3QFY20 | February 2020

VOICES

VOICES

India Inc on Call

VOICES, a quarterly product from Motilal Oswal Research, provides a ready reference for all the post results earnings calls attended by

our research analysts during the quarter. Besides making available to readers our key takeaways from these interactions, it also

provides links to relevant research updates, and transcripts links of the respective conference calls.

This quarterly report contains

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

transcripts

Links to our Results Updates on each of the companies included

Research & Quant Team

(Gautam.Duggad@MotilalOswal.com); Tel: +91 22 6129 1522

Investors are advised to refer through important disclosures made at the last page of the Research Report.

24 November 2015

1

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Contents

Summary

..................................................................................................................................................................................................................................

3

Sectors

...............................................................................................................................................................................................................................

8-142

Automobiles ......................................................................................................... 8-18

Amara Raja ........................................................................................................................ 9

Ashok Leyland ................................................................................................................... 9

Bajaj Auto ........................................................................................................................ 10

Bharat Forge.................................................................................................................... 10

BOSCH ............................................................................................................................. 11

CEAT ................................................................................................................................ 11

Eicher Motors.................................................................................................................. 11

Endurance Tech............................................................................................................... 12

Escorts............................................................................................................................. 13

Hero MotoCorp. .............................................................................................................. 14

Mahindra & Mahindra..................................................................................................... 15

Maruti Suzuki .................................................................................................................. 16

Tata Motors..................................................................................................................... 17

TVS Motors...................................................................................................................... 18

Capital Goods ..................................................................................................... 19-29

ABB.................................................................................................................................. 20

BHEL ................................................................................................................................ 20

Blue Star .......................................................................................................................... 21

Crompton Greaves CG ..................................................................................................... 22

Cummins ......................................................................................................................... 24

Havells ............................................................................................................................. 25

L&T .................................................................................................................................. 27

Thermax .......................................................................................................................... 28

Voltas .............................................................................................................................. 28

Cement............................................................................................................... 30-35

ACC.................................................................................................................................. 30

Birla Corp ........................................................................................................................ 31

Dalmia Bharat ................................................................................................................. 31

Grasim Inds ..................................................................................................................... 32

India Cements ................................................................................................................. 33

JK Cements ...................................................................................................................... 34

JK Lakshmi Cements ........................................................................................................ 34

Ultratech Cement ............................................................................................................ 35

Consumer ........................................................................................................... 36-51

Asian Paints ..................................................................................................................... 37

Britannia Inds .................................................................................................................. 38

Dabur India...................................................................................................................... 39

Emami ............................................................................................................................. 40

Godrej Consumer ............................................................................................................ 42

GSK Consumer................................................................................................................. 43

Hindustan Unilever.......................................................................................................... 43

Jyothy Labs ...................................................................................................................... 44

Marico ............................................................................................................................. 45

Page Inds ......................................................................................................................... 46

Pidilite Inds...................................................................................................................... 47

Tata Global Beverages ..................................................................................................... 48

United Breweries ............................................................................................................ 49

United Spirits................................................................................................................... 50

Financials- Banks ................................................................................................ 52-62

AU Small Fin. ................................................................................................................... 53

Axis Bank ......................................................................................................................... 54

Bank of Baroda ................................................................................................................ 55

DCB Bank ......................................................................................................................... 55

Federal Bank ................................................................................................................... 56

HDFC Bank....................................................................................................................... 57

ICICI Bank ........................................................................................................................ 58

Indian Bank ..................................................................................................................... 59

IndusInd Bank.................................................................................................................. 59

Kotak Mahindra Bank ...................................................................................................... 60

RBL Bank ......................................................................................................................... 61

State Bank of India .......................................................................................................... 62

Financials – NBFC ................................................................................................ 63-74

Aditya Birla Capital .......................................................................................................... 63

Bajaj Finance ................................................................................................................... 64

Equitas Holdings .............................................................................................................. 65

HDFC Life ......................................................................................................................... 66

ICICI Pru Life .................................................................................................................... 67

L&T Finance..................................................................................................................... 68

LIC Housing Fin. ............................................................................................................... 69

M&M Financial ................................................................................................................ 70

MAS Financial .................................................................................................................. 71

Muthoot Fin .................................................................................................................... 72

PNB Housing.................................................................................................................... 72

Repco Home Fin .............................................................................................................. 73

Shriram City Union Finance ............................................................................................. 74

Healthcare .......................................................................................................... 75-83

Alembic Pharma .............................................................................................................. 76

Alkem Labs ...................................................................................................................... 76

Aurobindo Pharma .......................................................................................................... 77

Biocon ............................................................................................................................. 77

Cadila Healthcare ............................................................................................................ 78

Cipla ................................................................................................................................ 78

Dr Reddy’s Labs ............................................................................................................... 79

Glenmark Pharma ........................................................................................................... 79

IPCA Labs ......................................................................................................................... 80

Jubilant Life ..................................................................................................................... 80

Laurus Labs...................................................................................................................... 81

Lupin ............................................................................................................................... 82

Strides Pharma ................................................................................................................ 82

Sun Pharmaceuticals ....................................................................................................... 83

Torrent Pharma ............................................................................................................... 83

Media..................................................................................................................84-91

DB Corp ........................................................................................................................... 85

Jagran Prakashan............................................................................................................. 86

PVR Ltd ............................................................................................................................ 87

Sun TV Network .............................................................................................................. 88

Zee Entertainment .......................................................................................................... 89

Metals ............................................................................................................... 92-95

Hindalco Inds................................................................................................................... 92

Jindal Steel ...................................................................................................................... 93

JSW Steel ......................................................................................................................... 93

SAIL ................................................................................................................................. 94

Vedanta........................................................................................................................... 95

Oil & Gas .............................................................................................................96-99

BPCL ................................................................................................................................ 97

Mahanagar Gas ............................................................................................................... 97

Petronet LNG................................................................................................................... 97

Reliance Inds ................................................................................................................... 98

Retail .............................................................................................................. 100-108

Aditya Birla Fashions ..................................................................................................... 100

Jubilant Foodworks ....................................................................................................... 102

Shoppers Stop ............................................................................................................... 104

Titan .............................................................................................................................. 105

V-Mart........................................................................................................................... 106

Technology ...................................................................................................... 109-117

Cyient ............................................................................................................................ 110

HCL Tech ....................................................................................................................... 111

Hexaware Technologies ................................................................................................ 111

Infosys ........................................................................................................................... 112

L&T Infotech .................................................................................................................. 112

Mindtree ....................................................................................................................... 113

Mphasis ......................................................................................................................... 113

NIIT Technologies .......................................................................................................... 114

Persistent Systems ........................................................................................................ 114

TCS ................................................................................................................................ 115

Tech Mahindra .............................................................................................................. 115

Wipro ............................................................................................................................ 116

Zensar Technologies ...................................................................................................... 117

Telecom .......................................................................................................... 118-122

Bharti Airtel ................................................................................................................... 118

Bharti Infratel ................................................................................................................ 120

Tata Comm .................................................................................................................... 121

Utilities ........................................................................................................... 123-126

JSW Energy .................................................................................................................... 123

NHPC ............................................................................................................................. 123

NTPC.............................................................................................................................. 124

Power Grid Corp ............................................................................................................ 124

Tata Power .................................................................................................................... 125

Torrent Power ............................................................................................................... 126

Others ............................................................................................................. 127-142

Allcargo Logistics ........................................................................................................... 127

Brigade Entp. ................................................................................................................. 127

BSE Ltd .......................................................................................................................... 128

Container Corp .............................................................................................................. 128

Coromandel Intl ............................................................................................................ 129

Gateway Distriparks ...................................................................................................... 130

Godrej Agrovet .............................................................................................................. 130

Indian Hotels ................................................................................................................. 131

Interglobe Aviation........................................................................................................ 132

Info Edge (India) ............................................................................................................ 133

Kaveri Seeds .................................................................................................................. 133

KNR Constructions......................................................................................................... 134

Lemon Tree Hotels ........................................................................................................ 135

MCX............................................................................................................................... 135

Oberoi Realty ................................................................................................................ 136

Phoenix Mills ................................................................................................................. 136

PI Inds............................................................................................................................ 137

Quess Corp .................................................................................................................... 137

SRF Ltd .......................................................................................................................... 138

SH Kelkar ....................................................................................................................... 139

Tata Chemicals .............................................................................................................. 140

Team Lease ................................................................................................................... 141

UPL ................................................................................................................................ 141

Note:

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

3QFY20 | India

| 3QFY20

Voices

Inc. on Call

Voices

BSE Sensex: 41,323

S&P CNX: 12,126

Mixed commentary; short-term respite not visible yet!

In this report, we present detailed takeaways from the 3QFY20 conference calls as

we refine the essence of India Inc ‘Voices’.

The December-quarter corporate earnings-report was in line with our

expectations for both the Nifty and the MOFSL Universe. EBITDA/PBT/PAT met

our estimates, supported by tax cuts. Financials drove 100%+ of incremental

earnings as expected, while Metals and O&G dragged the aggregates. Nifty

delivered 9% YoY earnings growth (in-line) for the quarter, even as PBT was up

by 4% YoY. For FY20, our Nifty EPS estimate is revised down marginally to

INR527, and we now expect 9% profit growth for the Nifty, singularly led by

Financials. Retail and Utilities were the only sectors exceeding our PBT estimate

in the quarter. Corporate commentaries remained mixed with very few pockets

of optimism and emerging concerns around the potential impact on supply

chain in the wake of coronavirus outbreak in China.

In BFSI, Banks have reported slowdown in corporate loan growth, reflecting the

weak macro and the lower utilization limits by the corporates. Also, Banks are

maintaining a cautious and conservative stance toward wholesale lending, while

retail loan growth remains steady (ex-auto segment). A few banks like AXSB and

ICICIBC have downgraded the stressed telecom account to BB & below pool, and

near-term credit cost is thus likely to stay elevated. NBFC commentaries across

companies were mixed. In the auto segment, sentiment is turning positive for

passenger vehicles and tractors, while it still remains subdued for CVs and 2Ws.

Asset quality for vehicle financiers is likely to be stable.

Consumer companies across the board were cautious on the outlook, given the

weak rural scenario and the ongoing moderation in personal care products

demand. Demand slowdown continued to be led by subdued consumer

sentiment, liquidity crunch in channels, and weakness in wholesale. North and

west India witnessed sharper slowdown compared to the rest of the country.

In Autos, OEMs expect the demand scenario to remain weak during the BS6

transition phase. They do not expect a revival before 2HFY21. Commodity price

benefits are likely to ease in 4QFY20 due to an uptrend in RM prices, impacting

players on the margin front. Demand trend is likely to remain volatile over the

next 6-8 months due to BS6 transition-related cost inflation.

In IT, margins improved sequentially as companies work their way on cost-

optimization levers, but shrank on an annual basis due to structural changes in

industry. However, despite uncertain macros, companies highlighted robust deal

wins, particularly INFY and TECHM.

In Capital Goods, 3QFY20 was marked by sharp slowdown in execution, implying

continued slowdown in the economy. Most companies have started focusing on

payments and are going slow in execution, in case of stretched working capital

cycle. While National Infrastructure Pipeline was announced, the budgetary

allocations proved to be a let-down.

In Cement, managements indicated that demand has started showing signs of

recovery across regions, except south. The months of Jan and Feb'20 have also

witnessed price hikes across regions. However, there have been roll backs in

south due to poor demand and in east due to heavy supply. Industry, however,

is likely to benefit from lower fuel and logistics costs, as energy prices (oil/pet

coke/coal) have been on a downtrend.

February 2020

3

Voices | 3QFY20

Autos

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

festival season. PVs exhibited a pick-up in volumes, while 2W/CV/tractor

momentum was weak. OEMs expect the demand scenario to remain weak

during the BS6 transition phase and do not expect a revival before 2HFY21.

Commodity price benefits are expected to moderate in 4QFY20 due to the

uptrend in RM prices, impacting players on the margin front. Increased threat of

coronavirus may further disrupt RM and component sourcing from China,

hurting business activities. Strong pre-buying expectation has come down and

OEMs have targeted to reduce BS4 inventory to zero ahead of BS6 launch.

Demand is likely to remain volatile over next 6-8 months due to BS6 transition-

related cost inflation.

Capital Goods

The third quarter was marked by sharp slowdown in execution, implying

continued slowdown in the economy. Most companies have started focusing on

payments and going slow on execution, in case of stretched working capital

cycle. While National Infrastructure Pipeline was announced, the budgetary

allocations proved to be a let-down. Order inflows surprised marginally, offering

some comfort on execution, provided working capital does not stretch further.

Coronavirus issues need to be closely monitored.

Room AC companies are to

be closely watched as prolonged closure in China due to coronavirus will disrupt

the supply chain. Strong summer season may lead to loss of sales opportunity in

case the supply chain does not normalize. There might be scope of price hikes in

the summer season in case there is supply shortage, but loss in volumes may

offset any such advantage for overall revenue.

Cement

Managements indicated that demand has started showing signs of recovery

across regions, except south. The months of Jan and Feb’20 have also witnessed

price hikes across regions. However, there have been roll backs in south due to

poor demand and in east due to heavy supply. Industry, however, is likely to

benefit from lower fuel and logistics costs, as energy prices (oil/pet coke/coal)

have been on a downtrend.

Consumer

Consumer companies across the board were cautious on the outlook, given the

weak rural scenario and the ongoing decline in personal care product demand.

Demand slowdown continued to be led by subdued consumer sentiment,

liquidity crunch in channels, and weakness in wholesale. North and west India

witnessed sharper slowdown compared to the rest of the country.

Managements were hopeful that a combination of a possible good Rabi crop,

volume growth pick-up off a low base and government measures to boost

consumer sentiment could lead to growth from 1QFY21.

Financials

Banks

Banks reported slowdown in corporate loan growth, reflecting the weak macro

and the lower utilization limits by corporates. Also, banks are maintaining a

cautious/conservative stance toward wholesale lending, while retail loan growth

remains steady (excl. auto segment). Growth in CV/CE remains tepid, and banks

February 2020

4

Voices | 3QFY20

have reported an uptick in the delinquency trend in these segments. On the

asset quality side, all banks reported an increase in slippages, led by both

corporate/retail slippages. Corporate slippages were elevated led by a stressed

HFC account, while retail slippages spiked in the auto and agri segments.

Overall, the PCR ratio has improved as banks continued making healthy

provisions to further strengthen balance sheet. A few banks like AXSB/ICICIBC

downgraded the stressed telecom account to BB & below pool, and near-term

credit cost is thus likely to stay elevated. NIM trajectory remains stable, led by

an improvement in cost of deposits.

NBFC

Commentary across companies was mixed. In the auto segment, the sentiment

is turning positive for passenger vehicles and tractors, while it still remains

subdued for CVs and 2Ws. Asset quality for vehicle financiers is likely to be

stable. In the MFI segment, recoveries have started in the flood-impacted areas.

In housing finance, players remain cautious in the wholesale segment, but

expect retail growth to remain steady. BAF is cautious on some segments like

2W, SMEs and B2C.

Healthcare

There has been impetus on cost-cutting initiatives by companies and re-think on

strategy for the US generics segment, given the product-specific considerable

investment and the uncertain timeline for potential approval. Further,

companies continue working on evolving requirement for regulatory

compliance. The focus is gradually shifting toward the branded generics

segment in India and other emerging markets. In addition to further enhancing

value of existing brands, companies are expanding their product portfolio using

an in-licensing strategy, wherein competition is limited with products being

under patent. Domestic formulation is likely to remain the key focus area as it is

a strong-RoE business with low capex requirement. Over the near term,

companies are concerned with availability/prices of RM procured from Chinese

suppliers due to the ongoing shutdown on account of coronavirus issue.

Companies indicated that typically they have inventory to the tune of 70-90

days which would be sufficient till 4QFY20. However, if the issue gets extended,

then they could get adversely impacted by supply shortage from China.

Media

In 3QFY20, ad revenues were hit across the sector due to the lack of spending by

corporates on account of the short-term dip in the consumption outlook.

Broadcast companies (ZEEL/SUNTV) are quite focused and bullish in the OTT

segment over the next two years. The TRAI has released a new order on

bouquet pricing beginning Mar’20, which should likely impact broadcasters’

subscription revenue. PVR witnessed healthy pace of screen additions with the

quarter having multiple blockbuster releases and being a festive season. Radio

and print companies’ revenue declined due to weaker-than-expected ad spends

from government/national players. Expect newsprint prices to fall further by

INR1-2/kg.

February 2020

5

Voices | 3QFY20

Metals

Steel demand has improved since November, supporting consistent price hikes

since December. Steel companies expect net steel realization (NSR) to rise by

INR2500-3000/t QoQ in 4QFY20. Auto-contract prices, however, were

negotiated down by ~INR6000/t for 2HFY20 which has tempered down the

improvement in NSR for flat products companies (TATA, JSW). Most of the

excess inventory lying with the companies has been diluted in 3Q with some of

it sold in the export markets, supporting higher volumes in the quarter. On the

costs front, industry does not expect any further reduction in 4QFY20 as both

coking coal and iron ore prices have moved up from the lows.

Oil & Gas

Refining margin outlook for the reminder of FY20 is likely to remain weak owing

lower-than-expected boost in diesel yields. OMCs expect healthy marketing

margins to continue, which will offset the weakness in the refining margins. RIL’s

refining margin is set to improve with the enhancement of delayed coker and

distillate yields, while petrochemical cracks are likely to improve with feedstock

flexibility. The company’s strong growth avenue remains in its retail business.

MAHGL continues to struggle with lackluster volume growth and it expects

some volume relief from development of Raigad GA. Continued higher opex

challenges would normalize the EBITDA margin of MAHGL. IGL expects volume

growth of ~12% from its high-growth gas, supported by government regulations.

PLNG expects strong volume off-take at Dahej (on expanded capacity) from the

power and CGD sector and foresees capacity utilization of 30% from ramp-up at

Kochi post completion of the Kochi-Mangalore pipeline (Mar’20). For FY21, GAIL

has guided for incremental volumes of ~7-8mmscmd from startup of two

fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk

on its US contracts.

Retail

Increase in sales was mostly driven by new store additions during the quarter

and SSSG remained weak for most companies. Retailers expect low SSSG for a

few more months until the economy revives and spending gets a boost.

Retailers are quite optimistic about the business in the long term and will

continue with the pace of store adds (undeterred by short-term headwinds).

Store-level profits remain a key parameter and companies have guided that they

will close certain stores if they continue incurring losses in the foreseeable

future.

Technology

Overall, the quarter saw moderation in tier 1 organic revenue growth rate (on a

sequential basis) with continued pockets of weakness in two large verticals –

BFSI and Retail. Margins improved sequentially as companies work their way on

cost-optimization levers, but shrank on an annual basis due to structural

changes in the industry. However, despite uncertain macros, companies

highlighted robust deal wins, particularly INFY and TECHM. In 3QFY20,

companies slowed down on headcount addition. TCS and Tech M reported a

headcount decline v/s strong additions in 1HFY20.

Telecom

Bharti’s management has welcomed the recent tariff hike (in Dec’19) but

emphasized that ARPU should be INR300 to have healthy balance sheet and to

February 2020

6

Voices | 3QFY20

make investment in 5G. Further, management indicated that capex could

increase on an immediate basis, but overall would continue trending down as

the company has many ways to increase network capacity such as spectrum

reframing, TDD deployment, increased sectorization, massive MIMO and fiber

rollout. Bharti Infratel’s management expects tenancy cancellation to be over by

this quarter and is targeting an energy margin of 3% for FY20. In the longer

term, the target is to achieve 5% energy margin. TCOM’s management is

working on investment strategy for the innovation segment which should be in

place by 1QFY21; growth segment should continue to grow at current pace.

Utilities

NTPC expects commercialization of 5.3GW of capacities in FY21. Transaction

advisors have been appointed for NTPC’s potential acquisition of NEEPCO and

THDC. PWGR has set a FY21 capitalization/capex target of INR150/105b. The

company’s FY20 capitalization target of INR200-250b would also be dependent

on commissioning of Raigarh-Pugalur. According to the company, it has resolved

much of the RoW issues faced and remains confident of completing it in FY20.

With declining capex and removal of DDT, the company noted that there is a

likelihood of increasing dividends. Torrent Power noted it has paid debt of

INR10b in this quarter, which should reduce interest costs. Approval for

extension timelines though has not been received for its SECI-III and SECI-V

projects.

February 2020

7

AUTOMOBILE | Voices

Key takeaways from management commentary

AUTOMOBILES

Industry volumes remained weak in 3QFY20 after some revival during the festival season. PVs exhibited a

pick-up in volumes, while 2W/CV/tractor momentum was weak. OEMs expect the demand scenario to

remain weak during the BS6 transition phase and do not expect a revival before 2HFY21. Commodity price

benefits are expected to moderate in 4QFY20 due to the uptrend in RM prices, impacting players on the

margin front. Increased threat of coronavirus may further disrupt RM and component sourcing from China,

hurting business activities. Strong pre-buying expectation has come down and OEMs have targeted to

reduce BS4 inventory to zero ahead of BS6 launch. Demand is likely to remain volatile over next 6-8 months

due to BS6 transition-related cost inflation.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY20

Ashok Leyland

FY21 outlook: While 1QFY21 would be tough and 2Q flattish, AL is preparing

for growth in 2HFY21. Exports are likely to grow by 20%, driven by a revival in

Bangladesh, SL and African markets (new tender coming in). We are building

in volume growth of ~11% for M&HCV and ~40% for LCV in FY21.

Cost-cutting program ‘K54-2’ is on track to deliver savings of ~INR5b in FY20.

For FY21, it is targeting savings of INR6-6.5b.

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

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

increase with commodity prices rising in 4QFY20.

It has resumed 3W exports to Egypt with 3-4k units.

The company is holding inventory of ~5 weeks.

Expecting weak 2W demand for next 2-3 quarters due to BS6 cost inflation.

The company believes that business has bottomed out and estimates 4QFY20

to be similar to 3QFY20.

Cost-reduction measures taken in India business should start reflecting in

2HFY21.

Impact of Coronavirus on business is difficult to assess currently as there is 4-

6 weeks of inventory in EU and the US.

The company expects the premium segment to grow by ~5% in FY21,

although 1HFY21 will be muted.

System inventory at 2 weeks.

The company has already moved to BS6 variants for models like Classic,

Himalayan and 650cc Twins. It is continuing network expansion. Added seven

large format stores, and will further add ~250 RE Studio stores by Mar’20.

Benefits of cost-saving initiatives may get offset by commodity cost inflation

in 4QFY20. The company is ready with BS6 product line-up and will stop BS4

production by mid-Feb’20. It is holding five weeks of BS4 inventory.

FY21 PV industry outlook: PVs should grow by 2-4%, CVs by 4-6% and tractors

by 5%. In FY20, tractors should de-grow by ~7-8% (although expected to grow

by 5-7% in 4QFY20).

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

at normal level.

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

Demand environment is improving, which can be gauged from inquiry

improvement. Rural is now doing better than urban, and the outlook is

promising based on encouraging estimates for Rabi crop. SIAM estimates PV

industry growth at 3-5% in FY21.

In Jan’20, key models have seen a reduction in discounts of ~INR5-6k and

price increase of ~INR5-6k. Commodity prices, which have started rising

(steel, rhodium, palladium, etc.), will start reflecting in P&L from 1QFY21.

SMP's US plant continues to progress with manufacturing ramp-up (increase

of 10% QoQ); it will see further ramp-up based on Daimler's requirement.

It is yet to reach optimum utilization, which is expected in the next 3-6

months. The coronavirus outbreak can impact SMRPBV’s exposure in China in

4QFY20.

New Launches

Bajaj Auto

Chetak

(e-scooter)

Bharat Forge

Eicher Motors

Hero MotoCorp

M&M

e-KUV100

,new

Thar

Maruti

Brezza (Petrol Variant), S-

presso (CNG variant)

Motherson

Sumi

February 2020

8

AUTOMOBILE | Voices

JLR –

China business is on a recovery path with continued growth in last six

months. However, the coronavirus risk could have some impact in 4QFY20.

The company has already deferred reopening its CLR plant post the Chinese

New Year. JLR capex guidance for FY20 has been reduced to GBP3.6b (v/s

GBP3.8b earlier).

India –

India M&HCV business is seeing signs of recovery with improved

inquiries for replacement demand from large fleet operators and for tippers.

Realizations have improved from Dec’19 level due to lower inventory and

higher inquiries.

The company expects domestic 2W industry to recover from 2HFY21 with a

mild decline in 1HFY21. Dealer inventory level is at 5 weeks. Has stopped BS4

production from Jan’20 and its entire portfolio for the domestic market has

been shifted to BS6.

Tata Motors

Passenger Vehicles -

Altroz,

Gravitas, JLR -Defender

TVS Motors

i-Qube (e-scooter)

Amara Raja Batteries

Current Price INR 784

Click below for

Results Update

Buy

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

markets.

No pricing action was taken for 3QFY20 and Jan’20, though there has been some

volatility in lead prices.

Commercial production for e-rickshaw batteries to start in 4QFY20, as both

product and tubular battery capacity is expanded by ~0.36m units p.a.

Capex guidance maintained at INR5.5-6b for ongoing capacity expansion in (a)

2W batteries (by ~2.5m units to 17m by Mar/Apr-20) and (b) 4W batteries (by

~2m units to 14.5m by 3Q/4QFY21).

Ashok Leyland

Current Price INR 81

Click below for

Detailed Concall Transcript &

Results Update

Buy

FY21 outlook:

While 1QFY21 is likely to be tough and 2Q flattish, AL is preparing

for growth in 2HFY21. Exports are likely to grow 20% led by a revival in

Bangladesh, SL and African market (new tender coming in).

Focus on inventory reduction continued in 3QFY20.

Total inventory (AL +

dealer) reduced from ~27.5k units (Jun’19) to ~8k units (Dec’19) and further to

~6.5k units (Jan’20). Company level inventory reduced by ~5,500 units QoQ.

Cost-cutting program K54-2 is on track to deliver savings of ~INR5b in FY20. For

FY21, it is targeting savings of INR6-6.5b.

Capex:

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

continue focusing on controlling capex with maintenance capex of INR4-5b per

annum in M&HCV and growth investments in LCV.

AL has walked away from deals due to very high discounts where it was losing

money even at contribution level.

Sequential increase in RM cost was attributable to inventory reduction at

company level (impact of INR2.5b-2.6b) and an adverse mix (higher ICVs and

STU business).

Staff cost reduction for reversal of bonus provisioning of 1HFY20. Also, ~250

people have opted for VRS.

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

February 2020

9

AUTOMOBILE | Voices

Hinduja Leyland Finance (HLFL):

AL and Hinduja family to acquire ~7% stake of

Everstone at ~2x FY19 P/BV in multiple tranches over the next nine months.

Delinquencies in HLFL have gone up and there had been higher cases of vehicle

repossessions during the quarter but nothing alarming yet.

Bajaj Auto

Current Price INR 3,090

Click below for

Detailed Concall Transcript &

Results Update

Neutral

Recently launched BS6-compliant CT and Platina are not based on e-carb but on

an internally developed electronic injection system. This solution works well for

lighter bikes. It has passed entire cost increase of BS6/other modifications

(without loading margins) through price increase of 13-20%.

BJAUT plans to shift entire production to BS6 by mid-Feb'20. It has inventory of

~5 weeks and is hopeful of clearing entire BS4 inventory by first week of Mar'20.

It does expect some pre-buying ahead of BS6 transition.

For domestic 2Ws, it expects weak demand for 2-3 quarters due to BS6 cost

inflation. This is based on its experience during insurance/ABS price increases. It

does not expect material down-trading due to BS6.

Commodity costs are expected to go up as early as 4QFY20.

3W exports to Egypt have resumed from Jan’20 with 3-4k units shipment.

However, it is seeing some signs of stress in Iraq and Cambodia.

Chetak (e-scooter) has received very good response and ~2,000 bookings.

Export incentives: If there is any change or lowering of export incentives due to

WTO ruling, management believes it has enough pricing power to pass it on.

Domestic 3Ws volumes are expected to be stable. 3W cargo could be a

beneficiary of high cost inflation in SCVs due to BS6.

Bharat Forge

Current Price INR 480

Buy

Click below for

Detailed Concall Transcript &

Results Update

BHFC’s management believes the business has bottomed out; while 4QFY20

should be similar to 3Q, the normal seasonal uptick in 4Q might be absent due

to the BS6 transition. Both domestic/exports should be flat QoQ.

Coronavirus impact on business is difficult to assess currently as there is 4-6

weeks of inventory in EU and the US.

Significant cost reductions should occur in India, which would reflect in the P&L

in 2HFY21. This is across all major cost heads (both variable as well as fixed).

At its German subsidiary, BHFC had undertaken significant restructuring and

cost reduction target (~10pp of sales). The company’s aluminum forging

business has an order book of USD300m p.a. over the next 5-6 years.

Capex: In FY21, except for on-going projects’ residual capex of ~INR2.5b (plus

~INR1b of maintenance capex), the company will not invest in any new capacity

addition as current utilization is ~50%.

AP plant should start commercial operations from Feb’20, with full ramp-up

happening during FY22/FY23.

INR11k/t increase in steel prices in the last 2 years (2017 to now) has inflated

realization and deflated margins due to pass-through impact.

Oil and Gas business revenues in 3QFY20 declined 25% QoQ.

BS6: Pump housing for urea dousing is a new product under BS6, which BHFC

will supply.

February 2020

10

AUTOMOBILE | Voices

Bosch

Current Price INR 14,616

Click below for

p

Results Update

Neutral

Underlying industry (relevant for BOS) declined 11.2% YoY. BOS' revenue

declined by ~25.8% YoY from autos and by ~13.9% YoY from non-auto. Domestic

revenue declined ~25% YoY, whereas exports fell ~10% YoY.

Aftermarket is going through transformation (which has near-term

repercussions), results of which would be visible in 2020.

It is supplying EV components for recently launched TVS e-scooter iQube / Tata

Nexon EV. This is in addition to order wins for Bajaj Chetak e-scooter.

It expects 1HFY21 to be muted and moderate growth in 2HFY21.

For SCR used in BS6 trucks, it is partnering with vendors for components other

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

CEAT

Current Price INR 1,070

Click below for

Detailed Concall Transcript &

Results Update

Buy

Total volume grew ~2% YoY (~4% QoQ) driven by ~8% growth in replacement

and export market, despite ~8% decline in overall OEM demand, which

remained weak.

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

25%/~10%.

Replacement market demand is sluggish, but base has turned favorable from

Nov’19.

OEM business in CVs, PVs and 2Ws should benefit from new

capacities/customer/model addition.

RM prices in 4QFY20 should remain similar to that in 3QFY20; however, based

on spot prices, some inflation is expected in 1QFY21.

Capex: S/A project capex has been further reduced to ~INR30b from ~INR35b.

Of this, ~INR19b was incurred till 9MFY20, another ~INR2.2b in 4QFY20 and

~INR8-10b will be used in FY21. Balance INR5b will not be spent in the next 2

years. This is excluding maintenance (~INR1-1.2b p.a.) and OTR capex (~INR5b,

to be triggered based on certain milestones).

TBR plant is operating at 50-55% utilization of targeted capacity. Has helped to

gain 1.5-2pp market share of TBR.

PCR plant will be commissioned in Feb’20 and will be ramped up by ~50% in

FY21. 2W plant would also get commissioned in 4QFY20.

The company is evaluating merits of the new corporate tax regime, but is yet to

take a final decision as it does not offer MAT credit.

Eicher Motors

Current Price INR 18,870

Click below for

Detailed Concall Transcript &

Results Update

Buy

Royal Enfield

Management expects the premium segment to grow ~5% in FY21, though

1HFY21 will be slow.

Bullet X and Classic X were launched in CY19; this has made RE bikes more

accessible (affordable) to buyers. Bullet X contributed ~10% to Bullet volumes in

3QFY20.

February 2020

11

AUTOMOBILE | Voices

500cc product portfolio has not been doing well, and hence, will be

discontinued in BS6, particularly since it has 650cc Twins to dilute the impact.

Network expansion continues with addition of ~7 large format stores to ~939

stores and ~250 RE Studio stores to ~500 stores. The company expects to add

another ~250 RE Studio stores by Mar’20.

System inventory stands at ~2 weeks. It has already moved to BS6 for Classic,

Himalayan and 650cc Twins. Given the supply chain complexity, it has moved to

BS6 early, in turn losing some pre-buying opportunity as dealers were stock-out

in some parts of the country in Jan’20 (BS6 was ~33% of wholesales).

Jan’20 order book was higher than dispatches.

BS6 cost inflation was largely passed on to customers without loading

contribution.

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

Argentina, France and the UK, increasing its total touch points to 675 outside

India, including 67 exclusive stores.

‘Make your own initiative’ played out well.

Soft launch of Configurator (with 600 units initially) helped to test the system.

These motorcycles are made within 24hrs from the time of order to dispatch,

and has attracted customers from metros/large cities to customize their

motorcycles, without increasing the complexity of manufacturing.

Export market

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

to seasonality (due to cold weather); it is expected to revive from the dealer end

by Feb-Mar’20.

Both Himalayan and Twin have performed well in the export market.

Himalayan was a surprise win in the USA, Europe, Brazil and Columbia. It grew

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

markets.

The company’s slower approach on dealer expansion to ensure profitability first

(like a few in Thailand), is expected to pick up pace once expansion happens.

Expect ~10 dealers to come up next year.

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

dealer profitability.

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

markets.

Endurance Technologies

Current Price INR 1,059

Buy

India

Click below for

Detailed Concall Transcript &

Results Update

Aftermarket in 9MFY20 grew 9.6% to INR2,147m (incl. exports).

In 9MFY20, new business wins were at INR4.6b p.a.; RFQs at INR13.2b are WIP.

New business includes new product platforms (~50%) and the replacement

business (~50%), but doesn't include new orders/RFQs from the Bajaj group

(incl. KTM, Husqvarna and Triumph). Peak execution of these orders would be in

FY22.

Karnataka plant (front forks) for HMSI started in Sep’19; it has reached ~4,000

sets per day in Feb’20. Including the Sanand plant, it has reached a peak run rate

of ~INR250m/month in Feb’20 (v/s INR30-40m/month in 3QFY20).

February 2020

12

AUTOMOBILE | Voices

Progress of the ABS business is slower by 6-8 months, as clearance is awaited

from BJAUT by 1QFY21. It has a capacity of 250k (can be ramped up to 400k/p.a)

with revenue potential of ~INR750m p.a. (or ~INR1.2b on expanded basis).

With TVS, the company is in the process of getting further orders for brake,

suspension as well as clutch assemblies for 2Ws/3Ws. Its current share of

business on disc brakes for Apache and front forks for scooters is ~33%.

The company believes the growth decline will stop from Feb’20 due to new

business on its hands.

Europe

New order wins stood at EUR22.5m p.a. from VW, FCA and Maserati.

EU PV sales grew 11.5% in 3QFY20 led by 21% growth in Dec’19 due to

significant changes to CO2-based taxation for 2020. While sales grew, OEMs are

cutting inventory. Jan’20 saw decline in both registrations and production.

EU outlook is uncertain as many OEMs have given profit warnings for CY20 as

they are reducing prices to sell cars. Also, exports have reduced from Germany

on account of the noise around trade war, which resulted in loss of ~EUR35m

business from BMW, VW and Daimler. However, it does expect to grow faster

than the underlying market.

Others

Consol. net debt is at INR881m.

FY21 capex for both India and EU business would be very less, as focus is on

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

Escorts

Current Price INR 911

Neutral

Click below for

Results Update

Tractors

In 3QFY20, industry declined in the North/Central regions (strong markets) by

4.2% YoY while the South/West regions (weak markets) declined 8.1% YoY.

Industry momentum has improved QoQ. In 4QFY20, ESC expects industry to

grow in low single-digit. While FY21 is expected to be a tad subdued, FY22

should see full revival. FY20 saw decline of 7%, largely due to infra (70%) and

agri (30%). Many infra projects have been stalled; although there has been some

improvement, it is far from normal. Infra is not as bad as it was in 1HFY20, but

recovery is very slow. Agri was positive for the last 2-3 months due to positive

sentiment post monsoons. Recovery should start with the South/West regions,

whereas the North/East/Central regions should play catch-up fast.

Tractor mix:

The Farm tractor: Power tractor ratio at 39:61 improved in 3QFY20

(v/s 36:64 YoY and 41:59 QoQ). Contribution of tractors (40HP and above) in

3QFY20 stood at 54% (v/s 47% YoY).

Distribution network:

Added 970+ (added 20 in 3QFY20). Will continue to add

dealerships in both strong and weak markets.

Dealer inventory at 3-4 weeks, lowest in the industry (over 5 weeks). Retails for

ESC have been higher than wholesales.

South:

ESC has done very well in the last 18-20 months with market share

increasing in all four key states (Kerala is not an important tractor market). In

some of these markets, market share is inching toward 10%. The South is seeing

recovery due to good monsoons, as it more heavily dependent on rainfall than

other markets.

February 2020

13

AUTOMOBILE | Voices

The Kubota JV has started exports from 3QFY20 under joint branding ‘E Kubota’.

It started with compact tractors (25-26hp) but will cover the entire range (going

up to 90hp). Every quarter will add new models and new countries. Positioning

is different. Kubota products known for their features are power oriented. ESC

products are rugged and fuel efficient. There is no material overlap in offerings.

Construction Equipment

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

In 9MFY20, industry is down 22%, ESC is down 25.3%. Industry in 3QFY20 – BHL

down 5.1%, Crane down 29.7% and Compactors down 20.8%.

Industry 9MFY20: Backhoe loader down 22% in 9Ms, Compactor down 23.6%

and Cranes down 22.7%.

Capacity utilization at 40%, RoCE at 28.8%.

Margin improvement on better product mix, price increase and cost

optimization.

New product launches in the next couple of quarters in the high-value segment.

Financing: Banks are now quite active with 65% contribution (v/s 40% earlier) as

against NBFCs).

Railways

Order book at ~INR4.5b as of Dec’19 to be executed in the next 12-15 months.

EBIT Margins down QoQ/YoY due to impact of high share of NPD products,

which have ~40% import content. Localization plans are in place, but testing and

validation would take 18-24 months since it is a braking system.

Received approval for 3 new products and are in the pipeline for FY21. Primary

growth would be through the new products.

Others

Net Cash: INR7.2b.

Released ~INR3b of cash from working capital from Mar’19 level.

Capex: INR2.5b each for FY20/FY21.

Commodity prices: Steel prices are increasing, which should impact the CE

business in 4QFY20 and tractors in 1QFY21.

Cost cutting efforts should continue in FY21; margin guidance should be better

than FY20.

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

cost increases.

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

start reflecting in P&L from 1QFY21.

Hero Motocorp

Current Price INR 2,252

Neutral

Click below for

Results Update

Cost savings and commodity prices accounted for 100bp benefits of total gross

margin expansion of 220bp.

Cost-saving initiatives will continue to benefit operating margins, but

commodity cost inflation including the rise in cost of precious metals may offset

benefits.

Increased penetration, through deeper distribution network, resulted in strong

spare sales with further growth estimated in the future.

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

50% share.

February 2020

14

AUTOMOBILE | Voices

Scooter production was stopped in Dec’19.

Ready with BS6 products and plan to stop complete BS4 production by mid-

Feb’20.

Out of 16 brands in the product portfolio, HFdelux, iSmart and Pleasure are

already BS6 compliant with new launches to flow in the coming months.

Have been successful in passing most of the BS6 cost inflation in prior launches.

In wait-and-watch mode till Apr’20 to estimate BS6 production targets.

Holding BS4 inventory of 5 weeks and don’t see any heavy discounting as BS4

products are already priced cheaper by INR8-10k.

The Andhra plant should get commissioned in 4QFY20 with material revenue

and profits starting to reflect post FY21 only.

Export targets should remain intact despite the slow growth in markets like

Bangladesh, Nigeria and Columbia.

HMCL has declared an interim dividend of INR65/share on face value of

INR2/share. Following the announcement of the Dividend Distribution Policy, no

significant changes have been noted on the company’s dividend distribution.

Mahindra & Mahindra

Current Price INR 526

Click below for

Results Update

Buy

Inventory for Auto was lower than normal and for tractors at normal level

(Dec’19). It plans to stop BS4 production by third week of Feb’20.

FY21 outlook: (a) PVs: 2-4% growth, (b) CVs: 4-6% growth and (c) Tractors: 5%

growth (FY20 decline of 7% based on 5-7% growth in 4QFY20).

MM has a strong product pipeline for Auto:

(a) e-KUV100 (1QFY21), (b) new

Thar (1QFY21), (c) Atom (e-Quadricycle, 2QFY21), (d) W601 (crossover SUV,

4QFY21), (e) new Scorpio (1QFY22) and (f) e-XUV300 (mid-CY21). In Tractors, it

plans to launch the new platform K2 (developed with Mitsubishi) in mid-CY21

with launches spanning over two years across four HP range.

Capex (incl. investment in subs):

It has lowered guidance to ~INR170b over

three years (v/s ~INR180b earlier) based on savings of ~INR10b already realized

through Ford JV. Based on the expected further savings from the Ford JV, capex

could further reduce to ~INR150b.

For BS6 petrol UVs, it has taken price hike of ~INR20k, which is for BS6 cost (incl.

contribution margin). For diesel BS6, it expects cost increase of INR50-70k, but

the extent of pass through would depend on competitive intensity.

SYMC has taken impairment of ~INR3.4b on certain assets. In addition, MM has

taken impairment of ~INR6b for investments in SYMC (gross investment of

~INR24.5b).

SYMC's board has approved business plan targeting breakeven in CY22

based

on funding of INR27-30b (through debt, equity by M&M as well as possible

strategic investor). Breakeven would require increase in volumes, reduction in

cost and improved efficiencies. It is targeting significant reduction in cost

(negotiated compensation cut with the labor union + 3-4pp reduction in

material cost). It is targeting new export markets like Russia and Vietnam.

Ramp-up in Russia will happen by mid CY21 and Vietnam this year.

MUSA (Mahindra Tractor USA):

Last year, it had significantly changed business

model and that exercise is roughly half way through. Inventory has gone down

February 2020

15

AUTOMOBILE | Voices

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

by next year.

Ford JV:

JV would be launching connected vehicle solution this week. C-SUV

platform work going on and expects savings of INR10b. Similarly, B-SUV (1 yr

behind C-SUV) would drive savings of ~INR10b. Further, by MM utilizing excess

capacity at Ford’s plant, it would save capex of ~INR4b.

EVs:

It expects 3W segment to take lead in electrification. MM sells 500 li-ion

3Ws (Trea) and 1,000 Lead-acid 3Ws (e-Alfa). Treo is already viable for owner

operator, as it makes little more money than normal 3Ws. Treo is profitable at

contribution level for Mahindra Electric (ME) and as volumes goes up it will

break-even at PBT. For PV fleet, e-KUV100 would be commercially viable at

launch price of ~INR825k (ex-showroom Delhi). e-KUV100 is not profitable

currently for ME, but at monthly volumes of ~500 units, it would be positive at

contribution level. Management indicated that Mahindra Electric (100% sub

focused on EVs) would be EBITDA positive in FY21.

Maruti Suzuki

Current Price INR 6,756

Click below for

Detailed Concall Transcript &

Results Update

Buy

Inquiries in Jan’20 have been good – with growth in Petrol and ~2% decline in

Diesel. While rural demand is now better than urban, outlook is also promising

based on encouraging estimates for Rabi crop.

BS6: MSIL’s 11 top selling models are BS6 compliant.

Inventory: ~9 days as of Dec’19. Diesel is <10 days inventory.

Diesel: See no scope for any material pre-buying as company plans to stop diesel

production beginning Feb’20. It has just 8,700 units of diesel vehicle inventory

(v/s avg. monthly sales of ~27,000 units).

FY21 outlook: SIAM has estimated PV industry growth at 3-5% in FY21.

Diesel: In 3QFY20, diesel contributed ~29% to industry volumes (lowest in

decades) and ~20% for MSIL. Post BS6, company expects industry share of diesel

to decline further to 15-20%. Even in mid-sized SUVs like Hector, Creta and

Venue, share of petrol is picking up. MSIL should benefit from this change due to

its strength in petrol (of total 50.1% market share, ~40.2% comes from petrol

and ~9.9% comes from diesel).

Discounts in Jan’20 have been reduced by INR5-7k for some models.

QoQ realization decline is due to higher discounts and mix (lower diesel, higher

volumes of smaller cars, etc.).

Gross margin decline of ~150bp QoQ was due to (a) higher sourcing from

Gujarat (accounting impact), (b) higher discounts (~110bp QoQ), (c) lower

production (v/s wholesales; 100bp QoQ impact), and (d) 60bp benefit of lower

commodity costs.

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

rates have also come down.

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

pass on cost increases.

Commodity prices, which have started to rise (steel, rhodium, palladium, etc.),

will start reflecting in the P&L from 1QFY21.

February 2020

16

AUTOMOBILE | Voices

Tata Motors

Current Price INR 158

Click below for

Detailed Concall Transcript &

Results Update

Buy

Defender – three months of order book with retails to start from mid-March.

China business is on a recovery path with continued growth over the last six

months. However, the coronavirus risk could have some impact in 4QFY20. It

has already deferred reopening of the CLR plant post Chinese New Year.

JLR’s capex guidance for FY20 was reduced to GBP3.6b (prior: GBP3.75b).

Project Charge delivered savings of ~GBP0.2b in 3Q (total GBP0.7b), as well as

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

(total GBP0.7b).

It has initiated Project Charge+ targeting further savings of GBP1.1b over the

next 15 months (GBP0.4b in 4Q and GBP0.7b in FY21). Key drivers for these

would be material and variable cost reduction.

India M&HCV business is seeing signs of recovery with improved inquiries for

replacement demand from large fleet operators and for tippers. Realizations

have improved from Dec’19 level on lower inventory and higher inquiries.

JLR: Key takeaways from management commentary

Defender has three months of order book, with retails starting mid-March.

New Discovery Sport would be launched by CJLR on 20th Feb. This is important

model as it contributes 40-50% of CJLR volumes.

China business is on recovery path with continued growth in last six months.

However, coronavirus risk could have some impact in 4QFY20. It has already

deferred reopening of CLR plant post Chinese New Year.

JLR’s capex guidance for FY20 reduced to GBP3.6b (v/s GBP3.75b earlier).

Project Charge delivered savings of ~GBP0.2b in 3Q (total GBP0.7b), as well as

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

(total GBP0.7b). Total savings under Project Charge has exceeded target of

GBP2.5b by Mar’20 to GBP2.9b by 3QFY20.

It has embarked on Project Charge+ targeting further savings of GBP1.1b over

next 15 months, with target of GBP0.4b in 4Q and GBP0.7b in FY21. Large part

of these savings are on material and variable cost reduction, which would

support EBIT margin guidance of 4-6% for FY22/23.

Warranty cost (% of sales) at 4% in 3QFY20 on like-to-like basis. Reported is

~3.6% due to GBP mark to market.

Continue to have higher marketing cost. VME worst QoQ and expected to be at

similar levels in next two quarters.

VME increased from 6.6% to 7.5% (+30bp QoQ), incl. GBP25m US residual

accrual for 16MY vehicles.

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

1H.

February 2020

17

AUTOMOBILE | Voices

TVS Motors

Current Price INR 441

Click below for

Detailed Concall Transcript &

Results Update

Neutral

Domestic 2W Industry outlook:

TVS expects a recovery from 2HFY21 for

domestic 2Ws after a mild decline in 1HFY21. It is still expecting GST to be

reviewed by the government.

Dealer inventory levels stand at five weeks.

Retails have been higher than

wholesales.

It has transited its entire portfolio for the domestic market to BS6 and stopped

BS4 production in mid-Jan'20 (~60% of Jan’20 dispatches were BS6).

BS6 price increase is to cover cost only

(and not contribute to margins). BS6

pricing is based on overall portfolio basis (incl. exports) and cost-reduction

initiatives. It expects EBITDA per unit to be similar under BS6 (v/s BS4).

RM cost declined sequentially due to cost-reduction initiatives

and soft

commodity prices. Cost savings contributed ~230bp YoY (60-70bp QoQ) in

3QFY20. Import content came down to 10% of RM cost from 14% in FY19. FY21

target would be ~8%.

Indonesia witnessed EBITDA breakeven in 3QFY20.

Its 2W volumes grew ~55%

(to 40.75k) and 3W volumes were up ~219% (to ~6k units).

Weakness in mopeds

due to weak rural and high discounting in economy

segment. 95% of moped volumes are from utility and 5% from commuting side.

Recently launched e-Scooter iQube is sold through 12 dealerships in Bangalore.

It would be later entering several other cities like Delhi, Mumbai, Hyderabad,

Trivandrum, Chennai etc. It has capacity of ~1,000 units/month for e-scooter. It

is investing ~INR2b for electric vehicle program.

Financing penetration

for TVSL at ~52%, of which ~45% is TVS Credit. In

9MFY20, TVS Credit has book size of ~INR91.5b and earned PBT of ~INR1.35b.

Ban on 2W & 3W taxis in Lagos city (Nigeria) on certain roads is a very recent

phenomenon and as per the management it is too early to assess the impact.

For TVSL, Nigeria contributes ~55% of 3W exports and 12-15% of 2W exports.

Capex planned

for FY20 is at ~INR6.5b. In 3QFY20, it invested ~INR498m in TVS

Motor (Singapore) and ~INR142m in PT TVS Motor (Indonesia). In 9MFY20, it has

invested ~INR2.47b in subsidiaries.

February 2020

18

CAPITAL GOODS | Voices

CAPITAL GOODS

The third quarter was marked by sharp slowdown in execution, implying continued slowdown in the

economy. Most companies have started focusing on payments and going slow on execution, in case of

stretched working capital cycle. While National Infrastructure Pipeline was announced, the budgetary

allocations proved to be a let-down. Order inflows surprised marginally, offering some comfort on

execution, provided working capital does not stretch further.

Coronavirus issues need to be closely monitored. Room AC companies are to be closely watched as

prolonged closure in China due to coronavirus will disrupt the supply chain. Strong summer season may lead

to loss of sales opportunity in case the supply chain does not normalize. There might be scope of price hikes

in the summer season in case there is supply shortage, but loss in volumes may offset any such advantage

for overall revenue.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY20

Near-term slowdown in

industrial automation is

expected to continue. However,

discrete automation, robotics

and electrification products are

ABB

expected to do well.

Exports as an opportunity can be

huge in case the global economy

picks up. CY19 saw healthy

growth in exports (+55% YoY).

KKC has maintained its FY20

growth guidance for the

domestic business at 3-5% YoY.

Cummins

Guidance for exports growth has

also been maintained at 20% as

the company does not see any

appreciable pick up in 4QFY20.

Consumption slowdown and

liquidity crunch in the real estate

segment has impacted the

Havells

business in 9MFY20.

Lloyd business was impacted

due to sharp fall in LED TV sales

on account of price erosion.

FY20 order inflow guidance is at

10-12%, revenue guidance is at

12-15% and EBITDA margin

Larsen and

Toubro

guidance for the core E&C

business is at 10.5%. Revenue

ask rate for 4QFY20 stands at 16-

25%.

AC continued to perform well for

the company with double-digit

growth in a non-seasonal

Voltas

quarter. Impact of coronavirus

may negatively impact the

company in 1QFY21.

EMPS segment performance was

subdued due to poor execution

and challenges in working capital

cycle.

Domestic Capex Cycle

Budget Impact

Slowdown in industrial automation

business is largely due to the muted

auto sector.

ABB is leveraging opex-related

spending, since capex from the

private sector is still muted.

None

Near-term challenges exist such as

economic slowdown and liquidity

crunch.

Export market continues to face

roadblocks owing to prolonged

muted demand.

Capex-related demand has been

muted. Confidence is low due to

economic slowdown.

In Lloyd, the company witnessed

double-digit growth in ACs, which is

a key positive.

Outlook remains robust over the

medium term with key projects

expected to expedite in 4QFY20 (AP

and Maharashtra).

Order inflow surprised positively as

infrastructure orders were up 31%

YoY.

Ordering in EMP segment was

strong, leading to an all-time-high

order book. This gives comfort of a

sharp pick-up in EMP revenues over

the next two years.

Negative as overall capex

outlay was muted in the

budget.

Positive – due to import duty

hike on small appliances.

Negative – due to import duty

hike on compressors.

Negative as overall capex

outlay was muted in the

budget.

Negative – due to import duty

hike on compressors.

February 2020

19

CAPITAL GOODS | Voices

ABB

Current Price INR 1,211

Buy

Click below for

Results Update

While customers are looking to gain higher productivity by using automation,

most are looking to invest in technology.

See some risk due to weak capacity utilization.

Once the investment cycle turns, ABB will be ready to capitalize its offerings.

Exports – making in-roads into the Indian subcontinent.

Have started leveraging robotics and motion for business outside India.

ABB has received projects under smart city for distribution of water and

electrification.

Continue to gain traction in Railways, announced INR2b order on 12th Feb’20.

Continue to see opportunities in Data Center, Airports, and Railways.

4QCY19 results are different compared to historical trends. In CY19, distribution

of revenue was even during each quarter, which has led to 4QCY19 looking

subdued on a heavy base YoY.

Lower margins on account of legacy orders in Industrial Automation.

INR700m provisions taken as exceptional items relating to the Solar business.

Cash balance stood at INR16b.

Inter-corporate loan of INR3.4b to PG exists at result-end date; the same has

been repaid by them.

Employee cost for the quarter looks higher, as earlier the actuarial-related

changes reflected in the last quarter of the financial year. From CY19, it is being

evenly spread across 4 quarters.

Exports – 18% of the revenue now. Grown 55% YoY in CY19.

Solar business: 7-8% sales come from Solar. Margins are very thin. Solar

business is 50% exports and 50% domestic.

Over the years, ABB has diversified its product offerings to mitigate itself against

slowdowns in segments that it operates in. India being a large market, there are

segments that will do well while some may not perform at all. Also, demand is

led by Tier 3/4 cities and ABB is focused on these markets.

BHEL

Current Price INR 35

Neutral

Click below for

Results Update

For FY21, the company is looking at new project ordering as per NIP guidelines

For 3QFY20, In-house production was more than bought outs.

Yadadri and Udangudi projects have been put on hold by the client.

The company did not receive orders from NTPC Talcher and Tanzania which

were expected in 3QFY20. Talcher received clearance from Odisha government

in January. For Adilabad (1*800MW), key decisions are pending with the

government.

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

from clients.

Other expenses in 3QFY20 was lower on account of: (a) lower creation and more

withdrawal of provisions (INR2.86b net creation in 3QFY19 versus INR1.87b net

withdrawal in 3QFY20), (b)Power, fuel and indirect material costs – INR1.25b

lower YoY, (c) Currency gain of INR1.38b in 3QFY20 on account of Euro

depreciation

February 2020

20

CAPITAL GOODS | Voices

Receivables stood at INR003143.1b at the end of 3QFY20 (versus INR153.4b end

of 3QFY19). Contract assets stood at INR237.5b at the end of 3QFY20 (versus

INR222.9b end of 3QFY19). Effort is to convert contract asset into receivables.

Cash balance currently stood at INR4b.

Gross margins were impacted due to increase in material costs.

Receivables breakup at the end of 3QFY20 stood as - Private (12%), SEBs (48%),

Export (9%), CPSUs (31%)

NIP talks of overall Thermal capacities going up, hence old power plants should

shut and new power plants should start. 48GW worth of opportunity exists.

Cash flow from operations (CFO): Stood at -INR60.7b ending 3QFY19 versus -

INR29.2b ending 3QFY20, thus showing improvement. Capex till 9MFY20 stood

at INR3b, and the company is expected to end FY20 with INR3.5-4b of Capex.

Out of INR1.07t order book, around INR875b is executable, while BHEL is

favorably placed in around INR130b worth of orders. (INR105b in power, INR9b

in industrial, INR17b in international).

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

worth INR42b.

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

stood at INR90b.

Tax rate – the company hasn’t taken a final view and the same will be

communicated in 4QFY20.

Employee headcount currently stood at 34,500. Management expects around

500-600 employee retirements every year.

Out of total expenses of BHEL (except provisions), around 75% in towards fixed

cost, which the company is trying to bring down.

Blue Star

Current Price INR 832

Neutral

EMP segment

Click below for

Detailed Concall Transcript &

Results Update

Order book stood at INR28.1b (+23.5% YoY).

Order inflow - INR5.5b.

Commercial AC business – Growth slowed down in 3QFY20 compared to

1HFY20. Increased market share in Chillers and VRV segment.

There is a slowdown in collection from government projects, and therefore,

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

UCP segment

Margins were impacted on account of higher ad-spends. Last year, on account

of weak summer there was a cut in ad-spends, which were ramped up this year

after a good summer season. The company has also roped in cricketer Virat

Kohli as brand ambassador in 2QFY20; related expenses will be incurred fully in

3QFY20. This is a seasonally low quarter and therefore margins are looking

subdued. For FY20, the margin guidance now stands at 8.5-9.0% v/s 9.5%

earlier.

Growth picked up in end-Nov’19 after a muted festive season.

Grew Room AC segment by 10% in 3QFY20 (v/s 5% for industry). It is a weak

quarter, and therefore does not have material impact on overall full-year trend.

Expect industry growth at 10-12% in FY20 and 15% growth for Blue Star.

Room AC pricing in the market has been competitive for some time. Hence,

Samsung coming in doesn’t change the equation. Price hikes have not happened

February 2020

21

CAPITAL GOODS | Voices

at industry level for the last 2 seasons and depends on how the summer season

pans out. Competitors haven’t disclosed new pricing as of now. A positive

though is the lack of inventory overhang, and therefore, a rational pricing

strategy can be expected in 4QFY20.

Existing indicators suggest that summer should start from February-end and

that would mean a normal summer season.

36% of sales through consumer finance schemes.

Water purifiers – Competition is intensifying, but Blue Star continues to invest.

Have started seeing contribution from services business due to strong

installation base. Expect FY20 revenue to be ~INR600m with 2% market share.

This is lower than the internal target set at INR800m. Water purifiers would

have 80bp negative impact on segmental margins in FY20, which should be

neutral in FY21.

Mass premium AC category for Blue Star is doing well. Company is seeing strong

demand; while there is a market for entry-level as well, as a strategy, Blue Star is

concentrating on the mass premium segment, which has done well. From a

near-term perspective, the summer season is a key monitorable.

Coronavirus impact – As a trend, stocking for India happens in advance,

therefore, 4QFY20 supplies have already been received or are in transit, and

should arrive in February-end and early-March. There might be an additional 10

days shutdown in China. If this is a short-term phenomenon, then there should

be no issue. At least as of now, 4QFY20 is not expected to be impacted.

Others

Borrowings reduced owing to superior cash flow generation (D/E = 0.47).

Deferred tax asset write-back led to higher taxes. Normalized tax rate to be at

27-28%. After a year, post consuming MAT credit (currently at INR700m)

benefits, company will move to 25.2% tax rate.

Un-allocable expenses look higher as last year saw net of interest tax refunds. In

3QFY20, there was a minor one-off expense on office renovation. Broadly, the

run-rate of INR240m per quarter or INR850-900m per year on un-allocable

expenses continue.

Crompton Greaves Consumer Elec

Current Price INR 290

Buy

Demand scenario

Click below for

Detailed Concall Transcript &

Results Update

Apart from very specific pockets, not seeing any slowdown.

Facing slowdown in 2 categories: (1) rural business, which is primarily

agricultural pumps, and (2) B2B lighting business.

Have not seen any dealer de-stocking as yet.

ECD segment

Fans volume growth stood at 8% YoY. Market share increased 80bp and stands

at 27% (was 24% around 2-3 years back).

Appliances business witnessed exponential volume growth in geysers (66%) with

Crompton now ranked the no. 4 player. Have 11% market share currently,

helped by two back-to-back strong seasons.

Domestic Pumps continued to see volume growth momentum at 8% YoY, while

Agricultural pumps were impacted by unseasonal rains.

February 2020

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CAPITAL GOODS | Voices

New series of fans named as ‘Silent pro’ were introduced. It falls under Premium

fans with 50% less power usage.

Entering the season for air coolers, expanding product range and offerings.

Continue to increase product offerings in appliances, backed by higher ads-

pends and investments toward branding.

Mixers seeing low single-digit market share.

Premium fans form 20% of the fans business, up from 10% 4 years ago.

Crompton is no. 2 in the Premium segment with market share of 20-25%.

Crompton defines Premium fans as INR2,500 and above.

BEE rating change – Production allowed till end-Jun’20 and sales can happen till

end-Dec’20. We believe that Crompton will benefit from the rating change.

Won’t have specific answer on price impact, but it can stated that not all SKUs in

fans will have similar impact of price change. The company has invested and

worked on cost structure and has valuable solutions.

Lighting segment

LED Panel and Battens registered 15% volume growth.

Value growth continues to be negative v/s strong volume growth.

LED portfolio continues to face price erosion. However, on QoQ basis, prices

were stable. In the next 2 quarters, volume growth should translate into similar

value growth given no further price erosion happens.

B2B business continues to witness slowdown in Government and EESL order

execution and clearance.

Market share increased by 100bp in LED Lamps.

Sequentially, PBIT margins improved although not at desired level.

Volume growth continues to be in double-digit, a trend that should continue

over the next few years. If price erosion gets arrested, value growth can be in

double-digit as well.

Baroda factory – Investments were made earlier toward automation. Put in 7

new lines, of which 3-4 lines are already operational. While these were a part of

cost cutting initiatives, it was also aimed at increasing capacity and improving

quality. While margins have already improved on sequential basis, further

benefits are expected to accrue in the future.

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

components.

GTM program

Distribution reach continues to expand in fans and B2C lighting.

Making investments in systems, processes, people and data.

This has significantly helped in planning prudently – from earlier 4 weeks to 1

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

investments.

New product launches

Have done well with launch of geysers, air-coolers and mixer-grinders over the

past 2 years. These 3 categories together have an addressable market of

INR100b.

Objective is clear that the company will enter segments where there is a

roadmap to be a meaningful player.

China coronavirus disruption in supply chain

No issues as yet with respect to supply chain.

February 2020

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CAPITAL GOODS | Voices

Anyways, on account of Chinese New Year, shutdown generally.

Any incremental shutdown post that might have an impact, which we will have

to evaluate.

Cummins India

Current Price INR 540

Neutral

Macro outlook

Click below for

Detailed Concall Transcript &

Results Update

Slowdown in economic activity continues to affect segments like Power

Generation and Construction. Management expects the slowdown impact to

spill over in the next quarter before government measures start showing results.

Exports market remains challenging with demand slowdown accelerating in the

Middle East and Africa the most.

Domestic revenue growth guidance maintained at 3-5% while export guidance

maintained at 20% decline for FY20.

No initial signs of recovery in Jan’20 as yet.

Domestic market update

Power generation

Revenue at INR3.8b (-12% YoY). HHP - INR1.7b, MHP - INR1.2b, LHP - INR0.9b.

LHP showed signs of recovery in 3QFY20.

Market share in the different sub segments stood at:

HHP – 65% (market leader)

MHP – 48%

LHP – 38%

Very low HP – 18% (not a major player and lost 4% market share)

Cummins India has cost advantage in medium and low horse power segment; it

forms the major supply chain for global markets.

Channel has much inventory and demand is poor currently. Hence, management

is not very bullish on the near term. On an annual basis, FY20 is expected to

witness a decline of 6% over FY19.

Industrial

Revenue at INR2.7b (+8% YoY).

Rail business continues its strong performance and has grown 49% YoY. Even if

railways go for electrification, Cummins will be able to cater to the new demand

with alternate product offerings.

Distribution

Revenue at INR4.2b (+18% YoY).

Growth was mainly on account of a single contract in the bus segment for gap

engine product. The size of the order was INR700m with execution done in

3QFY20, no spill over should happen in the next quarter. The order was margin

accretive.

Exports update

HHP = INR2.1b (-2% YoY).

LHP = INR1.4b (-27% YoY).

The Middle East and Africa were impacted the most. Rest of Asia, Mexico and

even Latin America remain weak.

Exports in 4QFY20 are expected to be on similar lines of 2QFY20 and may

remain flat for the next 2 quarters. Positive impact was visible from certain

markets like Egypt, but overall these markets continue to slow down.

February 2020

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CAPITAL GOODS | Voices

Margins

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

network were offset by weakness in Power Generation and export market.

On cost rationalization, management has cut down on costs, such as travel,

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

FY21.

According to management, FY21 margin guidance should be at 2QFY20 level.

While cost cutting measures should aid margin expansion, export market

recovery will be a key monitorable.

Expect gross margins to contract sequentially in 4QFY20.

On CPCB IV opportunity

CPCB IV should provide great opportunities to Cummins India and will require

total revamp of products. Export potential will open up for all products and the

company should see capex on the technology side.

CPCB IV is more stringent, with over 80% improvement required in NOx and

hydrocarbon and also requires significant amount in after treatment. Cummins

has been leading in this technology in India and the world. Peers will be required

to invest in the new technology whereas Cummins has already done that.

Havells India

Current Price INR 619

Click below for

Detailed Concall Transcript

& Results Update

Neutral

Macro

Infrastructure related slowdown has been impacted by industrial segments.

While consumption related slowdown was also evident, the company has

performed better than industrial segments.

Offshoot of improvement in consumer sentiment was seen in 4QFY20; difficult

to decide whether entire growth will be recouped in 4Q as it is too early to

comment.

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

Cables & Switchgears

As liquidity improves at government side, stalled projects would get completed

and will result in demand coming back.

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

correction.

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

impacted the business on the consumer side.

Electrical Consumer Durables

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

witnessed such low levels of inventory.

Both fans and water heaters saw flat growth YoY.

All the GFK reports suggest that the company will see market share gain in 2Q-

3QFY20.

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

delay in the onset of winter, so initial sales were low and picked up

subsequently. January has been better and has started to catch up the loss of

sales in Nov’19.

Due to the credit situation, normal channel refilling for fans, which happens

November onwards, hasn’t happened.

February 2020

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CAPITAL GOODS | Voices

The management could have increased off-take by increasing credit terms and

offering heavy discounting, but chose not to.

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

discounting.

On fans rating change, management does not see any destocking in 4QFY20 as

rating change is still some time away. It may happen in 1QFY21 toward the end.

Lloyd

LED continues to be impacted by price erosion.

Currently, the company has strong control on its supply chain as the new factory

has got operational.

The company has improved distribution network with wider geographical reach

as well as increasing presence in MBOs. Hence, the brand has started to witness

cost advantages in 3QFY20, which are further expected to improve in 4QFY20.

Expect margin improvement to happen over next few quarters. Focus is to

regain market share; margins should follow as the company now has control

over production and supply chain.

AC plant capacity is 6lacs on single shift. Total capex incurred is INR4b.

Compressors will be sourced and won’t be manufactured.

AC sales witnessed low double-digit growth in revenue. In the latest GFK report,

there has been an improvement in market share to some extent.

In the next 3 quarters, nearly 70% of ACs would be from own factory. For

upcoming season, demand would be served from carrying inventory.

On AC pricing, the company has taken some corrective action. Management

believes there is positive sentiment from the channel. Pricing is now competitive

with other brands.

Lighting

Decline attributable to infrastructure/government related business.

In the consumer segment, company grew in low single-digit.

Despite on-going price erosion, Havells has been able to maintain margins.

In rural segment, lighting is doing extremely well for Havells.

Margin related

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

excesses spending does happen, which is now at an optimal level.

A&P spending cut by 15% YoY. Management views advertisements long-term

investments and will continue to spend. Discretionary related ad spend

continues to happen, and as volumes pick up, ad spends will proportionately

pick up.

Others

30% of the business is B2B or government related.

Demand will keep on improving as liquidity situation improves.

New product launch is a continuous exercise. Looking to launch heavy-duty AC

as they are largely imported and sold by few players. With own factory and

R&D, such a product becomes viable.

Capex for FY20 at INR5b.

Havells is expanding fast in rural distribution and reach. It has appointed 1,800

distributors and targets to take it to 3,000 in a couple of years. Rural

contribution to sales would be ~INR1-1.2b on full-year basis this year.

February 2020

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CAPITAL GOODS | Voices

Larsen & Toubro

Current Price INR 1,281

Click below for

Results Update

Buy

Strong international order inflow: LT recorded INR416b of order inflows (+2%

YoY), supported by ordering from the international market. Domestic order

inflow declined by 20% YoY, whereas international ordering grew 64% YoY to

INR179b. International orders contributed 43% of total order inflow for the

quarter. For 9MFY20, 34% of order inflow is contributed by international

markets.

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

YoY to INR3.06t.

FY20 guidance maintained: The company maintained its guidance for FY20 –

revenue growth of 12-15%, order inflow growth of 10-12% and core E&C margin

of 10.5%. Revenue ask-rate thus stands at 16-25% for 4QFY20.

Key segmental comments

Infrastructure: International business drives order inflow. Strong order pipeline

in domestic market.

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

reflection of job mix and stage of execution.

Heavy Engineering: Healthy operating performance on account of strong order

book.

Defense: Revenue growth led by artillery gun execution.

Hydrocarbon: Unexecuted order book of three years of revenue. Strong revenue

growth is on account of robust order book with margin expansion on account of

efficient execution. Management believes margins are sustainable at current

high levels if execution too is maintained at current levels.

Others: Base had lumpy sale of commercial property. The company is witnessing

improved traction of reasonably priced apartments.

Developmental Projects: Hyderabad Metro contributed INR7.8b for 9M. For 3Q,

Hyderabad metro had revenue/EBITDA of INR2.3b/1.0b.

IT & TS: Mind Tree consolidation led to 65% growth in revenue.

L&T Finance Holdings: Growing despite challenging environment. Loan book up

by 5% YoY. PAT de-growth of 26% owing to DTA restatement.

E&A business: Revenue declined 10% YoY. Margin improvement to come in via

operational efficiencies.

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

Other highlights

Borrowing cost at parent level at 7.5%.

Tax rate lower on account of new corporate tax rates.

In 2Q: Hydrocarbon segment got favorable claim of INR700-800m. A quantum of

claim was present in 3Q as well.

Working capital: Receivables along with retention is down but payable has not

moved up. Higher working capital is on account of payables side rather than

receivables side. Supporting vendors in liquidity crunch.

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

restarting projects.

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

Possibility of delay exists.

February 2020

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CAPITAL GOODS | Voices

Defense ordering – Positive development related to submarine order but still

early days to comment on it.

E&A sales update – Taking time on transfer of different entities. Doing piece by

piece. Lot of contract transfers. Expect to complete in next few months. If not in

4Q, then by 1QFY21.

Thermax

Current Price INR 986

Click below for

Detailed Concall Transcript &

Results Update

Neutral

Ordering outlook looks positive, and hence, management expects order inflow

to pick up in FY21 from FY20 levels. Our order inflow assumption of 15% CAGR

over FY20-22E adequately factors in the same.

Danstoker will continue to be loss-making in 4QFY20 (as against management’s

expectation of break-even in FY20). Break-even will lead to 50bp/40bp margin

improvement in the Energy segment/overall margins.

There were no delays in execution and payments; however, there was no push

from customers for completion of projects.

Depreciation stood higher on account of TBWES. The factory is fully operational.

Taxes were lower on account of deferred tax adjustment.

There has been an improvement in the cash position in recent quarters.

However, overall financing continues to be challenging as there has been no

improvement in NBFC financing.

Voltas

Current Price INR 733

Click below for

Detailed Concall Transcript &

Results Update

Buy

Unitary Cooling Products

Inverter AC accelerated – now forms 43% of total AC sales (35-36% last year).

20 producers chasing an underpenetrated AC market – hence, competition is

tough with some players cutting prices.

Air coolers’ market share stood at 11.2% (No. 3). Grew 135% YTD.

Commercial refrigerators also grew YoY.

120bp market share expansion in the South for ACs.

AC sales by geography:

North – 40% of AC sales.

West and South – 22-23% of AC sales.

East – small market.

For 9MFY20, in ACs, industry grew 29% YoY while Voltas grew 35%.

Concentrating on the mid-market AC segment.

Impact of import duty hike in the Budget will be passed on to the customer.

Electro-Mechanical Projects and Services

Slow pace of execution coupled with delayed receivables.

Total order book currently stands at INR70.2b (v/s INR50b YoY), with major

orders booked in the water segment.

International order book stood at INR27.2b. The company added INR1.7b fresh

orders from the international market in this quarter.

Leadership transition in Oman was smooth with no major risk to business.

28

F b

February 2020

CAPITAL GOODS | Voices

Domestic order book stood at INR43b, while order intake stood at INR10.8b.

This includes prestigious projects like RWSS (Rural Water Sewage Sanitation

project) in Orissa and the Mumbai metro project.

The company wants to go for higher and bigger projects in India so that it can

manage its resources comfortably. Ideally looking at Ob/revenue ratio of 2-2.5x.

Carillion order stands completed. Because of Carillion’s bankruptcy, it is taking

time to get paid.

RWSS (Rural Water Sewage Sanitation) project is funded by the government and

an external body.

Voltbek

Production has commenced, rollout of products ongoing.

Will raise capacity to 2.5m units in due course (currently 1m units).

Gained market share in Washing machines and Refrigerators.

Sold 220,000+ units in 9MFY20 (Refrigerators, washing machine, microwave and

dishwashers).

On Coronavirus

Adequately covered for 4QFY20 with respect to supplies, however, some impact

if closure is prolonged.

Factories are expected to start by the third week of Feb’20 in China. Output

ready, only unable to tie up with shippers. 15-20 days of lead time to transport

goods from China.

Have some alternate plans ready, with option to go to Korea and Thailand to

source products. Won’t compromise on the quality of products if importing

from a different source. Have some scope to play around with in margins.

Others

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

facility is set up.

Tax rate for the company – 26.7%.

.

February 2020

29

CEMENT | Voices

CEMENT

Managements indicated that demand has started showing signs of recovery across regions, except south.

The months of Jan and Feb’20 have also witnessed price hikes across regions. However, there have been roll

backs in south due to poor demand and in east due to heavy supply. Industry, however, is likely to benefit

from lower fuel and logistics costs, as energy prices (oil/pet coke/coal) have been on a downtrend.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook FY20

Volume Growth

Capacity expansion in east is on track to contribute to

Cement volumes were strong at 5.1mt

FY21 volume growth. While the new clinker line (3mt)

(+14% YoY).

Dalmia Bharat

has commenced trial run, 5.2mtpa cement grinding

3QFY20 volume growth in the south was

units should be commissioned over the next 12 months.

negative (while it was flat for Dalmia),

Murli Industries: NCLAT has given a favorable

and East saw single-digit growth (while

order on 24th Jan’20 and shortly, the asset should

Dalmia grew >10%) with Bihar and

be acquired.

Jharkhand growing in double-digits.

A clinker unit of 8,000tpd at Mangrol and a 1mt cement

In 3QFY20, grey cement volumes (incl.

grinding unit at Nimbahera have been commissioned.

clinker) increased 3% YoY to 2.2mt, while

JK Cement

The company has commissioned 1mt/1.5mt grey

white cement volumes were flat YoY at

cement grinding unit at Mangrol (Rajasthan)/Aligarh

0.35mt.

(UP) on 3rd Feb’20.

The 0.7mt grinding unit in Balasinor (Gujarat) should

get completed in the next two months

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

The company expects CTIL’s asset to achieve EBITDA/t

Consol. volumes declined 4% YoY in

of INR1,000 by 1QFY21 with utilization of 80%.

3QFY20.

Commissioning of 10.5MW of WHRS in Nathdwara

CTIL operated at utilization of 55% for

should further improve performance.

the quarter and 79% in Dec’19.

Ultratech

Capex guidance for FY20 is reduced from INR20b to

Nathdwara is operating consistently at

Cement

INR16b.

60% utilization.

East expansion of 3.4mt should be completed by

Mar’21. Orders for the same have been placed.

ACC

Current Price INR 1,431

Click below for

Results Update

Buy

ACC remains focused on growing the premium product portfolio, wherein

volumes were up 6% YoY in 4Q; RMX volume grew 8% YoY.

The company has been working on supply chain efficiencies and source mix

optimization to reduce costs.

Alternative fuels consumption improved. The company also improved its

electrical energy efficiency.

Freight cost/t improved in 4QCY19 due to road freight reduction and an

improvement in logistics operating efficiencies. Packing material cost reduced

too.

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

INR40.6b.

Unitary cost declined 1% YoY (-2% QoQ) to INR4,536/t. Cost reduction was a

result of better source mix optimization, logistics efficiency and better supply

chain management.

However, cement realization declined 5% QoQ (+0.5% YoY) to INR4,615/t (our

estimate: INR4,689) due to weak pricing in its key markets.

Subsequently, EBITDA/t declined 19% QoQ (+7% YoY) to INR697 (our estimate:

INR778). EBITDA of INR5.4b (+11% YoY) missed our estimate by 9%; margin was

at 13.3% (+0.81pp YoY, -2.46pp QoQ).

February 2020

30

CEMENT | Voices

Birla Corp

Current Price INR 747

Buy

Click below for

Results Update

Cement prices in key markets in northern and central India weakened from the

September quarter. In eastern India, cement prices dropped sharply in the three

months till December.

BCORP operated at utilization of 87% (+5pp YoY) in 3QFY20.

BCORP was able to garner increased market share in West Bengal and Bihar by

expanding its distribution reach and leveraging cross-branding from multiple

plants of its own and its subsidiary, RCCPL Private Limited. In 3QFY20, BCORP’s

sales in eastern India grew 27%YoY, led by premium brands such as MP Birla

Cement Unique and MP Birla Cement Perfect Plus.

In 3QFY20, green shoots were visible in the infrastructure sector with demand in

the non-trade segment growing faster than the trade segment.

BCORP’s trade sales were impacted in the market of Madhya Pradesh due to

extended monsoon. As a result, trade sales declined to 79% in 3QFY20 from 83%

in 2QFY20. Growth in trade volumes was 4% YoY for the quarter.

Share of premium products increased from 37% in 3QFY19 to 41% in 3QFY20.

Share of premium products in trade segment sales in the east has now touched

45% from 38% a year earlier. Share of blended cement in total sales jumped

from 89% a year ago to 90.5% in 3QFY20.

BCORP has secured through auction two coal mines in Madhya Pradesh –

Bikram and Brahampuri. The company has submitted the necessary compliance

documents with the Union Government, completing the first step toward

commercial exploitation of the mines.

Benefits of the company's investments in cost optimization have started to kick

in. Waste Heat Recovery System (WHRS) and solar power units in Maihar and

Chanderia are now operational. A 20-MW captive solar unit, set up in joint

venture with a third party will start supplying power to the Kundanganj and

Raebareli units during the current quarter.

MP Birla Perfect Wall Putty and construction chemicals, test marketed in Uttar

Pradesh, Madhya Pradesh and Rajasthan, have been received well by the trade

channel and end-consumers. The company is gearing up for full-scale launch of

these products in FY21.

Dalmia Bharat

Click below for

Results Update

Current Price INR 866

Buy

3QFY20 volume growth in the South was negative (while it was flat for Dalmia),

the East saw single-digit growth (while Dalmia grew >10%) with Bihar and

Jharkhand growing in double-digits.

Cement demand in 9MFY20 was almost flat. It has started showing green shoots

from mid-Nov’19 but the South still remains negative.

3QFY20 prices remained under pressure, particularly in the East. Price has

started picking up in Jan’20, but prices in the North East are broadly stable.

The company continues to remain focused on trade (60% of sales mix) and

premium sales (currently 20% of trade sales in the East and 14% overall).

Raw material cost was higher in 3QFY20 as Dalmia had to purchase some clinker

since the new clinker line was being commissioned, which required Rajganjpur

plant shutdown.

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

February 2020

31

CEMENT | Voices

Incentives accrued in 3QFY20 were INR330m (INR1.1b in 9MFY20) and collected

were at INR2.0b in 9MFY20. FY21E incentives are expected at INR1.5b (excl.

Murli and Kalyanpur).

New clinker line (3mt) in Rajgangpur, Odisha, commenced trial run in Dec’19

and should be stabilized by end-Mar’20 with 75% utilization expected to be

achieved by 3QFY20. As regards the planned 7.7mtpa grinding unit (GU)

expansions in the East, up-gradation and debottlenecking has been completed

at Bokaro GU (0.8mt) and trial-run should start by Mar’20 in Bengal GU (2.2mt)

and by Sep’20 in Odisha GU (2.2mt). Bihar GU (2.5mt) should start in FY22.

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

withdrawn.

Murli Industries: NCLAT has given a favorable order on 24th Jan’20 and shortly,

the asset should be acquired. Renewal of mines as well as incentives (of INR11b

till CY32) has been approved.

The mutual fund issue is nearing a resolution and the units should come back to

Dalmia in 6-9 months.

The company has purchased back INR2.5b of high-cost debentures in Jan’20,

which should reduce interest cost in 4QFY20.

Capex: Out of INR30b total capex for the East, INR15.4b has been spent till now,

of this, INR9.4b was spent in 9MFY20. The company plans to spend INR2.5b

more on the East and INR4b on Murli in 4QFY20. Capex for FY21 should be

~INR10b, which includes INR7b on expansion in the East and INR3-3.5b on

upgradation at Murli.

The company plans to keep its net debt/EBITDA below 1.8-2x.

Refractory business divestment is expected to be completed by Dec’20. The

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

Kolkata NCLT.

Demand should grow at 5-6% YoY in FY21 with the East at 6-8%, the North East

at 8-10% and the South at +-2%.

The company has changed the method of depreciation in its north- eastern

capacities from straight line to written-down value method w.e.f. 1st Jul’19. As a

result, depreciation charge for 3QFY20 and 9MFY20 is higher by INR690m and

INR1,530m, respectively.

Grasim Industries

Current Price INR 757

Neutral

VSF

Click below for

Detailed Concall Transcript &

Results Update

Capacity addition of ~1.3mt in last one year in Asia. Muted demand due to weak

macroeconomic conditions, US-China trade war, and sharp RMB depreciation

have impacted global prices.

Domestic VSF prices may witness some improvement in the near term with

improving sentiment post phase-1 of US-China trade deal and near-term supply

constraints from China.

US-China trade deal (Phase-1) and lower-than-expected production of cotton

led to an uptick in global cotton prices.

Share of VAP sales in total sales increased to 22% (+2% QoQ).

Pulp price remained below USD650/ton in 3QFY20.

Further benefit of weakening input costs (pulp prices) to reflect in the

subsequent quarters.

February 2020

32

CEMENT | Voices

VFY profitability impacted by lower sales volume (-9% YoY) mainly due to lower

exports of tyre cord yarn on account of slowdown in automobile markets in

Europe.

Chemical

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

of lowering demand in Asia (incl. China).

New caustic capacity addition and an increase in imports are resulting in a

decline in domestic caustic prices, in line with international prices.

In India, ECU in short term is likely to remain depressed till new capacities are

absorbed by additional demand.

Chlorine consumption in VAPs improved to 30% in 3QFY20 from 27% in 3QFY19.

Zero liquid discharge plant commissioned at Rehla and under-advanced

commissioning stage at Ganjam.

Expansion in capacities of VAPs and new VAP manufacturing facilities to be

commissioned by FY21, which is expected to improve margins.

Epoxy EBITDA marginally higher as weakness in realization was offset by

softening of input costs.

Cement

Cement demand in 3QFY20 was impacted by economic slowdown, lower

government spend, and construction ban in NCR region by NGT.

Consol. net debt reduced QoQ by INR19.94b to INR186.25b in 3QFY20. Net

debt/EBITDA at 1.87x.

Aditya Birla Capital

Lending business raised long-term funds of INR100b+ in YTD Dec’19.

Revenue and net profit after minority interest for 3QFY20 are at INR43.26b

(+14%) and INR2.5b (+17%).

India Cement

Current Price INR 75

Click below for

Results Update

Neutral

The cement industry in the South declined 12%/8% YoY in 3QFY20/9MFY20. This

was due to stalling of major projects in Andhra Pradesh and Telangana,

combined with deferment of infra spending in these states, which was further

fuelled by the economic slowdown. Demand weakness in the South impacted

prices in the region, which remained under pressure.

Post Jan’20 demand has started to pick up, resulting in higher prices in Feb’20.

Prices increased by INR25-30/bag in Tamil Nadu, by INR30-35/bag in Karnataka

and Kerala, by INR30-35/bag in Maharashtra and by INR70/bag in AP/Telangana.

Capacity utilization during the quarter was 69% against 76% in 3QFY19.

Term debt for the company stands at INR25b and should decline to INR23.3b by

Mar’20. Working capital debt stands at INR5.8b. The company has INR5b of

planned debt repayment in FY21.

The company has launched ‘Coromandel Super Kings’ (CSK) in Kerala, which is

sold at INR40/bag premium.

ICEM plans to set up a green-field unit in Damoh, Madhya Pradesh, which

includes a 2.5mt clinker unit; there is also a split-grinding unit (Uttar Pradesh) on

the cards. The company has spent INR1.4b on land acquisition for Damoh.

February 2020

33

CEMENT | Voices

JK Cement

Current Price INR 1,462

Click below for

Results Update

Buy

During 3QFY20, the company commissioned grinding units of 1mt at Mangrol

(Rajasthan) and 1.5mt at Aligarh (UP).

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

Apr’20.

Prices: Realizations have reduced by INR110/t QoQ in 3QFY20. Prices have

increased by INR8-10/bag in the North currently compared to 3QFY20.

Capex for FY20 should be ~INR12b; for FY21, it is expected at ~INR7b

The company has acquired 500 acres of land in Panna, Madhya Pradesh for

INR9b. The board will decide to put up the capacity once environment

clearances are in place.

Cost savings on the new capacity should be visible only in 4QFY21 as the new

capacities are on trial-run currently.

JKCE is consulting the Boston Consulting Group (BCG) to formulate market

strategy for its new capacities and existing business. The consultancy fee for

FY20 and FY21 should be INR500m each.

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

spends on packing costs.

The newly commissioned unit in UP should enjoy incentives of INR100m/year

initially. Rajasthan plants have minimal incentives.

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

is INR25-40/bag in the South.

The company expects turnaround in its UAE operations in the coming year. It

has started operations in Tanzania and Kenya.

Trade forms 69% of the total mix.

Import of white cement has doubled in the last two years.

JK Lakshmi Cement

Current Price INR 326

Click below for

Results Update

Buy

Total sales stood at 2.33mt (+1% YoY). Cement sales were up 3% YoY at 2.17mt,

while clinker sales declined 22% YoY to 0.16mt.

Cement utilization in 3QFY20 stood at 66%, while clinker utilization was at 95%.

JKLC has taken price hikes of INR10-15/bag in Jan’20 which have been sustaining.

JKLC is planning to increase its grinding capacity in Udaipur Cement Works from

1.6mt to 2.2mt by FY21 with capex of INR600m.

The company also planning 2-2.5mt new brownfield capacity in north for which

the final decision is likely to be taken by Mar’20.

The newly commissioned 0.8mt Cuttack grinding unit is running at utilization of

40% with likely ramp up to 75% in FY21.

RMC revenue in 3QFY20: INR390m.

Trade sales in north were 56%, while those in east were 70%.

Demand in north was down 3-4% in 3QFY20, while east market witnessed

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

and Orissa to report growth of 9-10%.

JKLC is planning to add 10MW WHRS in Sirohi which should generate ~INR250m

of annual savings. Investment in WHRS will be ~INR1.5b.

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

debt stands at INR16.7b.

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

FY21.

Petcoke consumption stood at 85%.

February 2020

34

CEMENT | Voices

Ultratech Cement

Current Price INR 4,473

Buy

Click below for

Detailed Concall Transcript

& Results Update

Demand picking up in many regions

States of Orissa, West Bengal, Maharashtra, Jharkhand, Bihar, Rajasthan, Tamil

Nadu, Kerala, Telangana and Madhya Pradesh are witnessing growth.

Work on Polavaram dam and other irrigation projects has started.

Work on Indore/Bhopal Metro has commenced. The Supreme Court has

approved the Mumbai coastal road project.

Select markets showing signs of pick up in rural demand.

4QFY20 witnessing price hikes

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

east, south and west

Prices have started picking up with improved demand sentiment.

Expect improvement in efficiency for Century’s assets

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

Petcoke usage has been enhanced from 30% pre-acquisition to 69% now.

Exceptional item of INR310m has been reported as part of process integration.

The company expects to record another INR300m in current quarter.

Brand transition completed for ~55% of production. ~84% production to be

transitioned to UltraTech Brand by 2QFY21.

Currently, production cost is higher by INR425/t, of which INR 70/t is toward

higher royalty charge and INR125/t is one-time exception. The company

expects to achieve more than EBITDA/t of INR1,000 by 1QFY21 with utilization

of 80%.

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

some time.

Nathdwara operating at EBITDA/t of INR1,500

Operating consistently at 60% utilization.

Achieved cost reduction of ~INR425/t since acquisition.

Have achieved EBITDA/t of INR1500.

The company is in the process of disposing non-core assets.

Commissioning of 10.5MW of WHRS should further improve performance.

Cost reductions to continue

Spot prices of petcoke are at USD70 and of coal at USD80. Pet coke usage at

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

USD91/t in 2QFY20.

The company has achieved a consistent reduction in consumption of fossil fuel

with increasing share of green power. The company expects annual savings of

INR2.5b from green power. AFR usage stood at 3.5%.

The company benefitted from exemption of busy season surcharge from

railways and better market plant mix.

Current WHRS capacity of 103MW and 39MW is under implementation.

Limited capex going forward

Capex guidance for FY20 is reduced from INR20b to INR16b.

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

have been placed.

Have commissioned phase 1 of Bara grinding unit (2mt capacity).

Dalla Super should commission by Mar’21.

Deleveraging continues

Consol. net debt has reduced from INR221b in Mar’19 to INR186b in Dec’19.

Net debt/EBITDA reduced to 1.87x in Dec’19 from 2.83x in Mar’19.

February 2020

35

CONSUMER | Voices

CONSUMER

Consumer companies across the board were cautious on the outlook, given the weak rural scenario and the

ongoing decline in personal care product demand. Demand slowdown continued to be led by subdued

consumer sentiment, liquidity crunch in channels, and weakness in wholesale. North and west India

witnessed sharper slowdown compared to the rest of the country. Managements were hopeful that a

combination of a possible good Rabi crop, volume growth pick-up off a low base and government measures

to boost consumer sentiment could lead to growth from 1QFY21.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Comment on demand scenario

Asian Paints

There has been faster growth in smaller towns

and rural, same as 2QFY20. Slowdown in metros

and Tier-1 cities continues.

Discounting may have gone up marginally this

quarter but nothing material to call out for.

Sleek and Ess continue to be affected by

slowdown in the real estate business.

International business may get affected by

emerging concerns in the Middle East.

Budget Impact

Nothing material

Outlook FY20

In the near term, realization growth

decline should continue.

Some increased volatility in key RM

needs to be noted. Currently, the

company does not see a need to

raise prices, but if a further increase

due to global geo-political concerns

is required, it could raise prices.

Capex of INR7b for FY20 v/s earlier

expectation of INR9b.

Effective tax rate will be 25% for the

year.

Cost efficiency targeted at 2.1% of

revenues in FY20. Targeting similar

savings for FY21 as well.

Open to taking selective price

increases to offset the likely impact

of RM cost inflation. Price hikes will

be taken in brands, which haven’t

seen a price hike in 24 months.

Some fiscal benefits on new plants

are boosting other operating income

and this trend should continue.

Capex at INR1.9b in FY20.

Dabur’s own categories are not

showing any green shoots. Led by

low base from 2QFY21, growth

should look better for three quarters

in FY21.

Gross margins should expand, led by

low RM costs in 4QFY20, but

company will invest in ad spends.

Therefore, EBITDA margins are

unlikely to expand in the domestic

business. Agri commodity basket is

nevertheless witnessing some

inflation in 4QFY20.

Management expects 5-6% price

increase in soaps over the next few

months. This effectively means

reversal of the 5-6% decrease it had

taken in Sept-Oct when commodity

prices were soft.

GSK merger: The next date of the

NCLT hearing is 3rd Feb’20.

Britannia

BRIT did not focus inordinately on volumes as

demand is weak.

Rural is growing much slower than urban. While

urban has also been affected by the slowdown,

rural has been impacted much more.

Croissants and salty snacks were in the test

market, but company has not taken it national

as consumer sentiment is weak and ‘consumers

are not as experimental currently.’

Marginally negative as it

is a potentially high

dividend paying company

that is impacted by the

DDT abolishment which

may make promoters

reconsider extent of

dividend.

Dabur

Further deceleration was witnessed in the

FMCG sector in 3QFY20. Demand situation

continues to be worrying.

6.6% FMCG category value growth – itself a

multi-year low on Nielsen data, which was 5.3%

in Dec’19 – therefore, slowdown was witnessed

toward the quarter-end. Moreover, Jan’20 has

not offered any green shoots.

Liquidity pressure in trade remains tight.

Broader level hike in telecom tariffs could be

one of the factors affecting FMCG sector

growth.

Urban growth has moderated but rural growth

has slowed down even further (at 0.5x urban

growth during the quarter).

Delayed onset of winter affected skin care sales,

while personal wash pricing actions impacted

Beauty and Personal Care sales.

Parts of Punjab, Haryana, UP, West Bengal and

Bihar are witnessing faster slowdown, while the

southern market has still done better.

Near-term demand outlook is challenging.

Marginally negative as it

is a potentially high

dividend paying company

that is impacted by the

DDT abolishment which

may make promoters

reconsider extent of

dividend payout.

Nothing material

Hindustan

Unilever

February 2020

36

CONSUMER | Voices

Overall weak demand environment in 3QFY20

led to a sharp QoQ and YoY dip in sentiment.

Rural and wholesale growth was even lower.

Recovery in sentiment expected by 2QFY21.

Continued to gain market share across most

categories, therefore, lack of growth is largely a

category-specific issue. However, reverse

migration from branded to loose in case of hair

oils is happening in rural. Pricing intervention

by the company is likely to arrest the trend.

Marginally negative as it

is a potentially high

dividend paying company

that is impacted by the

DDT abolishment which

may make promoters

reconsider extent of

dividend payout.

New brands - ‘Parachute Aloe

Vera’ and ‘Hair and Care Dry Fruit

Oil’ have scaled up nicely and are

likely to report revenues of

INR1.2-1.5b sales next year.

Expect to sustain international

business sales momentum.

May see mild inflation in Copra

costs in FY21. Witnessing inflation

in edible oils. Will take a price

increase in Saffola.

Full-year tax rate will be 24.5-25%.

PIDI is taking initiatives to achieve

15% value growth. Expect demand

scenario to improve FY21 onward.

Striving to grow faster in rural

markets.

Full year A&P at 3.5%-4% of sales.

Tax rate for 4QFY20 expected at

23%.

VAM costs continue to be stable in

4QFY20 as well.

Marico

Pidilite

Demand conditions remain subdued. Smaller

towns and rural areas grew faster than urban

areas for PIDI in 3QFY20.

Remains cautious on credit to channels if it

senses any risk to payments.

India subsidiaries: Nina, Percept and Cipy -

operating environment remains tough in these

businesses.

West and north were relatively slow in C&B

sales compared to the rest of the country in

3QFY20.

Not material

Asian Paints

Current Price INR 1,886

Click below for

Detailed Concall Transcript

& Results Update

Sell

On sharp realization decline

While there is greater focus on economy segment, cumulative price reduction

YTD is now above 1%. The company has also recently introduced 2 new

economy products (15-20% lower price v/s erstwhile product portfolio), both of

which have done well. There has also been faster growth in smaller towns and

rural as was the case in 2QFY20. Slowdown in metros and Tier-1 cities continues.

In the near term, the realization growth decline should continue as well as some

of these factors as well.

Discounting may have gone up marginally this quarter but nothing material to

call out for.

Gross margins are not significantly different (in economy/other segments),

therefore, margin impact has not been as severe as realization impact. Soft TiO2

prices have also helped.

Factors to consider incrementally

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

company does not see a need to raise prices, but if a further increase due to

global geo-political concerns is required, it could raise prices.

International business may get affected by emerging concerns in the Middle

East.

Lower-than-expected capex

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

Other matters

Management is not sure if GST implementation has led to faster gains from the

unorganized segment in the economy category due to absence of data.

The company’s definition of rural is outside of the top-100 towns. Overall urban

rural mix is around 50:50 by value.

February 2020

37

CONSUMER | Voices

65,000-70,000 shops across the country are served by a sales force of 2,000 and

aided by 140 depots, which is increasing every year.

Management continues to believe that in terms of product quality and service

provided, they are still superior to peers.

Effective tax rate will be 25% for the year.

International and other businesses

Indonesia green-field plant has led to a healthy pick-up in sales. Overall,

international business performance was a mixed bag.

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

business.

Britannia Inds

Current Price INR 3,081

Click below for

Detailed Concall Transcript

& Results Update

Neutral

Environment and strategy

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

company.

Did not focus inordinately on volumes as demand is weak.

Delta between volume and value was 1% for the quarter, thus volumes are likely

to have been ~3% given the standalone sales of ~4%.

Rural is growing much slower than urban. While urban has also been affected by

the slowdown, rural has been impacted much more.

Focus on systems and costs to deal with the slowdown

BRIT has improved its replenishment system and distributor health, crucial

factors in a weak operating environment (zero-day inventory for expensive cities

to operate in). Have not increased credit days to trade.

Expanding distribution month-after-month. Direct reach is now ~2.2m outlets.

Total reach at 5.5m outlets currently and targeting to increase it to 6m in 2

years. Parle is at 6.3m outlets in terms of total reach but at half of BRIT on direct

reach.

18,000 rural distributors in Mar’19, which has increased to 21,000 now.

Furthermore, BRIT has reduced wastages in the system and tightened fixed

costs.

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

for FY21 as well.

Higher inventory and commodity hedges led to raw material cost control. Not

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

was INR1.25b.

BRIT is open to taking selective price increases to offset the likely impact of raw

material cost inflation. Price hikes will be taken in brands, which haven’t seen a

price hike in 24 months.

Some fiscal benefits on new plants are boosting other operating income and this

trend should continue.

Ad-spends have been flattish YoY in absolute amount.

Innovation and new categories

Innovation: Croissants and salty snacks were in the test market, but company

has not taken it national as consumer sentiment is weak and ‘consumers are not

as experimental currently as they are in a more normalized environment.’

February 2020

38

CONSUMER | Voices

Croissants will be taken national in 3-4 months. Salted snacks’ will be launched

nationwide in 5-6 months.

Wafers and milkshakes are available across the country.

BRIT is the third largest player in cream wafers already.

Of the 4% growth achieved in 3QFY20, BRIT has achieved ~2% growth from the

base business, 1% from innovation in the base business and 1% from new

categories.

Sustainability

BRIT has already reduced 12% laminates on a tonnage basis. 20% of the plastic is

now recyclable. Targeting 100% recycling by 2024.

Biscuits are now 100% transfat-free, 46% of products are now fortified with

micro nutrients.

5% sugar and sodium reduction targeted by 2021.

Targeting 50% usage of renewable power by end-2021 from 28% currently.

Have rainwater harvesting across their plants now.

Other points

Modern trade and e-commerce is 10-11% of sales.

Inter Corporate Deposit - no major movements and is within the limits that they

had set for themselves.

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

from India.

Capex at INR1.9b in FY20 v/s INR2.5b in FY19.

Dabur

Current Price INR 508

Neutral

Operating Environment

Click below for

Detailed Concall Transcript

& Results Update

Further deceleration was witnessed in the FMCG sector in 3QFY20. Demand

situation continues to be worrying.

6.6% FMCG category value growth – itself a multi-year low on Nielsen data,

which was 5.3% in Dec’19 – therefore, slowdown was witnessed toward the

quarter-end. Moreover, Jan’20 has not offered any green shoots, so far.

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

in personal care.

Dabur’s own categories are not showing any green shoots. Led by low base from

2QFY21, growth should look better for 3 quarters in FY21.

There has been a sharp slowdown in India’s oral care category, but it has gained

30bp share in 3QFY20 with 8.5% sales growth. Down-trading is rampant in oral

care category (lower-unit packs). December month actually witnessed decline in

sales in the oral-care category.

Continued sharp slowdown in juices category also led to decline in category

sales for Dabur.

Rural sales for Dabur grew 400bp ahead of urban in 3QFY20, aided by increased

village reach. Overall domestic sales growth was 5% YoY with 5.6% volume

growth.

Domestic Margin outlook

Gross Margins should expand, led by low RM costs in 4QFY20, but company will

invest in ad-spends; therefore EBITDA margins are unlikely to expand in the

domestic business. Agri commodity basket is nevertheless witnessing some

inflation in 4QFY20.

February 2020

39

CONSUMER | Voices

Key category details

Juices and nectar - 63% over 500bp gain in market share but the category

continues to decline (11% dip according to Nielsen numbers).

(1) Slowdown in consumption, (2) higher price points for Dabur brand and

multiplicity of options in lower-price drinks, and (3) milk-based beverages is

leading to lower category sales. Company has launched INR10 coolers and PET

bottles. At the same time, company is launching few more products in the

premium segmen ts as well to check margin dip as a result of LUPs.

Power brand strategy is helping healthy sales growth in the Healthcare segment.

Because it is more resilient to slowdown, sales have not been affected

compared to other segments.

Chyawanprash – 64% market share, 300bp higher. Sugar-free Chyawanprash

launched 2 years ago did well, winter sales were good.

Honitus and Hajmola are doing well.

Honey sales declined in 3QFY20, owing to smaller and regional players chipping

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

International business

MENA the largest segment has done well, coming off a low base.

Overall growth is likely to be in mid-to-high single-digit in the international

business on steady-state basis compared to 12% in 3QFY20.

Margin improvement in international business is coming from crude linked

packaging costs.

Other points

E-commerce is 2.9% of sales now with over 90% growth YoY.

Liquidity pressure in trade remains tight.

Broader level hike in telecom tariffs could be one of the factors affecting FMCG

sector growth.

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

peers. Complications arise from the diversity of Dabur’s portfolio; however,

company is planning expansion for the next few years shortly.

INR200m provisions were made in 3QFY20 due to some rating downgrade in

some of their debt investments.

Analytics will be a focus in FY21 once the basics are in place by end-FY20.

Emami

Current Price INR 272

Click below for

Detailed Concall Transcript

& Results Update

Buy

Demand environment

Rural is still under stress.

Seeing no recovery at wholesale as well at retail level.

Delayed winter impacted winter portfolio.

Market conditions expected to stabilize in the next 2-3 quarters.

Excluding seasonality, HMN clocked 13% growth in its non-winter portfolio. If

Navratna loading takes place as expected, then HMN can clock double-digit

sales growth in 4QFY20.

The company is offering 12-13 days of credit, which will be reduced to 7 days

once the environment improves.

Material costs and EBITDA margin

Material cost is likely to remain soft going forward.

Expect 50bp gross margin improvement in FY20.

40

February 2020

CONSUMER | Voices

Will focus on new launches and ad spends going ahead. Thus, EBITDA margins

won’t be as high as 29-30%.

Domestic business

Domestic volume declined 2% YoY.

BoroPlus - Delayed winters and unfavorable seasonality impacted sales.

Inventory which was piled up has now normalized at distributor end.

Kesh King growth is volatile due to promotions. 30% is shampoo-led growth and

15% is oil-led.

Navratna – launched Navratna Garam Ayurvedic Oil.

7 Oils in one (INR1b brand) is small in size and not taking away shares from big

players.

Pain management – season starts in the month of July.

Fair & Handsome – male grooming declined due to trend among young men (20-

28 years old) to keep a beard which has led to decrease in facial surface area by

25-30%. This in turn leads to lower consumption. The company is however

taking corrective measures such as price cuts etc. and expects growth to come

back from 1QFY21.

Will be launching a lot of new brands in healthcare range. Pancharista was

degrowing at 18% for 1HFY20. 65% business in healthcare comes from

Pancharishta.

Sale of cement business

Enterprise value is INR55b.

Emami cement has INR22b debt.

Promoter will be left with INR33b.

Group debt is INR30b.

Company will keep INR7-8b for tax purposes.

Outstanding debt expected to be INR5-6b after the transaction.

Deal expected to close by May-Jun’20.

Need only CCI approval on the regulatory side. No other approvals required.

Keeping 8% pledge with the buyer towards guarantees.

Promoter pledge to come down to ~18-20% from ~70% currently.

Total pledge post the transaction would be ~25%.

International business

Excluding Crème 21, international business growth was just 3.5%.

Expect 15% growth in international business going forward.

Other points

Going forward effective tax rate will be ~20% on a consolidated basis.

Overall volume growth of -1% in 3QFY20.

Ad-spends will be maintained at 17.5-18%.

Expect 9MFY20 other expenses run-rate to continue for FY21 as well.

MT grew by 15% and CSD by 7%.

Male grooming range should revive from 1QFY21.

February 2020

41

CONSUMER | Voices

Godrej Consumer

Click below for

Detailed Concall Transcript &

Results Update

Current Price INR 622

Neutral

Domestic highlights

Household Insecticides (HI) recovery continued in 3QFY20 and the same is

expected going ahead.

HI continued to gain market share in overall category, including incense sticks

(+70bp in 3QFY20).

Expect new launches on the electric side and in spray form in HI segment.

Illegal incense stick growth has plateaued.

Expect value and volume to converge in HI segment over the next few months.

Soaps - price offs and consumer offers resulting in sales decline of 4%;

Continued focus on micro marketing initiatives and consumer offers for scaling

up growth.

Broad-based growth seen in soaps - with Godrej No. 1 focusing majorly on

volumes and Cinthol on value growth.

Hair color - impacted by general slowdown in hair color category due its

discretionary nature and consumers stretching consumption.

Strategy to grow Hair color segment is: (1) to scale up Expert Easy shampoo

nationally, (2) re-launch of Expert Crème and (3) focus on growing herbal based

powder.

Expect value and volume imbalance to improve going ahead with measures such

as price hike, premiumization and portfolio mix changes.

International highlights – mix performance

Indonesia did well in top and bottom-line.

GAUM - West and South Africa recorded healthy growth; East (Kenya business)

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

demonetization.

Margins in GAUM impacted due to one-off (waste water management expenses

of ~70bp YoY impact) in the US. Margins should improve going ahead.

Seeing strong growth in both West and South Africa.

Outlook

From industry point of view, company believes that the worst is over and things

should hopefully improve post Jan.

Focus will be on volume growth and market share gains.

FY21 should be much better on value growth v/s FY20.

Tax rate expectations: 21-23% in FY20.

Rural growth was ahead of urban for the company.

Rural saliency is less than 30% for GCPL.

Saw sharper deceleration in urban, especially in North and West.

Indonesia - hoping to sustain topline and bottom line growth.

Product rollout

The initial response to the recently launched Goodknight Gold Flash Liquid

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

in 4QFY20.

Rolling out Good Knight natural range of household insecticide products on

select ecommerce platforms.

Godrej Expert Easy 5 minute shampoo hair colour performing well in Southern

states and has been scaled up nationally.

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

42

February 2020

CONSUMER | Voices

Other points

Other expenses had ~INR80-100m worth of one-time expenses.

No major impact of restriction on Palm oil sourcing from Malaysia.

GSK Consumer

Current Price INR 9,868

Click below for

Detailed Concall Transcript &

Results Update

Neutral

Volume, distribution

Domestic HFD volume growth stood at 3% for the quarter.

HFD distribution reach: ~2.1m outlets now (v/s 1.8m in 3QFY19).

Domestic HFD growth of 6%.

Segmental highlights

Sachets are growing in double digits YoY and now contribute 12% of sales.

North and west markets are growing faster than south and east.

Middle East and Bangladesh slowdown led to a decline in exports sales.

Exports were down 17% YoY – Bangladesh (witnessing category slowdown), Sri

Lanka (as the company has restructured formulation to make products cheaper),

Malaysia (destocking due to slowdown) and Pakistan (exports stopped due to

tensions between India and Pakistan).

Exports contribution stood at INR790m.

RM outlook and pricing

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

few more quarters.

The company is focusing on various trade negotiations, conversions and

costsaving initiatives to offset inflation.

It would not take price increase in line with or ahead of inflation, as it can lead

to a decline category penetration.

Other highlights

Other income had a one-off in 3QFY19.

HUL-SKB merger – reserved by the bench; now awaiting the formal order from

Chandigarh NCLT.

HFD category is growing at 6%, of which volume/value growth is 3% each.

Food business is not doing well (decline by 13% due to withdrawal of

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

business structure.

Focus areas: Drive HFD penetration (only ~20% in India) and sachets; focus on

getting more family members connected with brands (apart from kids) and

increasing distribution in north and west market.

In north and west – relevance of HFD category is improving every day.

On high sugar labeling, it is taking a more scientific approach in consultations

with industry participants.

Hindustan Unilever

Current Price INR 2,294

Click below for

Detailed Concall Transcript &

Results Update

Buy

Business environment remains soft – in fact worsens in 3QFY20

Urban growth has moderated but rural growth has slowed down even further

(at 0.5x urban growth during the quarter).

Delayed onset of winter affected skin care sales, while personal wash pricing

actions impacted Beauty and Personal Care (BPC) sales for HUVR.

February 2020

43

CONSUMER | Voices

Parts of Punjab, Haryana, UP, West Bengal and Bihar are witnessing faster

slowdown, while the southern market has still done better.

BPC category growth declined substantially, while food category growth has

held on well.

Palm oil, agri and dairy costs are now inching up.

Near-term demand outlook is challenging.

Key points on categories

Management expects 5-6% price increase in soaps over the next few months.

This effectively means reversal of the 5-6% decrease it had taken in September-

October when commodity prices were soft.

Oral Care category slowdown: There was an increase in the number of oral care

brands in household earlier, which in slowdown reverses slightly. Smaller packs

usage also picks up.

Very good quarter on Indulekha. Hair Oils slowdown has not affected them.

Margin expansion

EBITDA margin up 335bp YoY and 210bp on a comparable basis.

Cost-saving programs continue to be a factor in driving margins and so are GST

led

logistics savings.

There was some phasing of expenses between September and December

quarter on a YoY basis, as a result of which other expenses were higher than

usual YoY in the September quarter but was lower than usual YoY in the

December quarter.

GSKCH merger

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

New launches during quarter

Hellman’s brand mayonnaise in Kolkata, a test marketing activity.

Comfort Deluxe.

Love Beauty and Planet shampoo and conditioner, and Indulekha Neemraj Oil.

Strategic review of global tea business by parent (announced this week)

The strategic review likely to conclude in six months.

This review is because of the weak performance of black tea worldwide.

HUVR will await the parent’s decision, but the team business is doing well for

them in India.

Jyothy Labs

Current Price INR 130

Click below for

Detailed Concall Transcript &

Results Update

Neutral

Guidance

Expect mid-high single-digit top-line growth in 4QFY20 if HI segment picks up.

EBITDA margin guidance maintained at ~16% for FY20.

GM led benefits will be reinvested in the brands.

Effective tax rate expected at 15% on consol. basis for FY20 and FY21.

JYL will focus on market share gains, distribution expansion and BTL activities.

Outlook

Urban demand is stable but rural demand is weak.

In order to maintain channel hygiene, despite working capital constraints, the

company hasn’t extended credit to distributors.

February 2020

44

CONSUMER | Voices

Raw material and margins

Benign input cost environment and certain operational efficiencies are aiding

gross margin expansion.

Result

Reduction in revenue was primarily due to 4% one-off moderation in

institutional sales (higher sales in 3QFY19) and 1.9% as a result of GT channel

facing rural slowdown & working capital constraints at distributor & wholesale

level.

Category highlights

Fabric care

Ujala fabric whitener – Market share intact; focusing on activations in trade to

drive visibility through Dangler Packs.

Ujala crisp and shine – Introducing new variants to drive growth; extending the

marketing mix to a new market – Karnakata.

Henko – focusing on BTL initiatives.

Dishwashing

In Exo, launched Exo Super Gel in Kerala.

Focusing on small packs to drive growth.

For Exo brand, Rural:Urban contribution stood at 40:60.

Pril delivered better growth (v/s Exo) as it is largely urban-focused and has high

market share as well.

Household Insecticides (Maxo)

HI reported 5% volume growth.

HI is showing signs of improvement in volume/value terms. Expect decent

growth in 4QFY20 as well.

Liquids are doing better than coils. Coils:Liquid contribution is 60:40.

Growing salience of Genius LV, which contributed 15% to total LV sales in

3QFY20.

Personal care (Margo, Neem)

Visibility drives and trade activations across key towns.

Geographical extension of Margo Glycerine in Tamil Nadu and Kerala.

Margo Neem face wash was launched in West Bengal and has received positive

feedback.

The company has not taken price cuts in Margo.

EBIT margins should revive in the personal-care segment.

‘Others’ (Maya, T shine)

T-shine (liquid toilet cleaner) has been re-launched with revised formulation

and packaging.

Others

Dish wash and HI saw better growth.

Rural contributes 40% to overall sales.

Employee cost increased due to rise in sales force in order to expand retail

coverage.

Secondary growth was flattish at 0-1%.

CSD accounts for 8-10% of total revenue. 20% contribution from MT and

Ecommerce.

Distributor inventory has declined from 30 to 22 days.

South market is doing much better in terms of geographical mix, 40% business

comes from the southern market.

February 2020

45

CONSUMER | Voices

Seeing no impact from private labels in the fabric-care business.

100% of distributors are on data-based management (DMS) from 60% in FY19.

Marico

Current Price INR 300

Neutral

Click below for

Detailed Concall Transcript &

Results Update

Environment and outlook

Continued to gain market share across most categories, therefore, lack of

growth is largely a category-specific issue.

However, reverse migration from branded to loose in case of hair oils is

happening currently in rural. Pricing intervention by the company is likely to

arrest the trend.

VAHO has also witnessed slower growth in the mid-to-premium segments

compared to the lower end, contributing to effective realization decline.

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

dip in sentiment.

Rural and wholesale growth was even lower.

Recovery in sentiment expected by 2QFY21.

New brands outlook

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

up nicely and are likely to report revenues of INR1.2-1.5b sales next year.

New launches in Foods - Saffola Fittify Gourmet and Coco Soul have received a

good response as well.

In case of Crème Oil and True Roots, the company is going back to the drawing

board with learnings.

New product contribution to total sales has increased over the past two years

although it is far below expectations.

International

Expect to sustain international business sales momentum.

Other points

May see mild inflation in Copra costs in FY21.

Witnessing inflation in edible oils. Will take a price increase in Saffola.

Will increase distribution for Saffola, even in the top-6 cities.

Full-year tax rate will be 24.5-25%.

1m is direct reach and total reach is 5m.

Page Inds

Current Price INR 22,930

Click below for

Results Update

Neutral

Volumes decline by 2.8% YoY in 3QFY20

Volumes declined 2.8% YoY in 3QFY20, but were up 1% on a YTD basis. The

Impact has been uniform across segments.

Management reckons that most apparel players have reported a decline in

demand YoY in 3QFY20.

Average price for winter wear was higher, as a result of which realization growth

was higher than usual. The contribution of premium products has also

increased.

Demand weakness is reflected in considerably reduced walk-ins to EBO stores in

the last two years.

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

February 2020

46

CONSUMER | Voices

Investments in technology implementation and staff recruitment (mainly on

tech and kids business) impacted the EBITDA margin.

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

same going forward.

Other points

Price increase has been 4-5% this year as well.

Yarn costs are at similar levels YoY compared to the earlier part of the year.

The company has 4,300 distributors on rolls now. The number of distributors is

growing at 4-5% annually.

VFM-focused product launches will continue but need tailwinds for growth.

It has launched a wider variety of bras recently to boost sales in a segment

where its share is much lower than in men’s innerwear.

Inventory days have come down to ~75 from 85 as of Mar’19.

Kids wear demand has been good

Kids wear has shown an encouraging demand trend. A 120+ member team is

now headed by a separate division head.

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

Pidilite Industries

Current Price INR 1,594

Neutral

Demand environment

Click below for

Detailed Concall Transcript

& Results Update

Demand conditions remain subdued.

Smaller towns and rural areas grew faster than urban areas for PIDI in 3QFY20.

PIDI remains cautious on credit to channels if it senses any risk to payments.

India subsidiaries: Nina, Percept and Cipy - Performance is better in 3QFY20

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

businesses.

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

country in 3QFY20.

Pricing and raw material costs

Price reduction was taken in 3QFY20, but was not material on an overall basis.

VAM costs during 3QFY20 stood at USD850-900 (avg. USD875) v/s USD1,300 in

the base quarter. The prices continue to be stable in 4QFY20 as well. PIDI also

stores some stock of VAM.

As of now, the company does not appear to be particularly concerned about the

impact of Coronavirus on China based manufacturing of VAM but are

monitoring the situation closely.

Management does not believe that passing on of benefits will yield better

volume growth in the current operating environment but are willing to do so

when sentiment improves to boost volumes.

Outlook

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

to improve FY21 onward.

Striving to grow faster in rural markets.

Aims to expand distribution in geographies where its presence is weak.

Full year A&P at 3.5%-4% of sales. It wasn’t particularly high in 3QFY20 as some

costs had bunched up in 2QFY20.

Tax rate for 4QFY20 expected at 23%.

February 2020

47

CONSUMER | Voices

HomeLane investment

The company acquired stake in HomeLane to work in close collaboration and

create mutual value with it.

This is in view of the evolving market dynamics due to technology. PIDI has

interest in interior design space and wants to be part of the changing landscape

due to technology.

HomeLane is growing at a strong pace of more than 100%.

Pre-money valuation of HomeLane was USD100m. PIDI has acquired more than

5% stake for INR500m.

Other points

ICA Pidilite: Localization of manufacturing has led to improved margins and

improved top-line due to better resultant flexibility.

Premium white glue constitutes 60-65% of market, where PIDI has dominant

market share. The remaining market constitutes popular, economy and

unorganized segments. PIDI has introduced products in popular and economy

segments as well.

Tile adhesives are doing well with the category growing fast. The product is

witnessing higher market acceptance with consumers increasingly switching

from cement to tile adhesives.

Tata Global Beverages

Current Price INR 383

Click below for

Detailed Concall Transcript

& Results Update

Buy

Tea

Tea prices in India continue to be benign. Kenyan tea prices continue declining.

Regular black tea category has witnessed a decline or remained flat across in key

international markets. Growth is led by non-black teas. In India, both black and

non-black tea are growing categories, but growth has slowed down to ~5%.

India Business

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

both national and regional brands.

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

brands are gaining market share.

‘Agni’ and ‘Spice mix’ continues to grow on high double digits, while ‘Lal Ghoda’

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

UK Business

Revenue remained flat as growth in discounters was partially offset by a decline

in the grocery channel.

The company focuses on margin expansion with cost optimization. The green

tea category witnessed headwinds.

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

volume terms.

Canada

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

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

specialty tea category.

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

innovations.

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

February 2020

48

CONSUMER | Voices

US Business

EOC K-cups and private labels coffee segment volumes grew 3QFY20, along with

some decline in bags coffee segment, due to de-listing of a large account. US

coffee saw a volume decline of 2% YoY in 3QFY20.

However, on a 9MFY20 basis, overall coffee volumes grew by 2%. Good Earth

tea grew by double digits in 3QFY20.

EOC coffee continues to face headwinds due to increased competitive intensity.

Tata Coffee

Revenue grew by 25% YoY (underlying volume growth was 14% YoY) in 3QFY20,

driven by Vietnam sales, partly offset by lower TCL performance.

Domestic instant coffee (IC) volumes stood at 2,052MT, marking the fifth

consecutive quarter of over 2000MT in volumes.

Tata Coffee launched AMA Trails with Taj Hotels (IHCL signed a management

contract for nine heritage bungalows in Coorg and Chikmagalur).

Capacity utilization for Vietnam plant is expected to be 60-70% in FY20 and 80-

90% in FY21.

Others

The company opened 28 new Starbucks stores, totaling to 174 stores and added

a new city, Vadodra, to its portfolio. Tata Starbucks witnessed 27% revenue

growth in 3QFY20.

‘Himalayan’ brand grew both in value (+5% YoY in 3QFY20) and volume terms,

leveraging its partnership with Conde Nast to build connections in the food and

beverage industry.

Tata Water Plus (TWP) PET continued to grow (+3% YoY revenue growth) with

distribution expansion, focusing on better product mix and hence descaling the

low price pouch business (4% volume de-growth).

TGP volumes decline, mainly in the states of Odisha and AP, on account of

adverse weather conditions.

The merger with Tata chemicals Limited (TCL) is in the final stages; record date

to be announced shortly.

EBITDA margins for international tea dipped due to elevated advertising and

promotion expenses.

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

movement.

United Breweries

Current Price INR 1,286

Neutral

Business environment and market share

Click below for

Results Update

Volumes declined 7% in 3QFY20 and would have been flat adjusted for the AP

impact (which saw its volumes decline 50% for the quarter).

For 3QFY20, mild beer grew 1% and strong beer volumes declined 10%, more

indicative of premiumization than state mix effect.

There has not been any improvement in the AP situation in the current quarter.

Overall slowdown in consumer spending has also had an impact, leading to

subdued demand resulting in flat demand even excluding Andhra Pradesh.

The company has not shared data on industry volumes for the quarter but we

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

February 2020

49

CONSUMER | Voices

Material and other costs

Have cycled higher input costs in barley and glass, and hence, GM decline YoY in

3QFY20 was lower than the earlier quarter.

For barley, we do not see any significant changes in 4QFY20 and have also

secured materials for the next few months.

In case of barley, the company is awaiting the barley crop around Mar’20 before

commenting on the outlook.

Glass costs are also not expected to rise over the next two quarters.

INR150m one-off on reversal of license fees means that other expenses were

lower. Receivable days increasing, capex reduced slightly

Overall receivable days have increased by 5 days YoY due to delays in payment

by the AP government.

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

Premium portfolio

Amstel, Ultra and Ultra Max are doing well in the super-premium segment.

The super-premium segment has seen double-digit growth in recent quarters.

Regional performance

There has been an increase in excise in Telangana/AP, resulting in MRP increase

for Kingfisher Strong by INR10/INR20 for a 650ml bottle.

North – Volumes were down 4%, Delhi reported flat volumes.

South – Volumes were down 13%, mainly led by AP but Karnataka and Kerala

also declined.

East – Volumes increased 19%.

West – Volumes declined 7%.

United Spirits

Current Price INR 730

Buy

Click below for

Detailed Concall Transcript

& Results Update

Operating environment

Despite the impact of ongoing slowdown in demand, there was a material

sequential improvement in P&A sales.

Prestige & Above reported sales growth of 8% YoY, despite a challenging base

(+16% YoY in 3QFY19). This compares to flattish YoY growth in 2QFY20.

There was no material pipeline filling during the quarter.

Good wedding season, Christmas/New year sales and winter are boosting P&A

demand, making up for the weaker-than-expected Diwali season.

It is seeing green shoots on demand growth.

Premiumization trend remains strong.

Liquidity in trade which was a problem in 2QFY20 improved sequentially.

Factors aiding BIO growth

A few states including Karnataka have witnessed a sharp reduction in duties in

Bottled in Origin (BIO) products.

Three factors aid BIO growth: higher aspiration levels, lower customs duty and

lower state excise duty.

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

Margin improvement in 9MFY20 despite intense RM pressure

EBITDA margin improved ~120bp YoY in 9MFY20, despite intense material cost

pressure.

There has been some softening in ENA costs over the last two months.

Management believes that gross margins have bottomed out.

February 2020

50

CONSUMER | Voices

Continued discipline in cost management and foregoing growth to adjust for

credit risks meant a control on other expenses (provisions and write offs).

In FY19, there was some provisioning on credit risks which has been absent in

9MFY20. Last year witnessed INR1.4b in 9MFY19 on such provisions.

In addition, there was INR460m reduction YoY in other expenses on account of

Ind-AS adjustme nt, which also helped EBITDA margin expansion.

Staff costs were ~7.8% of NSV in FY18, ~7% in FY19 and ~6% in 9MFY20 owing to

cost savings.

Ad-spend is at a four-quarter-high because December quarter is usually a high

ad-spend salience quarter. Ad-spend is more than competitive when

benchmarked with peers.

Regulatory environment

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

made against it by concerned authorities.

Telangana took sharp price increase in Dec’19 (INR20 per liter) led by excise

increase. Price increase is flat irrespective of the segment. This is material from

popular perspective, not so much from P&A perspective. Beyond 3-4 months

category bounces back from sharp near-term down-stocking. Because of flat

INR20 increase, there could also be premiumization within their portfolio.

Andhra Pradesh: 3QFY20 performance was satisfactory. There has been some

impact in January though due to short-term ordering and collection issues. No

alarm bells yet.

No material price increase granted by states over last 3-4 months.

New launches to boost premiumization

Re-launch: Rollout of significantly enhanced mix in ‘McDowell No 1’ coming

soon in several states. The re-launch not only features new and improved liquid,

but also more environment friendly carton and better quality of bottle.

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

Balance sheet factors

Management stated debt reduction and working capital continued in 9MFY20,

~INR15b assets to be monetized which provides further opportunity for debt

reduction.

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

going forward.

February 2020

51

FINANCIALS/BANKS| Voices

FINANCIALS/BANKS

Banks reported slowdown in corporate loan growth, reflecting the weak macro and the lower utilization

limits by corporates. Also, banks are maintaining a cautious/conservative stance toward wholesale lending,

while retail loan growth remains steady (excl. auto segment). Growth in CV/CE remains tepid, and banks

have reported an uptick in the delinquency trend in these segments. On the asset quality side, all banks

reported an increase in slippages, led by both corporate/retail slippages. Corporate slippages were elevated

led by a stressed HFC account, while retail slippages spiked in the auto and agri segments. Overall, the PCR

ratio has improved as banks continued making healthy provisions to further strengthen balance sheet. A

few banks like AXSB/ICICIBC downgraded the stressed telecom account to BB & below pool, and near-term

credit cost is thus likely to stay elevated. NIM trajectory remains stable, led by an improvement in cost of

deposits.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY20

Provisioning pressure

Expect loan growth to be higher than industry at

~5-7%, driven largely by retail (20%+).

Margin trajectory to remain in the medium-term

Management has not provided any specific guidance on credit

range of 3.5%-3.8%.

cost for FY21. However, it guided for credit cost over the long

Cost to assets ratio is likely to be impacted by

term to reach the long-term average of 110-115bp.

branch expansion. However, over the medium

The bank will focus on improving the provision coverage ratio in

term, it expects cost to assets to reach 2%.

the coming quarters.

Guided for RoE of 18% by FY22, driven by

improving credit cost, margins expansion, lower

opex and higher fee income.

The bank has shortlisted candidates (global as

Bank has been creating contingent provisions in certain pool of

well as internal) and the right candidate is

stressed accounts and provided INR7b during the quarter and

expected to be finalized by Jul’20.

thus holds total contingent buffer of INR14.6b.

It is in an investment mode and guided for

Most retail segments are reflecting improving trend. It, however,

adding 600-700 branches over FY20 and similar

sighted slight concerns in the CV and construction equipment

branches in FY21.

(CE) portfolio.

Bank is not targeting any particular level of loan

growth and focusing on growing the core

operating profit in a risk-calibrated manner.

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

Margins can improve further due to asset mix

quarters.

change, while it does not expect incremental

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

cost of deposit reduction in the near term.

long term.

Maintains its guidance of achieving 15% consol.

RoE by 1QFY21.

The bank does not foresee any stress in the retail portfolio,

Expect loan growth at ~20% due to slowdown in

including the unsecured book.

the macro.

Of the total stressed exposure of INR18b, INR15b has slipped in

Loan mix of 55:45 in favor of non-wholesale over

the past two quarters with total provisions of INR7b (which is

next 18-20 months.

above regulatory requirement).

Plans to exit FY20 with total 400 branches.

Credit cost to remain elevated in the near term.

Expects stressed HFC account to resolve by Sep’20 and will

provide more in 4QFY20. Overall, it expects the recovery rate at

Expect loan growth to be ~10%.

40-50%.

Margins to remain under pressure given the

Expects recoveries in three large accounts: Alok Textile (INR18b),

impact of repo based pricing/MCLR cuts.

Bhushan Power (INR40b) and one power asset (INR10b) and in

C/I ratio should improve on the back of lower

addition recoveries from smaller account.

wage provisions and improved digitalization.

Guided for corporate NPL formation to moderate significantly

and thus a sharp decline in credit cost trends.

Axis Bank

HDFC

Bank

ICICI Bank

RBL Bank

St. Bank

of India

February 2020

52

FINANCIALS/BANKS | Voices

AU Small Finance Bank

Current Price INR 1,167

Buy

Click below for

Detailed Concall Transcript &

Results Update

P&L & balance sheet related

Drop in disbursement yields QoQ in the wheels segment was led by product mix

change and discounts offered to customers during the festive season. In

3QFY20, the bank financed ~60% new vehicles and 40% used-vehicles & cash on

wheels.

It will continue concentrating on reducing the cost of funds, which has declined

20bp QoQ in 3QFY20, led by focus on repayment/prepayment of high-cost

grandfather borrowings.

Availed long-term refinances amounting to INR23.2b without CRR and SLR cost.

AUBANK will remain cautious in lending to small and mid corporate segment.

However, retail continues to be its main growth driver.

Personal loans have been disbursed to existing-liabilities customers only and not

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

on pilot basis.

Housing is another focus product where the yields are between 12.0-12.5%.

On the deposit side, bank is targeting customers who can deposit initial amount

of INR25k.

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

Asset quality

Follows daily tagging of NPA. Overall, it has tightened credit underwriting skills.

AUBANK does not witness any challenges in the collection and overall asset

quality of the vehicle portfolio. Further, the proportion of LCV and HCV is not

very high in the total wheels portfolio.

Overall, GNPA movement in the vehicle portfolio is broadly flat QoQ.

It has also increased margin money requirement from its customers to tighten

its standards.

No targeted guidance on the PCR.

Bank has an exposure of INR620m to Altico and has INR500m fixed deposits as

collateral. The court judgment was in the bank’s favor. The bank used fixed

deposits for installment payments.

Others

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

growth of 35% YoY.

Overall, NIMs trajectory should remain at 5.8% in the near term.

The bank will consider opening 200 new branches by FY22, mainly in the rural

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

cost ratios.

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

raise in CY21.

February 2020

53

FINANCIALS/BANKS | Voices

Axis Bank

Current Price INR 741

Click below for

Detailed Concall Transcript &

Results Update

Buy

P&L & balance sheet related

The opportunity in the retail segment remains large and the bank has

strengthened its underwriting skills in this segment.

The bank is tapping rural and semi-urban markets for growth.

There is a change in LCR guidelines by the RBI which has slightly impacted the

margins. The new guidelines are applicable for all banks.

Corporate fees declined 25% YoY during the quarter.

The bank is investing aggressively in its branch network and staff. It expects

opex to average assets to remain high for a few more quarters before it comes

down to the guidance of 2%.

SME loans declined during the quarter mainly due to the cautious stance and

lower utilization limits.

Attrition rate is at 19%. The recent change in its business strategy led to this

higher attrition – although it is settling down now.

Growth in PSL loans to catch up in 4Q

Fee to average assets is now normalizing at 1.35% of total assets. As corporate

loan growth picks up, we expect fee income trajectory to improve.

Corporate loan book is becoming granular with top-20 single borrowers

accounting for 86% of tier-1 capital.

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

slowdown.

Asset quality

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

expects credit cost to remain high in the near term as it is looking to further

strengthen its provision coverage.

~INR4.1b of corporate loans got slipped due to technical reasons which got

upgraded during the quarter.

Non-fund exposure on BB & below increased due to downgrade of telecom

exposure, mainly on account of AGR (adjusted gross revenue) issue.

Received payment in one account from security receipt pool and thus

outstanding pool reduced to INR22.3b.

All accounts in which there are signs of stress is part of the BB & below pool.

There is only one corporate account which got slipped outside the BB & below

pool, mainly due to RBI directions.

There are some bank guarantees which had auto renewal. Further, bank

guarantees are valid after one year of expiry period.

Guidance/Others

Loan growth to be ~5%-7% higher than systemic loan growth.

NIMs in the range of 3.5-3.8%. Further, NIMs for FY20 are likely to be better

than FY19.

Cost to assets at ~2%.

AXSB opened 131 branches during the quarter.

Axis Finance: Two large accounts slipped during the quarter, which led to an

increase in the GNPA ratio to 2.2%.

February 2020

54

FINANCIALS/BANKS | Voices

Bank of Baroda

Current Price INR 81

Click below for

Results Update

p

Buy

Opening remarks by Mr. Sanjiv Chadha as new MD & CEO

Mr. Chadha will continue to focus on the initiatives taken by Mr. P.S. Jayakumar

(ex-MD & CEO), such as supply chain financing on the retail assets side and

many others.

Will remain focused on strengthening the risk management profile of the bank.

Will work closely with NBFC players in co-origination loans.

Strong opportunities exist in the MSME space.

P&L & balance sheet related

The bank has raised additional tier-1 bonds of ~INR34b during the quarter.

Yields have declined QoQ mainly led by ~50bp MCLR cut.

Cost of funds is improving led by increasing CASA mix, and therefore, helped

reflect better NII trends

There is a one-off of ~INR2.7b in operating expenses due to ESPS scheme.

The bank has strong INR200b pipeline of projects sanctioned. It expects

disbursement trends to improve in corporate lending. Focus remains on

betterrated corporates.

Asset quality

Slippages of ~INR45.1b were due to RBI divergences. There are interpretation

issues with the RBI on 3-4 accounts (includes 1 chemical account, 2 road

projects); all these accounts are making interest payments.

The chemical account (international account) is worth INR27b approximately.

The bank expects some of these accounts to be upgraded over the next few

quarters.

RBI divergences of INR45.1b have come from both international and corporate

slippages.

Slippages break-up – Agri-INR5.5b, MSME-INR10b, Retail-INR4.5b, International-

INR33b and Corporate-INR51b.

DHFL account worth INR20b slipped during the quarter, the bank has

maintained 20% provisions.

The bank expects recoveries in 2-3 big accounts in the coming months. Thus,

recoveries trend should remain high in the coming quarters.

The bank has signed 20 ICA accounts so far.

Reliance Home Finance slipped last quarter, the bank made 20% provisions on

that account.

The bank has restructured 30k MSME accounts of ~INR13b till date.

DCB Bank

Current Price INR 172

Click below for

Detailed Concall Transcript &

Results Update

Neutral

P&L & balance sheet related

DCBB is careful in lending to SMEs; however, vast experience of over 11 years

provides comfort on the overall loan portfolio.

The bank does not have presence in credit cards, auto loans, personal loans and

two-wheeler loans, and thus, loan growth in not as high as some of its peers.

It expects loan growth to pick up from 2QFY21.

Opportunities are available in mortgage/SMEs, and thus, are key focus

segments.

February 2020

55

FINANCIALS/BANKS | Voices

Agri segment is doing well and will continue to grow due to multiple products

being offered by the bank.

Processing fee and ATM fee income has started to pick up. Trade finance is static

due to strict lending toward brokers. DCBB continues to do well on the

insurance side.

The concentration of Top-100 depositors has decreased from ~18% to ~8% in

the past two years. This is due to increased focus toward retail deposits.

The bank plans to venture into credit cards and personal loan segment.

Over 60-70% of deposits are coming from the retail segment.

Employees have been added in the mortgage/SME segment, while it has

reduced in the CV segment.

PSLC fee income has been growing for the bank; in the current year PSLC income

should be higher than last year.

Asset quality

Slippages include one large corporate account of INR418m from packaging

industry account. There were some repayments from this account in the

last/current month. DCBB is the sole banker and has tangible collateral against

the loan. The bank holds 25% provisions on this account.

CV industry is going through stress, resulting in elevated slippages. The bank has

accelerated its efforts in the recovery process and further risk prudence

underwriting.

Total exposure toward a broking account stands at INR300m; of this, half is

backed by guarantees while some of the remaining portion is backed by cash

margin. Thus, the bank does not see any challenge in recovery of this account.

The bank has floating provisions of INR930m as on Dec’19.

The bank’s upgrades/recoveries to slippages remain at ~60% and will continue

to remain in a similar range.

Provision break-up: NPA - INR520m, floating/standard - INR60m and Investment

- INR10m.

Others

The bank is targeting NIMs to reach ~3.70-3.75%.

The bank is targeting a fee income growth of 12-14%.

The bank will add ~14-15 branches in 4QFY20; it will continue adding 14-15

branches every year.

Federal Bank

Current Price INR 84

Click below for

Detailed Concall Transcript &

Results Update

Buy

P&L & balance sheet related

The bank consciously focused toward secured & high-rates corporates.

Higher interest reversal of INR0.2b has impacted margin by ~5bp.

Collection efficiency and underwriting skills in retail business has improved.

The bank expects a 2% increase in opex due to wage revision.

~9-10% of the loan book is linked to T-bills.

Asset quality

Corporate slippages have largely come from two HFC accounts (DHFL and

Reliance Home Finance). Excluding both these accounts, corporate slippages

were at multi-year low. The bank provided 25% and 15% provisioning in these

accounts.

February 2020

56

FINANCIALS/BANKS | Voices

Received payment from one large restructured account (Air India) with exposure

of INR2b which is fully settled now.

There is no large exposure that is alarming for the bank as of now. It has nil

exposure to both the large telecom operators which are in the media names. It

has insignificant non-fund based exposure to the telecom sector.

The bank targets to improve PCR (incl. TWO) to 70%.

The bank has exposure to three IL&FS accounts (2 NPA & 1 is standard). All the

three accounts are making interest payments.

Others

The bank expects margins to improve in the coming quarters led by lower

slippages and change in asset mix. It guides to improve the margins to 3.15%-

3.20% (15-20bp overall margin improvement). The bank expects to achieve an

exit NIMs of 3.1% by 4QFY20.

It expects credit growth of 15%-17% over FY20.

The bank targets for an exit ROA of ~1.1% for 4QFY20 and 1.25% for 4QFY21.

It has guided to add 40 branches next year.

The bank will look for capital raise in early FY21.

It has guided for credit cost of ~65bp.

HDFC Bank

Current Price INR 1,226

Click below for

Detailed Concall Transcript &

Results Update

Buy

P&L & balance sheet related

Miscellaneous income includes INR2b recovery from resolution in NCLT

accounts. No impact on the flow of GNPAs.

Retail forms ~78% of the total deposits.

Corporate banking: NIMs were helped by improvement in cost of funds.

Corporate lending started picking up from Nov’19. Delinquencies remain stable.

RWA/total assets declined due to change in the asset mix. Market risk also

improved while favorable lending mix led to better RWAs.

Fee income: Core fee income is expected at ~15% in the medium to long term.

Fees from payment products range between 30-35% while wholesale is at 15-

20%. Overall, retail contribution is at 80-85%.

Asset quality

Annualized slippage ratio excluding lumpy accounts and agri stood at 1.7%. Core

slippages stood at INR38.3b while additional lumpy one-offs including agri

slippages stood at INR15b (~60-65% is agri). During 2QFY20, core slippages

stood at INR37.4b (1.7%) while in 3QFY19 it was INR32.9b (1.7%).

Including contingent provisions, PCR stood at 78%.

The bank has made additional provisions of INR7b, largely toward certain

corporate accounts with a very small proportion toward the agri portfolio.

HDB Financials: Asset quality has deteriorated led by the CV portfolio.

Asset quality of retail portfolio: Most retail products are showing an improving

trend; however, there are slight concerns in the CV and construction equipment

(CE) portfolio. A few bp increase in delinquencies was noted in few retail

segments (CV & CE).

Unsecured segments: Overall, asset quality is holding well toward this segment.

Personal loans are pre-dominantly toward salaried customers. Credit cards are

witnessing an improving trend due to customer selection and cross-sell to

internal employees.

Commercial Vehicle needs to be monitored carefully due to various economic

parameters.

February 2020

57