAS at 43%, while it has declined to 11% for AUBANK (v/s 25%
reported earlier). AUM growth moderated for both SFBs.
Life Insurance – APE sees steep decline; mix of Protection business continues to rise:
The Insurance industry
saw sharp decline in total APE, largely led by decline in ULIP sales. However, individual protection growth
remained strong. In 1QFY21, life insurers (barring MAXLIFE) reported a 30–44% plunge in total APE. Absolute
VNB declined across insurers in the range of 16–43%. However, the VNB margin expanded for IPRULIFE, led by
higher protection share, while margins contracted for HDFCLIFE. On the cost front, total expenses (incl.
commissions) declined 25%/23% YoY for HDFCLIFE/IPRULIFE.
Our view:
While the banks have created higher provisions and strengthened their balance sheets, we remain
watchful of asset quality as slippages are likely to increase once the moratorium ends. Although, relaxations by
the RBI on restructuring would help control overall damage. Nevertheless, we estimate credit cost to remain
elevated in the near term. Overall, we believe banks with a strong/granular liability franchise, higher liquidity,
and strong capital levels would be able to tide over the crisis and gain market share as growth revives.
We
maintain our preference for ICICIBC, HDFCB, and SBIN, while among the life insurance players, we prefer IPRU
Life.
Positive surprises:
SBIN, IIB
Negative surprises:
KMB, BOB (we downgraded BOB to Neutral during the quarter)
Guidance highlights:
HDFCB
expects retail growth to remain tepid over the next few quarters, while wholesale trends would remain
strong. Also, there is long-term guidance of 3–5% improvement in cost ratios over the next few years, led by
digital initiatives.
KMB
expects the benefit of interest rate cuts on savings deposits to flow into the current year, which could
support margins. Overall, the near-term focus would be on preserving the balance sheet and continuing to build
a strong liability franchise. On the lending side, it remains cautious on the unsecured portfolio. It would focus on
the Mortgage business and would disburse loans to the MSME segments under a credit guarantee scheme. The
bank is likely to exercise caution in lending to companies with high fixed cost, high leverage, etc.
August 2020
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 Motilal Oswal Financial Services
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ICICIBC:
The bank does not have any loan growth targets, but expects some incremental opportunity on the
corporate side. On the cost side, the hiring rate would slow in the near term, while investments toward digital
infrastructure would continue. The RoE guidance of 15% by 1QFY21 would be delayed by some quarters, with
the near-term focus likely to be on preserving the balance sheet.
SBIN
expects the loan pipeline for the corporate segment to be strong and thus expects disbursement trends to
improve. Margins would remain stable at current levels. Furthermore, we expect recovery of INR100–120b from
the resolution of large accounts by Dec’20.
AXSB
expects credit cost to remain elevated and downgrades in the BB & below pool to continue, which would
keep asset quality under pressure. The near-term focus would be on preserving the balance sheet.
Bandhan:
The new customer acquisition rate would reach below 10% YoY for FY21E, while a higher focus would
be on tapping the existing customer base. On the asset quality front, it expects credit cost of 2.0–2.2% for FY21E.
However, a large proportion has already been incurred by making contingent provisions.
IIB
expects deposits to grow faster than loan growth. It would continue to accelerate provisions toward stressed
accounts and increase provision coverage to >70% in the near term.
RBK
would not focus on loan growth over the next few quarters, but on preserving the balance sheet,
maintaining excess liquidity, granularity, and improving cost of deposits. Margins are likely to decline in FY21.
Also, fees earned on credit card spends would be lower in FY21 as the bank is likely to be cautious and thus block
the card limits of customers in the high-risk category.
Exhibit 38: Loan growth moderated, while deposit growth
remained steady for large banks
1QFY21
SBIN
BOB
AXSB
FB
HDFCB
ICICIBC
IIB
KMB
RBL
DCB
BANDHAN
Exhibit 37: Earnings were impacted due to elevated
provisions and weak fee income trends
1QFY21
PSBs
SBIN
BOB
PBs
AXSB
FB
HDFCB
ICICIBC
IIB
KMB
RBL
DCB
BANDHAN
NII Growth (%)
QoQ
YoY
17
0
3
7
3
4
2
5
2
(5)
8
16
5
20
12
18
20
16
17
27
1
15
PPP Growth (%)
QoQ
YoY
(2)
(16)
(0)
(3)
(1)
46
2
(4)
(8)
(10)
4
36
1
(1)
19
15
71
13
9
14
15
17
PAT Growth (%)
QoQ
YoY
17
(271)
(180)
33
(4)
113
62
(2)
23
15
6
81
(222)
(19)
4
20
36
(64)
(9)
(47)
(2)
(32)
NIM (%)
Loan Growth (%) Deposit Growth (%)
4QFY20 1QFY21 QoQ
YoY
QoQ
YoY
3.0
3.0
-1.2
7.7
5.5
16.0
2.6
2.6
-0.5
8.4
-1.2
4.3
3.6
3.0
4.3
3.9
4.3
4.7
4.9
3.6
8.1
3.4
3.1
4.3
3.7
4.3
4.4
4.9
3.4
8.2
-1.8
-0.8
1.0
-2.2
-4.2
-7.2
-2.3
-1.1
3.5
12.9
8.3
20.9
6.5
2.4
-1.9
-0.3
4.2
17.7
-1.9
1.7
3.7
4.0
4.6
-0.5
6.8
-3.1
6.0
16.2
16.9
24.6
21.3
5.3
12.3
1.5
2.2
35.0
Exhibit 39: Snapshot of moratorium availed by borrowers and COVID-19-related provisions built by banks
Moratorium 1.0
Moratorium 2.0
Provision (INR b)
Loans
% of
% of
Total
COVID
Total
As a % of
(1QFY21)
(INR b)
loans
loans
(INR b)
Provision
Provisions
loans
AXSB
5,613
25%-28%
9.7%
545
30.0
68.9
1.2%
BANDHAN
697
~71%
24%
167
14.4
17.8
2.6%
DCBB
251
~60%
26%
65
1.0
2.0
0.8%
HDFCB
10,033
NA
9%
903
15.5
70.0
0.7%
ICICIBC
6,312
~30%
18%
1,105
82.8
96.7
1.5%
IIB**
1,981
~50%
16%
317
12.0
12.0
0.6%
IDFC First
1,041
~35%
28%
291
6.0
6.0
0.6%
KMB
2,040
~26%
9.65%
197
12.6
12.6
0.6%
FB
1,213
~35%
24%
291
1.9
1.9
0.2%
RBK
567
~33%
13.7%
78
3.6
3.6
0.6%
AUBANK
263
~25%
11%
29
2.8
2.8
1.1%
EQUTAS