1QFY21 | September 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)
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.
24 November 2015
1
 Motilal Oswal Financial Services
Contents
Summary
.......................................................................................................................................................................................................................
3
Sectors
...................................................................................................................................................................................................................
9-159
Automobiles ................................................................................................................9-21
Amara Raja ...................................................................................................................... 10
Ashok Leyland ................................................................................................................. 10
Bajaj Auto ........................................................................................................................ 11
Bharat Forge.................................................................................................................... 12
BOSCH ............................................................................................................................. 12
CEAT ................................................................................................................................ 13
Eicher Motors .................................................................................................................. 13
Endurance Tech. .............................................................................................................. 14
Escorts ............................................................................................................................. 15
Hero MotoCorp. .............................................................................................................. 16
Mahindra & Mahindra ..................................................................................................... 17
Mahindra CIE ................................................................................................................... 18
Maruti Suzuki .................................................................................................................. 19
Motherson Sumi.............................................................................................................. 20
Tata Motors..................................................................................................................... 20
TVS Motors...................................................................................................................... 21
Capital Goods.............................................................................................................22-30
ABB.................................................................................................................................. 23
Blue Star .......................................................................................................................... 23
Crompton Greaves CG ..................................................................................................... 25
Cummins ......................................................................................................................... 25
Havells ............................................................................................................................. 26
KEC International............................................................................................................. 27
L&T .................................................................................................................................. 27
Voltas .............................................................................................................................. 29
Cement ......................................................................................................................31-40
Birla Corp ........................................................................................................................ 32
Dalmia Bharat.................................................................................................................. 33
Grasim Inds ..................................................................................................................... 34
India Cements ................................................................................................................. 36
JK Cements ...................................................................................................................... 37
JK Lakshmi Cements ........................................................................................................ 38
Ultratech Cement ............................................................................................................ 39
Consumer...................................................................................................................41-56
Asian Paints ..................................................................................................................... 42
Britannia Inds .................................................................................................................. 43
Dabur India...................................................................................................................... 44
Emami ............................................................................................................................. 45
Godrej Consumer ............................................................................................................ 47
Hindustan Unilever.......................................................................................................... 47
Jyothy Labs ...................................................................................................................... 48
Marico ............................................................................................................................. 49
Nestle India ..................................................................................................................... 50
Page Inds ......................................................................................................................... 50
Pidilite Inds ...................................................................................................................... 51
Tata Consumer Products ................................................................................................. 52
United Breweries............................................................................................................. 54
United Spirits................................................................................................................... 55
Financials- Banks .......................................................................................................57-69
AU Small Fin. ................................................................................................................... 58
Axis Bank ......................................................................................................................... 58
Bandhan Bank ................................................................................................................. 60
Bank of Baroda ................................................................................................................ 61
DCB Bank ......................................................................................................................... 62
Federal Bank ................................................................................................................... 63
HDFC Bank ....................................................................................................................... 64
ICICI Bank ........................................................................................................................ 65
IndusInd Bank.................................................................................................................. 67
Kotak Mahindra Bank ...................................................................................................... 68
State Bank of India .......................................................................................................... 69
Financials – NBFC .......................................................................................................70-88
Aditya Birla Capital .......................................................................................................... 71
Bajaj Finance ................................................................................................................... 71
Cholaman.Inv.&Fn ........................................................................................................... 72
Equitas Holdings .............................................................................................................. 73
HDFC Life ......................................................................................................................... 74
ICICI Pru Life .................................................................................................................... 75
ICICI Securities ................................................................................................................. 76
Indostar Capital ............................................................................................................... 77
IIFL Wealth ...................................................................................................................... 78
L&T Finance ..................................................................................................................... 79
LIC Housing Fin. ............................................................................................................... 80
M&M Financial ................................................................................................................ 81
MAS Financial .................................................................................................................. 82
Muthoot Fin .................................................................................................................... 83
PNB Housing .................................................................................................................... 84
Repco Home Fin .............................................................................................................. 85
Shriram City Union Finance ............................................................................................. 86
Shriram Transport Fin...................................................................................................... 87
Healthcare .................................................................................................................89-98
Alembic Pharma .............................................................................................................. 90
Alkem Labs ...................................................................................................................... 90
Aurobindo Pharma .......................................................................................................... 91
Biocon ............................................................................................................................. 91
Cadila Healthcare ............................................................................................................ 92
Cipla ................................................................................................................................ 92
Divis Lab .......................................................................................................................... 93
Dr Reddy’s Labs ............................................................................................................... 93
Glenmark ........................................................................................................................ 94
Granules India ................................................................................................................. 94
IPCA Labs ........................................................................................................................ 95
Jubilant Life ..................................................................................................................... 95
Laurus Labs ..................................................................................................................... 96
Lupin ............................................................................................................................... 96
Strides Pharma ................................................................................................................ 97
Sun Pharmaceuticals ....................................................................................................... 97
Torrent Pharma ............................................................................................................... 98
Media ...................................................................................................................... 99-101
Sun TV Network .............................................................................................................. 99
Zee Entertainment ........................................................................................................ 100
Metals.................................................................................................................. 102-109
Hindustan Zinc .............................................................................................................. 102
Hindalco Inds ................................................................................................................ 103
Jindal Steel .................................................................................................................... 104
JSW Steel....................................................................................................................... 105
NMDC ........................................................................................................................... 107
Tata Steel ...................................................................................................................... 108
Oil & Gas ................................................................................................................ 110-113
BPCL .............................................................................................................................. 111
Reliance Inds ................................................................................................................. 112
Retail ..................................................................................................................... 114-120
Aditya Birla Fashions ..................................................................................................... 114
Jubilant Foodworks ....................................................................................................... 116
Shoppers Stop ............................................................................................................... 117
Titan .............................................................................................................................. 118
V-Mart........................................................................................................................... 119
Technology ............................................................................................................ 121-128
Cyient ............................................................................................................................ 122
HCL Technologies .......................................................................................................... 122
Hexaware Technologies ................................................................................................ 123
Infosys ........................................................................................................................... 123
L&T Infotech ................................................................................................................. 124
Mindtree ....................................................................................................................... 124
Mphasis......................................................................................................................... 125
Coforge (NIIT Tech) ....................................................................................................... 125
Persistent Systems ........................................................................................................ 126
TCS ................................................................................................................................ 126
Tech Mahindra .............................................................................................................. 127
Wipro ............................................................................................................................ 127
Zensar Technologies...................................................................................................... 128
Telecom ................................................................................................................. 129-134
Bharti Airtel ................................................................................................................... 129
Bharti Infratel ................................................................................................................ 131
Tata Comm.................................................................................................................... 132
Vodafone Idea ............................................................................................................... 134
Utilities .................................................................................................................. 135-139
Coal India ...................................................................................................................... 135
JSW Energy.................................................................................................................... 135
NHPC ............................................................................................................................. 136
NTPC ............................................................................................................................. 137
Power Grid Corp............................................................................................................ 137
Tata Power .................................................................................................................... 138
Torrent Power ............................................................................................................... 138
Others .................................................................................................................... 140-159
Brigade Entp.................................................................................................................. 140
BSE Ltd .......................................................................................................................... 140
Container Corp .............................................................................................................. 141
Coromandel Intl ............................................................................................................ 142
Essel Propack ................................................................................................................ 143
Godrej Agrovet.............................................................................................................. 144
Indian Hotels ................................................................................................................. 145
Interglobe Aviation ....................................................................................................... 146
Info Edge (India) ............................................................................................................ 147
Kaveri Seeds .................................................................................................................. 148
KNR Constructions ........................................................................................................ 149
Lemon Tree Hotels ........................................................................................................ 150
MCX .............................................................................................................................. 151
Phoenix Mills ................................................................................................................. 152
PI Inds ........................................................................................................................... 152
Quess Corp .................................................................................................................... 154
SRF Ltd .......................................................................................................................... 154
Tata Chemicals .............................................................................................................. 156
Team Lease ................................................................................................................... 157
UPL ................................................................................................................................ 158
Note:
All stock prices and indices are as on 11th Sept 2020, unless otherwise stated.
 Motilal Oswal Financial Services
1QFY21 | India Inc. on Call
Voices | 1QFY21
BSE Sensex: 38,855
S&P CNX: 11,464
Voices
Commentary improves on Demand; COVID caveat remains!
In this report, we present detailed takeaways from the 1QFY21 conference calls as
we refine the essence of India Inc. ‘Voices’.
The 1QFY21 corporate earnings were better than our muted expectations for
both the Nifty and the MOFSL Universe. Nifty sales declined 29% YoY (v/s est.
decline of 30%), while EBITDA/PBT/PAT declined 6%/30%/26% YoY (v/s est.
decline of 11%/39%/35%). Six sectors posted YoY profit growth - Healthcare
(27%), Utilities (16%), PSU Banks (10%), Life Insurance (4%), Private Banks (1%)
and Technology (1%). The sectors that posted losses in line with our
expectations were Automobiles, Metals, Retail and Telecom. 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. Corporate commentaries were cautiously optimistic based on gradual
demand recovery Jun'20 onwards due to easing of the lockdown restrictions.
Commentaries of Banks suggest that business trends are gradually picking up
MoM. The rural economy is picking up faster than expected and has reached
~70-80% of pre-COVID levels. Overall, banks would continue accessing the on-
ground situation over the next few months, and accordingly, decide their
growth strategy. In terms of asset quality, collection efficiency (CE) trends
improved further in Jul-Aug'20 with ~75-85% collections in MFI and above ~80%
in Affordable Housing. While banks do not expect higher restructuring in large
ticket sized corporate accounts, it is expected in mid-sized corporate/SME
segments. Commentaries of NBFCs across suggest that improving macros across
most business segments has led to increased optimism on CE as well as on
growth across product segments. In terms of restructuring, most financiers are
awaiting Sep'20 CE trends given the end of the moratorium period.
For the Consumer sector, the outlook on rural is positive on account of strong
monsoons, good harvest and higher government spends. Rural is expected to
grow faster than urban in the near term. The commodity environment remains
benign, providing some relief in these challenging times. While in 1QFY21
companies had cut down their A&P spends, they are not sustainable going
forward.
In Autos, 2W/4W demand recovery post the lockdown surprised OEMs and
dealers on the back of (a) preference for personal vehicles, (b) pent-up demand
from pre-COVID bookings, and (c) high disposable income in the rural market.
While there is still some uncertainty over sustainability of demand, there is high
focus on cost cutting, capex and conserving cash, which is evident from the cut
in variable/fixed costs and slashing of capex budgets for FY21 across companies.
In IT, despite the COVID-19 led disruption in 1QFY21, revenue saw limited
impact while deal wins were healthy. Supply side challenges are largely behind
as ~99% employees are working from home (WFH). Demand side challenges are
also expected to subside given that clients are now prioritizing IT spends and
deal discussions. These had earlier come to a standstill and have picked up
again.
September 2020
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 Motilal Oswal Financial Services
Voices | 1QFY21
Managements of Cement companies have informed that cement prices have
softened across India in Aug'20 and are down by INR15/bag over Jun'20 on an
average. Demand recovery in the East/North India has fared better than the
South/West India due to lesser spread of COVID-19. A large part of the recovery
was driven by robust demand from rural/semi-urban areas. However,
managements remain cautious on the demand outlook due to the spread of
COVID to rural areas.
In Healthcare, COVID-19 led impact on domestic formulation (DF) segment was
recorded due to limited MR-doctor connect and lesser footfalls at clinics.
Companies have been aggressively pursuing digital marketing and looking to
further strengthen relationships with doctors to improve DF sales gradually. DF
sales growth outlook is expected to gradually pick up, but cost calibration should
keep margins at elevated levels over the near term.
Autos
2W/4W demand recovery post the lockdown surprised OEMs and dealers alike
on the back of (a) preference for personal vehicles, (b) pent-up demand from
pre-COVID bookings, and (c) high disposable income in the rural market. For
Aug’20, most OEMs were able to meet current demand in a seasonally weak
month and are inching up toward inventory refilling for the upcoming festive
season. 2W/4W demand sustaining in Aug’20 is a positive sign. CV demand
recovery is expected only toward 2HFY21. While there is still some uncertainty
over sustainability of demand, there is high focus on cutting cost, capex and
conserving cash, which is evident from the cut in variable/fixed costs and
slashing of capex budgets for FY21 across companies.
Capital Goods
Due to disruption caused by the COVID led shutdown, managements across
companies highlighted the need to focus on working capital (execution has been
slowed down on purpose). While ABB’s management indicated positive outlook
for Automation in F&B and Electronics industry, Cummins’ management was
cautious on the Hospitality sector and indicated slower pace of recovery for it.
For ACs, Voltas’ management alluded to higher-than-normal inventory in the
channel; however, it expects the same to get normalized over the next few
months.
Cement
Cement industry volumes declined ~38% YoY in 1QFY21 as Apr’20 was a
washout due to shutdown of operations till 19
th
Apr’20, post which operations
have ramped up gradually. Managements informed that cement prices have
softened across regions in Aug’20 and are down by INR15/bag over Jun’20 on an
average. Demand recovery in the East/North India has fared better than the
South/West India due to lesser spread of COVID-19. A large part of the recovery
was driven by robust demand from rural/semi-urban areas, but managements
remain cautious on the demand outlook due to spread of COVID-19 to rural
areas. The quarter witnessed sharp decline in fixed costs due to lower admin,
traveling, and maintenance and advertising expenses. While, a part of fixed cost
reduction is likely to sustain in FY21, with an increase in volumes, some costs are
likely to return. Further, while fuel costs had bottomed out, they are looking up
in 2QFY21. As a result, margins are likely to decline.
September 2020
4
 Motilal Oswal Financial Services
Voices | 1QFY21
Consumer
The sector saw broad-based recovery toward the latter part of 1QFY21, which
has sustained for most companies in Jul’20 and early-Aug’20 as well. Overall,
rural demand held up well during the quarter and the outlook is getting even
better with good progress of the monsoons. Even among urban centers there is
a big divergence between performance as well as recovery outlook for metros,
non-metros and Tier-1/2 cities. Performance and outlook of in-home food
consumption categories were exceptionally strong in 1QFY21 and the same was
the case for cleansing and herbal products. Down-trading is a fear called out by
most companies, which along with slower pace of recovery for discretionary
products, means that premiumization is unlikely to be a material factor for the
full year. On the other hand, benign material cost outlook and strong focus on
cost savings are likely to shore up margin outlook for the rest of the year
particularly as sales declines are likely to be lower from 2QFY21. Channel
inventory days are also declining sustainably as companies are culling their tail-
end products.
Financials
Banks
Commentaries of banks suggest that business trends are gradually picking up
MoM. The rural economy is picking up faster than expected and has reached
~70-80% of pre-COVID levels. Overall, banks would continue accessing the on-
ground situation over the next few months, and accordingly, decide their
growth strategy. Among business segments, retail growth is picking up faster
with some segments like tractors, 2Ws, gold disbursements and affordable
housing seeing the fastest improvement. On the other hand, MHCVs (especially
linked to large fleet operators/commercial vehicle segment) continue to see
challenges. On the asset quality front, CE trends have improved further in Jul-
Aug’20 with ~75-85% collections in MFI and above ~80% in Affordable Housing.
While banks do not expect higher restructuring in large ticket sized corporate
accounts, it should occur in mid-sized corporate/SME segments. Overall,
slippages are expected to rise in the coming quarters, and thus, credit cost
trends should remain elevated.
NBFC
Commentaries of NBFCs suggest that improving macros across most business
segments has led to increased optimism for collection efficiency (CE) as well as
for growth across product segments. In terms of restructuring, most financiers
are awaiting Sep’20 collection trends given the end of the moratorium period.
Improving liquidity and a higher risk appetite on account of better collection
performance has given companies the confidence to lift disbursements.
Improvement in the rural segment is a consensus view of most NBFC companies.
Healthcare
The COVID-19 led impact on domestic formulation (DF) segment was a result of
limited MR-Doctor connects and lesser footfalls at clinics. Companies have been
aggressively pursuing digital marketing and looking to further strengthen
relationships with doctors to improve DF sales gradually. The DF sales growth
outlook is expected to gradually pick up, but cost calibration should keep
margins at elevated levels over the near term.
September 2020
5
 Motilal Oswal Financial Services
Voices | 1QFY21
Capacity utilization has improved 70-90%. The trade generics segment has seen
better off-take as compared to branded generics in 1QFY21. On the US generics
front, ANDA approvals were higher but volumes for certain products were
impacted in 1QFY21 due to stock piling in 4QFY20. Companies, post completion
of remediation measures, are pursuing virtual inspections to ensure regulatory
compliance at sites. Thus, the outlook remains steady for the US generics
segment. The vaccine development for prevention of COVID is on at a rapid
pace. Specifically, Bharat Biotech and Cadila Healthcare are expected to
complete Phase-II clinical trials and subsequent statistical analysis by end-CY20.
Media
Gradual opening up of the economy has led to rise in advertisement spends by
corporates, which has led to healthy recovery in ad revenues of broadcasters.
Commencement of production and shooting of daily shows should further drive
viewership, aiding ad revenues. Subscription revenue is likely to remain on a
steady track and threat from NTO 2.0 regulations is expected to have a short-
term impact on major broadcasters like ZEEL and SUNTV. SUNTV has guided that
ad revenues could potentially decline 15-20% while ZEEL expects to grow ad
revenues from the 2HFY21. Subscription revenues would moderate in FY21,
after witnessing strong growth in FY20, led by NTO 2.0 regime.
Metals
Companies have highlighted that domestic demand has improved in 2QFY21 as
the economy opened up post the lockdown. Exports are likely to remain
elevated YoY; with domestic volumes picking up, share of exports in total
volumes should decline sequentially to 30%. Managements of Tata Steel and
JSW Steel have guided for higher capacity utilization in 2QFY21. Tata Steel has
guided for >95% utilization and improvement in realization in 2QFY21 on the
back of repetitive price hikes in the domestic market, better product mix and
higher export realizations. It has also guided for sequential improvement in
realization in excess of INR3,000/t. For FY21, both Tata Steel and JSW Steel have
guided for flattish sales volumes whereas JSPL has guided for volume growth in
the range of ~15% on the back of unutilized capacity and its ability to sell excess
volumes in the export market. On the other hand, managements of Hindalco
and Hindustan Zinc have highlighted that domestic demand for base metals has
improved resulting in lower dependence on exports. Hindalco has guided that
exports are likely to contribute ~65% of its volumes in 2QFY21.
Oil & Gas
OMCs expect some more time before 100% demand is retained, with further
pickup in demand from the industrial and commercial space. Thus, refining
margins are also likely to remain subdued due to poor product cracks, which are
weighed down by demand destruction. However, the OMCs have reiterated that
marketing margins and GRM trends over the longer term would stand at
normalized levels. RIL is further planning to streamline its O2C integration
business and focus on expanding its fuel marketing business. In the current
challenging operating environment, RIL’s ability to optimize between feedstock
and sales mix provides an edge in improving its performance. The company’s
strong growth path remains in its digital and retail business. MAHGL and IGL
stated that CNG volumes have recovered to 70-75% of pre-COVID levels,
September 2020
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 Motilal Oswal Financial Services
Voices | 1QFY21
although it is likely to range between 80-85% of pre-COVID levels in the near
term. However, margins are likely to remain strong owing to lower domestic and
spot prices. GUJGA has mentioned that current sales volume stands at
9.5mmscmd (v/s 9.4mmscmd of average sales in FY20), aided by strong recovery
post the lockdown. Apart from probable benefits of the NGT’s stringent norms
to curb industrial pollution, the company also plans to set up ~60 CNG stations
in FY21 (out of 100 planned), which would increase the reach of CNG in Gujarat
and encourage conversion. Post completion of the Kochi-Mangalore pipeline,
PLNG expects utilization to increase to ~30-35% and reach 40-45% after 2-3
years. Utilization levels at Dahej should remain at current levels even 4-5 years
down the line, primarily due to back-to-back tie-ups despite competition coming
in. GAIL has stated that Gas trading, Gas transmission and Petchem operations
are back to pre-COVID levels. Growth guidance for the company continues on
the back of incremental volumes of ~8-12mmscmd from the commencement of
fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk
on its US contracts.
Retail
Retail sector witnessed a complete shutdown during the lockdown period and
has seen almost insignificant revenues during Apr-May’20. However, since
Jun’20 pace of store reopening has been significant across states. Though
footfalls have been lower, the conversion rate and bill size of customers has
improved significantly. ABFRL/SHOP/V-Mart have negotiated rents during the
lockdown period and reduced rental expense in FY21 as business is expected to
remain muted. Retailers are also focusing on increasing their sales via the online
channels and invest in marketing, branding and logistics to scale up online sales.
ABFRL/V-Mart/SHOP have guided for muted capex/store adds in FY21 until
normalcy returns. V-Mart; however, might look at expansion opportunities via
attractive deals from 2HFY21.
Technology
Despite the COVID-19 led disruption in 1QFY21, revenues saw limited impact
while deal wins were healthy. Supply side challenges are largely behind as ~99%
employees were enabled for the WFH model. Demand side challenges are also
expected to subside given that clients are now prioritizing IT spends. Deal
discussions, which were earlier at a standstill have picked up again. Deal pipeline
is healthy and has returned to pre-COVID levels. In terms of verticals, BFSI,
Healthcare and Hi-tech remained largely resilient and are expected to be growth
drivers in the near term. Retail, Energy and Utilities and Manufacturing were the
most impacted verticals and will continue to see further challenges over the
next couple of quarters. Deal closures have been slower than usual given that
clients have added another layer of decision making. However, deal ramp-ups
have been largely on track. The near-term outlook is positive and the worst is
now behind. Expect 2QFY21 to see largely stable revenues and margins.
September 2020
7
 Motilal Oswal Financial Services
Voices | 1QFY21
Telecom
Telcos have reiterated their stance that ARPUs should reach INR200 in the near
term and INR300 in the long term for the industry to be sustainable. Further,
managements have noted that 2G would exist in the market for at least the next
3-4 years and telcos would continue to offer 2G services until revenue share
from these services become insignificant. Capex remained muted this quarter
due to the nationwide lockdown; however, the companies would start deploying
capex with the opening up of the economy. Bharti Infratel’s management
mentioned that energy margin should reduce from 3-5% to 0-3%. However, it is
continuously engaging with telcos to move back to the long-term fixed energy
contract that is expected to bring back margins to previous levels. TCOM’s capex
guidance remains intact and the company would keep investing in business
opportunities. Further, it does not have any immediate plans to monetize its
land parcel and would look for other means to deleverage.
Utilities
PWGR has witnessed a pickup in RE related projects in Rajasthan. The Pugalur-
Thrissur project is also progressing well. But, overall execution pickup is uneven.
On the supply side, manufacturers are having difficulty in restoring production.
Nevertheless, PWGR has maintained its FY21 capex and capitalization target of
INR105b and INR200-250b, respectively. For the sector, while receivables did
increase in 1QFY21, it has now started to normalize. For PWGR, receivables
increased from INR49b in Mar’20 to INR82b in Jun’20, but reduced to INR75b in
Jul’20. Collection efficiency has increased and is >100% for Jun-Jul’20. For NTPC,
outstanding over-dues have reduced to INR145b from INR164b at end-Jun’20.
The company is hopeful of squaring off past dues by end of the quarter. In terms
of capitalization, NTPC expects its capitalization run rate at 5-6GW per annum
over the next 3-4 years.
September 2020
8
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Key takeaways from management commentary
AUTOMOBILES
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY21
2W/4W demand recovery post the lockdown surprised OEMs and dealers alike on the back of (a) preference
for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the
rural market. For Aug’20, most OEMs were able to meet current demand in a seasonally weak month and are
inching up toward inventory refilling for the upcoming festive season. 2W/4W demand sustaining in Aug’20 is
a positive sign. CV demand recovery is expected only toward 2HFY21. While there is still some uncertainty
over sustainability of demand, there is high focus on cutting cost, capex and conserving cash, which is evident
from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.
Capacity utilization stood at 30–35%. AL is confident of
producing ~10k BS6 units (incl. LCVs) in 2QFY21.
Net debt stood at INR42.47b as of Jun’20 (v/s INR20b as of
Mar’20). QoQ increase in debt was attributed to: (a) INR12b
payments to vendors and (b) the funding of expenses. Inter-
corporate deposits (ICD) declined by INR1b QoQ to INR4b.
Hinduja Leyland Finance: Moratorium rate stood at 40% (v/s
75% in Apr’20). PAT was down 15–20% YoY despite an
additional ~INR150m provision (over and above INR700m in
4QFY20) for COVID-19.
The supply side is slowly ramping up, with manufacturing at
65–75% capacity utilization levels. 95%/85% of outlets for
motorcycles/3W is operational.
It has fully passed on BS6 cost, but is yet to load margins.
Since Apr’20, it has increased prices of domestic motorcycles
by an average of 0.5%.
KTM rebounded in the Apr–Jun quarter; this would be
reflected in BJAUT in 2QFY21 (consolidated with quarter lag).
Status of operations: Supply chain constraints continue to
affect production. It expects production to return to normal
levels by end-Aug or Sep’20 (assuming there is no further
impact due to COVID-19).
New product launches are expected over Aug–Sep'20. Future
product launches are on track, and timelines for these have
not changed.
VECV acquired Volvo Bus India for INR1.05b, completing its
product portfolio on Buses.
Purchases for commuting to work and additional vehicles
have gone up significantly, while replacement demand is
down considerably. Demand for additional vehicles has gone
up substantially, and FTB is also higher.
Price hikes: It took a price hike of INR250 in Jul’20 and
INR1000 in 1QFY21.
Cost-cutting initiatives: Leap-2 targets cost-cutting by 100bp
(2x target), capex phasing, and Project Mileage for overheads.
Update on capital allocation: The company has decided not to
bid for the US Postal Services order through its US subsidiary
as this does not fit 18% RoI norms and would have required
substantial investments of over USD0.5b.
Status of operations: Capacity utilization was as follows – FES:
>90% and Autos: >50%; a number of dealers (~85%) have
opened up in both businesses. New launch pipeline: The new
th
Thar would be revealed on 15 Aug’20 via a launch over Sep–
Oct'20. The W601 (XUV500) would be launched in 1QFY22
and the Z101 (Scorpio) in 3QFY22.
Sales Commentary after Unlock
Ashok Leyland
It expects LCV to recover first, followed by ICV
and M&HCV (tippers would recover first,
followed by tractor trailers, and then MAVs).
Bajaj Auto
Eicher Motors
Domestic: Motorcycle demand is at 80–85% of
July levels from last year, with no downtrading
across segments. Inventory is less than 30 days
of current retail sales. 3W demand is 20% of
normal levels, although Cargo 3W is faring
relatively better.
Exports: Demand for motorcycles is back at 80–
85% of July levels from last year. 3W exports are
at 70–75% of normal levels.
Bookings are almost back at pre-COVID levels
and inquiries are higher than the said levels.
Bookings have sustained at pre-COVID levels for
the last six to eight weeks, convincing the
management that this is not just pent-up
demand. Bigger cities are below average and
smaller cities above average
.
It has an order backlog of 40–45k units and is not
seeing any material cancellations. Inventory is
just 10k (dealer + co.); ideally, it should be at
least three weeks (v/s one week currently).
Strong demand recovery: Demand does
constitute only pent-up demand; recovery seems
sustainable. Rural is seeing a V-shaped recovery,
while urban is lagging behind due to sporadic
lockdowns. 10–12% of demand is owing to
purchases being brought forward.
Tractors: FY21 would be a growth year, but the
supply side would influence demand. Market
share loss in 1QFY21 was due to supply-side
issues.
Auto demand is yet to be tested as supplies itself
are at 50–60% of normal levels. Rural is faring
much better (contribution at 62% v/s 50%
normal). The challenge currently is to ramp-up
supplies, with demand not an immediate
concern.
Hero MotoCorp
M&M
September 2020
9
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Maruti
Status of operations: Current production ramp-up is at a run-
rate of over 4,000/day. With the Gujarat plant starting its
second shift from mid-Aug’20, it would add 900/day to the
current run-rate of 900/day.
Due to fresh lockdowns, the number of operational
dealerships has declined from >90% at the start of Jun’20 to
80–92%.
ν
Discounts were at INR25,000/unit
(~INR14,000/unit on retail sales) as Wholesales (67k units)
were substantially lower than Retail sales (119k units).
The diesel model share for the industry declined to 20.6% (v/s
29.5% YoY).
JLR’s Project Charge delivered total savings of GBP1.2b (cost
savings of GBP0.5b) and cash flow improvement in the
quarter. It further increased the FY21 target from GBP1.5b to
GBP2.5b, with the remaining GBP1.3b being equally targeted
between cash and cost savings.
S/A cost and cash savings stood at INR10.2b in 1QFY21.
Target savings of INR60b in terms of cost (INR15b target) and
cash.
The company expects premiumization to continue, albeit
delayed by one or two quarters due to the COVID-19 impact.
This should benefit Apache and Ntorq.
Expect margins to improve in 2H, driven by cost-cutting and
focused market strategy. Jun’20 EBITDA and PBT were
positive, with July faring even better.
Capex would be INR3b for FY21 and investment in TVS Credit
would be ~INR750m.
Retail demand stands at 85–90% of pre-COVID
levels, with the rural markets bouncing back
stronger than urban.
Demand for entry-level cars has increased to
65% v/s 55–56% earlier. Share of salaried
customers has gone up to 49% (from 45%), the
self-employed sector is stable, and the
contribution of customers with businesses has
come down.
First-time buyers’ contribution has increased by
5.5pp (to 50–51%), whereas replacement is
down to 16–17% (v/s 25–26%). Second-car
demand is also up.
JLR launched the Defender across markets and
has a strong order book of over 30k units. The
Defender is expected to be a volume driver;
annual volumes are estimated at over 100k units.
India’s business utilization stood at 20% for CVs
and 60% for PVs.
Tata Motors
TVS Motors
The company expects demand recovery in
2HFY21, with TVSL performing better than the
industry on account of its portfolio.
Amara Raja Batteries
Current Price INR 747
Neutral
Click below for
Results Update
Status of production –
Currently, capacity utilization is at 80-85%, though it is
lower than pre-COVID levels. However, the situation is dynamic due to the
sporadic lockdown and its possible impact on supply chain.
Demand –
Aftermarket demand is good; however, its sustenance after
normalization of the current situation is a key monitorable.
Other expenses –
One-off expense of INR125m for provision in delay for BSNL’s
receivables.
Exports
faced major challenges as many countries were either impacted by the
lockdowns or disruption in logistics.
Spot lead prices
have seen inflation of ~14.5% from 1QFY21 average of
~INR127/kg.
It has launched its e-rickshaw battery in 1QFY21 and expects small sales to
happen in 2QFY21.
Capex
was largely maintained at ~INR4b for FY21. The company is planning to
expand its 4W (2m units) and 2W (2-3m units) capacity.
Ashok Leyland
Current Price INR 68
Buy
Click below for
Results Update
Status of Operations:
Capacity utilization stood at 30-35%. AL is confident of
producing ~10k BS6 units (incl. LCVs) in 2QFY21.
Demand Outlook:
It expects LCVs to recover first, followed by ICVs and M&HCVs
(first Tippers, followed by tractor trailers and then MAVs).
September 2020
10
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
AVTR Platform-
It has received excellent feedback for BS6 modular platform
AVTR. The company is seeing interest from both fleet operators (due to better
ad-blue efficiency) and drivers (due to cabin quality).
LCVs:
Phoenix platform should be launched over the next 60-90 days. It will be a
differentiated vehicle product and is expected to be a game changer. Production
of LCVs at Hosur is ramping up quickly.
Cost cutting initiatives:
The company saved INR5-5.5b under K54 project during
FY20. It has launched ‘Project Reset’ focusing on improving efficiencies (variable
cost) and reducing overheads.
Spare parts business:
It has seen good recovery and is clocking a run-rate of
INR1-1.1b/month (v/s FY20 average of ~INR1.3b).
Net debt:
It stood at INR42.47b as of Jun’20 (v/s INR20b as of Mar’20). QoQ
increase in debt was on account of (a) INR12b payments to vendors, and (b)
funding of expenses. ICD has declined by INR1b QoQ to INR4b.
Hinduja Leyland Finance:
Moratorium rate stood at 40% (v/s 75% in Apr’20).
PAT was down 15-20% YoY despite providing an additional ~INR150m (over and
above the INR700m in 4QFY20) for the COVID impact. HLFL plans to raise capital
from a private equity player; however, if it does not materialize then AL would
have to invest in HLFL.
BS6 Models:
The company took a price hike of 15-20% for M&HCVs and 15% for
LCVs. However, price discovery for BS6 hasn't happened yet.
Capex:
FY21 capex is expected at INR5-6b. If demand recovers, the company
may make some investments in paint shops, line balancing, etc. Thus, total
capex could increase. Investment in subsidiaries of INR1.5-1.7b was made
(Optare and Albonair).
Bajaj Auto
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 2,914
Neutral
Domestic motorcycle:
Demand is at around 80–85% of July levels from last year.
There is no evidence of any down-trading across segments. The share of Pulsar
(incl. 125cc) increased to 50% from 40% in 4QFY20. Inventory is less than 30
days of current retails.
Domestic 3W:
This is most impacted, with demand at 20% of normal levels,
although Cargo 3W is doing relatively better. Till the time that normalcy is not
restored, 3W demand is not expected to normalize as 3W operator income
would not support financing. There is a need to have innovative financing
products for this segment, and if need be, BJAUT may share the cost of such
offerings.
Exports:
Demand for motorcycles is back to 80–85% of July levels from last year.
While some markets are doing relatively better (S. Asia, Middle East, LATAM)
and some are lagging behind (Africa, ASEAN), most of the markets are at 75–
100% of last year’s July levels. 3W exports are at 70–75% of normal levels.
Nigeria is at 75% of normal levels from the 1st half of July (v/s 50% in June).
The supply side is slowly ramping up, with manufacturing levels at 65–75%
capacity utilization. 95%/85% outlets for Motorcycle/3W are operational.
Gross margin sequential improvement was driven by favorable Fx (~INR0.77b
benefit) and higher exports, offset by lower 3W sales and some commodity cost
inflation on the precious metals side.
September 2020
11
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Considering the continuous cost inflation in precious metals used in BS6, the
company has fully passed on BS6 cost, but is yet to load margins. Since Apr’20, it
increased the prices of domestic motorcycles by an average 0.5%.
In 1QFY21, other expenses amounted to ~INR1b (excluding marketing cost,
which was very low).
KTM bounced back in the Apr-Jun quarter; this would be reflected in BJAUT in
2QFY21.
Bharat Forge
Current Price INR463
Click below for
Results Update
Buy
Outlook:
Revenue is expected to decline in 2Q on a YoY basis, but domestic
revenue would be flat, with growth in Industrial, PV, Mining, and Tractor to
cover for expected 67% decline in CV. It has added new customers in all three
areas and gained market share, including in the CV segment.
International business:
Revenue (excl. Oil & Gas) would be flat in 2Q on a YoY
basis. The Oil & Gas business would be lower; however, Brent sustaining above
USD42/barrel could drive recovery in demand.
US Class 8 Trucks:
The net ordering trend has been positive in the last two
months, and the segment has seen slow traction toward increased demand.
Defense business:
BHFC’s focused products are part of the government’s
localization drive and it is also looking at their potential export. Two of the key
product offerings on the priority localization list are the Towed Artillery Gun and
Ultra-Light Howitzer Gun. Even without this opportunity, the company is
confident of doubling Defense revenues by FY23, supported by small projects
and consumable supplies. As per Mr Kalyani, the sale of all defense products in
India would be accounted for in the standalone entity, whereas global sales for
certain defense products would be accounted for in the associate company
(Kalyani Strategic Systems Ltd).
Aerospace business:
The Commercial Aerospace business has substantially
declined due to the COVID-19 impact. However, demand for engine parts for
business jets has increased. Also, new products in replacement parts would add
to revenues. Hence, it is confident of achieving its USD100m target over the
next three years, although there could be a small downside.
Cost-cutting:
The VRS scheme (offered from Jul’20 at two plants) and
digitalization in manufacturing have reduced manpower cost. Also, it is targeting
other fixed cost in identified areas; 70% of cost reduction was done in 1Q.
Overseas subs:
The impact of COVID-19 would be extended to 2Q as well.
Bosch
Current Price INR 12,874
Click below for
Results Update
Neutral
Status of operations:
Plants resumed operations during May’20 and are
currently operating at different levels. Jul’20 production reached 66% of the
normal level. Multiple lockdowns in several states are adversely affecting the
supply chain.
The company expects good demand in tractors, compact PVs and 2Ws.
BOS is in the process of rightsizing its manpower, driven by changing business
dynamics. It reduced manpower by few hundred people in FY20 and has further
reduced it by ~1,000 people in 1QFY21. It would continue this exercise, which is
driven by increasing business mix that is shifting toward gasoline and
12
September 2020
 Motilal Oswal Financial Services
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EV/hybrids, which are less man-power intensive businesses (manpower intensity
for diesel: petrol: EVs is 10: 3: 1).
BS6:
Project acquired for FY20-25 was estimated at cumulative revenues of
INR245b (pre-COVID level), which is now estimated at INR185b in post- COVID
levels. Further acquisition of BS6 business is expected in FY21. Pricing in BS6 is
decent and not as low as in BS4.
Production constraints
for tractor fuel pump was resolved in 2HJul’20.
Capex
is expected at INR2.5-3b (~50% of FY20 capex of INR5.5b).
CEAT
Current Price INR 895
Click below for
Detailed Concall Transcript &
Results Update
Buy
Demand Recovery: Farm/truck radial replacement sales picked up just after
opening up of the market. 2W/PV replacement demand picked up toward end-
1QFY21 as urban markets opened with a lag.
Finished goods inventory decreased by INR2.12b (v/s increase of INR0.45b in
4QFY20). It also had non-material cost of goods like direct manufacturing and
labor costs, etc., which resulted in gross margin contraction. Otherwise, gross
margin per kg improved on like-to-like basis due to better mix and lower RM
costs. The subsequent decrease in gross margin was captured by decline in
other expenses. Thus, it did not have an impact on EBIDTA margin.
Other expenses decline was also supported by cost-cutting measures like zero
advertisement expenses – discretionary costs were minimum, however, it
should stabilize with sales and production normalizing.
Margins: Near-term mix would be favorable in 1HFY21 in the form of
replacement and farm demand. With OEMs and exports picking up from
2QFY21, some change in mix is expected. Plus, RM costs should be supportive.
The company reported exceptional loss of INR218m (including INR25.8m loss)
toward unusable semi-finished inventory due to the abrupt stoppage of
production. Another INR175m was toward borrowing cost not capitalized due to
temporary suspension of on-going projects and payment for unutilized contract
labor during the lockdown.
Realization improved 3-4% QoQ and 1.5% YoY.
1QFY21 capex stood at ~INR1.05b. Target for FY21 is ~INR6.5b, which includes
~INR5.5b for standalone and ~INR1b for the Specialty tyres business. For FY22E,
capex is expected at ~INR6-7b
Net debt declined by ~INR700m and gross debt to equity ratio stood at 0.69x.
Natural rubber prices declined from INR135/kg to 115/kg during 1QFY21, but
again increased to INR132/kg. Benefit due to the crude price decline during
Apr’20 would come in 2QFY21, but should be partially offset by INR weakness.
Eicher Motors
Click below for
Results Update
Current Price INR 2,159
Buy
Royal Enfield (RE)
Demand outlook: Bookings are almost back at pre-COVID-19 levels, and inquiries
are higher than pre-COVID-19 levels. This is not just pent-up demand as per day
bookings have been at pre-crisis levels for the last six to eight weeks. Current
demand is mostly from tier 2 and tier 3 cities; therefore, there is headroom for
demand from the urban areas.
September 2020
13
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Bookings and inventory: It has an order backlog of 40–45k units, and it is seeing
no material cancellations. Inventory is just 10k across channels; ideally, it should
be at least three weeks (v/s one week currently).
Status of operations: The supply chain has been the biggest bottleneck due to
lockdown seen in its key supplier cities (Pune, Aurangabad, and Chennai).
Operations could have been at 20–25% higher levels in Jul’20, but for supply-
side issues. While the situation is improving, there are still issues in pockets; it
expects production to return to normal levels by end-Aug or Sep’20 (assuming
there is no further impact due to COVID-19).
Dealerships operational: Up to Jun’20-end, over 90% of its dealerships were
open. However, post that, the count reduced to 75–80% due to local lockdowns,
but is now back at 90%.
It added 38 studio stores in 1Q (to 638 studio stores and 1,559 total outlets) and
plans to add 600 more studio stores over the remainder of FY21. Over half of
the studio stores have been opened up in UP, MP, Rajasthan, Odisha, Bihar,
Andhra Pradesh, and West Bengal, where RE's market share is lower than its
India average.
Globally, it added five exclusive stores (to reach 82) and 32 multi-brand
dealerships (to reach 617) in 1QFY21. It plans to increase its exclusive store
count to ~100 by end-FY21 from 82 currently.
New product launches are expected over Aug–Sep'20. Future product launches
are on track and timelines for these have not changed.
VECV
It acquired Volvo Bus India for ~INR1.05b, completing its Buses product
portfolio. This is a no-debt acquisition as it is a slump sale and acquisition of all
assets. The acquired Bus business’ revenues for FY18/FY19/FY20 stood at
INR4.6b/INR4.2b/INR2.8b. FY18 EBITDA/PAT for VGIPL was at
~INR494m/INR225m.
All nine production units have resumed operations, and capacities are operating
at 25% utilization.
Endurance Technologies
Current Price INR 1,080
Click below for
Detailed Concall Transcript &
Results Update
Buy
India
Status of operations: Production was up 75% in Jul¡¦20 and reached near pre-
COVID levels during Aug-20.
Cost cutting: Focus is on cost (both variable and fixed cost). The company is
targeting fixed cost reduction of at least 10%.
New orders: ENDU has INR828m brake assembly orders from TVS/Yamaha with
supplies starting from FY22E. It has RFQs worth INR15.4b from various OEMs.
With TVSL, it has orders 2W/3W brakes (INR1.2b p.a.) and suspensions
(INR320m p. a., starting from 3QFY21). Further discussions are ongoing for
business worth ~INR810m.
The company is de-risking its CBS business, as it is only made at Aurangabad. It is
now setting up 600k per annum CBS capacity at the Pantnagar plant, which
should start from April-21.
Focus on value added products: (1) brakes & clutch assemblies for 200cc+
segment, (2) paper clutch assemblies for m/cycle, (3) CVT for scooters, (4) ABS,
September 2020
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 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Inverted Front Fork and Adjusted rear mono shock absorbers for local and global
requirement (for KTM), and (5) fully-finished machined castings.
The Vallam plant for machined aluminum casting for Hyundai and Kia would
start from Oct-20 and supply to Venue and Sonet. Additionally, it has got RFQs
worth INR1.1b for machined aluminum castings for Hyundai's plant in India,
Korea and Russia.
ABS business is on track for supplies starting 4QFY21.
EU
New Orders: EUR110m orders for EVs/Hybrids were won in the last two years
and should start in FY21 and peak in FY23. EUR45m business for EV components
is under discussion with VW; ENDU hopes to win 50% of this.
Cost Cutting: Focused cost cutting efforts are on through labor cost reduction
(reduced 116 contract workers), tight control on G&A and foundry plant
consolidation from 2 to 1 plant (to be completed by Sep’20, driving EUR0.6m
p.a).
ENDU did not get any support from the local governments as there were
restrictions.
Other highlights:
Consol. net debt to equity stands at 0.3x (India net cash at INR275m).
Capex: India FY21 at INR1.5b, but could increase to INR2b for growth
opportunities.
Incentive: INR100m incentive from Maharashtra state.
Escorts
Click below for
Results Update
Current Price INR 1,198
Neutral
Tractors
Supply Chain constraints -
Biggest challenge to ramp up production is supply
chain for the entire industry. For FY21, supply side would determine market
size/share. It has reached peak capacity in Jun’20. However, by end-Jun’20, the
industry has started facing supply constraints on fuel injection system from
Bosch. This is getting resolved and full capacity is expected by mid-Aug’20 (from
50-60% currently), though there would be some near-term uncertainties.
Growth Outlook:
For FY21, low single-digit growth for the tractor industry is
implied (~10% growth for rest of the year).
Geographically, it has positive growth, except in West Bengal and Chhattisgarh.
Growth is skewed toward the South with 50% growth (v/s pan-India growth of
22%) and is expected to remain skewed for the next 3-4 months.
This Kharif season crop sowing has been preponed; therefore, early harvest
might start the season early.
Current Inventory
is ~3-3.5 weeks (incl. depots) v/s normal 6-7 weeks (2 weeks
at depot and 4-5 weeks at dealer).
Operating performance
- Margin has improved due to lower commodity cost
along with:
Improved product mix (>40hp tractors), as share of 40HP+ tractors has
increased to 62% in 1QFY21 (v/s 45-46% YoY) v/s 57-58% in 4QFY20,
Subdued discounts during the quarter, which is expected to remain subdued
till the supply chain normalizes, and
September 2020
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 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Other expenses being lower by INR300-350m due to (a) no SG&A expenses in
45 days shutdown (had resulted in no cost on SG&A of INR300-350m, and (b)
no marketing spends, both of which will normalize in the coming quarters.
Cost:
It has aggressive plans to cut fixed cost by 10-15% in FY21.
Kubota JV production
to start in 3QFY21 (end-Sep’20) for domestic
requirement.
Exports:
Some delays are seen in aspiration of exports of 8-10k tractors by
FY22E (v/s 3k in FY20), however, it should be achieved in the next 3 years.
Railway business
was impacted due to (a) logistics issues impacting deliveries,
and (b) railway units being shut. Order book at INR4.8b would be executed over
the next 12-15 months. For FY21, it expects Rail business to grow in higher
single digits and maintain margins.
Construction equipment
volumes should recover in 2HFY21. Its break-even
volumes are 230-250 machines/month and the target is to reduce it further.
Capex:
INR2.25-2.5b in FY21 for new product development and capacity
expansion (machining capacity of 50k).
Hero MotoCorp
Current Price INR 2,991
Neutral
Click below for
Detailed Concall Transcript &
Results Update
Around 95% of the customer touch points of Hero MotoCorp are fully
operational.
Demand outlook:
Demand does not comprise just pent-up demand; recovery
seems sustainable, with some push from the movement toward personal
mobility. Rural is seeing V-shaped recovery, while urban is lagging behind due to
sporadic lockdowns. 10–12% of demand is owing to personal vehicle purchases
being brought forward.
Customer profile:
Contribution from people buying 2Ws to commute to work
has gone up significantly. Replacement demand has also reduced considerably;
additional vehicle demand has surged, and FTB is also higher.
Market share and product performance: Management is quite confident of
market share gains sustaining, driven by rural buoyancy, BS6 product response,
a refreshed portfolio (Passion, Glamour), and plugging the product gaps. Passion
is very well-received by the market. Also, post-BS6, Glamour is seeing multifold
growth in markets where it had minimal sales. Initial reviews of Xtreme 160
seem very encouraging.
Supply chain and inventory:
The supply chain has recovered to 80–90% of pre-
COVID-19 levels, but it is still in catch-up mode, and inventory levels are still
below normal. However, the supply chain is normalizing, and in the coming
months, the company would be ahead of demand to enable inventory build-up
for the festive season.
Premium segment strategy:
The first priority would be to complete the
portfolio of premium products and create confidence in the market. It would
then increase focus on gaining market share. This would be different from
earlier strategies, which were focused on acquiring market share as soon as the
product was launched, with the product being discontinued if targets were not
achieved.
September 2020
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 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Regional flavor:
Demand is good in Rajasthan, MP, UP, Bihar (before lockdown
from mid-July and has picked up in Aug) and the eastern region. South is
moderate, whereas Maharashtra and Gujarat are lagging behind.
Price hikes:
The company took an average price hike of INR250 in Jul’20 and
INR1000 in 1QFY21. The BS6 pricing pass-through is only for the cost and not for
contribution margins.
Cost-cutting initiatives:
Leap-2 targets cost-cutting by 100bp (2x target), capex
phasing, and Project Mileage for overheads.
Capex target
for FY21 was kept at ~INR6b.
BS4 inventory:
This included 25–30k unregistered vehicles of BS4 as of the
lockdown date.
Mahindra & Mahindra
Current Price INR 614
Buy
Click below for
Results Update
Status of operations:
Capacity utilization stood at FES: >90% and autos >50%;
Number of dealers opened – ~85% for both businesses and 100% suppliers are
operational.
Inventory:
Total system stock for both businesses (company + dealer) is at the
lowest level in the last three years. In tractors, there was nothing much left to
bill by end-Jun’20.
Tractors:
FY21 would be a growth year with supply side uncertainties. Tractors’
market share declined 39.1% in 1QFY21 (v/s 41.2% in FY20) due to supply side
issues.
Auto:
Current demand is 50-60% of normal; however, a clearer picture would
emerge over the next 3-4 months. Rural is doing much better (contribution at
62% v/s 50% normal). Current challenge is to ramp up supplies with demand not
being an immediate concern.
Key management concerns currently are:
Any supply chain disruption due to
local lockdowns and COVID spreading to rural areas, which could impact
demand in rural markets.
Update on Capital allocation:
It decided to not bid for the US Postal Services
order through its North American subsidiary, as it does not fit the 18% RoI
norms and would have required substantial investments of over USD0.5b. It has
written-off preparatory cost in this quarter. Further, it reiterated its decision of
not funding losses of SYMC as well as Mar’21 timeline for deciding on all the loss
making subs. The management team would be accountable for 3 variables i.e.
EPS growth, RoE and FCF.
It added Bristlecone as the 10th Gem to its businesses: Bristlecone is a profitable
company providing specialized technology for supply chain and serves Fortune
500 companies.
1QFY21 EBITDA margins got a boost from reduction in several expenses, which
should normalize. Also, net variable margin has improved in both businesses
and a large part of it is sustainable.
Diesel model share in UVs declined to 44% in 1QFY21 (v/s 50% in 4QFY20).
US Tractor:
It saw positive retail momentum with 1QFY21 growth at 15% and
22% growth in FY21YTD. It is taking this opportunity to correct its stocks as well
as reduce cost. It is targeting to reduce losses at least by half in FY21.
September 2020
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 Motilal Oswal Financial Services
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Jawa:
Demand is very strong; however, it took longer for BS6 transition. It faced
supply side issues from suppliers from Pune. The situation is normal now.
New Launches pipeline:
Thar will be revealed on 15th Aug and launched during
Sep-Oct'20. W601 (XUV500) would be launched during 1QFY22 and the Z101
(Scorpio) in 3QFY22. K2 Tractor platform launch would be in two years.
EV partnership:
MM is looking for external partners for investment of USD100m
for business needs (including product development), which would be funded
through stake sale.
Capex:
FY22-24 capex target stands at INR90b (v/s INR120b earlier).
Mahindra CIE
Click below for
Results Update
Current Price INR 123
Buy
Sales decline across businesses is below the breakeven point due to the COVID-
19 impact.
India business
BF Mexico changed its functional currency to USD with effect from 1st January
2020. The business has generated a restatement of its 1Q figures, with gains of
INR418m in exchange rate fluctuations.
April and May were heavily affected by the lockdown, so negative EBITDA was
generated mainly during this period. However, June was already reporting
positive EBIT.
AEL received INR122m as grant income in 2QCY20, with 90–95% from the prior
period. The total grant would be INR36m for CY20, of which INR18–20m came in
1H. The total accrual to date is ~INR1b.
Although employee headcount has reduced, the benefit would reflect in the
coming quarters.
BF Mexico has seen fresh business from new customers; exports are doing well
in Bill Forge and Gears.
Capacity utilization increased to 65–70% in 3QCY20 from 50% in June.
Europe business
The Europe business is nearing normalcy, with June already coming in EBITDA
positive (excluding restructuring costs).
Restructuring actions have already been undertaken, and EBITDA includes about
~INR344m of restructuring cost (in MFE and Metal castello). This is for lay-offs,
although the execution of the layoffs would happen in the next few months.
This would result in a EUR4m reduction in staff cost on an annualized basis.
Capacity utilization increased to 65–70% in 3QCY20 v/s 55–60% in June.
Incentives in EU – It received an EUR4m benefit under the schemes during
2QCY20. The benefit was largely for April and May as it was ramping up
production in June.
Outlook: For PVs, 75–80% of CY19 volumes in the next two to three quarters;
CY21 expected to be 10% below 2019 levels
Others
Net financial debt increased to ~INR14.5b in Jun’20 from ~INR11.5b in Mar’20
due to forex fluctuation impact of INR840m and IndAS16 impact of ~INR2.5b.
The company reduced its breakeven level by 10% to INR9b revenue from
INR10b revenue/quarter. Fixed cost reduced by INR 100m/month on fixed cost
of INR1000m/month earlier.
September 2020
18
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
The next quarter should see improvement in margins, and expect pre-COVID-19
margins by the end of the year.
Tactics to improve profitability:
Short term (3–6 months) – Cost reductions, profitability, improvements, and
restructuring at Metal castello and MFE
Medium term (6–12 Months) – OEE improvement, labor productivity
improvement, VAVE, and Bought Out Parts (BOP) insourcing
Long term (12 months and beyond) – OEE improvement, value stream mapping,
TPM/5S
It is seeing the emergence of import substitution opportunity in India and has
already acquired similar business in the Gears and Magnets division. Also, it
expects consolidation in the vendor base in both India and the EU, a benefit for
MACA.
Capex for CY20 at consolidated level would be ~INR2.4b (INR1.4 b invested in
1H).
CIE open to increase its stake through a creeping acquisition if market price is
conducive.
Maruti Suzuki
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 7,190
Buy
Demand post lockdown:
Retail demand stood at 85-90% of pre-COVID levels. In
some states, retail was higher than last year. Kerala, Maharashtra and TN were
the worst hit. Rural markets are bouncing back stronger than urban.
Entry-level car demand has increased to 65% share v/s 55-56% earlier.
Salaried customer share has gone up to 49% (from 45%), self-employed is stable
and business has come down.
First-time buyers’ contribution has increased by 5.5pp (to 50-51%), whereas
replacement is down to 16-17% (v/s 25-26%). Second car demand is also up.
Status of operations:
Current production ramp-up is at run-rate of over
4,000/day as Gujarat is still operating at single shift. Gujarat plant is expected to
start second shift from mid-Aug’20. It will add 900/day to current run-rate of
900/day. Currently, it is restricted by supply as vendors are located in 46
districts across 9 states.
Dealerships:
Earlier91-92% of outlets were open, but due to the new lockdowns
in sporadic manner, 80-92% outlets are open at any given point in time.
Additionally, 10 states have levied lockdowns on the weekend.
RM cost was exceptionally high due to sharp decline in inventory levels (impact
of INR1.1b or 3.5pp).
Discounts were at INR25,000/unit (~Rs14,000/unit on retail sales) as Wholesales
(67k units) were substantially lower than Retails (119k units). Model level
discounts have come down in 1QFY21. Given production constraints, discounts
in Jul’20 should be lower than 1QFY21.
Diesel models’ share for the industry declined to 20.6% (v/s 29.5% YoY). Ex-
MSIL, diesel model share stood at 26%. Given very low pricing disparity, running
cost of petrol and diesel is similar at ~INR4/km.
Inventory for MSIL stood at 80k units or 25 days.
September 2020
19
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
Motherson Sumi
Current Price INR 112
Buy
Click below for
Results Update
Status of operations:
Gradual ramp-up was witnessed in plants globally, with
84% plants operating at more than 50% capacity.
Demand:
Strong demand has been sighted for 2QFY21, supported by consistent
improvement at SMP’s green-field plants. Its US plant reduced manpower from
2600 to 1800. This is a structural reduction as it had created a strong bench due
to high absenteeism, and it is planning a further reduction.
Greenfield plants
benefited from the shutdown as they could carry out
structural improvements that would have otherwise happened when the plants
were seeing ramp-up. The US plant saw improved efficiency and a reduction in
scrap by 3%; costs for consultants and expatriates were also reduced.
Operations:
The Hungary plant has ramped-up to its peak revenue potential,
whereas the US plant would have achieved peak revenues this year if not for the
COVID-19 impact.
Greenfield plants posted FY20 revenue/EBITDA loss of EUR461m/EUR175m and
1QFY21 revenue/EBITDA loss of EUR66m/EUR19m.
PKC:
The CV segment in China showed very good recovery in 1QFY21. However,
most of the OEMs in other regions were heavily impacted.
MSS expects to reach pre-COVID-19 revenues by Sep’20. Currently, it is at 80%
of last years’ revenues.
Net debt stood at INR90.83b v/s INR68.17b in 4QFY20. This includes an INR1.2b
impact of Fx.
Capex target
for FY21E is INR20b (v/s ~INR22b in FY20).
Tata Motors
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 144
Buy
On 1QFY21 performance
JLR’s realizations and Gross Margin improved by better market conditions
(China), product mix (SUV5), lower VME and favorable forex. Further, reduction
in warranty cost (by 210bp YoY to 3.8%) along with other cost cutting initiatives
supported EBITDA margins.
Chery JV achieved break-even during the quarter, driven by lower VME (from
23% to 13%), following the trend of improvement in dealer transaction price.
Elimination of prior UK tax losses led to deferred tax. This will reverse as it
recovers losses, may be by end-FY21 or early-FY22E.
Status of operations
JLR’s 98% retail network is operational. All plants are operational (barring Castle
Bromwich), which will gradually restart from 10th Aug-20.
JLR 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 over 100k units.
JLR’s near-term performance will be impacted as it is focusing on bringing down
dealer inventory to ~55 days (from 90 days in Jun’20 and 140 days in Mar’20).
However, overall performance should be better than 1QFY21. The company
expects to turn FCF positive from 2QFY21.
Warranty cost should sustain at current levels due to quality improvement
model year (MY20).
September 2020
20
 Motilal Oswal Financial Services
AUTOMOBILE | Voices
In 2QFY21, volumes may not pick up sufficiently to generate profits; however,
cash flow is expected to be positive, supported by improved working capital and
continued cost savings.
Utilization is relatively low. The company does not expect two shifts in other
plants (except in Solihul and Slovakia) in 2QFY21 as it is working to reduce dealer
inventories.
Investment spending is expected to be GBP2.5b in FY21.
JLR Project Charge delivered GBP1.2b of total savings (cost savings of GBP0.5b)
and cash flow improvement during the quarter. It has increased its FY21 target
further from GBP1.5b to GBP2.5b, with remaining GBP1.3b equally targeted
between cash and cost savings. This brings the total charge plus savings so far to
GBP4.7b, with a target of GBP6b by end-Mar’21.
JLR’s FY21 capex is maintained at GBP2.5b. The company spent GBP548m in
1QFY21.
JLR’s net debt stands at GBP2.75b (v/s GBP2.2b in Mar’20).
TVS Motors
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 445
Neutral
Demand outlook: It expects demand recovery in 2H. Rural is faring better than
urban. TVSL expects to outperform the market owing to its strong portfolio.
The Scooter and Moped categories are seeing a good response post the
BS6launch. Apache saw major production constraints. This has improved
substantially in 2Q.
The company expects premiumization to continue, albeit delayed by one or two
quarters due to the COVID-19 impact. This should benefit Apache and Ntorq.
For the dealerships that are open, demand is back at pre-COVID-19 levels. At the
start of Jul’20, 85% of dealerships were operational. However, this has dropped
to75% due to fresh lockdowns in select markets.
Production bottlenecks prevailed in Jun’20, but are easing in Jul’20. Apache
faced severe production-related challenges, which impacted the mix in 1QFY21.
Inventory is much lower v/s the normal 30–35 days.
It took price hikes of 0.7% in 1QFY21, and has taken a 0.4% price hike
in2QFY21.The gross margin declined by 90bps QoQ in 1QFY21, led by: (1) the
reversal of finished goods inventory and (2) a weaker product mix (lower export
mix), partly offset by price hikes taken in 1QFY21 and cost-reduction initiatives.
Expect margins to improve in 2H, driven by cost cutting and focused market
strategy. Jun’20 EBITDA and PBT were positive, with July thus far faring even
better.
It took a price increase of 0.7% in 1QFY21 and 0.4% in Jul’20 in the domestic
market.
Interest cost increased due to additional borrowings in 1QFY21 to ensure timely
payment to suppliers. The company repaid additional borrowings; hence, net
debt is similar to Mar’20 levels.
Finance: Finance penetration increased to 52% v/s 46% YoY. TVS Credit holds
54%share of TVSL Financing. TVS Credit’s moratorium is currently at 14% (incl.
Morat2.0) v/s 37% earlier, backed by strong collection efforts. Collections are
now atpre-COVID-19 levels.
Capex would be INR3b for FY21 and investment in TVS Credit would
be~INR750m.
21
September 2020
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
CAPITAL GOODS
Due to disruption caused by the COVID led shutdown, managements across companies highlighted the need
to focus on working capital (execution has been slowed down on purpose). While ABB’s management
indicated positive outlook for Automation in F&B and Electronics industry, Cummins’ management was
cautious on the Hospitality sector and indicated slower pace of recovery for it. For ACs, Voltas’ management
alluded to higher-than-normal inventory in the channel; however, it expects the same to get normalized over
the next few months.
Domestic Capex Cycle
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY21
The velocity of orders and revenues has been
encouraging currently, with ABB witnessing
double-digit YoY growth on a like-to-like basis.
Building automation is one of the focus areas for
ABB
ABB India. The entire Delhi airport is on ABB’s
automation system. Numerous hotel chains are
also using ABB’s automation.
Electronics manufacturing is set to increase in
India, and the industry depends heavily on
robotics. Hence, this would prove a strong
growth opportunity.
It is witnessing increasing spends in the Food and
Beverage industry.
Demand in Rental, Healthcare, and Data Center is
recovering. Commercial Realty, Hospitality,
Residential Realty, and Manufacturing are also
reviving gradually (lower than other segments).
Hospitality is in bad shape and would take longer
to recover. The current capacity utilization stands
at 65–70% (v/s pre-COVID levels).
~70% of Havells’ sales come from the B2C channel,
which has shown better traction. Overall, demand
for B2C products grew by 12% YoY in Jun’20.
On expected lines, order inflows fell 39% YoY to
INR236b, with core E&C order inflows declining
55% to INR137b.
The order book stood at >INR3.0t, providing
comfort against weak order inflows in the near
term.
Due to weakness in the overall market, order
inflows declined by 46% YoY to INR3.7b.
Domestic projects have ~70% labor availability
currently.
Cummins
Management has refrained from guiding for FY21
as it is still assessing the impact of COVID-19.
The Distribution segment is expected to rebound
faster as the refurbishment of existing equipment
would be the top priority for most customers.
Channel inventory is now lower than before as the
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.
As a percentage of sales, the working capital cycle
appears optically high at 26.8% v/s 23.7% at FY20-
end. L&T is expected to prioritize working capital
management over execution.
L&T has been adding 1.5k laborers/day, with the
total availability of the labor force now at 190k.
While this is lower than the peak of 220,000, it is
sufficient for the current monsoon quarter.
Company-level inventory stood at 140 days, while
that in the channel stood at 40–45 days.
Margin surprise in the UCP segment was owing to
a better mix, the curtailment of ad spend, and low
commodity prices. These levels of margins are
unsustainable.
Havells
Larsen and
Toubro
Voltas
September 2020
22
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
ABB
Click below for
Results Update
Business update
Velocity of orders and revenues has been good. On like-to-like basis, the
company is witnessing double-digit YoY growth currently.
Cash balance was higher at INR15b in 2QCY20. Non-trade items like tax refunds,
capex rationalization as well as focus on collections helped drive cash balance.
Building automation is one of the focus areas for ABB India. Whole of Delhi
airport is on ABB’s automation system. Many hotel chains are also using ABB’s
automation.
15% EBITDA level is the target set by the Global CEO for the ABB group.
Raw material cost target is maintained at around ~65% of sales.
Power Grid contracts are global and across group companies. Costs billed to ABB
Power are the ones, which are not incurring immediately. IT service support to
ABB’s Power Grid by ABB India is expected to be extended for 2 years at least.
~10% of orders are via the government (Railways, Utilities, etc.).
Electrification
Orders will decline 7-8% if solar business orders are removed.
Industrial Automation
Lower margins are on account of lower exports and services revenue in the
quarter.
ABB allowed certain digital services to be offered free to customers, in order to
make the customer get used to its advantages.
Other key takeaways
ABB is witnessing increasing spends in the Food and Beverages electronics
industry.
Service revenue stood at INR2.53b in 2QCY20 v/s INR3.32b YoY.
Exports stood at INR1.28b in 2QCY20 v/s INR1.59b YoY.
Employee cost is lower as bonuses and other related expenses have been fine
tuned.
Other expenses include forex gain of INR340m. Some part of other expenses cut
will come back as volumes grow, but few items like travel, promotions, etc. may
remain subdued in the near term until strong growth resumes.
Net working capital increase pertains to the Power Grid business as few
contracts are still routed through ABB’s books. It is yet to de-leverage as it
should have been done post demerger.
Electronics manufacturing is set to increase in India and the industry largely
depends on robotics. Hence it will be strong growth opportunity for ABB India.
Believe the portfolio is well placed to see structural string growth from energy
efficiency and automation.
Current Price INR 897
Buy
Blue Star
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 604
Neutral
EMP segment
Order inflow stood at INR2.7b in 1QFY21 (v/s INR9.7b in 1QFY20). BLSTR saw
healthy order inflows from segments such as BFSI, Healthcare, Pharma, and
Government.
September 2020
23
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
BLSTR had ~150 active project sites with ~ 10,500 laborers. Currently, it has
reduced this to ~50 active sites with 1,500 laborers (v/s the requirement of
3,000 laborers).
The order book stands at INR29.2b (+3% YoY).
~30% of order book exposure is toward the Construction segment
(electromechanical and AC systems).
Provisions taken stood at ~INR150m in 1QFY21.
UCP segment
The RAC industry is expected to have declined 65% YoY in 1QFY21. Even after
the lockdown was lifted, footfall was lower and the focus was on inventory
liquidation.
BLSTR’s revenue decline was in line with market decline.
Secondary sales in July’20 are likely to have recovered to 77% v/s the previous
year. Price levels have dropped by 10–12% for the industry post the lockdown as
the peak summer season has ended and the focus has been on inventory
liquidation.
In June’20, sales recovered by 71% for the industry, with recovery in northern
India sales at 85%.
The e-commerce channel gained traction, with BLSTR’s sales improving to 12%
during the quarter. Industry e-com sales stood at 17% of the total sales during
the quarter.
Inventory in the channel is likely to be higher by 30 days.
In 2Q, revenue is expected to recover by 80% and by 90% in 3Q; 4Q is expected
to be at 100% of last year and may witness 5–10% growth if there is no fresh
wave of COVID-19 infection.
Cost savings
Warehousing, logistic, and ad costs are variable in nature.
50% of the total cost savings are expected to be sustainable; the other 50%
depends on incremental sales.
Cash flow from operations
Gradual liquidation in inventory would help release cash.
Free cash would be used to pay off creditors.
The company would focus on the latter part of the year to lower its borrowings.
It targets INR3.5–4.0b net borrowings by the end of FY21.
Other takeaways
Import substitution: There is no final policy as of now. However, certain sectors
are being prioritized, such as ACs and Furniture. Custom duty is likely to be
enhanced.
BLSTR believes R&D is required to innovate and be price-competitive. The
government should provide incentives on R&D to aid industry.
BLSTR would not manufacture components such as motors or compressors. The
company would, however, indigenize inner door units (IDUs) and drives.
Another way to make the RAC industry competitive would be to reduce GST to
18% from 28% currently so it gives impetus to volume and leads to economies
of scale.
September 2020
24
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
Crompton Greaves Consumer Electronics
Current Price INR 255
Click below for
Detailed Concall Transcript &
Results Update
Buy
Demand outlook and business ramp-up
CROMPTON achieved 70% of last year’s sales in May’20 and 90% in June’20.
Secondary sales trend in July’20 indicate similar pickup in demand to that of
June’20.
CROMPTON continued to gain market share in Fans and LED B2C portfolio
(Bulbs and Battens)
E-commerce channel witnessed 400% YoY growth in May’20 and June’20.
While local lockdowns will continue to disrupt business, management expects
sales to normalize by the end of 2QFY21.
Management hasn’t seen a decline in demand post the pent up demand
witnessed post lockdown. Thus, the growth has been steady and improving.
Electrical consumer durables
Fans: In June, Fans activity scaled back to ~85% level. Latest market share
available for April period shows market share gains for CROMPTON.
Appliance: In June’20, appliance business witnessed 6% volume growth YoY.
Water heater saw 42% YoY volume growth in June’20, while Mixer grinders
grew by 125% YoY (volume) in June’20.
Pump: In June’20, Agro pumps achieved 25% value growth, with domestic
Pumps scaling back to 100% activity level.
Lighting
In June’20, B2C LED volumes grew 9% YoY.
B2B business came under pressure due to deferment of orders by institutions
and muted Government orders.
Margins came in better than expected on account of cost cutting initiatives and
favourable mix (1QFY21 saw supplies of EESL street lighting which has a higher
margin than EESL bulbs)
Margins
Ad-spends were curtailed to a negligible INR20m (0.3% of sales) from INR450m
(3.3% of sales) last year. Ad-spends will be restored as markets recover.
Other expenses declined by 51% YoY versus 47% decline in revenue, with the
reduction done across variable costs and discretionary costs. Some of these
costs could have been recurring cost but was cut down owing to COVID led
shutdown.
Other key takeaways
Strong focus on cash flow management led to improvement in balance sheet
with net cash position of INR4.6b (v/s INR2.4b at end-FY20).
Introduction of New BEE rating has been shifted by 18 months.
CROMPTON’s objective is not to improve margins from hereon, but to invest for
growth from near to medium term perspective.
Cummins India
Current Price INR 456
Click below for
Detailed Concall Transcript &
Results Update
Sell
Sales break-up
Power gen sales plunged 76% YoY to INR 960 M, Industrial sales declined 68%
YoY to INR800m and Distribution sales dropped 47% YoY to INR1.8b.
Note that the company operated for just one month during 1QFY21.
September 2020
25
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
Demand revival:
Demand in rental, healthcare and data center is recovering.
Commercial realty, hospitality, residential realty and manufacturing are also
reviving gradually (lower than other segments). Hospitality is in pretty bad
shape and would take more time to recover. Current capacity utilization stands
at 65-70% (v/s pre-COVID level).
Margins:
Higher gross margin was on account of the favorable sales mix – higher
proportion of distribution, better mix between HHP and LHP. Should revert to
normal as revenue normalizes. The company remains focused on reducing
material cost and keeping other costs under control to inch back to its historical
margin range.
Emission norms update:
As of now, there has been no notification on CPCB4+,
but expect the implementation to get postponed (likely by three quarters). The
new emission norms do open up export opportunity for KKC in developed
markets. Globally, KKC has manufacturing bases in the US, China and India. If
KKC India betters its cost and delivery, opportunities could come up for the
company.
Rental income
from captive continues at earlier rate. There has been no re-
negotiation as of now.
There was some element of backlog, which could not have been shipped during
the Mar’20 quarter (~INR1.9b).
The government is focused on infra development. Spending has been good in
the first quarter. Also, the construction end market has not slowed down.
Havells India
Click below for
Detailed Concall Transcript
& Results Update
Demand outlook
In Havells’ core portfolio, May reported 60% sales against last year (LY), whereas
June surpassed LY sales by 4%.
Lloyd achieved ~80% revenues against LY in May’20, whereas growth in June as
8% over LY.
Switchgears saw 70% of sales from the consumer/residential channel and the
remaining 30% from the industrial channel.
70% of Havells’ product portfolio is B2C and the rest is B2B + B2G. B2C has
shown better traction.
The B2C portfolio grew by 12% YoY in Jun’20.
The stock level in trade currently is lower than pre-COVID-19 levels. Pent-up
demand could have been a factor in June.
Market share gains are likely to have accrued from the unorganized sector on
the back of pent-up demand in June’20.
Management is unsure of whether June’20 demand levels are sustainable, with
the possibility of extended lockdown in local areas. Havells would monitor sales
on a monthly basis before settling down on a particular trend.
The western region is taking more time to bounce back, with cities such as
Mumbai, Pune, and Nagpur lagging behind in terms of demand recovery. In the
eastern region, recovery in Kolkata is slower than in other states. In the
northern region, recovery in Delhi is slow v/s other states.
Lloyd
Incremental capex would be limited to INR400–600m.
Post localization, Lloyd has witnessed market share gains in the CY.
26
Current Price INR 654
Neutral
September 2020
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
Other takeaways
If all supplies from China are stopped as of date, the risk to revenues for the
current year would be limited to 5% of sales.
The reason for raising Commercial Papers (CPs) worth INR5b: Havells had taken
loans in 1QFY21 to maintain liquidity due to the fear of COVID-19-led disruption.
The company is raising its short-term CPs to replace this high-cost debt. This is a
very short duration loan and would be repaid in due course of time.
Cost levers: a) many cost items would come back once revenue stabilizes.
However, a part of cost reductions could sustain, such as travel expenses and
marketing expenses based on new media avenues. b) Employee costs stood
lower in 1QFY21 due to certain voluntary actions. These costs are expected to
increase from hereon, but would still be lower on a YoY basis on account of
employee rationalization in FY20.
The online channel is likely to see strong growth. The company expects to
maintain the offline channel’s similar market share for the online market.
Havells would invest more in channel expansion in the rural areas.
The management has not witnessed any trend of down-trading thus far.
Click below for
Results Update
KEC International
Current Price INR 325
Buy
EBITDA margins were lower, mainly due to cost overruns in the EPC business in
Brazil. All international sites are working at pre-COVID level utilizations, except
for sites in Brazil, which have been hit harder by COVID.
The company is L1 in ~INR50b worth of orders, with majority from the
International T&D segment. KEC is also L1 in a defense package under the Smart
Infrastructure segment.
The company is using Automation to mitigate lower labor availability.
Management has targeted ~20% improvement in overall productivity.
Railways’ business has ~INR100b of new orders, which are expected for bidding
in the next few quarters.
Larsen & Toubro
Current Price INR 918
Buy
Click below for
Results Update
Outlook on order inflows:
Ordering activity has continued despite pandemic
concerns, albeit with time delays. Sectors such as Water, Heavy Civil, and Power
T&D are leading in terms of order inflows. Overall, the prospective order
pipeline stood at INR6.3t for FY21; the share of Domestic orders stood at
INR5.07t and International orders at INR1.2t. Within the Domestic order
pipeline, opportunities in segments such as Water, Heavy Civil, and Power T&D
would be worth INR1t each, with the rest equally divided between Buildings and
Transport Infrastructure. L&T’s dependence on public capex and PSU
investments has helped the company mitigate cyclicality. Order inflows would
be driven more by the government sector than the private sector.
Order book highlights:
International orders stood at 24% of the total order
book. Only 18% of the Domestic order book is from the private sector, while
82% is from the public sector. Within the public sector, 50% of the order book is
from the center and states, while 32% is from PSUs. Around half of the orders
from the center and states have multilateral funding. Around 55% of the order
book is variable pricing contracts with pass-through on material costs.
27
September 2020
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
On labor situation:
Labor availability has started to normalize. L&T has been
adding around 1,500 laborers per day. The current strength of labor stands at
190,000, which is lower than the peak strength of 220,000, but sufficient for the
current monsoon season.
E&A sales update
– Deal closure is getting delayed as some of the paperwork
needs to be signed in the presence of personnel from L&T and Schneider. This
process is expected to be expedited as soon as international travel has resumed.
Key segmental comments
Infrastructure:
Order inflow pipeline has remained healthy. Client collections
have continued during the quarter. Margins have remained stable due to
expense control and favorable input costs.
Power:
High-value orders won last year are yet to cross the margin recognition
threshold. Margins look optically low as profits of MHPS and other JV companies
are consolidated at the PAT level under the equity method.
Heavy Engineering:
Relatively healthy order inflows were witnessed despite the
pandemic situation.
Defense:
This segment continued to witness order deferment. Lately, there
have been some hopes of revival given government announcements and
ongoing border tensions.
Hydrocarbon:
A record share of the order book provides adequate visibility for
2–2.5 years of revenue.
Development projects:
Operations for the Hyderabad Metro were affected due
to lockdown. Under-recovery of fixed costs was possible in this period.
Others:
Revenues were significantly impacted, largely due to lower handover in
the Realty business.
IT & TS:
This reflects the contribution from the Mindtree acquisition. Even ex-
Mindtree, this segment grew YoY.
L&T Finance Holdings:
The business continues its focus on realization of the
loan book, prudent ALM, improving asset quality, and increasing the diversity of
funding sources. The Wealth Management business’ sale led to exceptional
income of INR2.2b.
E&A business:
Fixed overheads of manufacturing units charged to profits amid
low capacity utilization impacted margins.
Working capital as a percentage of sales stood at 26.8%. Although higher in
percentage terms, the absolute increase in working capital was only marginal.
Other highlights
On execution challenges:
The company has to follow social distancing norms
until the virus is controlled. Hence, despite labor availability, execution remains
a challenge.
Hyderabad Metro
– L&T opted for moratorium. Excluding interest expense,
fixed cost (cash outgo) was INR0.5b per quarter. The company does not intend
to increase additional debt on its SPV books. It will have to wait until E&A
proceeds come in to finalize on the level of support to the Hyderabad Metro.
L&T is not incurring additional INR5b contract labor cost that was incurred in
4QFY20.
Some orders are not under execution as of now, but L&T does not plan to
classify these as slow moving. The orders would be to the tune of INR70b.
The Realty business has taken a hit during this crisis.
September 2020
28
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
Development projects – Nabha Power had positive EBITDA and the Hyderabad
Metro reported EBITDA loss.
Design content was higher in the quarter as the company was able to shift to
the work-from-home model.
Voltas
Click below for
Results Update
Current Price INR 657
Buy
Demand outlook
VOLT sold over 3.4 lakh units in UCP in 45 days.
The Projects business witnessed slower execution and collection challenges due
to certification delays, shortage of labor, and liquidity constraints.
Unitary Cooling Products
Industry volumes of RAC (secondary sales) declined by 49%, while decline for
Voltas stood lower at 45%.
Inverter AC now forms 44% of overall AC sales and 66% of total Split AC sales.
North India witnessed a fair amount of demand owing to the heat wave in
May’20.
High inventory led to price deflation in RAC.
Reasons for higher margins comprise: (a) improved product mix (higher Inverter
AC sales), (b) drastic reduction in ad spend (in an otherwise heavily advertised
quarter), and (c) synergy from material costs (certain low inventory was already
available in-house).
In spite of higher margins, the management maintained margin guidance of 11–
12%.
Normally, ad spends in 1Q are approximately INR500m, which were cut down
heavily in the quarter due to loss of sales. Usually, VOLT spends around
~INR750m toward ad spends in a year.
Air coolers saw 70% de-growth, in line with the industry.
Voltas ACs is now available across 19,000 distribution touch points.
Inventory position: INR11b of inventory is with VOLT. The company has around
~140 days of inventory and an additional 40–45 days with the trade.
Jun’20 posted 1% YoY growth. However, June is generally not very strong for the
AC season.
Electromechanical Projects and Services
VOLT incurred idle costs over 45 days at different project sites.
In the Middle East, construction activity was classified as ‘essential’. However,
productivity declined due to the strict implementation of social distancing rules.
ECL and other time-based provisions incurred impacted profitability.
Management expects to incur further provisions over the next 1–2 quarters.
Order inflows stood at INR3.66b. The order book was at INR76.6b (domestic:
INR47.6b; international: INR29.0b).
Middle East: The level of transparency over client financials is lower. Hence, the
company has to deploy risk mitigation strategies to choose its clients. The Oman
project may require more provisions in the future.
Domestic projects have ~70% labor availability currently. Management believes
there are sufficient margins built in the orders. However, the impact of COVID-
19 on margins is yet to be ascertained, and any future guidance on this is
difficult to quantify.
September 2020
29
 Motilal Oswal Financial Services
CAPITAL GOODS | Voices
VOLT has focused on government projects since payments may be delayed, but
are sure to come through. The company does not want to depend only on
private clients.
Volt-Bek
The company witnessed high demand for washing machines, dishwashers, and
microwaves, in line with the changing trends in consumption. Demand for DC
refrigerators was also strong.
Volt-Bek was able to leverage on Voltas’ existing distribution network. Currently,
the brand is present across 6,000 touch point’s v/s 19,000 of Voltas.
~130 EBOs (Exclusive brand outlets) are selling Voltas and Volt-Bek products.
Voltas has invested INR3.73b in the JV. The company targets 10% market share
by 2025 and expects to achieve breakeven by then (or maybe a year or so earlier
as well).
Other takeaways
Major imports comprise compressors, DC motors, and PCBs. Highly and GMCC
have commenced compressor manufacturing in India. Hence, backward
integration in these components would not make sense. VOLT is looking to set
up its southern factory, with delay due to COVID-19 extending the timeline to
1Q of next year (1QFY22).
Import duty on compressors is set to be increased to 20% from 12.5% currently.
Similarly, a fully imported AC is likely to see higher duties at 30% from 20%
currently.
~40% of AC cost is due to imports. This would reduce, especially once
compressor imports are replaced. However, VOLT would not compromise on
product quality and would watch out for strong suppliers for localization.
.
September 2020
30
 Motilal Oswal Financial Services
CEMENT | Voices
CEMENT
Cement industry volumes declined ~38% YoY in 1QFY21 as Apr’20 was a washout due to shutdown of
operations till 19th Apr’20, post which operations have ramped up gradually. Managements informed that
cement prices have softened across regions in Aug’20 and are down by INR15/bag over Jun’20 on an average.
Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of
COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas, but
managements remain cautious on the demand outlook due to spread of COVID-19 to rural areas. The quarter
witnessed
sharp decline in fixed costs due to lower admin, traveling, and maintenance and advertising
expenses. While, a part of fixed cost reduction is likely to sustain in FY21, with an increase in volumes, some
costs are likely to return. Further, while fuel costs had bottomed out, they are looking up in 2QFY21. As a
result, margins are likely to decline.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook FY21
Commentary on Capex Cycle
Variable cost declined, led by lower power consumed
Capex guidance is at INR8.0b for
and higher blended cement sales. Reduced marketing
FY21, and including Murli
Dalmia Bharat
activity, traveling, office admin expenses, and other
Industries, it could go up to
overheads led to a further reduction in cost. As volumes
INR11.5–12.0b.
pick up, these costs are expected to normalize.
In 1QFY21, it repaid debt of INR5.1b, which brought
down net debt / EBITDA to 1.02 from 1.34 in 4QFY20.
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.
While the industry saw volume decline of 10% over July–
FY21 capex guidance stands at
Aug’20, JKCE’s volumes grew by ~20% YoY, driven by
~INR7b on account of Mangrol
JK Cement
capacity expansion.
capex at INR3.5b, other growth
1QFY21 witnessed sharp decline in fixed costs on account
capex at INR2.5b, and maintenance
of a reduction in consultancy charges and admin, travel,
capex.
and branding expenses. Variable costs, though, are
The Nimbahera Line 3 upgrade is
expected to go up due to an increase in petcoke and
expected to be completed by
diesel prices.
2QFY22. The total outlay stood at
The Nimbahera Line 3 upgrade is expected to be
INR1.96b as of 30
th
June’20.
completed by 2QFY22, and the 0.7mt Balasinor plant is
The 0.7mt Balasinor GU is
expected to be commissioned in 3QFY21.
expected to be commissioned in
3QFY21. The total outlay stood at
th
INR15.1b as of 30 June’20.
FCF generation stood at INR22.0b, achieved through a
The company has increased its
working capital release of INR7.9b. However,
capex guidance to INR15b for FY21
management does not foresee further reduction in
from earlier guidance of INR10.0b
working capital in FY21.
(INR17b in FY20). Of INR15b,
Ultratech
It aims to reduce fixed costs (including employee costs)
~INR7b is toward maintenance
Cement
by 10% or INR5.0b in FY21 (implying ~INR70/t) on a
capex, INR1.2b for the Bara
sustainable basis.
grinding unit, and another 1.2b for
UTCEM has divested the non-core China cement business
the Bicharpur coal block.
(part of the Binani acquisition) for EV of USD120m
(INR9.0b). Post the payment of its liabilities and
withholding tax, it would receive INR7.0b, which would
further reduce net debt.
September 2020
31
 Motilal Oswal Financial Services
CEMENT | Voices
Birla Corp
Click below for
Results Update
Utilization
The company’s production in April was at negligible levels. Operations
commenced effectively in the first week of May at most plants, leading to loss of
nearly five weeks of operations. Operations remained impacted by local
lockdowns and restrictions.
Capacity utilization stood at 58% during the quarter (v/s 96% in 1QFY20) on non-
operation for nearly five weeks, implying capacity utilization of >90% for the rest
of the quarter.
Market mix
Trade sales stood at 2.06mt, with volume share growing by 2pp YoY to 86%.
Premium cement sales (by volume) declined 44% YoY to 0.74mt, and the share
within the Trade segment declined 8pp YoY to 36% in 1QFY21.
Blended cement share remained unchanged at 94% of volumes in 1QFY21.
Demand and pricing
Trade demand picked up in May on the back of pent-up demand and strong
demand from rural housing. While urban demand remained weak throughout,
some green shoots have been visible since Jun-end, driven by a pickup in
infrastructure projects and the government’s funding of welfare schemes.
During the quarter, the company’s realizations were affected by lower sales in
lucrative markets such as North Bihar and higher sales in Madhya Pradesh,
where pricing was lower.
With the onset of the monsoons, cement prices have begun to weaken.
Management remains cautiously optimistic on gradual recovery in demand.
Cost reduction measures
During the quarter, the company undertook measures to rationalize fixed costs
and improve efficiencies. To reduce transportation cost, the company started
transporting fly ash through rail. Other cost reduction measures included higher
generation of solar power to reduce power cost and a change in the product
mix.
The board approved the buyback of secured Non-Convertible Debentures to
lower borrowing cost, if such an opportunity prevails in the market.
Upcoming capacity
Work at the Mukutban integrated project of 3.9mt was impacted due to
lockdown.
As a result, the company expects the completion of the Mukutban project to be
delayed by a quarter to early 2QFY22.
Others
Borrowing cost declined 52bps YoY to 8.08%.
The Jute division’s operations were impacted by lockdown and the Amphan
cyclone, and sustained for just 16 days in the quarter. It reported EBITDA loss of
INR34.2m v/s EBITDA of INR48.3m in 1QFY20. Production was at 1,1715t during
the quarter v/s 8,583t in 4QFY20.
Current Price INR 598
Buy
September 2020
32
 Motilal Oswal Financial Services
CEMENT | Voices
Dalmia Bharat
Click below for
Results Update
1QFY21 highlights
Volume de-grew by 20% YoY, but was better than industry de-growth of 35%.
The trade sales mix was up to 75% from an average level of 60%, led by a pickup
in IHB demand, and is likely to drop as infra demand revives.
Blended sales mix stood at 85%, while premium products accounted for 18% of
trade sales.
Continuing with the trend, pricing remained favorable over May–June and was
supported by higher volumes on account of pent-up demand.
DSP (special product) is gaining popularity in the eastern region, which has led
to a 3–4% increase in market share in eastern and 1% increase in southern.
Lead distance remained below 300km during the quarter.
Variable cost for DDSPL (Kalyanpur) is down to INR2,100/t from INR2,900/t, and
capacity is expected to increase to 1.1mt by Dec’20.
Demand and pricing outlook
The demand outlook remains uncertain as the COVID-19 spread in eastern
states could lead to continued lockdown; monsoon floods would further
dampen demand in Assam and Bihar.
Demand has deteriorated in eastern and southern post mid-July and is expected
to drop by 5–10% and 25–30%, respectively, in 2QFY21.
Industry cement volume is expected to decline by 15–20% in FY21, but growth
would be significant in FY22 on account of a lower base.
Road projects in southern are now operational at 95% of normal levels, while
the Polavaram project is progressing slowly due to labor issues. The AP govt. has
established low-cost housing projects, but no other govt. projects have picked
up pace in southern.
Current prices in eastern and southern have been down by INR10–12/bag and
INR5–8/bag, respectively, since June.
Cost insights
Variable cost was down, led by reduced power consumption, reduced power
rate, and an increase in blended cement sales. The WHRS plant is expected to be
commissioned by Dec’20, which would bring down power cost.
DBL expects to further reduce variable cost going forward, but uncertainty in
pet coke prices and decline in the blended cement mix (as non-trade demand
picks up) could have an impact.
Logistics cost was down despite an increase in diesel prices due to the use of the
reverse auction mechanism and emphasis on digitization.
Reduced marketing activity, traveling expenses, office admin expenses, and
other overheads have led to a further reduction in cost, but as volume picks up,
these costs are expected to go up.
DBEL is not purchasing any clinkers from outside.
Depreciation cost: Depreciation would be lower at INR12.5–13.0b in FY21 owing
to the WDV method and retirement of certain assets, while the goodwill
amortization amount would vary.
Debt and capex
INR5.1b of gross debt was repaid in 1QFY21, which has brought down net debt /
EBITDA to 1.02 from 1.34 in 4QFY20.
Current Price INR 710
Buy
September 2020
33
 Motilal Oswal Financial Services
CEMENT | Voices
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’20, respectively.
70–80% of land has been acquired for the Bihar grinding unit; construction
would commence within two to three months and would be completed in 15–18
months (from the start of construction).
Other highlights
Incentive booked in revenue was INR170m, while INR90m of incentives were
received in 1QFY21. Outstanding incentive receivables stand at INR7.16b as of
Jun’20.
The Murli Industries acquisition would be completed by Sep’20, and it would
take 10–12 months for ramp-up post the acquisition.
The mutual fund issue is under resolution, and the timeline for the same is
uncertain; the strategy on IEX would be finalized in CY20.
Grasim Industries
Current Price INR 722
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Update on operations
Capacity utilization in the VSF and Chemical segments was impacted due to
lockdown in the country. VSF capacity utilization stood at 26% in 1QFY21, and
Caustic Soda utilization stood at 49%.
However, capacity utilization ramped up in Jul’20. Capacity utilization in VSF
stood at 79% in Jul’20 (73% in Mar’20); utilization in Caustic Soda improved to
78% in Jul’20 (v/s 72% in Mar’20).
The fertilizer plant continued to operate normally even during lockdown.
VSF
The VSF business’ performance was impacted by weak domestic and overseas
demand due to local lockdowns and low operating rates in the Textile industry.
Reported EBITDA loss stood at INR1.1b (v/s profit of INR4.4b in 1QFY20) due to
~78% decline in revenues.
VSF sales declined 69% YoY to 43kt in 1QFY21, and VFY sales declined 90% to
1.0kt.
Share of VAP sales in total sales stood at 30% (v/s 24% in 4QFY20).
Grey VSF prices declined ~26% YoY during the quarter v/s ~20% decline in
cotton and ~29% in PSF.
Management highlighted that VSF prices remain under pressure. Textile
demand recovery in China has not been up to the mark, and China’s textile
industry is still operating at low utilization (64%).
However, with the Europe and US markets opening up, it expects demand to
recover in 2QFY21. It expects prices to bottom out from current levels, already
at historical lows.
It expects Viscose demand to reach 90–95% of normal levels by 4QFY21.
Chemical
Revenue from the Chemical segment declined ~53% YoY to INR7.04b due to a
sharp dip in sales volumes and weakness in ECU realization (INR25,649/t; down
31% YoY).
As a result, EBITDA declined ~90% YoY to INR410m.
Caustic Soda sales declined 42% YoY to 138kt.
Caustic Soda prices (CFR) in Asia eased below USD300 levels due to an
oversupply situation, which created pressure on domestic prices.
September 2020
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 Motilal Oswal Financial Services
CEMENT | Voices
Chlorine realizations turned positive in 1QFY21, driven by demand from
disinfectants and hygiene products.
Chlorine value-added product demand remained strong, reaching pre-COVID-19
levels in Jun’20.
Caustic Soda sales for 1QFY21 were 32% lower YoY at 138kt on account of lower
demand for user-based industry.
Chlorine consumption in VAPs stood at 27% in 1QFY21 from 26% in 1QFY20.
Fertilizer
Revenue declined 13% YoY to INR6.05b.
However, EBITDA improved 38% YoY to INR720m due to fixed cost reduction,
one-time gains pertaining to freight arrears (INR120m) and better PURAK sales
(16% of total, up 10% QoQ). PURAK sales contributed ~24% to segmental
EBITDA.
Demand for urea continued to be strong on account of normal monsoons
leading to advance crop sowing.
Other Business – Textile and Insulators
The Textile business’ revenue declined 83% YoY to INR750m. Reported EBITDA
loss was INR550m v/s profit of INR310m in 1QFY20.
The Insulators business’ revenue declined ~59% YoY to INR1,100m. Reported
EBITDA loss was INR150m v/s profit of INR60m in 1QFY20.
Cement
Volumes were lower by 21% YoY due to the impact of COVID-19.
India operations reported EBITDA of INR20.3b and EBITDA/t of INR1,453 in
1QFY21.
Variable costs declined 9% on a YoY basis in 1QFY21: Logistics was down 3%,
Energy 11%, and RM 2%.
Consolidated net debt reduced by INR22b QoQ to INR146.5b in 1QFY21. Net
debt / EBITDA stood at 1.44x as of Jun’20.
Aditya Birla Capital
Revenue and net profit after minority interest for 1QFY21 stood at INR40.3b and
INR2.0b, respectively.
Overall, closing AUM (Domestic) increased 8% QoQ to INR2,176b and closing
Equity AUM grew 19% to INR780.2b in Jun’20.
In Life Insurance, Individual First-Year Premiums (FYPs) grew 5% YoY to INR3.1b;
13th-month persistency improved to 81% from 79%.
In the Health Insurance business, gross written premiums were up 72% YoY to
INR2.5b in 1QFY21, with the retail mix at 73%.
Others
Standalone net debt increased by INR1.6b QoQ to INR31.4b.
The company has taken the board’s approval for capex spend of INR16.1b for
FY21. This includes spend on the VSF business of INR8.64b (largely for capacity
expansion) and the Chemicals business of INR3.17b. However, Chemical capacity
expansion remains on hold. Capex was INR1.31b in 1QFY21.
September 2020
35
 Motilal Oswal Financial Services
CEMENT | Voices
India Cement
Click below for
Results Update
Operational highlights
1QFY21 sales volumes declined 53% YoY to 1.43mt on 48% decline in volumes in
the main markets.
Capacity utilization was at 35% for 1QFY21.
Breakeven utilization stands at 32%, down from 62% in FY20.
Net plant realization stands at INR4,235/t and EBITDA stands at INR1,090/t.
India cement trade sales mix stood at 67%.
Revenue for Windmill/Shipping/RMC stood at INR42m/INR60m/INR80m.
EBITDA for Windmill/Shipping stood at INR42m/INR38m. EBITDA loss for RMC
stood at INR20m.
Cost-reduction measures
Focus on cost reduction led to the company achieving lower fixed cost. Fixed
cost for the quarter stood at INR1.3b, down from an average level of INR1.9b.
This was achieved by cutting down travel and admin expenses, and curtailing
contractual labor to 970, down from pre-COVID-19 levels of 1,500.
Variable cost of production was at INR2,150/t for 1QFY21 and is expected to
drop to INR2,100/t, supported by lower fuel prices.
The rationalization of geographical distribution and distribution channels
through a reduction in the no. of warehouses and direct sales from plants led to
a reduction in freight cost to INR954/t (from INR1,058 YoY).
Gifts and discounts to dealers were capped as a part of cost-reduction
measures.
The fuel mix stood at 50%/50% for pet coke / coal.
Guidance on cost and margin
India Cements could not benefit from lower fuel prices due to the high-cost fuel
inventory carried forward from the previous quarter. Hence, the benefit of
lower prices is expected to be realized in 2QFY21.
Fixed cost is expected to increase to INR1.5b per quarter with an increase in
production.
Lead distance is expected to increase as supply is directed to the western and
eastern regions with the normalization of the COVID-19 situation.
Demand and pricing insights
The company is focused on improving the trade mix (67% in 1QFY21) to boost
realizations as the NPR differential between trade and non-trade stands at
INR800/ton.
The company expects govt. spending on infrastructure, low-cost housing, etc.,
to support demand and pricing in AP and Telangana.
Average monthly demand for AP and Telangana is 1.0mt and 1.6mt, respectively
(subdued in FY20 due to elections), and is expected to revive by 3QFY21.
India Cements expects capacity expansion by Chettinad, Penna, and Ramco to
have no impact on the southern market, which has a monthly capacity of 12–
13mt.
Road and irrigation projects are supporting demand and offsetting muted
demand from metros.
Debt
Debt reduced by INR1.3b in 1QFY21.
Standalone gross debt stood at INR34.4b as of 30th June 2020.
Current Price INR 116
Neutral
September 2020
36
 Motilal Oswal Financial Services
CEMENT | Voices
Term debt stood at INR25b and should decline to INR20b by Mar’21. Working
capital debt stands at INR5.5b. The company has INR5.3b of debt repayments
planned in FY21.
Management highlighted that industry in southern India has witnessed a shift
from credit-based sales to cash-and-carry, leading to improved liquidity for India
Cements.
JK Cement
Click below for
Results Update
Operational highlights
Current capacity utilization for plants in south India is at 60%.
The Aligarh grinding unit is operating at 50% utilization levels.
Cement production volume was at 1.59mt for 1QFY21.
Cost insights
1QFY21 witnessed sharp decline in fixed costs on account of reduction in
consultancy charges and admin, travel, and branding expenses. Variable costs,
though, are expected to rise on an increase in petcoke and diesel prices.
Petcoke prices have increased by INR600/t MoM in Sep’20. As a result, fuel
costs are expected to increase further.
Freight cost would go up on account of an increase in diesel prices.
In 1QFY21, power cost was higher on account of a change in the power mix,
triggered by a fire breakout at the Mangrol captive power plant.
The Nimbahera Line 3 upgrade would enhance clinker capacity by 1000t/day as
well as reduce power and fuel cost.
The average grid power mix stands at 20%, while the cost differential between
grid power and captive power is at INR1.5–2.5/unit.
Demand and pricing outlook
Cement prices have softened by INR10–15/bag in 2QFY21 due to seasonal
demand weakness. Non-trade prices have declined by INR30–40/bag.
JKCE expects demand to pick up from mid-Sep’20 and non-trade prices to
improve by end-Sep’20.
JKCE remained cautious about demand, but expects an increase in volumes on
account of commissioning and ramp-up of new capacities.
While the industry saw volume decline of ~10% over July–Aug’20, JKCE’s
volumes grew by ~20% YoY, driven by capacity expansion.
Demand for white cement has started to pick up, while prices have remained
flat YoY in 2QFY21.
Sales mix
Blended cement mix was at 69%.
Trade mix was at 75% v/s 69% in 4QFY20.
Trade mix is at 65–70% on account of the monsoon-led softening of retail
demand.
Debt and cash position
Standalone gross/net debt stood at INR26.0b/INR13.37b, while debt for UAE
operations was at INR4.0b.
Net debt/EBITDA improved to 1.22x in 1QFY21 from 1.35x in FY20.
Net D/E is at 0.42x v/s 0.51x in 1QFY21.
Cash balance was up to INR12.6b in 1QFY21 from INR10.0b in 4QFY20.
Current Price INR 1,434
Buy
September 2020
37
 Motilal Oswal Financial Services
CEMENT | Voices
JK Lakshmi Cement
Current Price INR 256
Click below for
Results Update
Buy
Utilization and volume
Sales volume at 1.9mt included 0.3mt clinker sales while consolidated sales
volume stood at 2.07mt.
Clinker production stood at 925kt while cement production was at 1.43mt.
Utilization in Jul’20 stood at 67%, flat YoY.
Demand and pricing insights
The South witnessed higher price hikes in 1QFY21 (on QoQ basis) as compared
to other regions, but price has started softening in Jul’20 (on MoM basis) across
India.
In Jul’20, demand softened in the East due to the monsoons while it has picked
up in the North and West.
Jun-Jul’20 sales volume stood flat YoY.
Rural demand remains strong due to better liquidity on account of several Govt.
initiatives including MGNREGA but it could suffer in the East due to stricter
lockdowns in Chattisgarh and Odisha on account of increasing spread of COVID-
19.
In urban areas, demand from independent house building (IHB) segment has
started picking up in Jul’20 while infra projects continue to suffer due to labor
issues, which are expected to normalize in 3QFY21.
Trade and non-trade average price differential is at INR40-50/bag across regions
while the East has the highest differential of INR70-80/bag.
Sales mix
Trade mix stood at 61%, up from 59% in 4QFY20. Trade mix in the East is higher
than in the North.
Higher clinker sales led to lower realization as compared to the industry.
Lower profitability in the East resulted in lower EBITDA/t as compared to the
industry. EBITDA/t for East is at INR700/t while for the North it stands at
INR1,000/t.
Blended cement sales mix stood at 78% in 1QFY21.
RMC revenue – INR120m while aggregate non-cement revenue stood at
INR290m.
Debt and cash
Standalone gross debt stands at INR15b while net debt is down to INR8.0b from
INR10.0b in 4QFY20.
Cash balance increased to INR7.0b from INR4.5b in Mar’20.
Cost of debt stood at 8.3% p.a.
JKLC plans to repay debts amounting to INR2.0b each in FY21 and FY22.
JKLC availed first moratorium on INR650m debt repayment; however, the
company did not avail the second moratorium.
JKLC expects to receive INR400m of ICDs from a group company and will further
deploy INR400-500m as ICD. Pre-tax treasury yield stands at 9.5% p.a.
Capex
Capex plan is on hold and will be announced in 2QFY21, depending on the
prevailing COVID-19 situation.
New capex in the North has been put on hold. It would have amounted to
INR14.0-15.0b if not for COVID-19.
10MW WHRS at Sirohi has been delayed by 2-3 months due to labor availability
issues and is expected to be commissioned in 2QFY22E.
September 2020
38
 Motilal Oswal Financial Services
CEMENT | Voices
Cuttack grinding unit ramp-up has been adversely impacted by COVID-19 and
has reached 60% utilization level.
No additional land is required for Durg, Sirohi and Udaipur brownfield
expansion.
Other highlights
Incentive for Udaipur plant is available till FY22E.
Engagement with BCG has reached completion and JKLC will take a call on
further engagement once the situation normalizes.
Ultratech Cement
Current Price INR 3,897
Click below for
Detailed Concall Transcript
& Results Update
Buy
Capacity utilization at 65% in July; Retail and rural drive demand
The company resumed operations w.e.f. 20th April 2020 and operated at 46%
capacity utilization during the quarter. It is operating at ~65% capacity utilization
in July.
The Cement market is witnessing strong demand from the Retail market and
rural regions on account of good monsoons and govt. support, which have
improved rural cash flow.
Real estate demand is expected to normalize post Diwali as migrant labor is
expected to return post the agri season.
The company is not facing any labor shortages or logistic issues, and could
rampup utilization in line with demand.
Plants in the eastern and central regions are running at optimum utilization
levels. Utilization is picking up in the northern region, while it remains low in the
western region. Demand in AP and Telangana has been muted.
Expect strong demand from rural and ongoing govt. infra projects, such as
highways and metros, in the post-COVID-19 era.
However, management remains skeptical about demand due to the recent
lockdowns and rising cases of COVID-19.
1QFY21: Operational highlights
In 1QFY21, volumes declined by 32% YoY to 14.65mt and industry volumes by
33%.
The retail volume share increased by 13% YoY. Blended sales were up 11% YoY to
78%.
It also increased penetration in rural markets by 13% YoY. UBS (UltraTech
Building Solutions) contributed 8% to total sales.
Cost of production declined 9% YoY on account of lower logistic, raw material,
and energy costs.
During the quarter, the company booked a one-time expense of INR1.57b as per
the Supreme Court order directing the partial refund of VAT incentives (incl.
interest) received toward the investment in the Aditya Cement plant during
2006–12.
Revenue from White Cement / RMC declined 39%/75% YoY to INR2.5b/INR1.5b.
Fixed cost reduction to continue, but variable cost reduction to pause
The company achieved cost reduction of 5% YoY / 3% QoQ in logistic cost per ton
to INR1,116/t. This was due to the absence of busy-season surcharge (2.5%) and
synergy with acquired plants (2.5%). Sequentially, it benefitted from lower lead
distance. However, it expects a rise in diesel cost to impact logistic cost in
2QFY21.
It achieved 11% YoY (flat QoQ) cost reduction in power and fuel costs per ton on
lower pet coke cost and higher pet coke usage. Average pet coke price was down
September 2020
39
 Motilal Oswal Financial Services
CEMENT | Voices
26% YoY to USD70/t, whereas pet coke usage stood at 77% (1QFY20: 59%). Spot
prices of pet coke were at USD75/t (nearly flat YoY).
Century assets: EBITDA/t of >INR900; cost reduction of INR105/t QoQ
The Century plant’s capacity utilization was at 70% over May–Jun’20 (80% in
4QFY20).
Pet coke usage increased to 73% (69% in 4QFY20), while power consumption
reduced by 3% (v/s 4QFY20).
In 1QFY21, cost declined by INR105/t QoQ. As a result, EBITDA/t stood at
>INR900/t.
Capex guidance increased; deleveraging to continue
The company has increased its capex guidance to INR15b for FY21 from an earlier
guidance of INR10.0b (INR17b in FY20). Of INR15b, ~INR7b is toward
maintenance capex, INR1.2b for the Bara grinding unit, and another 1.2b for the
Bicharpur coal block.
Consol. net debt declined further by INR22b to INR146.5b in the quarter (from
the peak of INR221b in Mar’19). This was achieved through FCF of INR22b during
the quarter.
Net debt/EBITDA reduced to 1.7x in Jun’20 from 3.0x in FY19.
Working capital release stood at INR7.9b during the quarter. Management does
not expect further release of working capital.
September 2020
40
 Motilal Oswal Financial Services
CONSUMER | Voices
CONSUMER
The sector saw broad-based recovery toward the latter part of 1QFY21, which has sustained for most
companies in Jul’20 and early-Aug’20 as well. Overall, rural demand held up well during the quarter and the
outlook is getting even better with good progress of the monsoons. Even among urban centers there is a big
divergence between performance as well as recovery outlook for metros, non-metros and Tier-1/2 cities.
Performance and outlook of in-home food consumption categories were exceptionally strong in 1QFY21 and
the same was the case for cleansing and herbal products. Down-trading is a fear called out by most
companies, which along with slower pace of recovery for discretionary products, means that premiumization
is unlikely to be a material factor for the full year. On the other hand, benign material cost outlook and strong
focus on cost savings are likely to shore up margin outlook for the rest of the year particularly as sales declines
are likely to be lower from 2QFY21. Channel inventory days are also declining sustainably as companies are
culling their tail-end products.
Demand Environment
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook FY21
Asian Paints
The demand outlook for rural and lower tier cities is good.
The management is looking at demand on a QoQ basis. The
predictability of festive season demand is weak currently.
No change was seen in pricing in 1QFY21, and change is not
likely in 2QFY21 either.
APNT is looking at sourcing and formulation efficiencies on
material costs for gains from a longer term perspective.
Britannia
Dabur
Godrej Cons.
Hindustan
Unilever
Britannia reckons it is ahead of the market owing to execution
efficiencies.
BRIT rationalized A&SP spend for the quarter. ~200bp of the
460bp reduction in other expenses to sales was on account of
the A&SP reduction. 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.
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.
The channel pipeline has been corrected to 16 days from 20–
21 days over the last year despite NPD additions.
Management believes a further pipeline reduction by another
4–5 days may be possible.
Some inflation is seen 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 this year.
While rural forms 30% of India sales, GCPL believes it has the
SKUs to take advantage of better-than-expected rural demand
going forward.
Expect sequential gross margin improvement as the mix
improves and due to some price action by the company on
Soaps.
A sequential uptick in ad spends is expected in the Sep’20
quarter.
Rural demand outlook – A good harvest, government spend,
and a good monsoon are leading to higher growth.
With more lockdowns, the company advised caution on
extrapolating the growth reported in June. At the same time,
a heightened sense of hygiene is likely to persist.
HUVR’s adverse portfolio mix for the quarter impacted gross
margins. The mix would not be as bad going forward.
COVID-19-related sanitization costs would be lower going
forward, and some of the GSKCH integration would also be
lower.
Demand is still weak in metros and tier 1 cities such
as Ahmedabad and Surat (~45% of total sales), but
has recovered in tier 2, tier 3, and tier 4 markets.
Western India demand is weaker than in the rest of
the country.
Both automotive and industrial coating demand
remains very weak, although the former seemed to
have recovered a bit in June.
Industry growth is healthy owing to the higher in-
home consumption of biscuits amid lockdown.
Expect rural growth to be higher going forward. The
spread of COVID-19 in these geographies has not
had any impact on sales.
The Healthcare segment (despite it being off-season)
grew 29.2% YoY, with over 50% growth seen in
health supplements such as Chyawanprash and
Honey (with sharp improvement in market shares as
well). OTCs also reported 30% growth, with Honitus
and NPDs doing very well.
Rural is reporting better sales than urban.
HI grew 27% YoY in the quarter, aided by health
awareness and a good season.
80% of the portfolio (non-discretionary) has grown
at 6%. On the other hand, discretionary businesses
such as Skin Care, Cosmetics, and Deodorants (15%
of the portfolio) declined 45% YoY in the June
quarter.
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.
September 2020
41
 Motilal Oswal Financial Services
CONSUMER | Voices
Marico
Pidilite
UBL
MRCO is confident of growth for the remainder of the year,
unless the COVID-19 situation worsens significantly.
MRCO targets flattish sales for the full year.
Expect copra prices to see mild deflation from a full-year
perspective.
Operating margins are likely to be over 20% for the rest of the
year.
The New Hygiene portfolio would be INR800m–1b for MRCO
in FY21 (Veggie-Clean, Sanitizer, Home and Travel Protect,
etc., launched recently).
Foods – INR3–3.5b sales are targeted in FY21 and INR5b in
FY22. They were at INR2b in FY20. Margins in Foods would
also increase despite remaining lower than the overall
portfolio.
Near-term demand appears uncertain.
Consumers remain reluctant about allowing labor into their
house. The company is providing certifications for contractors,
stating that they are following all the prudent measures.
Recovery in confidence, however, is being seen gradually.
VAM price is currently at USD650–700 due to low demand.
Management does not believe these low price levels are
sustainable in a post-pandemic environment. However, the
near-term material cost outlook remains soft. Going forward,
gross margins may be similar to 1QFY21 levels.
UBBL expects demand recovery to take time. Karnataka, a
large state in terms of demand, has seen multiple lockdowns.
Restrictions are being imposed and repealed in various states
even in 2QFY21, which is creating further volatility.
Price increases have been taken in free pricing markets such
as Karnataka (INR5 per bottle) and Maharashtra (INR10 per
bottle).
Capex would be close to INR2b in FY21, depending on how
things pan out.
The business saw smart recovery in May and June
(~3% sales growth combined), which continued in
July.
Rural grew 120% of the FY20 run-rate, while urban
growth was on par with FY20 levels.
Recovery was seen in June and July. However,
management was unable to quantify how much of
this was pent-up demand.
The C&B business is seeing a swifter recovery,
particularly in the rural areas.
Retail construction chemicals are also recovering
well.
Demand for beer was impacted more than demand
for spirits on account of: (1) beer being bulkier to
carry than spirits, (2) limited refrigeration capacity in
households, and (3) summer being the peak season
for beer, but not for spirits.
Asian Paints
Click below for
Results Update
Performance and outlook comments
May and June witnessed improving demand.
Demand is still weak in metros and tier 1 cities such as Ahmedabad and Surat
(~45% of total sales), but has recovered in tier 2, tier 3, and tier 4 markets.
Western India demand is weaker than the rest of the country.
After a near-washout in April, May demand was down only 20% YoY, while June
demand rose to the double digits YoY in terms of volumes.
Demand recovery was driven by: (a) the ‘safe painting’ campaign, which gave
customers confidence, and (b) a campaign to paint ahead of the monsoons.
The demand outlook for rural and lower tier cities is good.
Channel normalization has also played some part in driving sales growth, but
was not the most significant part.
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 demand impact in the affected pockets.
The management is looking at demand on a quarter-to-quarter basis. The
predictability of festive season demand is weak currently.
Other businesses
Both automotive and industrial coating demand remains very weak, although
the former seemed to have recovered a bit in June.
Demand recovery for Sleek (kitchen equipment retail) and Ess Ess (bathroom
fittings) has not been as good as for the Decorative Paints business.
42
Current Price INR 2,035
Neutral
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Margins and pricing
Decline in gross margins happened sequentially despite input prices also falling
sequentially. Margin decline could be on account of deterioration in the mix.
No change was seen in pricing in 1QFY21, and change is not likely in 2QFY21
either.
Other expenses declined sharply due to control discretionary spend.
Other points
Waterproofing margins in the retail business are comparable with those of
Decorative Paints. However, institutional business margins are lower in
Waterproofing.
APNT is looking at sourcing and formulation efficiencies on material costs for
gains from a longer term perspective.
The per capita consumption of paints in India is half of that in developed
countries. Infrastructure development would be a big boost to improve this
metric.
Britannia Inds
Click below for
Results Update
Current Price INR 3,771
Neutral
Factors that aided sales growth
BRIT successfully pursued rural sales as urban sales slowed to some extent.
Rural contributed 37% to sales.
The company also managed to resume manufacturing earlier than peers.
While direct reach fell by over 100k outlets due to the lockdown, the company
has managed to bring its reach back to pre-COVID-19 levels.
Industry growth is also very healthy. The management reckons BRIT is growing
ahead of the market owing to the execution efficiencies.
Volume growth was 21%, with the remaining growth attributed to the mix and
price increase. BRIT was selling more premium products, especially in the first
two months of 1QFY21.
Costs
BRIT rationalized A&SP spend for the quarter. ~200bp of the 460bp reduction in
other expenses to sales was on account of the A&SP reduction.
The A&SP reduction is not sustainable going forward.
BRIT has renegotiated contracts wherever possible.
Overall, material cost inflation of 3% YoY was witnessed in 1QFY21. Deflation of
flour and milk and very low inflation in sugar costs were also seen during the
quarter.
BRIT would continue its efforts for cost savings going forward.
New launches, adjacencies, and international business
BRIT launched ‘Lassi’ in some states under the ‘Winkin’ Cow’ brand in 1QFY21.
It also launched Layer Cake in eastern India, the largest market for cakes.
Cheese did very well during the quarter. On the other hand, demand for Milk
Shakes was affected as this is more discretionary in nature.
Most markets for its international business expanded well.
In the FY20 Annual Report, BRIT indicated that 2% of sales were from new
categories such as Milk Shakes and Cream Wafers, with the latter category
seeing growth recently.
September 2020
43
 Motilal Oswal Financial Services
CONSUMER | Voices
ICDs outstanding and balance sheet
Group ICDs – GoAir has repaid its ICDs to some extent, but group ICDs remained
at INR6b, broadly in line with Mar’20 quarter levels.
BRIT would incur capex for augmentation in Orissa and the setup of new plants
in Orissa, Tamil Nadu (TN), and Uttar Pradesh (UP). Capex over the next two
years is expected to be INR7b; additional capex is forecast for Dairy as well.
UP is now the second largest market for BRIT.
Dabur
Click below for
Detailed Concall Transcript
& Results Update
COVID-19 acting as catalyst for further change
COVID-19 is acting as a vehicle for rapid change within the organization.
Cost optimization and new category additions, and lower price points to plug
erstwhile gaps are being implemented.
NPD contributed 5–6% to sales in 1QFY21, a very good performance. The
fearless attitude on innovation in the past year is turning fruitful. 3–4% steady-
state NPD contribution is the medium term-target (NPD was 1% of sales a year
ago).
Newly launched Dabur Sanitize posted INR900m sales in 1QFY21.
Dabur continued to gain share even in categories such as Shampoo, Home Care,
and Hair Oils, which declined for the quarter.
7–8% secondary sales growth was reported in June, and similar growth in July as
well. Recovery has been witnessed in all the categories that were impacted in
1QFY21, while Healthcare segment sales remain extremely healthy.
Rural sales grew 1%, while urban declined 8–9% for the quarter. Expect rural
growth to be higher going forward. The spread of COVID-19 in these
geographies has not had any impact on sales.
Nielsen expects 12.5% growth in rural going forward v/s 1% negative in urban.
Additional data points on improvement underway – Distribution technology,
analytics, costs, launches
The channel pipeline has been corrected to 16 days from 20–21 days over the
last year despite various NPD additions. Management believes further pipeline
reduction by another 4–5 days may be possible, thus improving distributor ROIs
even more.
Sales and operation planning meetings are happening every week instead of
every month, enabling better flexibility.
Project Samriddhi – The cost optimization program of INR1–1.2b is likely to be
implemented this year.
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.
E-Commerce contribution stood at 5.6% of sales for the quarter. This is likely to
be 5% for the full year as well, especially with exclusive e-commerce products.
Segmental performance
The Healthcare segment (despite being in the offseason) grew 29.2% YoY, with
over 50% growth in health supplements such as Chyawanprash and Honey (with
sharp improvement in market shares as well). OTCs also reported 30% growth,
with Honitus and NPDs doing very well.
44
Current Price INR 508
Buy
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
HPC declined 14.9% YoY.
Foods (mainly juices) declined 34.4% YoY.
International business declined 21.6% for the quarter, particularly led by MENA.
Recovery has subsequently been seen in Turkey, sub-Saharan Africa, and the US.
Dabur continued to gain market share across key categories, such as
Chyawanprash, Toothpaste, and Packaged Juices & Nectars, during the quarter.
Costs and margins
Some inflation is being witnessed in Ayurvedic product costs. Expect 3% inflation
in the Agri product basket as well.
International business – MENA, the largest and most profitable geography,
declined more sharply, negating improvements in the standalone margins.
Dabur does not see gross margins being at risk for the rest of the year despite
improving contribution from the low-margin Foods business.
Dabur would use the gains from the Samriddhi cost-savings program to boost ad
spend.
Emami
Click below for
Detailed Concall Transcript
& Results Update
Current Price INR 383
Buy
Demand environment
Performance in Apr-May’20 was impacted due to the lockdown.
Domestic secondary sales decline was lower at 15% in 1QFY21.
Domestic business sales declined 26% YoY in 1QFY21, International business
sales declined 18% and Institutional business sales declined 38%.
Green-shoots visible in Jun’20 (high-single digit growth). Double-digit growth
expected in Jul’20.
Health and Hygiene portfolio (43% contribution) grew 29% YoY, while Other
Brands (57%) declined 44%.
New launches contributed 5% to domestic revenues in 1QFY21 (3% contribution
from Sanitizers and 2% from other products).
Overall, volumes declined 28% YoY in 1QFY21.
Buyback of shares
The board has approved share buyback from the open market at a maximum
price of INR300/ share up to INR1.92b as permitted by the Companies Act and
SEBI on 19th Mar’20. Buyback was completed on 7th Jul’20 with 9.42m shares
purchased at an average price of INR203.78.
Share capital post buyback reduced from INR453.9m to INR444.5m.
Consequently promoter stake increased from 52.74% to 53.86%.
Material costs and EBITDA margin
Margins increased despite lower sales due to stringent cost control measures
and benign raw material prices.
Material cost is likely to remain soft going forward.
Expect INR500-600m worth of reduction in costs in FY21.
Confident of achieving at least 26% margins but it could improve further if
momentum of Jun-Jul’20 continues.
Guidance
Expect NPD contribution to be at 5.5% of sales.
Plans to introduce new products in the Home and Hygiene segment.
Expect 20-30 new launches.
Going ahead amortization should reduce to INR250m/quarter.
45
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Completed Cement stake sale – expect promoter pledge to decline to 50% by
FY21 from 56% currently.
Expect positive growth in FY21 (in-line with last year), provided the COVID crisis
does not heighten.
Effective tax rate to be at ~20% on consolidated basis.
Ad-spends as % sales expected to be maintained at 17.5-18%.
Capex plans of INR800m in FY21.
Does not expect price increase of more than 1.5% in FY21.
Domestic business
In Jul’20, growth was led mostly by Zandu and the Pain Management portfolio.
Chyawanprash sales have increased 7x YoY. Honey sales have risen 5x.
Expected focus to increase in the Healthcare segment.
Home and Hygiene segment – Expect market to triple over the next three years,
and hence, there exists a huge opportunity to grow.
Pancharishta is growing in double digits.
Boroplus growth is led by new launches i.e. sanitizer in particular (inorganic
growth).
Zandu - Seeing 30% growth and plans to increase ad-spends here.
Pain management – Good growth was driven by increase in consumption and
consumers switching to Ayurveda products from painkillers.
Healthcare Range – contribution to increase to 10% from 8% currently.
International
Business performed well in Jul’20 with Crème 21 showing significant growth.
Hygiene products introduced in key geographies.
Planned 3P manufacturing in the Middle East and Sri Lanka.
Other points
E-commerce grew 108% but GT and MT got impacted.
Stocks at distributor level reduced to 19-20 days in Jul’20 from 26 days in Jun’20
and 27-28 days in Mar’20.
Secondary sales were higher in Jul’20.
Credit in domestic business has declined to 4-5 days from 13-14 days in Mar’20.
The company has taken price reduction in Honey.
Fair & Handsome is still under stress.
Rural has grown in double digits in 1QFY21. Wholesale channel was not in stress
and is growing, but on the other hand, retail and MT are declining.
Contribution of sachets is in the range of 32-33%.
Margins in Healthcare are slightly better.
New Launches
BoroPlus Advanced Anti Germ Hand Sanitizer, BoroPlus Antiseptic Moisturizing
Soap, BoroPlus Aloe Vera Gel, Zandu Ayurvedic Hand Sanitizer, Zandu Ayush
Kwath Powder, Zandu Single Herb Range.
E-comm specific launches: Zandu Pachan Vati (Digestive Stimulant), Zandu
Sandhigata Pida har Vati (Joint pain reliever), Zandu Amla pitta harvati (Acidity
Regulator), Zandu Draksha Pachan Churna, Zandu Papaya Leaf Extract.
International business: Launched hygiene products under Creme 21 Gold
Turmeric and BoroPlus brands.
September 2020
46
 Motilal Oswal Financial Services
CONSUMER | Voices
Godrej Consumer
Current Price INR 686
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Update on segments/ geographies
Household Insecticides (HI), Hygiene and Value for Money (VFM) products (85%
of sales) grew 9% in 1QFY21.
Indonesia and India grew 5% YoY each for the quarter.
GAUM has started reporting better growth in recent months.
Rural is reporting better sales than urban. While rural forms 30% of India sales,
GCPL believes that they have the SKUs to take advantage of better expected
rural demand going forward.
Primary and secondary sales for the quarter were roughly the same. Inventory
at distributor level (end-Jun’20) was at a lower level than the past 18-24
months’ average.
HI sales were strong, Soap sales surprisingly weak
HI grew 27% YoY in the quarter aided by health awareness and good season.
There has been an impact on illegal incense sticks because of supply chain issue.
Duty on Bamboo sticks imported from China and Vietnam has increased from
10% to 25% affecting the illegal trade.
Soap sales surprisingly declined 2% YoY (in a period where we expected sales to
improve due to the favorable environment).
Costs and margins
Hair color is the highest gross margin category for GCPL. Sharp decline in Hair
color sales affected gross margin. Input costs for soaps were also higher.
Expect sequential gross margin improvement as mix improves and due to some
price actions by the company on soaps.
A sequential pickup in ad-spends is expected in the Sep’20 quarter.
Other points
Africa – Dry hair competitors have significant supply chain issues owing to
absence of imports. Thus, performance should get a tad better going ahead.
HI is also being introduced in Africa now.
Hindustan Unilever
Current Price INR 2,159
Click below for
Detailed Concall Transcript &
Results Update
Buy
Key highlights
HUVR believes it has made good progress over the last few months, with
satisfying results. Its dynamic response to a changing environment has
supported its performance.
The merger with GSKCH could not have come at a better time from the
perspective of introducing an in-home consumption and immunity building
product. It witnessed sound growth of 5% v/s the corresponding quarter last
year.
8% volume decline was reported on a like-to-like basis on 7% sales decline.
80% of the portfolio (non-discretionary) has grown at 6%.
HUVR was at a 70% operational level in April, which was better in May.
June sales growth was in the mid-single digits, partly due to the normalization of
pipelines; if not for this, growth would likely have been flattish.
With more lockdowns the company advised caution on extrapolating the growth
being reported in the month of June. At the same time, a heightened sense of
hygiene is likely to persist.
47
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Rural demand outlook – A good harvest, government spend, and a good
monsoon are leading to higher growth.
Urban growth has also been affected by the lockdown.
HUVR maintains that rural is witnessing green shoots and is not yet a fullfledged
revival even as performance vs. urban is likely to be better.
Impact on discretionary businesses
Skin Care, Color Cosmetics, and Deodorants (15% of portfolio) declined 45% YoY
in the June quarter. Skin Care showed signs of improvement in June and is likely
to do 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.
Glow & Lovely (formerly Fair & Lovely)
HUVR is highly confident of not only retaining existing customers but also
attracting new ones.
Despite the repositioning more than a year ago, growth has been healthy.
Other points
Production capacity was rapidly increased by 100x in Sanitizers and by 5x in
Hand Washes to meet demand.
The base business reported a 170bp EBITDA margin decline, while GSK added
60bp to margins, implying 110bp margin decline on a merged basis.
HUVR’s adverse portfolio mix for the quarter impacted gross margins. The mix
would not be as bad going forward.
GSKCH – Since there are no royalty costs now they were able to offset the
transition costs in the GSKCH business.
COVID-19-related sanitization costs would be lower going forward, and some of
the GSKCH integration also be lower.
HUVR is taking price increases in Tea due to higher commodity costs. In
Detergents, the company is looking to pass on the benefits of lower crude costs
to boost growth.
The number of SKUs is still at 50% of pre-COVID-19 levels, but the company is
looking to prune 20% of the tail anyway.
Special Dividend
The Scheme of Arrangement for the transfer of balance in General Reserves of
INR21.9b to the P&L A/c was approved by its Shareholders in 2016.
Subsequently, the scheme was sanctioned by the Hon’ble National Company
Law Tribunal, Mumbai Bench – vide its order dated 30th August 2018. The Board
approved the distribution of the Reserves to its Shareholders by means of a
Special Dividend of INR9.50/share.
Jyothy Labs
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 143
Neutral
Positive sales growth in 1QFY21
Positive growth due to (a) agility – focus on hygiene products, (b) flawless
execution, and (c) financial prudence.
Jul’20 is also in the positive category in terms of growth.
Rural demand is positive due to good monsoons and government support.
Manufacturing is near pre-COVID levels.
Higher sales of lower price low unit pack (LUP) products aided volume growth,
being higher than sales growth.
48
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Larger pack sales were more an urban phenomenon.
The company has refrained from giving sales growth outlook for the year given
the uncertain demand environment.
Key categories
Good household incense sticks and Hygiene products demand helped. For JYL, it
is not a key season for HI.
As customers are at home, dish-washing product usage is also healthy.
Fabric care sales were down 23%. Some recovery was seen in Jul’20 relative to
1QFY21.
Costs and margins
Low fabric wash (post-wash) sales led to flattish gross margins despite lower
material costs YoY.
Soft input prices would support gross margins, going forward.
Ad-spend decline of 40% YoY was higher than peers. Trade offers were also low
during the quarter.
Maintained 15-16% margin guidance despite higher margins in 1QFY21.
Other points
40% sales come in from rural markets.
Marico
Current Price INR 367
Buy
Click below for
Detailed Concall Transcript
&
Results Update
Recovery is happening well
The business has seen smart recovery in May and June (~3% sales growth
combined), which continues in July. MRCO is confident of growth for the
remainder of the year, unless the COVID-19 situation worsens significantly. This
is despite a higher base in 1QFY20.
Market share gains were posted in 90% of the portfolio on a MAT basis. The
quarterly YoY trend is even higher.
Rural grew 120% of the FY20 run-rate, while urban growth was on par with FY20
levels.
MRCO targets flattish sales for the full year.
Operating margins are likely to be over 20% for the rest of the year.
Key products and channels
Parachute and Saffola are doing well. The ‘untouched by hand’ campaign for
Parachute has received a good response. MRCO has taken a 5–6% promotional
pricing cut in Parachute and believes market share gains (62% currently) from
both organized and unorganized players may be highly significant and, more
importantly, permanent. The company launched Saffola Honey, with high purity.
Even VAHO sales were at 94% of prior-year levels for the recent month. The Hair
Oils category is recovering. Only the small Discretionary portfolio is seeing slow
offtake.
The CSD channel declined by 48% YoY in 1QFY21. Modern trade sales are
recovering, but expected to be sub-optimal in the near future. The kirana
channel is expected to continue to do well.
Owing to an increase in direct distribution (currently 0.9–1m), MRCO now has a
critical mass of portfolio, particularly in VAHO with Sarson (mustard), in addition
to Shanti Amla.
E-Commerce was 7% of sales in 1QFY21.
September 2020
49
 Motilal Oswal Financial Services
CONSUMER | Voices
Other points
Ad spends were at 90% of normal levels for the core portfolio. Cuts were
implemented on non-core products. The remainder of the year would also
witness a 100–150bps decline YoY.
The New Hygiene portfolio would be INR800m–1b for MRCO in FY21 (Veggie
Clean, Sanitizer, Home and Travel Protect, etc., launched recently).
Foods – INR3–3.5b sales are targeted in FY21 and INR5b in FY22. They were at
INR2b in FY20. Margins in Foods would also increase despite remaining lower
than the overall portfolio.
Expect copra prices to see mild deflation from a full-year perspective.
Cost savings are targeted in all areas, barring innovation, safety, and employee
costs (jobs and salaries).
Among the newer categories, virgin coconut oil, green coffee, and Coco Soul
offer promise.
Nestle India
Current Price INR 16,324
Click below for
Results Update
Neutral
In the past three months, the company has witnessed volatility, uncertainty, and
stresses never imagined nor experienced before. This has led to disruptions
across the value chain, in turn impacting results. However, NEST built back the
momentum strongly as the quarter ended.
On average, factories were operating at 75% capacity during the quarter.
The company’s eight factories have restored their manufacturing capabilities
almost to pre-COVID-19 levels.
The e-commerce channel grew by 122% in the quarter and now contributes
3.6% to domestic sales.
Demand in all out-of-home consumption channels declined sharply due to the
lockdown.
EVERYDAY Dairy Whitener, Nestlé a+ Milk, the portfolio of other milk-based
roducts, NESCAFÉ Classic, and NESCAFÉ Sunrise performed well in 2QCY20.
MAGGI also witnessed solid growth toward the end of the quarter following
initial supply constraints.
Page Inds
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 18,443
Neutral
Key highlights
Volumes declined by 69% in 1QFY21.
Operations resumed in the last week of May. There were only 33 working days
with the changing lockdown rules in 1QFY21.
Things are now reviving, and a positive pull is seen from the market. Aug’20
sales were at par (or a little higher) v/s Aug’19 sales.
Supply-side issues are now mostly resolved.
PAG introduced face masks and has received good traction. Customer
acceptance and feedback have been good.
The Jockey Junior business did well in 1QFY21.
The Athleisure brand is on a growth trajectory, driven by a higher number of
consumers being homebound during the lockdown.
Average Selling Price grew by 12% owing to higher athleisure sales.
Innerwear and outerwear both have similar gross margins.
50
September 2020
 Motilal Oswal Financial Services
CONSUMER | Voices
Competition has done well as they are stronger in smaller cities, whereas PAG’s
business comes primarily from the Top 6 metro cities (including Ahmedabad),
which saw 12.6% decline in contribution.
Management does not expect competition taking away market share.
Opex has come down significantly due to the deferment of A&P and royalty
(well below FY20 levels) and the cutting of discretionary spends.
The festival season is expected to see good demand.
Channels and inventory
Channel inventory has reduced. Secondary sales were higher by 18% in 1Q.
Both exclusive brand outlets (EBO) and multi-brand outlets (MBO) were doing
well. But, EBO fared better due to better opportunity for social distancing in
these stores and repeat customers knowing what to buy.
LFS sales are still weak as footfall at malls is low. This has been offset by e-
commerce sales, which are now in the high single / double digits from 2–3%
earlier and could sustain at these levels.
Around 60% of distributors are on ARS (automated replenishment system),
based on which the stock gets refilled every Tuesday.
All of the distributors dealing in outerwear are now on ARS, and dealer
inventory is declining due to this.
Each SKU is stocked within 30 days as per the store’s demand pattern; hence,
this would not bring down inventory days, but would optimize stocking.
It started with good inventory over May–June; July and August saw much better
demand than 1Q.
Everyone in the value chain is acting prudently about stocking up due to ongoing
uncertainty.
Other points
PAG paid all its laborers and employees fully during the lockdown, resulting in
lower labor absorption.
Cash and equivalents have increased due to better cash management. Net
working capital has reduced due to good collections from debtors.
It has not borrowed any funds during this crisis period.
PAG has put capex on hold up to Jan’21.
Contract manufacturing, at 30% of last year, faced manufacturing issues in the
initial weeks post the start of operations in June (due to labor-related issues),
but is now nearing 30% levels.
An INR107m provision was taken due to slow-moving goods, which may be
reversed later.
A price hike was taken only in products below the EBITDA-level threshold.
Pidilite Industries
Current Price INR 1,488
Click below for
Results Update
Neutral
Outlook
Recovery was witnessed in June and July. However, the management was
unable to quantify how much of this was pent-up demand.
Pipeline inventory remains similar to end-Mar’20 levels.
Near-term demand appears uncertain.
International business, particularly in SAARC, was also affected.
September 2020
51
 Motilal Oswal Financial Services
CONSUMER | Voices
Normalcy would resume once the pandemic situation comes under control and
the consumer has oney in his pockets once again. Consumers remain reluctant
about allowing labor into their house. The company is providing certifications
for contractors stating that they are following all the prudent measures.
Recovery in confidence, however, is being seen gradually.
Manufacturing and store openings are at 80% of pre-COVID-19 levels, but the
management refrained from commenting on whether sales have also recovered
at anywhere near the same level.
Recovery has been strong wherever the lockdown is being repealed.
There has been a significant increase in the use of digital technology to connect
with channel partners and end users.
Segmental outlook
The C&B business is seeing a swifter recovery, particularly in the rural areas.
Rural and small towns in India constitute 30% of domestic sales.
Retail construction chemicals are also recovering well.
The B2B business in Construction Chemicals continues to be negative.
Domestic subsidiaries Nina and Cipy struggled in 1QFY21, and their outlook
remains unclear.
Material and other costs
VAM price is currently at USD650–700 due to low demand. Management does
not believe these low price levels are sustainable in a post-pandemic
environment. However, the near-term material cost outlook remains soft.
Consumption cost for RM was ~USD800 for 1QFY21, against USD925 in 1QFY20.
Going forward, gross margins may be similar to 1QFY21 levels.
Other points
Capex in a normal year is at 4–5% of revenue, and this would continue in the
long term. However, management deemed it difficult to guide for the current
year due to the rapidly changing business environment. JVs also impact capex at
the consolidated level.
Tata Consumer Products
Current Price INR 548
Click below for
Detailed Concall Transcript &
Results Update
Buy
India Beverages (Tea and Coffee)
India Beverages business (tea and coffee) recorded revenue growth of 8% and
volume growth of 4% YoY.
Apr’20 sales were significantly impacted, followed by high double-digit growth
in May-Jun’20.
Increase in profits was due to better price realization, efficient management of
commodity costs and lower discretionary expenditure.
Premium offerings – Tata Tea Gold delivered double-digit growth. Tata Tea Agni
and Spice Mix continued its robust growth momentum.
Gained market share in India tea business from most competitors on the back of
better procurement and better distribution (compared to peers).
Sharp increase in North India Tea prices during 1QFY21 was a result production
being impacted by the lockdown and excessive rains (flooding) in Assam.
Tea prices surged 50% in the last few months. It is believed to have peaked and
is expected to decline (as crop harvest would come to market). Focus would be
to achieve profitability rather than volume growth.
September 2020
52
 Motilal Oswal Financial Services
CONSUMER | Voices
India Food business
India Food business recorded revenue growth of 19% and volume growth of 8%
YoY.
High double-digit growth was achieved in each month of the quarter, despite
operational challenges.
Salt revenues grew 11%. Record sales volumes were achieved for Tata Salt in
May-Jun’20. Profits increased due to better gross margin, lower trade spend and
lower discretionary expenditure.
TCP faced supply-chain issues during the early days of the lockdown. However,
supply-chain is now robust.
In a bid to reduce multiple layers in the distribution network, TCP decided to
remove consignee agents/distributors and directly deal with stockiest.
NourishCo
Revenue decreased by 34% YoY to INR460m in 1QFY21.
TCP completed acquisition of the entire stake of PepsiCo in NourishCo and rights
over the ‘Gluco Plus/Gluco+’ brand at a total consideration of INR290m.
Volumes declined due to drop in on-the-go consumption due to COVID-19.
Total revenues in May-Jun’20 bounced back to ~85% of last year levels.
New organization structure is in place with Mr. Vikram Grover as MD and CEO of
NourishCo.
Tata Coffee (incl. Vietnam)
Top line grew 12% (10% in constant currency terms) led by Vietnam and the
Plantations business.
Plantations business grew 17% (+18% volume growth). Highest-ever sales of
coffee in a quarter.
Overall extraction business grew 14% (+6% volume growth) led by Vietnam
business.
India extraction business declined 30% in value terms being adversely impacted
by the reduced exports on account of COVID-19.
Vietnam plant is now operating at ~87% of its production capacity and has
turned EBIT positive.
Steep decline in supplies to domestic out-of-home business. Demand for instant
coffee continues to face headwinds due to the COVID-19 impact.
JV: Starbucks
Despite challenges ~60% stores have now re-opened.
Revenue is growing every month, with Jun’20 revenue at ~27% (v/s last year).
Take-away contribution to revenue currently stands at 82%, whereas delivery
stands at 18%.
Opened India’s first Starbucks Drive-through store at Zirakpur near Chandigarh.
UK Business
Strong revenue growth of 12% with volume growth of 7%.
Discounter channel remains the biggest growth driver, with growth across all
key accounts.
The OOH (out-of-home) channel is growing despite the lockdown on the back of
DEFRA supply (government food packs).
Good Earth Teas and Kombucha launched in the UK should create new tea
occasions and beverages for a new generation of consumers.
September 2020
53
 Motilal Oswal Financial Services
CONSUMER | Voices
USA Business
Revenue grew 37% with underlying growth (constant currency) of 26%. Volumes
grew 27%. Growth is seen across both branded/private-label coffee business.
Tea (excluding Empirical): Strong revenue growth of 25% in value and 26% in
volume terms.
Canada business
Strong revenue growth of 32% and volume growth of 28%, largely driven by
pantry loading and retailer re-stocking.
Growth continues to outpace the category –both Regular and Specialty.
Improved profits driven by sales and reduced overheads.
Synergy
TCP completed organization structure and operating model to enable profitable
growth across multiple categories.
On track to realize initial synergy estimates of 2-3% of combined India branded
revenues over the next 18-24 months.
In the near term, focus is to expand into adjacent categories F&B. Post this, the
company can focus on new product developments within the existing product
portfolio and new launches.
COVID-19
All factories and plantations are now operational. 60% of Starbucks stores are
operational across India.
As part of the ongoing risk management, TCP secured its raw materials and
packaging supply chains.
Others
Currently TCP is the second largest branded tea player in the world.
TCP is already listed with Jiomart and supply chain of the company is robust to
meet Reliance Jiomart’s requirements.
Debt: Currently net cash of TCP stands at ~INR20b with gross cash at INR30b.
The company’s long-term borrowings are due to loans in Vietnam and for Eight
O’clock, which are at very low interest rate.
Overall spending on advertisement and sales promotion would be robust. TCP
does not plan to cut down on ads and promotional spends.
TCP aims to become a complete FMCG entity from an F&B company now. TCP
plans to expand to adjacent product portfolio in the near term. Over the long
term, it plans to branch out to newer categories. The company’s focus will be to
maintain strong RoCE rather than improving sales alone.
United Breweries
Current Price INR 1,060
Click below for
Results Update
Sell
Operating environment
Volumes were down 77% YoY in 1QFY21, with Jun’20 volumes down 57% YoY.
Among the states that announced sharp increases in excise duty, excise has
been reduced only in Delhi and Orissa.
Net debt increased by INR1.2b over Mar’20 levels (~14% increase in percentage
terms).
UBBL expects demand recovery to take time. Karnataka, a large state in terms of
demand, witnessed lockdown.
Restrictions are being imposed and repealed in various states even in 2QFY21,
which is creating further volatility.
September 2020
54
 Motilal Oswal Financial Services
CONSUMER | Voices
Market share has been flattish in 1QFY21.
Reactions worldwide to the opening up of bars and restaurants have been
mixed given the volatile COVID-19 environment.
Beer affected more than spirits
Demand for beer was impacted more than demand for spirits on account of:
Beer being bulkier to carry than spirits
Limited refrigeration capacity in households
Summer being the peak season for beer, but not for spirits
Margins and costs
A weak state mix led to sharp gross margin decline despite soft raw material
costs. Barley costs are down 10% YoY.
On-trade has more premium sales. Hence, the sales mix was affected to some
extent due to the lack of on-trade sales.
Price increases have been taken in free pricing markets such as Karnataka (INR5
per bottle) and Maharashtra (INR10 per bottle).
There is a higher proportion of new bottles currently as on-trade is closed.
There was no inventory write-off due to expiry. This was unlike 4QFY20.
Depreciation was lower due to single-shift manufacturing in 1QFY21.
Balance sheet and capex
Capex would be close to INR2b in FY21 depending on how things pan out.
Working capital is under control on a sequential basis.
United Spirits
Current Price INR 547
Neutral
Click below for
Detailed Concall Transcript &
Results Update
Performance and outlook
During 24th Mar’20 to 3rd May’20, there was a complete ban on manufacturing
and sales of alcohol.
80-85% of off-trade outlets are now operational, although some are only open
for home delivery in cities like Mumbai.
On-trade is important for P&A and since they were closed, P&A was affected
more than the ‘Popular’ segment.
Factories were fully operational by end-Jun’20, but the second wave of localized
lockdowns in Jul’20 has affected both manufacturing and retail.
Across the board tax increases are also a deterrent to performance. Only Delhi
and Odisha have rolled back the hikes.
Impact of tax increases will be felt even more in the subsequent quarters.
Online delivery is still at a very nascent stage.
Sentiment is improving but cannot be extrapolated given the volatile situation,
particularly for the alcohol business in India.
Margins impact and outlook, state government delays
Impact of INR210m obsolescence of inventory in the quarter affected gross
margin by ~150bp.
Other operating income was also affected by the sharp dip in franchise income,
which additionally impacted gross margin by 160bp. Franchise income stood at
INR100m in 1QFY21 (v/s INR500m in pre-COVID period). Expect ~40% decline in
franchise income in the coming days.
ENA costs have been flattish. Glass industry was also under lockdown and prices
are expected to increase gradually.
September 2020
55
 Motilal Oswal Financial Services
CONSUMER | Voices
70% of sales are to the state governments. Some states are delaying payments.
Ageing of inventory at corporation level due to the lockdown has led to some
provisions. There is no credit risk with these corporations.
UNSP has been able to reduce receivables over Mar’20 levels.
Other points
UNSP is wooing consumers that would buy from duty-free shops. However, the
prices are much higher and there is little evidence of a material shift from
dutyfree to duty-paid consumption. Nevertheless, management believes that
there will be some shift in the coming days.
Spirits’ companies are likely to benefit over beer companies. This is due to the
fact that it is easier to carry spirits home (v/s beers). Bars and pubs, which are
shut, also have higher beer salience. The company is surprised by the extent of
shift from beer to spirits in recent months.
Home delivery has helped but contribution is still relatively small, especially in
areas where over-the-counter sales are allowed. On the other hand, the
contribution is decent where only home delivery is allowed.
UNSP received price increases from the government in 7-8 states in recent
months; however, the quantum was modest.
Consumer behavior trends: Larger SKUs are being sold because of improving and
higher in-home consumption. No material down-trading has been witnessed
yet.
No material restrictions are affecting scotch imports.
September 2020
56
 Motilal Oswal Financial Services
FINANCIALS/BANKS| Voices
FINANCIALS/BANKS
Commentaries of banks suggest that business trends are gradually picking up MoM. The rural economy is
picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue
accessing the on-ground situation over the next few months, and accordingly, decide their growth strategy.
Among business segments, retail growth is picking up faster with some segments like tractors, 2Ws, gold
disbursements and affordable housing seeing the fastest improvement. On the other hand, MHCVs (especially
linked to large fleet operators/commercial vehicle segment) continue to see challenges. On the asset quality
front, CE trends have improved further in Jul-Aug’20 with ~75-85% collections in MFI and above ~80% in
Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it
should occur in mid-sized corporate/SME segments. Overall, slippages are expected to rise in the coming
quarters, and thus, credit cost trends should remain elevated.
Outlook for FY21
KEY HIGHLIGHTS FROM CONFERENCE CALL
Retail disbursements have improved to 80–
85% of pre-COVID levels, with better trends
seen in Home Loans, but weaker trends in
the LAP portfolio.
NRI deposit traction remains healthy for the
bank.
Gold loans are showing strong momentum,
although the bank is not chasing any growth
targets.
Growth trends are gradually improving
across retail lending segments, and activity in
the Rural segment is picking up faster.
Corporate trends remain muted.
ICICIBC does not have any loan growth
targets, and the focus would be on growing
profits in a risk-calibrated manner.
In the near term, margins would remain
under pressure, dragged down by excess
liquidity and muted business trends.
IIB is witnessing healthy traction in retail
deposits.
Margins should remain in a tight band as an
improving asset mix offsets cost of higher
liquidity / retail TD cost.
Expect normalcy in MFI business from
Oct’20.
The focus is on reducing fixed cost; expect
branch expansion to moderate.
The focus remains on garnering deposits,
particularly CASA and retail deposits.
Growth momentum has slowed in unsecured
retail segments, such as Credit Cards and
Personal Loans over the past two quarters.
The bank expects normalcy to return by the
latter part of FY21 or early FY22.
Lending activity has gradually been
improving since June’20.
The bank stated that its guidance to achieve
ROA of 1% is expected to be deferred by a
year.
Asset Quality & Moratorium
Federal
Bank
The moratorium pool declined steadily, while customers
who have not paid any dues have declined to the mid-single
digits (v/s 12% reported earlier).
It does not have any large-ticket corporate accounts under
stress, while some mid-sized corporate accounts have
availed moratorium and could see restructuring.
Overall, the bank believes that restructuring should not be
more than 20–25% of the moratorium pool.
The CV and Builder portfolios have witnessed higher
moratorium and may see relatively higher restructuring.
Furthermore, expect some rating downgrades on the
corporate side.
The asset quality of the other retail portfolio, including
unsecured loans, remains steady; however, the bank
remains watchful of job loss in the economy.
IIB did a stress test to analyze the impact on asset quality
and expects an increase of 90–95bp in GNPA on account of
COVID-19.
Restructuring could be in the range of 1.5–2.5%, closer to
the top banks.
Among the sectors, it expects higher restructuring in the
Passenger Bus portfolio, two Real Estate accounts, and two
Hospital accounts.
Moratorium under the corporate book was low, while that
under the SME book was higher; thus, some amount of
restructuring may be seen.
The CV/CE portfolio saw higher moratorium.
The overall impact on asset quality is likely to be visible over
the next six months.
SBIN expects slippages and restructured book combined to
remain within 2.5% of total loans. Also, not much stress in
corporate loans above >INR15b.
Overall, expect recoveries of INR160b over FY21E.
ICICI Bank
IndusInd
Bank
Kotak
Mahindra
SBI
September 2020
57
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
AU Small Finance Bank
Current Price INR 674
Buy
Click below for
Detailed Concall Transcript &
Results Update
Moratorium and Collections related
Improvement in collection efficiency to ~90% in Jun’20 indicates that some
borrowers have paid more than one EMI. Overall, 67% of customers (in value
terms) have paid 90% of the total billed amount in Jun’20
Overall, ~11% of the portfolio have not paid any installments (moratorium
book), 67% of the portfolio paid full EMI in Jun’20 while the rest have paid at
least some installments.
Total collections during the quarter stood at INR22b.
On the commercial taxi segment, collection trends are a bit low at the moment.
Deposit franchise
The bank’s emphasis is on high quality retail deposits led by (a) a separate team
being set up recently to focus on NRE/NRI and government accounts ,and (b) the
entire bank staff coming together to focus on building the deposits franchise.
Retail term deposits of INR7b were garnered during the quarter.
Non-branch banking employees have garnered close to INR4b deposits during
1QFY21.
As at 31st Mar’20, 26 branches (excluding unbanked areas) had above 5%
market share of the total banking system’s deposits in the respective centers.
The bank remains focused on maintaining high liquidity buffers.
Asset side
At the moment, it is difficult to give guidance on asset growth. However,
customer confidence is reviving and new opportunities are expected to emerge
once the situation stabilizes.
The bank is facing some challenges in geographies like Mumbai, Pune and Surat.
The bank has adopted a cautious stance in lending to the NBFC segment. The
decline in portfolio is also due to borrowers making full repayments.
The bank disbursed ~INR3b in retail while similar disbursements were made in
the MSME portfolio.
Operating metrics
Focus was high on collections during 1QFY21 while disbursement trends were
muted, resulting in a sharp drop in fee income. Core focus remains on lending
and building deposits franchise rather than creating new fee lines.
Axis Bank
Click below for
Results Update
Current Price INR 447
Buy
Business related
The agriculture and rural sector is performing fairly better.
The bank remains cautious, and thus, is creating provision buffer, conserving
capital and is carrying excess liquidity.
The bank made some conservative changes in their accounting policy, which
impacted earnings to the tune of INR5.1b.
Balance sheet related
Demand in rural and small towns is recovering.
Rural disbursement in Jun’20 stood at 90% of Jun’19.
September 2020
58
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
MSME credit guarantee scheme
– Total eligible borrowers with a loan value of
INR120b with sanctions of INR30b and disbursement of INR10b.
Retail business saw decline of ~80% in disbursements across products. There has
been an increase in secured business such as mortgages and rural lending. The
bank remains cautious on the unsecured side.
~80% of the retail book is secured. Of the unsecured retail, ~84% is salaried
while 80% have banking relationships with the bank. ~67% of these salaried
customers are from premium corporates, MNCs and government entities.
P&L related
~60% of the decline in fee income was due to reduced retail disbursement and
moderation in credit card spends.
The bank is carrying surplus liquidity, which has impacted NIMs by ~9bp.
Asset quality related
Moratorium 2.0 for AXBS stands at 9.7% of total loans. The reduction has been
across segments.
Retail MFI customers were granted moratorium with conditions and constitutes
~0.5%. Of these, ~67% paid their installments for Jun’20.
90% of Moratorium 2.0 customers are from moratorium 1.0. Reduction has
been due to focus on collections and closer scrutiny of the business’ cash flows.
Of the total moratorium book, ~78% is secured.
Collection from the moratorium book – ~80% in corporate and ~70% in retail
during Jun’20.
Of the non-moratorium book, 95% of retail customers paid in Jun’20.
None of the NBFCs have been granted moratorium.
Wholesale book:
82% is rated A- and above. 95% of the incremental are in A-
while 75% are AA- and above.
Exposure of top-20 borrowers as % of Tier-1 capital stands at 102% v/s 110% in
FY19.
SME:
87% of SME book is rated SME 3 or better with ~88% of book secured in
nature. ATS stands at 35m across 35 sectors and diversified across 120 locations.
For Axis Finance, both Moratorium 1.0 and Moratorium 2.0 stood at 7%.
Asset quality under retail segment for AXSB is 10-20% better than the industry
for unsecured retail and 50-80% for secured retail.
Collections:
8,000 member team collections; 1,500 agents are working from
home for collections. Collections have improved to ~65% in Jun’20.
Slippages: ~21%
of slippages were due to the bank’s risk assessment criteria and
not due to the 90-day DPD on which the bank made 100% provisions. Further,
~42% of slippage is toward a single corporate group for which the bank made
provisions of 100%.
There were downgrades of ~INR13b in the BB & below book.
95% of credit card customers are in 0-DPD.
As on Jun’20, SMA-2 book stands at ~0.4% of the total book.
Others
Axis-Max deal: Query and discussions are ongoing with the
regulators/authorities. The transaction remains on track.
September 2020
59
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
Bandhan Bank
Current Price INR 312
Click below for
Detailed Concall Transcript &
Results Update
Buy
Collection trends
Challenges remain widespread for the industry, which is dealing with the COVID-
19 crisis, floods/cyclones in Assam and West Bengal, etc. Despite these
concerns, collection trends have been improving steadily and recovered to ~73%
v/s 70% as of 3rd Jul’20.
If no further lockdown is announced, collection trends would continue to
improve.
In terms of state-wise collection trends, Bihar and Telangana have the highest
collection efficiency, while Maharashtra and Tamil Nadu the lowest collection
trends. Collection efficiency in Maharashtra is at ~54%.
Disbursements made in June were largely toward ~5% of existing borrowers
with avg. ticket sizes of top-up loans at ~INR35k. Furthermore, the bank
disbursed loans for new business activity in sectors such as Retail, Food
Processing, and Agri-related.
Collection efficiency in terms of proportion of borrowers is at 68%; it stands at
~70% in terms of billing collection (for the month).
~30% of customers have not paid even a single installment.
Balance sheet and P&L related
In terms of incremental opportunities, 30–35% of existing borrowers have loans
with one or more lenders. Thus, the bank expects to tap these customers by
proving top-up loans and become the sole lender.
In the Small Enterprise Loans portfolio, unsecured loans stand at INR20b.
The opex-to-asset ratio has already hit the bottom level, and not much
improvement is expected from current levels.
PSLC income during the quarter was INR1.19b (INR4.7b for the full year).
Guidance: The new customer acquisition rate would slow to 10% YoY for FY21E;
the bank would focus on providing loans to existing customers only.
Bandhan has reduced the center meetings’ size to lower the probability of
infection.
The bank is providing top-up loans at 100bp higher than the usual interest rate.
50% of borrowers in MFI have ticket sizes of ~INR150k, while 14% have ticket
sizes of INR100–150k. The remaining 35% of borrowers have ticket sizes of
INR50–100k.
More than 50% of incremental disbursements in the Mortgage portfolio are
toward new customers, while the bank has also purchased loans under IBPC.
Asset quality
BANDHAN has made additional provisions of INR7.5b during the quarter; thus,
the total contingent provision buffer (including COVID-19-related and additional
standard asset provisions) stood at INR17.7b.
Overall, expect credit cost of 2.0–2.2% for FY21E. However, a large proportion
has already been incurred by making contingent provisions.
~75% of COVID-19-related provisions are toward the MFI portfolio.
In the Mortgage portfolio, a marginal increase is witnessed in GNPAs, primarily
from the LAP portfolio. Furthermore, although moratorium availed has
60
September 2020
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
increased in value terms, it has reduced by 20% in terms of the number of
borrowers v/s Apr’20.
Bank of Baroda
Current Price INR 46
Click below for
Results Update
Neutral
Moratorium update
The moratorium book declined significantly and stood at 21% of term loans as of
July’20 (including all the accounts that did not pay last month’s EMI). If we
consider the payment of two installments, the moratorium book declines to
17%.
A large proportion of moratorium is availed in the Corporate portfolio.
Therefore, higher restructuring could be availed in this portfolio.
P&L & balance sheet related
The bank is seeing strong traction in both CASA and retail term deposits.
Unrecognized treasury gains on the Investment portfolio stand at ~INR89b.
NIMs would continue to remain under pressure in the near term due to surplus
liquidity on the balance sheet.
Expect domestic CASA to improve to 42% by FY21E.
Plans for capital raise: It plans to raise INR90b through equity and another
INR45b through bonds.
Business growth guidance:
The focus is on aligning deposit growth with loan
growth. Expect loan growth to be 7–8% for FY21E.
Fee income would continue to remain under pressure. Overall, expect the C/I
ratio to remain at ~50%.
CET-I decline during the quarter was on account of reported net loss, DTA
impact, and revaluation reserves.
Under the credit guarantee scheme, total loans sanctioned stand at INR80b
(~90% of eligible customers are sanctioned) and disbursed at ~INR55b (~60%
disbursed).
90%+ of the customers would have a liability relationship with the bank.
Wage revision:
It made provisions of INR2.78b during the quarter.
On the revised current account circular, PSBs would benefit from RBI guidelines.
74% of retail loans are to borrowers with a CIBIL score above 725.
Asset quality
~90% of slippages came from the watch list. However, additions to the watch list
were primarily from one NBFC account.
There is some possibility of restructuring in retail loans, while a higher
proportion of restructuring could be availed in the Corporate portfolio.
NBFC portfolio:
Some accounts have been downgraded and included in the
watch list. However, the larger proportion of the portfolio is highly rated.
Total standard asset provisions stand at INR90b on global advances, while they
stand at INR79b on domestic advances.
Exposure to the Infrastructure sector was down to 10% from 14% earlier.
Higher standard asset provisions during the quarter were on account of one
large single account and are expected to reverse over the next few quarters.
Slippages in the international portfolio comprised: (1) INR11b from one group in
the Middle East and (2) the balance was from two accounts (a large diversified
group of INR6b and an INR2.5b one based in Australia).
61
September 2020
 Motilal Oswal Financial Services
DCB Bank
Click below for
Results Update
FINANCIALS/BANKS | Voices
Current Price INR 86
Neutral
New RBI resolution framework
In the corporate book, large proportion of loans, which were SMA as on 1st
Mar’20 have already been recovered.
Moratorium/collection update
MFI loans:
The bank was able to collect at least one installment from 79% of
customers.
Highest moratorium availed is in the CV portfolio.
~26% of the portfolio has not paid any installments during Apr-Jul’20. While the
rest 74% of the portfolio have paid at least one or more installments.
Balance sheet and P&L related
Under the CGS, the bank expects ~40k customers to be eligible with peak
disbursal likely at ~INR14b. However, currently the bank has sanctioned
~INR6.68b and disbursed ~INR0.75b (628 customers).
The focus over the next 6-9 months would be on disbursing loans under the
CGS, Gold, Tractor, KCC and Home loans. Also, the focus would be on improving
fee income.
Focus remains on replacing bulk deposits with retail term deposits. The bank has
‘Nil’ certificate of deposits.
The bank has slowed down hiring at the moment.
Home loans have risk-weighted assets of 35% while LAP has 75%. The approval
rate in home loans is ~65-68%.
Overall, the focus continues to remain on reduction in risk-weighted assets.
The bank operates in small ticket sized home loans.
The average LGD should be in the range of 20-30%.
The bank is witnessing strong traction in retail deposits. Many customers are
also giving CASA balances.
The focus is on giving top loans and disbursing under the CGS to viable projects.
Asset quality related
The bank has built provisions of INR150m during the quarter on restructured
MSME loans affected by COVID-19.
SMA/overdue accounts have reduced from ~INR19.1b as at Mar’20 to INR4.75b
as at Jul’20. The bank expects this to reduce further in Aug’20.
The bank will continue to face higher delinquencies in the CV portfolio. This
portfolio is expected to take time to revive.
The bank holds standard asset provisions of INR1.17b. COVID-19 related
provisions stand at INR0.95b, floating provisions at INR1b and the rest are NPA
provisions.
Total net restructured standard advances stood at INR 4.69b – INR2.39b in CV,
INR1.47b in mortgages, INR0.65b in SME/MSME, INR0.11b in corporate and
INR0.07b in others.
September 2020
62
 Motilal Oswal Financial Services
Federal Bank
Click below for
Detailed Concall Transcript &
Results Update
FINANCIALS/BANKS | Voices
Balance sheet related
Gold loan remains one of the key focus areas for the bank.
1QFY21 was good for NRE deposits and early trends of 2QFY21 are also on
similar lines. Generally, the first five months of a fiscal are always good for
traction in NRE deposits
The bank expects 2HFY21 to be better in terms of advances growth and expects
overall growth to range between 10-12% in FY21.
~INR10b was disbursed under the MSME Credit Guarantee scheme – of the total
customers eligible under the scheme, ~70-75% have opted for it. Majority of
these have chosen to pay an existing line of credit and create liquidity buffer.
P&L related
Focus remains on keeping operating expenses tight.
Number of employees in FedServ currently stands at ~320. The bank is planning
to take this number to 900 in the near term. 50% of its employees are currently
working for 2 processes. The bank is targeting to make ~80% employees work
for 3 processes, which will help in cost efficiency and enable an overall
improvement in the C/I ratio
INR350m was provided toward pension provision due to change in the interest
rate. If the interest rate remains the same, similar amount is expected to be
provided for in the remaining quarters. This amount, however, could change
based on movement in interest rates.
Balance sheet related
Focus was on increasing the PCR with the bank looking to create an adequate
cushion.
A large corporate account (in the Middle East) slipped during the quarter, on
which, the bank has made 100% provision (INR1.74b).
FB has also created an additional provision of ~INR370m toward an IL&FS entity.
Moratorium has declined from 35% to 24% as at end-Jun’20.
Credit cost stood at 83bp for 1QFY21.
The bank does not have much exposure in the stressed segments like aviation,
hospitality and tourism.
Of the total INR130b reduction, ~INR20b is on account of Gold/other liquid
instruments while the remaining INR110b is pure repayments.
Recovery for the quarter stood at INR670m and is expected at ~INR1b in
2QFY21. Overall recoveries are expected to be dull for FY21.
Moratorium book’s partial payments stand at ~12%. Hence, of the total 24%,
~12% have paid nil installments.
Others
As of now, the bank is considering taking shareholder approval for capital raise.
However, there are no plans to raise capital in CY20 and early-CY21.
Current Price INR 52
Buy
September 2020
63
 Motilal Oswal Financial Services
HDFC Bank
Click below for
Detailed Concall Transcript &
Results Update
FINANCIALS/BANKS | Voices
Opening remarks by Mr. Aditya Puri (MD & CEO)
Mr. Munish Mittal (Chief Information Officer) moved from the bank to pursue
higher studies in a foreign university.
Mr. Abhay Aima (Group Head – Private Banking) has taken an early retirement
to pursue his personal interests.
Based on Internal Audit (vehicle dealer financing), some personal misconduct
was observed by a few employees. The bank has taken appropriate action
against these employees
Payment business – The bank has witnessed strong bounce-back and reached
~70% of Jan’20 levels with higher spends on online education
Corporate banking – Focus is on AAA rated corporates. The SME business has
witnessed some sequential decline. On the retail side, origination volumes have
declined ~70%. Credit card spends have also declined sharply over 1QFY21.
Loan origination volumes in vehicle financing have seen a steep decline, while
tractor/2W loans are showing better trends.
The bank has already put in place a strategy to overcome the current harsh
environment in every aspect. These include delinquency levels, technology,
business growth, distribution, etc.
HDFCB has 51% of its branches in semi-urban and rural India.
Succession planning – Mr. Puri has hinted at an internal successor.
P&L and balance sheet related
Of the total fees, retail forms 89%, while wholesale constitutes 11%. However,
retail loan originations have d
Recoveries witnessed an impact of ~INR3b due to the lockdown.
C/I ratio has declined due to lower discretionary spends, advertisement costs,
etc. However, once the situation normalizes, these expenses are likely to pick
up.
9% of the total portfolio is currently under moratorium as at Jun’20.
97% customers availing moratorium are in 0+DPD while 98% customers have
received full salary credits. Moratorium was availed to preserve liquidity.
Further, 70% customers that have availed moratorium 1.0 have cleared their
dues while ~90% customers that have availed moratorium 2.0 are from
moratorium 1.0.
The bank believes contingent provisions are sufficient to manage the stress.
The bank has sufficient cushion and believe a capital raise is not required in the
near term.
Business growth trends across segments
Corporate/wholesale banking portfolio
Corporate banking portfolio is benefiting from strong disbursement to public
sector companies, MNC, corporates, etc. It also participated in TLTRO 1.0.
Strong growth is coming from Power, Material, Consumer, etc.
In terms of collection trends, corporate collections stood at 45%/50% in
Apr/May’20 (v/s Apr/May’19); however, it has improved to 94% in Jun’20.
Sector wise, all industries showed positive collection trend in Jun’20 – NBFCs
reflected 66% increase while Auto ancillaries exhibited 100% increase over
May’20 levels.
Current Price INR 1,079
Buy
September 2020
64
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
Top disbursements: 48% toward capex, 33% toward working capital, 9% toward
other market participants while 6% toward lending for PSL, etc.
Corporate CASA grew 25% while corporate fixed deposits grew 14% YoY.
SME & Business Banking Portfolio
The bank is doing business on the basis of granular portfolio and geographical
spread while the risk is mitigated through self-funding and high collateral value.
~68% of the incremental disbursement has ticket size less than INR10m.
89% of new-to-credit customers have collateral cover in excess of 100%.
Credit Guarantee Scheme: Total eligible customers (pre-approved) stood at 30k
with loan value of INR200b, of which disbursements were in excess of INR100b.
Retail portfolio
Overall, retail loan originations fell ~70% with personal loan origination volumes
declining 86%. Credit card sourcing declined 87% while spends dropped 44%. In
the vehicle segment, originations plunged 66% (v/s pre-COVID levels) while
tractors/2Ws portfolios showed some resilience.
Tractor segment grew 26% QoQ.
Gold loans’ portfolio also grew during the quarter.
Asset Quality
Core Credit Cost ratio stood at 1.08% (v/s 0.77% in 4QFY20) while total credit
cost during 1QFY21 stood at 1.54%.
ICICI Bank
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 370
Buy
Moratorium update
The proportion of loans that have availed moratorium has declined to ~17.5% as
at Jun’20 (v/s 30% as at Apr’20). Further, another ~2% of loans (not explicitly
opted for the moratorium), have not paid Jun’20 EMIs. Thus, the proportion of
moratorium could increase to ~20%.
~90% of the moratorium as at end-Jun’20 comprise loans that were under
moratorium as at end-Apr’20.
Builder loans, commercial vehicle and dealer funding have relatively higher
proportion of moratorium.
Builder loans and CV portfolio was already witnessing some challenges from pre-
COVID times, and thus, the proportion of moratorium has been higher.
Balance sheet related
Customer footfall has started improving from Jun’20. Some high frequency
indicators such as toll collections, GST collection, tractor sales, sale of fertilizers,
etc. have also improved in Jun’20.
Retail portfolio is largely secured and is well priced.
The bank has crossed ~1m users on Whatsapp banking platform.
The bank has extended loans under the Credit Guarantee scheme with sanctions
of INR50b (~19k customers), of which, INR38b has been disbursed.
The bank has further reduced its international book, which includes 40% decline
in non-India linked businesses.
The bank does not have any loan growth targets and expects some incremental
opportunity on the corporate side (preferably short-term lending). The bank
expects some pick-up in the retail segment, while rural growth has picked up
well.
September 2020
65
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
Deposit growth has been strong despite pruning of TD & SA rates.
Business segments
Retail loans:
Focus remains on existing customer base to cross-sell products.
Incremental sourcing during the quarter was largely toward existing customers.
Home loans:
70% of mortgage loans are to customers having existing liability
relationship with the bank; Avg. LTV of 65%; LAP has an avg. LTV of 55%.
Commercial CV:
Utilization rate has started improving in Jun’20; Top-20
customers contribute 3% to the portfolio.
Auto loans:
Passenger vehicle is showing faster recovery; disbursement has
reached 65% of pre-COVID levels.
Credit Cards and Personal Loans:
85% is toward salaried customers. Of this, 75%
is with well-rated entities (MNC and government entities). 70% is toward
existing customer. 97% customers that have availed the moratorium are
receiving salary credits.
Rural Portfolio:
Gold loans/Kisan Credit Card comprises 3% each of the total
portfolio. Gold loans grew 32% YoY.
Business Banking:
Avg. ticket size stands at INR15m. ~85% of the portfolio has a
collateral cover of more than 100%.
SME portfolio:
Focus remains on granularity and higher collateral cover.
Disbursements were made through program-based lending.
Operating metrics
Significant decline in fee income was due to lower business volumes and
slowdown in customer activity affected by the lockdown.
On the cost front, the bank will continue to spend on technology at a reasonable
level. Increased employee expenses were largely due to retrial provisions.
Overall, the bank expects cost to pick up as loan volumes bounce back.
Margins declined during the quarter, largely due to surplus liquidity. However, it
expects margins to remain stable in the coming quarters as excess liquidity is
deployed toward loan growth.
Asset Quality
The bank carried additional provisions of ~INR144b (2.3% of loans), which is not
part of the PCR (includes COVID provisions of INR82.75b). Thus, this cushioned
the balance sheet from impact of the COVID-19 pandemic.
The bank has not sold any NPA during the quarter.
Increase in the BB & below book includes downgrades of INR14.7b.
Capital Raise
Proposed capital raise of INR150b would be utilized to further strengthen capital
ratios and improve competitive positioning.
September 2020
66
 Motilal Oswal Financial Services
IndusInd Bank
Click below for
Detailed Concall Transcript &
Results Update
FINANCIALS/BANKS | Voices
Current Price INR 610
Buy
Business related
Certain indicators suggest economic activity has picked up, but remains
challenged as pent-up demand settles and lockdowns are re-imposed in certain
areas.
The rural economy continues to pan out better than urban.
Balance sheet and P&L related
Retail deposit growth was at 5% QoQ.
The bank carries excess liquidity of INR300b.
The portfolio eligible under MSME stands at a disbursement value of INR32b;
just 2% of the portfolio has availed the facility, with the bank having disbursed
INR1.7b.
Short-term borrowings form ~12% of the total borrowings, while the proportion
of Certificate of Deposits fell below 10%.
Growth is likely to revive from 2HFY21.
Asset quality related
Moratorium 2.0 follows an opt-in facility for all customers, except MFI, which
continues to have the opt-out facility. 90% of Moratorium 2.0 is secured.
The moratorium book ex-MFI stands at 14% in value terms (8% in volume) and
16% including MFI (11% in volume).
Retail moratorium stands at 19%, while Corporate stands at 9%.
The moratorium book stood at ~50% in Moratorium 1.0: Retail at 75% and
Corporate at 23%.
92% of Moratorium 2.0 customers are from Moratorium 1.0.
Corporate moratorium decline to 9% from 23%: Of the 14% decline witnessed,
all are currently making payments.
Retail moratorium decline to 19% from 75%: Of the total decline of ~56%, ~46%
are currently making payments, while the balance 10% is not paying.
Vehicle finance: Collection efficiency has improved to 75% (current) from 30– 35%.
Moratorium is at 20% in value and 10% in volume.
LAP/BB: Business is now at 80–85% of normal levels.
Credit Cards: This comprises 3% of the total book. 15% of the book opted for
moratorium. Spends have reached 80% of pre-COVID-19 levels. Gems: One
customer of INR50m opted for moratorium.
COVID-19 impact: The bank expects incremental slippages of 92bp and
incremental credit cost of 65b due to COVID-19.
The SMA 1 and 2 books declined to 35bp in 1QFY21 from 70bp in 4QFY20.
Accounts for which the asset classification benefit was availed stood at INR33b,
comprising 1.6% of total loans.
The BB & Below book forms 5.5% of total loans.
Others
The bank has decided to raise INR32.88b thorough preferential allotment. This
increases the CAR by ~125bp to 16.5%.
September 2020
67
 Motilal Oswal Financial Services
Kotak Mahindra Bank
Current Price INR 1,330
Click below for
Detailed Concall Transcript &
Results Update
FINANCIALS/BANKS | Voices
Neutral
Moratorium update
Focus remains on assessing the viability of the borrower (ability to repay).
Customers who seem unviable have not been provided the moratorium 2.0 and
the bank prudently recognized the stress earlier. Thus, this resulted in some of
the accounts slipping during the quarter.
The collection trends have improved in the portfolio, which have come outside
Moratorium 1.0 over Jun-Jul’20 (v/s Apr-May’20).
P&L and balance sheet related
KMB has disbursed INR5.5b under the MSME credit guarantee scheme during
1QFY20. It has disbursed another INR35b in Jul’20.
KMB is sitting on significant bond gains (~INR30b) and will monetize it at an
appropriate time.
The bank has an LCR of 150% on a daily average basis.
The bank witnessed strong growth in retail SA deposits.
Total consolidated advances stood at INR2.31t while customer assets stand at
INR2.45t.
Business strategy
Mortgage business will be a key segment for growth in the near term. Also,
focus is on disbursing loans to the MSME segment (still some opportunity
available to lend under credit guarantee scheme).
Expect better fee income trends in the MSME segment.
Overall working capital utilization limit has come down due to muted economic
activity trends.
Collection front: Expect improvement in resolutions trends; strengthened the
collection team; enabled multiple digital repayment tools.
CV segment: Disbursements are quite low in this segment; however, it has
improved post May¡¦20. Traffic movement suggests operations at 75% of pre-
COVID levels. Collection trends were better in Jun-Jul¡¦20 (v/s Apr-May¡¦20).
Construction equipment segment is reflecting better trends and is improving
MoM.
Agri business: Collection efficiency is quite good in this portfolio. Cash flows of
borrowers have not been impacted severely.
Tractor loans: Higher disbursements in this segment, customer cash flows are
good and collection efficiency is close to pre-COVID levels.
Corporate portfolio: Conservative in lending to this segment; cautious in
lending, especially to companies with high fixed cost, high leverage, etc.
SME portfolio: Cleaned this portfolio last year; significant under-utilization of
limits due to low economic activity; optimistic in growing this segment. Market
share in the SME segment is around 2%.
HFC exposure: Increase in exposure to top-rated HFCs only.
Unsecured business: Remains cautious in this portfolio as it does not see risk-
reward in the current environment.
Overall, the bank sees huge opportunity in the non-credit risk business (such as
wealth management business).
Some opportunity exists in a special situation fund (significantly higher return);
some pockets of SME business, Home loans and on the LAP side.
Cost of funds provides competitive advantage. Expect cost of funds to further
trend downwards.
Future of branches: In the post COVID era, lower branch expansion is expected
while higher digital adoption would be seen.
September 2020
68
 Motilal Oswal Financial Services
FINANCIALS/BANKS | Voices
Asset quality
Total provisions (including COVID, contingent, NPA provisioning) stood at 107%
of the total GNPAs.
Single large accounts (3 digits) slipped during the quarter. This account is still
standard in other banks.
Total overdue accounts stood at INR130b (as on 29th Feb’20), of which, INR5b
slipped during this quarter.
State Bank of India
Current Price INR 203
Buy
Click below for
Results Update
Moratorium update
Term loan portfolio:
Only ~9.5% of term loans (only accounts that have paid less
than two EMIs) are under moratorium.
For working capital,
the interest deferment stands at ~INR48.8b on the overall
working capital book of INR7t.
Segmental moratorium:
Home loans at INR320b and personal loans at INR110b.
P&L & balance sheet related
Loans sanctioned during Jun’20 has picked up well. Further, loan pipeline on
corporate loans is strong (mainly project financing). Therefore, expect corporate
disbursements to pick up.
On the wage revisions –
The bank has built provisions of INR10b during the
quarter. Also, an additional impact of ~INR10b is expected in the coming
quarter.
The bank is witnessing strong traction in gold loans.
Further improvement in margins is not expected. Expect it to remain stable at
the present levels.
Under credit guarantee scheme,
loans sanctioned stands at INR210b, of which,
~INR150b was disbursed.
Home loans –
Average LTV stands at ~60%. 90% of the portfolio comprises first-
time buyers. Large proportion of the book is toward government employees.
Risk weights have reduced due to disbursement toward high-rated entities.
Asset Quality
Base line slippages guidance of 1.5-1.6% i.e. INR320-360b. This could increase
due to the impact of COVID-19.
Of the total SMA of INR420b (as at end-Feb’20), the portfolio where less than
two EMIs were paid stands at INR130b, on which, the bank has made provisions
of INR30b.
Interest reversal was negligible during the quarter.
Large HFC exposure (DHFL) was declared as a fraud account in the previous
quarter, and thus, provisions of INR35b were made in this quarter. Overall,
expect resolution to get completed by Dec’20.
On the large steel account, expect resolution by 3QFY21. Also, few power
accounts are expected to get resolved soon. Overall, expect total recoveries of
INR100-120b over the next two quarters.
No accelerated provision requirements are expected on the legacy portfolio.
Thus, expect ageing provisions of INR50b (each quarter) over the next 7
quarters.
Standard COVID provisions stood at INR30b while provisions for other standard
assets were INR2.82b during the quarter.
CRE Exposure is ~INR418.8, of which, 90% is LRD, exposure to Aviation (0.3% of
loans), and Tourism and Hotels (0.47% of loans).
September 2020
69
 Motilal Oswal Financial Services
FINANCIALS/NBFC| Voices
FINANCIALS/NBFC
Commentaries of NBFCs suggest that improving macros across most business segments has led to increased
optimism for collection efficiency (CE) as well as for growth across product segments. In terms of
restructuring, most financiers are awaiting Sep’20 collection trends given the end of the moratorium period.
Improving liquidity and a higher risk appetite on account of better collection performance has given
companies the confidence to lift disbursements. Improvement in the rural segment is a consensus view of
most NBFC companies.
Asset Quality & Moratorium
Bounce rates across segments have been
It aims to be among the top 3–4 credit card issuers
dropping 300–400bp per month for the past few
in India. New card origination was at 20% of normal
months.
levels in June and is at 30% in July thus far.
Without the flexi loan conversion, the
Gold loans are growing at INR500–700m per month.
moratorium rate would have been 18.3% (v/s
Flexi loans have now been extended to PL,
15.7% reported in June).
Professional Loans, LAS, etc. The loans are priced
Collection efficiency improved 800–1000bp
25–50bp higher than normal term loans. And, the
MoM in June and is expected to improve by the
company charges an AMC fee of 25–100bp.
same magnitude in July as well.
30–40% taxi aggregators are resuming activity, but
recovery is likely to be prolonged.
50% of opex reduction in 1Q is sustainable going
forward. Expect a 15–20% drop in overall opex in
FY21. The expense ratio would rise to 2% (from
2.85%) over the medium term.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY21
Bajaj Fin
Mahindra
Finance
50–52% of the Tractors portfolio has opted for
Morat. 1.0.
Moratorium rate by value and volume is 48%
currently (30% in Tractors). Expect decline.
60% moratorium customers of the 75% have not
paid a single full installment since April.
In June, of the total demand of INR7.5b (incl.
moratorium customers), LTFH collected 87–88%.
Net Stage 3 loans in the Tractor segment are
now at an all-time low of 0.26%.
The number of moratorium customers in retail
lending fell to 44% QoQ from 79%. However, on
a value basis, this number stood at just 34% in
June.
Most under-construction RE projects are under
moratorium, but they have enough money in
debt service reserve accounts (DSRA) to last up
to March.
Moratorium as of June 2020 in the PPT is by
value. In volume terms, less than 12% of
customers are under moratorium.
For the non-moratorium book, collection
efficiency is at 90%.
Construction finance and non-housing individual
moratorium stand at 77% and 36%, respectively.
L&T Fin.
The company has undertaken fixed cost reduction
measures, which should pay off in the near future.
Tractor demand is likely to continue to improve
MoM. In 2W, while the need is prevalent,
customers’ capacities may not exist. It may see a
drop in demand for 2W in the coming months.
Demand for MFI would be high as customers need
money to tide over the crisis.
LIC Housing
It is likely to see YoY growth in disbursements in
2QFY21.
It would look at capital infusion at the appropriate
time; there is no proposal as yet.
Muthoot Fin.
Guidance is 15% AUM growth for FY21, irrespective
of gold prices.
Expect yields to remain stable at 22%. Plans are
afoot to open 250 branches over the next 12
months.
Opex reduction in 1QFY21 is not sustainable over
the long term.
It is going slow on auctions of NPLs as the
collateral buffer is adequate. Rather, the
company is giving its customers time to repay.
Collection efficiency in July is as follows: MFI –
76%; HL – 87%, VF – 75%.
September 2020
70
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Aditya Birla Capital
Current Price INR 70
Click below for
Results Update
Buy
Business updates
NBFC segment – In the Personal Loan segment, 85–90% of customers are
paying; in Business Loan, 80% of customers are paying.
ABCL works with 40k IFAs in the AMC segment. The IFAs typically have high
persistency ratios.
Improvement in the claims ratio in the Health Insurance segment this quarter
(owing to lower elective procedures) is sustainable. Do not expect COVID-19
related claims to impact the profitability of the Health Insurance segment.
No capital raise is required in FY21.
Persistency in the Life Insurance segment is better v/s peers, largely led by
digital initiatives regarding renewal collection. Also, due to the grace period
granted by the regulator, some renewals for 1QFY21 were done in July (18–19%
customers opted for it).
It plans to increase the share of retail and SME loans to 50% by year-end from
46% currently. It would add 50–70 new locations to aid growth in the retail
book.
Management is cautious on the Group Life business.
Asset quality / Moratorium
It took INR500m COVID-19 provisions this quarter (in addition to INR900m in
4QFY20).
85% of the moratorium book in ABFL was never more than 30dpd+ in the three
months prior to the lockdown.
In the SME segment, the moratorium rate is higher than average. In wholesale
lending, it is less than 20%, and in unsecured lending, it is less than 15%.
Provisions on the balance sheet are adequate in the current situation.
Bajaj Finance
Click below for
Detailed Concall Transcript &
Results Update
Business updates
BAF earned an INR1.47b fee in 1QFY21 from switching from term loans to flexi
loans.
The option to switch to flexi loans is offered to customers who have never been
overdue. Of the INR86b worth of customers who switched to the flexi option,
INR50b were not in moratorium. The remaining INR36b worth of customers had
never been overdue, but had opted for moratorium as a conservative stance. In
fact, the company offered the flexi-switch option to INR150b worth of loans.
The C/I ratio could decline to 28–29% by 2HFY22 with zero-based budgeting.
Flexi loans
Flexi loans were launched in 2013 for LAP customers as an alternative to OD/CC
by banks. These have now been extended to PL, Professional Loans, LAS, etc.
The loans are priced 25–50bp higher than normal term loans. And, the company
charges an AMC fee of 25–100bp.
Flexi loans are the main product offered to doctors and affluent salaried
personnel.
60% of LAP/LRD is flexi loans.
The bulk of LAS are flexi loans.
Typical utilization rates are 65–80%.
71
Current Price INR 3,543
Neutral
September 2020
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
This product is a higher RoE product structurally.
Asset quality / Moratorium
Bounce rates across segments have been dropping 300–400bp per month for
the past few months.
Without the flexi loan conversion, the moratorium rate would have been 18.3%
(v/s 15.7% reported in June).
Collection efficiency improved 800–1000bp M-o-M in June and is expected to
improve by the same magnitude in July as well.
Moratorium customers as of June included those who did not pay EMIs in June.
They need not have cleared past EMIs.
Others
The company intends to increase the share of wallets.
It aims to be among the top 3–4 credit card issuers in India. New card
origination was at 20% of normal levels in June and is at 30% in July thus far.
Gold loans constitute INR15–17b of the loan book. This category is growing at
INR500–700m per month.
The company added 2800 collection officers to the existing 4500 officers (as of
4Q). This is a fresh addition; just 150 sales officers were moved to collections.
The number of collection agents increased to 45k currently from 28–30k in 4Q.
Provisions on 2W loans under moratorium are low due to variables such as
collateral value.
INR17b interest was earned on moratorium customers. The INR2.2b interest
reversal is a sort of ‘provision’ against interest accrual.
Cholamandalam Inv. & Finance
Current Price INR 225
Click below for
Detailed Concall Transcript &
Results Update
Buy
Business updates
June 2020 disbursements were 75% of June 2019 disbursements. The improving
trend is likely to continue.
Company’s market share performance YoY – Overall Auto: 1.7% to 3.99%; CV:
13% to 23%; PV: 3% to 6%; 3W: 3% to 19%; 2W: 1% to 2%; Tractors: 6% to 11%;
Construction Equipment: 8% to 21%
Activity in rural areas is higher than in urban areas. Hence, truck owners are
finding more work opportunities in these regions.
It renegotiated some rental agreements, leading to a one-time reduction in rent.
In addition, lower business activity led to lower opex in the quarter.
Truck capacity utilization increased significantly in June, but declined in July due
to lockdown in Tier 2/3 towns as well as seasonality.
It has recently tied up with one of the Top 3 tractor OEMs and also expanded
market share in the Top 3 OEMs. This is one of the reasons for strong tractor
disbursements this quarter.
Asset quality / Moratorium
Moratorium rate is high at 76% as customers face uncertainty in their
businesses.
Some customers moved from non-morat to moratorium and vice-versa from
phase 1 to phase 2.
COVID-19 provisions are believed to be adequate. It would continue to evaluate
and make further provisions if required.
September 2020
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FINANCIALS/NBFC | Voices
Collection efficiency in July is stable MoM.
GNPL ratio – VF: 2.41%, LAP: 6.9%, HL: 3.5%
It wrote-off some old over dues in vehicle finance in the quarter.
NRRB for the 1-2 bucket improved to 33.98% in June from 26.79% in May.
Similarly, that for HCVs improved to 30% in June from 17% in May.
Moratorium was given to customers even in the 180dpd bucket, as per the
board’s resolution. No moratorium is being offered to new contracts.
Liquidity/Funding
Liquidity on the balance sheet would hover around INR60b through the
remainder of the year.
Behavioral ALM in the PPT reflects some conservatism in collections
immediately post the lifting of the moratorium.
Incremental cost of funds: 3–month money - 7%; Banks - 7.5%
Others
Business was muted in April due to underlying pain in the Auto segment,
coupled with supply shortage at the dealer level and nationwide shortage.
Do not expect LGDs to increase.
Margins are down due to the liquidity drag.
When truck capacity utilization is at 65%+, the customer is able to service the
EMI.
Equitas Holdings
Current Price INR 53
Click below for
Results Update
Buy
Moratorium update
Expect moratorium trends to further improve in Aug’20.
Moratorium availed was higher in the Heavy Commercial Vehicles (HCVs) v/s
Light Commercial vehicles (LCVs) portfolio.
In the CC/OD accounts, Moratorium 1.0 stood at 65%. In Moratorium 2.0, it has
reduced sharply.
Balance sheet related
Average ticket size per loan is INR4lacs (excluding MFI loans).
Disbursement during Jul’20 reached ~75% of pre-COVID levels with higher
traction in the small business loans category.
Overall, normalization of disbursements is expected by end-3QFY21.
The bank has indicated that whenever the equity market looks stable, it would
launch listing of the SFB.
Under the Credit Guarantee Scheme, no disbursements were made so far.
Increased focus on Gold loans: It has been launched in 100 branches currently
and was started from mid-Jun’20. The product is showing great traction.
Disbursement TAT in Gold loans is 40 minutes.
Average LGD in used vehicle portfolio is ~40%. In small business loans, it is less
than 30%.
In the MFI portfolio, disbursements made during the quarter was 15% toward
new customers while 85% were to existing customers. Further, disbursements
made during Jul’20 were to 91% of existing customers. The rest were to new
customers.
On the used-vehicle portfolio: The entire CV industry is going through a tough
phase. Among segments, LCVs have higher demand v/s HCVs.
September 2020
73
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Liability franchise
Nearly 10k new accounts were opened through digital channels recently.
Mass affluent customer base is rising.
Retail TD interest rates reduced in the range 30-75bp across various tenor
buckets while bulk deposits rates have declined sharply. Overall, high focus
remains on retail term deposits.
Operating metrics
Yields during the quarter declined as investments were made in SLR bonds.
Overall, NIMs should remain at ~9% levels.
On the cost front, the company expects levels to be similar around FY20.
Asset Quality
Some concerns exist on HCV v/s LCV portfolio, especially in the high risk
category. However, concerns are low in the small business loan segment.
Under the new restructuring scheme, high restructuring is not expected.
29th Feb overdue account was ~INR9.9b, which has reduced to INR3.4b as at
31st Jul’20. Continued strong traction in collections was seen with an 86%
resolution in vehicles while 88% was witnessed in small business loans.
Credit cost under normal scenario ranges between 1.0-1.2% while under COVID,
credit cost rises sharply. Thus, the bank has built 100bp COVID related provision
buffer.
HDFC Life
Click below for
Detailed Concall Transcript &
Results Update
Current Price INR 605
Neutral
Business mix
HDFCLIFE has started witnessing better business trends MoM with strong
traction in the Individual Protection segment. Further, HDFCLIFE is also
experiencing better renewal growth trends.
Around 1.94lac policies were sold during the quarter.
It expects ULIP demand to remain soft over FY21E. However, trends in the
Protection business should remain strong with share of retail Protection
improving to 11% in 1QFY21.
Further, the credit life should witness tepid trends (down 74% YoY in 1QFY21).
As far as term plans are concerned, customers are sticking to 2-3 large players
only. HDFCLIFE has strong positioning, which is helping drive higher business
volumes.
It is witnessing some decline in persistency in the ULIP segment while it remains
strong in the Protection segment.
In non-PAR savings, it has cautiously slowed down in the current environment.
Solvency has been stable and remains comfortable. Over the last quarter, due to
volatile capital markets and higher demand for the Protection business, it has
decided to raise INR6b of Tier-II bonds.
The timing of Sanchay PAR advantage has helped in reflecting strong trends in
the PAR segment.
It has launched Group term insurance plan ‘Group Poorna Suraksha’ – a
comprehensive protection plan – offering multiple benefits under the group
platform. The margins in this product remain as high as in Individual Protection.
Only 39 COVID claims have been raised so far – 37 in the Savings business and 2
in the Protection segment.
September 2020
74
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Operating metrics
On the cost front, volume related variable cost has declined. But as business
volumes pick up, variable cost should increase. Thus, overall cost ratios are
expected to remain at similar levels to last year
Solvency position remains healthy at 190% v/s 184% in FY20.
The positive economic variance of INR11.5b in the EV calculation has largely
come from the equity market (INR4b), interest rate (INR2b), RBI operation twist
(INR4b) and credit spread (INR1.6b).
In terms of Protection plan pricing, it has increased pricing in certain age groups
to cover mortality risk.
Distribution channel
In terms of distribution mix, there was higher share of volumes in the banca
channel during Jun’20. The share of direct channel has improved.
Agency channels are doing very well in selling participating products.
ICICI Prudential Life
Current Price INR 439
Click below for
Results Update
Buy
Operating metrics
IPRULIFE witnessed some deferral in renewal premium due to grace period
offered to customers, which led to slight drop in persistency. However, the
company expects persistency trends to revert to normalcy in the coming
quarters.
The increase in VNB margins is primarily on account of increase in the Protection
mix in the total APE. However, VNB margins in the Protection segment have
contracted as entire re-insurance hike has not been passed. Nevertheless, it has
launched new product Jul’20 onwards, which has relative higher pricing and will
neutralize the impact of re-insurance hike and further support VNB margins.
Levers for cost reduction – to lower rental cost and manage discretionary
expenses, etc.
It continues to reiterate its guidance of doubling VNB over 3-4 years.
Business mix
IPRULIFE is witnessing better trends in the Non-Linked Savings business (14%
YoY) while it is continuing to witness pressure in the Linked business (declined
66% YoY).
Further, it is witnessing strong traction in the Protection/Annuity segment,
which will remain a key focus in the near term. The share of Protection in total
APE improved to 26% during 1QFY21
In terms of individual sum assured, IPRULIFE’s performance remains better
compared to peers.
On the other hand, persistency in the ULIP segment has dropped while it has
improved in the Protection segment.
IPRULIFE has launched a new term plan from Jul’20, and thus, expects margins
to improve further. The new product prices are 10-25% higher v/s old
premiums. Overall, increase in pricing is to neutralize impact of the re-insurance
hike.
The percentage of risk retained in the Protection business is 50% and the rest is
passed to the re-insurer.
Only received 69 claims so far due to COVID-19.
September 2020
75
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Some sectors have seen increased risk due to the COVID-19 pandemic.
However, it has only 0.9% of fixed income exposure below AA rated.
Non-par guaranteed return book is very minimal i.e. 0.4% of liabilities, and thus,
has minimum ALM mismatch.
Credit life business was affected significantly during the quarter. It is ~70% lower
due to pre-COVID trends.
Protection and non-linked business contributes 74% of total VNB.
Others
Entered into partnership with IDFC First Bank to sell Life Insurance policies.
ICICI Securities
Current Price INR 473
Click below for
Detailed Concall Transcript &
Results Update
Buy
Retail brokerage segment
Rising retail participation in equity trading witnessed across the globe. This has
been driven by activation of inactive clients as well as entry of new customers.
WFH has also contributed to this phenomenon. Some of this participation may
moderate in the coming quarters.
For the first 15 days of the quarter, the company did not open any accounts due
to the lockdown as i t did not have a fully-digital process. In addition, ICICI Bank
itself was acquiring fewer new customers due to the lockdown – this, in turn,
impacted ISEC.
Launched ‘ICICI Direct Insta’ account which is the open-architecture platform.
Customer acquisition happens digitally end-to-end. ISEC opened 20k such
customer accounts in the quarter. This channel is now used for customers
sourced by other means too.
Monthly average account opening increased YoY in June despite the lockdown.
ICICI Bank now contributes 65% of new account openings vs 80% earlier.
In the equities business, the company witnessed 90% YoY increase in the
number of customers trading on a daily basis.
Seeing share of delivery volumes going up. However, this may not be
sustainable.
Employee expenses shot up this quarter due to high variable employee cost
(due to strong company performance). Typically, 70% of an employee’s total
compensation is fixed.
Decline in other operating expenses this quarter was due to the one-time
INR90m COVID provisions taken in 4QFY20 as well as due to renegotiation of
some transaction and franking charges.
50% of retail brokerage business comes from ‘Prime’ customers.
Regulatory guidelines
There is a SEBI regulation on collection of upfront margin in cash and derivative
segments. There are also some changes in the margin requirement for these
segments. There should not be any impact of the same on the cash market.
There are also new guidelines in margin finance with respect to pledging and re-
pledging of securities.
SEBI regulation on intra-day margin collection – this will have some impact on
the industry but it’s too early to comment.
While SEBI’s guidelines are positive in the long term, there could be short-term
challenges.
September 2020
76
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Distribution
MF client base has bottomed out, though the SIP client base is still declining.
ISEC’s equity MF market share improved QoQ.
Immediately post the closure of some schemes by an AMC, there were outflows
from debt MFs. However, after some time, the company witnessed inflows back
into fixed-income funds, but mostly in sovereign/AAA assets.
Capital markets
Strong investment banking revenues were due to some large block trades as
well as QIP mandates. This is likely to continue in 2Q too.
Others
There is a clear trend towards preference towards online trading rather than
trading through the physical format. This is true across all client segments.
SEBI released simplified guidelines for digital on-boarding and KYC of customers
which helped customers open accounts in the lockdown without any physical
intervention.
Focusing on digitizing all possible non-digital processes
Focus is on growing the active client base from the current level of 1.5m
For the MTF book, ISEC borrows via CPs at ~5.5%. Average NIM is 4-5%.
However, this book is likely to grow cyclically rather than structurally.
Outbound remittances from India amount to ~$15b. But only $500m is going
into financial assets, while the rest is into physical & other assets/expenses.
Activation rate is down QoQ due to the change in channel mix towards non-ICICI
Bank channel customers.
Indostar Capital Finance
Current Price INR 260
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Business updates
The focus is on opex reduction (salary and rent, among others).
Expect to disburse loans worth INR4–5b under ECLGS.
It has undertaken certain projects on the digitization front. The quantum of
these expenses was INR100m in 1QFY21.
Some part of the AUM growth was attributable to interest capitalization.
Asset quality / Moratorium
Morat 2.0 was an opt-in rather than an opt-out.
Corporate NPL comprises just one account that turned NPL in 1QFY20. It holds
10% provisions against this asset and is confident of recovery in the asset.
ECL provisions – These were as follows: Stage 1: more than 0.4%; Stage 2: 6–
8%; and Stage 3: 27% in CV, 20% in HFC, and 20–22% in SME. INDOSTAR has
INR2.8b COVID-19 provisions over and above this.
More stress in new CV financing v/s used CV financing, primarily in central and
northern India.
It plans to consider moratorium for wholesale lending on a case-by-case basis.
In retail lending, it would reach 20–25% moratorium in August. It would reach
90% collection efficiency in retail in September or October.
Liquidity/Funding
Incremental funding is at 8.5–9.5% (one loan came in at sub-6%).
It has raised INR9.76b since April 1.
Others
Do not expect branch expansion in the near term.
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September 2020
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
Collection efficiency numbers include arrear collections. Excluding these,
numbers would be 4–5% lower.
A typical SME customer is a business with turnover up to INR100m. ATS is at
INR10m. Some loans have been assigned in this segment.
Non-morat customers are those who have paid at least one EMI.
Low tax rate this quarter is due to a change in the policy of calculation of
deferred tax rate.
Most of the real estate lending is seen in the Affordable segment. It is confident
of cash flow covers in this book.
INR2.07b write-offs were reported in the corporate portfolio and INR600m in
the Vehicle Finance portfolio in 4QFY20.
IIFL Wealth
Click below for
Results Update
Business Updates
All account opening processes, etc. is back to normal now. Expect to make up
for lost new business in 2QFY21.
Some money moved out of liquid funds to savings accounts.
Saw 7-8 new divestment transactions by clients over the past 30-45 days.
May see regulations of upfront commissions in AIF over the next 6-9 months.
There is scope to release equity capital from the (a) NBFC segment, and (b) sale
of the office building. This could potentially free up INR3.5-6b capital over 12- 8
months.
Typical revenue mix: 50-60% from ARR excl. NII, 10-15% from NII on loan and
25- 5% from TBR assets.
Tech spend has increased from 1.5% of revenue to 2.5% of revenue over the
past year. It could further increase to 4-5% over the next few years.
Client profile:
20% of AUM: Entrepreneur/Industrialist, whose portfolio is created out of
dividends receiveed,
40% of AUM: Industrialists, who have monetized businesses,
20-25% of AUM: Professional entrepreneurs (salaried but higher share of
ESOPs),
5-10% of AUM: PE/celebrities/consulting professionals,
5-10% of AUM: Treasury clients.
Given the sharp rise in the Sensex over the past three months, clients have
tactically shifted from equity to fixed income investments. Also, only 65% of the
equity allocation is currently invested, while the rest is yet to be invested. In
addition, there have not been any meaningful withdrawals.
Bulk of the new inflows in 1QFY21 came from existing clients.
ARR Assets
Lower ARR revenue is on account of (a) lower AMC fees (of which, 60-70% will
come back in 2QFY21), (b) NII on loans (due to INR2.3b lower capital translating
to INR60m impact), and (c) lower average AUM in distribution and IIFL assets.
Retention in ARR is stable at 80bp.
IIFL One yields: Non-discretionary – 30-35bp, Discretionary – 60bp, Blended –
40-50bp.
Target INR900b ARR AUM by end-FY21.
Current Price INR 980
Buy
September 2020
78
 Motilal Oswal Financial Services
FINANCIALS/NBFC | Voices
TBR Assets
TBR income – INR180-200m comes from brokerage (Equity, FICC). The rest is
from syndication income, which could vary on QoQ basis.
Operating expenses
Expect level of non-employee opex to sustain over the coming quarters.
30-35% of revenue goes in platform payouts (i.e. employee salaries, sourcing
opex, etc.). This figure is better for India v/s rest of the world.
Target 50% C/I ratio over the next 18 months.
Others
Entire onboarding of 900+ clients and employees of L&T Wealth was completed
during the quarter itself.
Large clients (INR1b AUM) prefer to pay fixed fees rather than % of AUM fees.
Retired some of liabilities early. Reduced liquidity from INR17-18b to INR11-12b
QoQ and expect to further reduce it to INR5-6b in 2QFY21. At the same time,
expect an increase in the loan book in the coming quarter.
No large scale changes were required for the new regulations on segregation of
advisory and distribution services.
More than 80-85% of sales team is productive.
BNP Paribas shut down its wealth management business in India, which had a
small pool of clients. IIFLWAM hopes to capture a large market share of that
company.
Joining bonus of INR200m was paid to L&T Wealth employees, which will be
amortized over the next 8 quarters.
Have a good CRM system but much more improvement is needed.
Clients still don’t want to execute large orders by themselves. They prefer doing
it through physical format or order instruction over the phone.
2.3m ESOPs are unexercised.
Management is clear that if the AMC were to go the retail way, it would not be a
me-too player. Besides strong management bandwidth, it would be increasingly
digital.
Expect to receive more mandates from institutional clients in the AMC segment.
Dividend pay-out should remain high.
L&T Finance Holdings
Current Price INR 63
Click below for
Results Update
Buy
Business updates
The rabi crop has seen good prices this season. Cash flows have reached the
farmers.
95% of all farm and MFI branches are now operational. 2W and home loan
branches are resuming a bit slower as they are largely located in the urban
areas. Dealer openings in the 2W and tractor categories are improving MoM.
The company has undertaken fixed cost reduction measures, which should pay
off in the near future. An around 25% reduction in opex this quarter comes from
fixed costs.
Tractor demand is likely to continue to improve MoM. In 2W, while the need
prevalent; customers’ capacities may not exist. It may see a drop in demand for
2Ws in the coming months.
September 2020
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MFI meeting centers have been decreased, particularly in eastern India. It would
exit a meeting center only after all collections are made (or loans written off).
Demand for MFI would be high as customers need money to tide over the crisis.
Asset quality / Moratorium
In June, of the total demand of INR7.5b (incl. moratorium customers), LTFH
collected 87–88%. Net Stage 3 loans in the Tractor segment are now at an all-
time low of 0.26%.
The number of moratorium customers in retail lending reduced to 44% QoQ
from 79%. However, on a value basis, this number stood at only 34% in June.
Most under-construction RE projects are under moratorium, but they have
enough money in the debt service reserve accounts (DSRA) to last up to March.
Collection numbers across products are better in July v/s June.
The INR2.25b provisioning against a defocused account this quarter was for a
large conglomerate. The account is now 100% provided for. This may reverse
partially over the next two to three quarters. LTFH has provided for 70% of its
defocused book GNPLs.
Farm bounce rates are down to sub-50% currently (typically 40%) from 69% in
April. 2W is down to ~50% (typically 25–30%) from ~60%. The entire reduction
in moratorium is attributable to the payment of installments.
Liquidity/Funding
The share of CPs would remain stable at current levels.
The company would keep liquidity at current levels (would not go beyond this).
Others
Kharif sowing is going well. Reservoir levels and monsoons are healthy.
Tractor disbursement volumes in June were just a few notches below all-time
high monthly levels.
Collections in Jun’20 were at 70% of Jun’19 levels in retail lending. This has also
improved in July.
Typically, 92–95% of first bounces in 2W are collected later in the month.
The interest capitalization impact on loans is around INR6–6.5b.
IBC has been suspended for a year.
The company was able to service redemptions in credit funds (AMC segment)
without borrowing incrementally.
Infra disbursements – it would weigh in risk and reward, most likely to curtail
disbursements.
~1k personnel has been laid off in the MFI segment.
LIC Housing Fin.
Current Price INR 297
Click below for
Results Update
Buy
Business growth and moratorium details
Business activity recommenced from June 2020. The first two months of the
quarter were completely washed out.
It is likely to see YoY growth in disbursements in 2QFY21.
INR10b disbursement was under the PMAY (>30% of retail disbursement for the
quarter).
Moratorium as of June 2020 in the PPT is by value. In volume terms, less than
12% of customers are under moratorium.
For the non-moratorium book, collection efficiency is at 90%.
September 2020
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INR26.69b provisions for Stage 3: COVID-19 weakness is already factored in the
coverage ratio.
Construction finance and non-housing individual moratorium stand at 77% and
36%, respectively.
No specific trend or regional concentration is seen in individual moratorium.
Do not expect any material increase in restructuring.
LTV-related details
Max LTV in retail housing is 80–85%; the average is 40–45% currently.
LAP – Max LTV is at 60%.
Builder loans – 1.5–2x primary security and 50% additional security; hence,
builder loan LTV is at max 40%.
Others
It would look at capital infusion at the appropriate time; there is no proposal as
yet.
There were two main reasons for QoQ improvement in yield: a) interest accrual
and b) lesser competitiveness.
Write-offs stand at INR3.5–4b to date.
Specific product segment yields: LAP and LRD – 10–10.5%; developer loans –
13%
During the quarter, NHB funding came in at 5–5.5%.
M&M Financials
Current Price INR 131
Click below for
Results Update
Buy
Business updates
The company foresees rural turnaround to certainly be much faster v/s the
urban markets.
Dealerships are open and operational. Even MMFS’ 300 ‘smart branches’ are
operational.
June was a great month in terms of disbursements and collections. The
company disbursed loans for 30k vehicles and collected INR22b in June (i.e.,
INR29b demand; ~75% collection efficiency). Disbursements could have been
higher in the month if dealers had more inventory.
Tractors, small cars, and small LCVs and pre-owned vehicles saw good traction.
30–40% taxi aggregators are returning to activity, but recovery is likely to be
prolonged. The company has 80k taxi aggregators of 2m customers.
Due to production constraints at OEMs, disbursements may be below demand.
Thus, expect 2Q to be muted, but 2HFY21 to be a strong period.
50% of the opex reduction in 1Q is sustainable going forward. Expect a 15–20%
drop in overall opex in FY21. This would be driven by rent renegotiations,
branch rationalization, advertising expense reduction, no/low increments, etc.
The expense ratio would rise to 2% (from 2.85%) over the medium term.
A rights issue that was priced attractively was only to reward shareholders.
It is confident of maintaining market share in various OEMs in FY21.
Asset quality / Moratorium
INR5b collections were reported in April and INR10b in May.
50–52% of the Tractors portfolio opted for Morat. 1.0.
Collections in July thus far are better v/s June.
Moratorium rate by value and volume is 48% currently (30% in Tractors). Expect
decline.
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40% of customers paid full installments in June.
The company is confident of maintaining asset quality, barring slight delays in
repayment; even post the lifting of the moratorium.
60% moratorium customers of the 75% have not paid a single full installment
since April.
The increase in the GNPL ratio QoQ is attributable to the Tractors segment
(many of these customers did not opt for moratorium as they expected cash
inflows). However, this is likely to reverse given good crop output.
It aims to take NPL to 4% levels.
Provisions made this quarter comprise – Stage 1, 2: INR1.8b and Stage 3:
INR4.7b.
Liquidity/Funding
The company has INR85b of liquidity on the balance sheet.
Others
Asset quality trends are more on geography than product segment.
Madhya Pradesh is doing better than other states.
Recovery in M&HCV would be prolonged.
Digital repayments have increased to 50% currently from 35–40% earlier.
It has not changed loan-to-value (LTVs).
RWA/Total assets % declined YoY in FY20 due to a higher share of liquid assets.
According to management, June demand is not pent up.
Southern India has been facing challenges since before the COVID-19 outbreak.
Expect some pick-up in mining activities in Karnataka post-October.
MAS Financial Services
Current Price INR 808
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Results Update
Buy
Business update
NBFC partners’ collection efficiency was at 80%/93% in Jun/July’20. NBFC MFI
ranged between 40% and 80%.
Expect disbursements/collections to normalize mid-3Q/3QFY21.
Of the total reduction in opex QoQ in 1QFY21, a ~33% reduction is attributable
to variable costs/pay and the balance 67% to travel/advt./professional fees, etc.
It did not implement pay cuts during the quarter, but converted some fixed
components to variable.
Expect the mix of fixed variable pay to be 50:50 in the coming year (historically,
70% has been fixed pay).
The 80bp opex to AUM ratio is not sustainable; it may return to ~1.4% once the
situation normalizes.
87% of the focused book is from the MSME segment.
Asset quality
Collection efficiencies are calculated against demand/billing for the month for
the on-book portfolio. The overall collection ratio on AUM would be +/-2–3%.
Write-backs/Collections (~INR3.5b) from the pre-COVID-19 (Feb’20) period were
not included in calculating the ratio.
If a customer started paying in June (with no installments honored in
April/May), they were issued a fresh repayment schedule.
Moratorium was offered to all customers. Borrowers were educated and
requested to pay if they could.
Normal collection efficiency pre-COVID-19 was at 97%.
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Liquidity/Margins
Lending yield was at 15.29% (15.68% in 1QFY20).
In July, it raised INR1b under term loans, INR1.50b under the PCG scheme, and
availed an INR1.25b refinance facility from SIDBI. Cost of borrowings stood at
9%, 8.5%, and 6.2%, respectively.
Repayment obligations were at INR6.50b in FY21.
Expect some compression in CoF (anticipate further linkage to MCLRs).
HFC:
It is focused on growth in the semi-urban and rural regions.
Tax adjustments and COVID-19 provisions have led to decline in HFC PAT.
Others:
Tier I capital is entirely of internal accruals.
Tax rate is at 25% (last year: 35%).
NBFC – MFI partners have started receiving funds from NABARD and other
lenders as well.
Muthoot Finance
Current Price INR 1,129
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Results Update
Neutral
Business Updates
Most branches were closed in Apr’20, but the situation is back to normal now.
Bulk of the lending in 1QFY21 came from top-ups.
Guidance of 15% AUM growth for FY21, irrespective of gold prices.
Don’t see much competition from banks on back of recent increased LTV cap.
Going slow on auctions of NPLs as the collateral buffer is adequate. Rather, the
company is giving time to its customers to repay.
More than 40% customers are now transacting online. Barring depositing gold
and taking back gold, the customer can do everything online.
The company took two new initiatives this quarter – (1) ‘Loans@Home’ wherein
MUTH’s staff visits a customer’s home, collects the gold and disburses the loan
instantly. Currently, MUTH is doing this for ticket sizes above INR200k. (2) ‘Gold
Unlocker’ – Customers can keep jewelry in MUTH’s lockers and take loans
whenever they want.
Average LTV of the outstanding portfolio currently stands at 54%.
Opex reduction in 1QFY21 is not sustainable over the long term.
Expect yields to remain stable at 22%.
Plans are afoot to open 250 branches over the next 12 months.
Liquidity/Funding
Cost of borrowings increased QoQ due to the full impact of ECB cost (which
came in on 1st Mar’20). MTM on ECBs goes into ‘OCI’ directly. ECBs raised last
year came in at double-digits (first tranche) and single-digits (second tranche).
INR15b worth CPs mature every month.
Will maintain 10% liquidity on the balance sheet.
Subsidiaries
MFI – Have slowly started lending (disbursed INR1b in Jul’20) and should be
back to normal in the next 2-3 months. 60%+ of the portfolio is SHG and the
remaining is JLG.
Housing Finance – Will wait for the moratorium period to end and see how
customers are behaving. Will resume lending after that only.
Vehicle Finance – Only collections happening right now.
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Expect share of subsidiaries to decline from 12% currently to 9-10% by end-FY21
due to muted growth
Provisions for subsidiaries were made for the loan book under moratorium.
Collection efficiency in July: MFI – 76%; HL – 87%, VF – 75%.
Others
MUTH is offering free COVID-19 insurance cover up to INR100k to all new gold
loan customers.
Internally, the company combined its 1Q-2QFY21 targets to a single 1HFY21
target. The company is confident of achieving the same.
When gold prices rise, competition typically increases, but only temporarily.
Got discounts on rentals from their landlords for 1 month.
When customers come to MUTH, they come with an amount in mind. Only 10-
20% of customers come to take loans at maximum LTV.
Average loan duration is 3-5 months.
80% of customers are repeat customers (not necessarily renewal customers).
4% of the portfolio is from new customers in 1QFY21, while in FY20, it stood at
27%. In FY20, the company auctioned only ~INR5b worth of loans.
Gold loan interest rates vary between 12-23%.
PNB Housing Finance
Current Price INR 316
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Neutral
Business updates
The company received sanction to sell down INR3.5b worth of corporate
accounts to banks.
It increased corporate loan yields by 100–125bp in the quarter.
INR5b per month has been collected in retail lending in the past three months.
INR1.25b corporate collections were made in April. This increased to INR4b in
May and INR5b in June.
The search for a new CEO is happening ‘very fast’.
It would maintain two to three months’ worth of borrowing repayments of
liquidity on the BS.
Yield: HL – 9.52%, LAP – 10.6%; Corp – 12.5–13%
Asset quality / Moratorium
Around 5k of 40k moratorium customers in the second phase subsequently
withdrew from the moratorium. Around 90% of Morat 2.0 customers had also
availed Morat 1.0.
IPL – One mortgaged parcel of land was auctioned in the quarter, and the
company received INR250m earnest money. The developer paid an additional
INR250m in July 2020. The principal outstanding is now at INR690m from
INR1.01b in March.
Supertech – The promoter and other parties are interested in resolving the
account. However, this would take some time to reach resolution.
Vipul Ltd. – PNBHOUSI had a court case with the promoter. The court has
allowed PNB HOUSING to auction the property under SARFAESI.
Radius – INR2.5b is outstanding. PNBHOUSI has started legal proceedings. Two
developers are interested.
Ornate – INR1.81b is outstanding. The company has been admitted to NCLT.
September 2020
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 Motilal Oswal Financial Services
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IREO – The promoter entirely paid over-dues. Hence, the company is now
classified as 0dpd (earlier it was in Stage 2 due to SICR). The builder is expected
to make further payments by 5th August.
60% of the construction finance book is under principal moratorium. Still, the
company received INR6b repayments from customers, but this was left in the
escrow account for the developer to use.
INR34.22b of the construction finance book is for projects that are less than 50%
constructed. Of this, INR10b is NPL, while the rest is 0dpd.
The increase in moratorium since 5th June (prior earnings call) is due to
customers now knowing that it was an opt-in option. Later, when the company
reached out to customers, some of them opted for it.
Collection efficiency in July is 98.1% (this comprises non-moratorium customers
only).
It received INR7b extra EMI repayments from retail customers in June.
Guidance
Target INR130b retail lending disbursements in FY21. No fresh corporate
sanctions would be granted in FY21. AUM growth would remain steady this
fiscal.
Expect share of retail AUM to increase to more than 85% in FY21.
Repco Home Finance
Current Price INR 180
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Results Update
Buy
Business updates
Disbursements are currently at 50–60% of run-rate levels.
Expect 5–8% AUM growth for the year.
Balance transfers by banks from REPCO’s book have increased from INR700–
800m per month to INR1b.
There have been no comments on the quantum of possible restructuring.
Housing prices have declined only moderately (~10%). However, this is not a
concern for management.
Asset quality/funding