6 May 2020
Market snapshot Today’s top research Idea
Equities - India Close Chg .% CYTD.% Larsen & Toubro: No worries on order inflows; Sensex 31,454 -0.8 -23.8 execution takes center stage Nifty-50 9,206 -0.9 -24.3 Order wins on strong footing: In the past one month, L&T has announced Nifty-M 100 12,817 -0.7 -25.1 core E&C orders worth INR300b+. Our deep dive analysis suggests strong Equities-Global Close Chg .% CYTD.% order inflows from the power sector. Power T&D (part of infra segment) S&P 500 2,868 0.9 -11.2 witnessed robust 26% growth in FY20E to ~USD3b (International orders Nasdaq 8,809 1.1 -1.8 +58%, domestic orders +8%) FTSE 100 5,849 1.7 -22.4 Order book stands tall at INR3t+: Strong OB of over INR3t (FY18-20E CAGR at DAX 10,729 2.5 -19.0 10.8%), implying FY20E OB/Rev ratio of 3x, providing strong revenue visibility. Hang Seng 9,698 1.0 -13.2 Expect L&T to focus on working capital rather than just top line growth: Nikkei 225 19,619 0.0 -17.1 Project execution has become challenging lately owing to COVID-19 scenario. Commodities Close Chg .% CYTD.% L&T would have to continue supporting its vendor base in these tough times Brent (US$/Bbl) 28 14.2 -57.4 as it has been doing over the past many months, which is likely to increase its Gold ($/OZ) 1,706 0.2 12.4 working capital. Cu (US$/MT) 5,128 0.7 -16.6 Still in a strong position compared to FY12-14 period: E&A deal conclusion Almn (US$/MT) 1,444 0.1 -18.9 to provide strong buffer of USD2b of cash proceeds, as we do not see any risk Currency Close Chg .% CYTD.% of deal cancellation. Since FY16, the company has taken multiple steps to USD/INR 75.6 -0.1 6.0 emerge as a pure-play EPC company. USD/EUR 1.1 -0.6 -3.3 Maintain Buy with TP of INR1,200: We maintain our earnings estimate and USD/JPY 106.6 -0.2 -1.9 ascribe target multiple of 16x on the core business (25% discount to long- YIELD (%) Close 1MChg CYTDchg term average to capture near-term uncertainty). 10 Yrs G-Sec 6.1 -0.01 -0.5 10 Yrs AAA Corp 7.4 -0.05 -0.2 Research covered Flows (USD b) 5-May MTD CYTD FIIs -0.14 -0.26 -6.76 Cos/Sector Key Highlights DIIs -0.13 -0.35 9.82 Larsen & Toubro No worries on order inflows; execution takes center stage Volumes (INRb) 5-May MTD* CYTD* Jindal Steel India steel production up 5% YoY in Apr’20 Cash 495 502 460 NIIT Tech Surprisingly upbeat commentary F&O 10,082 8,578 14,346 Persistent COVID-19 impact on IP drags down topline, drives beat on margins Note: *Average Expert Speak RETAIL: Apparel manufacturers to see prolonged pain
Chart of the Day: L&T (No worries on order inflows; execution takes center stage)
Segment-wise analysis of order announcements – Power T&D (+26% YoY), L&T Power (+475% YoY), while Water and Buildings and Factories down 33%/43% YoY respectively
Source: MOFSL, Company Research Team ([email protected]) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. In the news today
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Govt hikes excise duty on SBI set to okay moratorium to NBFC tomorrow petrol by Rs 10, diesel by Rs The executive committee of the State Bank of India (SBI) board will 13 meet on Wednesday and is likely to okay the extension of moratorium The Central government Tuesday to non banking finance companies (NBFCs) opening the door for other raised excise duties by Rs 10 per public sector banks to also extend benefits to these lenders. litre on petrol and Rs 13 per litre Extension of the RBI announced three month moratorium on loans by on diesel, which will kick into banks to NBFCs has been a borne of contention between banks as effect from May 6. The increase some large lenders led by SBI have refused to extend it to NBFCs in excise comes amid crude oil citing misuse by these borrowers.… prices still remaining at relatively lower levels of $23.86 a barrel, compared to peak level prices…
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Govt mulling introduction of import substitution policy: BMC decides to shut all liquor Gadkari shops in Mumbai, only Union Minister Nitin Gadkari on essential shops to be left Tuesday said the government is open 5 considering introducing a policy Liquor shops in Mumbai will on import substitution and urged remain closed from Wednesday Lockdown in Telangana India Inc to upgrade as the Mumbai Municipal extended till 29 May technologically and come up with Corporation has decided to let Keeping the pandemic in view, cost-effective substitutes to only essential services function the lockdown in Telangana has reduce the country's inward in the city. On Tuesday Mumbai been extended till 29 May, shipment.… Municipal Commissioner announced chief minister K. Praveen Pardeshi issued an Chandrasekhar Rao on Tuesday. order saying that... "Public should complete purchase of essential items by 6 pm and they should reach their 6 7 residences. There will be curfew in the state from 7 pm. If anyone
is found outside, police will Dabur India resumes NBFCs ask RBI for one-time initiate action," Rao said. Only restructuring of all loans till Mar production at all essential shops will be open in manufacturing locations 2021 red zones… Homegrown FMCG major Dabur Non-banking financial companies Indiaon Tuesday said it has (NBFCs) have asked the Reserve resumed production at all its Bank of India to allow them one- manufacturing locations time restructuring of all loans till following the government March 2021, as their borrowers relaxing guidelines for the third are facing funding issues amid the phase of lockdown… coronavirus pandemic and the subsequent lockdown…
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5 May 2020 Update | Sector: Capital Goods
Larsen & Toubro
BSE SENSEX S&P CNX 31,454 9,206 CMP: INR837 TP: INR1,200 (+43%) Buy No worries on order inflows; execution takes center stage We expect L&T to focus on working capital management vs. topline growth
Our deep dive into L&T’s core order inflows (>INR2.5t) over the past two years reveal
the benefits of a diversified EPC player – an ability to adjust business model to Stock Info growth avenues, both segment wise as well as geographically. Together with the Bloomberg LT IN services revenue stream, such a fungible business model has helped L&T grow its Equity Shares (m) 1,402 consolidated top line every year over the past few decades, as far as we recollect. M.Cap.(INRb)/(USDb) 1175 / 15.8 Key risks in such a business model are (a) the company’s ability to manage working 52-Week Range (INR) 1607 / 661 capital cycle, and (b) unforeseen execution challenges across segments, orders and 1, 6, 12 Rel. Per (%) -6/-20/-19 geographies. L&T’s past track record has not been too great on this front, especially 12M Avg Val (INR M) 4856 Free float (%) 100.0 the losses in the hydrocarbon business over FY15-16. However, we do realize that such risks are inevitable in the E&C business, especially given L&T’s size. Thus, it is Financials Snapshot (INR b) more important to create enablers to bounce back from such short-term setbacks. Y/E Mar 2020E 2021E 2022E The COVID-19 situation presents challenges on multiple fronts for the EPC business Sales 1,471 1,498 1,790 including new order wins, execution, working capital cycle, etc. While we do not EBITDA 175 174 216 PAT 92 79 110 expect L&T to be completely immune to such challenges, the situation would be EBITDA (%) 11.9 11.6 12.1 more challenging for various mid-sized EPC companies. Thus, over the medium-to- EPS (INR) 65.4 56.5 78.2 long term, the company should be able to consolidate its market share further in EPS Gr. (%) 14.2 -13.7 38.4 India’s construction sector. BV/Sh. (INR) 494 530 592
Ratios Order wins on strong footing with likely positive surprise to FY20E estimates Net D/E 2.0 2.0 1.9 Order inflow announcements been strong lately: In the past one month, L&T RoE (%) 14.0 11.0 13.9 RoCE (%) 6.1 5.2 5.9 has announced core E&C orders worth INR300b+ (calculated at the mid-point Payout (%) 30.0 30.0 30.0 of the order size classification range). Together with earlier announced orders, Valuations the company is well placed to meet our 4QFY20E/FY20E overall order inflows P/E (x) 12.8 14.8 10.7 P/BV (x) 1.7 1.6 1.4 (incl. services) of INR513b/INR1.8t (-13%/flat YoY). Note that as order inflows EV/EBITDA (x) 14.6 15.5 12.8 are announced only after confirmation from clients and with a lag, L&T may Div Yield (%) 2.5 2.2 3.0 report overall order inflows in excess of our assumption and closer to its FCF Yield (%) -9.3 -9.3 -4.0 annual growth guidance of 10-12%. However, more than just the order inflow
Shareholding pattern (%) wins, execution of the same would be a key monitorable hereon, in our view. As On Mar-20 Dec-19 Mar-19 Announced Power EPC + T&D order wins at USD5b, +84% YoY: Our deep dive Promoter 0.0 0.0 0.0 analysis suggests strong order inflows from the power sector. Power T&D (part DII 37.9 37.2 38.2 FII 17.9 19.9 20.3 of infra segment) has witnessed robust 26% growth in FY20E to ~USD3b, of Others 44.2 42.9 41.5 which international orders are estimated to grow ~58%, while domestic orders FII Includes depository receipts are estimated to grow at ~8%. Ex-power T&D, L&T Power has won orders worth ~USD2b. Key orders include (a) a mega (>INR70b) EPC order from SJVN Stock Performance (1-year) Thermal Private Limited to set up a 2x660MW ultra-supercritical power plant in Buxar, Bihar, (b) THDC's 2x660MW Khurja Super Thermal Power Project in Bulandshahar, UP, and (c) a couple of FGD orders. Hydrocarbon sees another strong year, even after sharp dip in 4Q: Announced order wins in the hydrocarbon segment stands at ~USD3.8b, a decline of 9% on YoY basis. We attribute this to the strong base of last year. On reported basis, 9MFY20 growth rate for the segment stood at 18%. This suggests sharp decline in 4QFY20, attributable to the strong base quarter
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(4QFY19: INR127b or 45% of FY19 order wins). We do not rule out deferment of orders toward the year end, owing to the COVID-19 impact and volatile swings in the oil prices. Ex-Power T&D, overall infrastructure segment order wins disappoint: Overall, the infrastructure segment had another year of weak order wins and is a major disappointment in our view. Excl. power T&D orders, which grew 26% YoY, infrastructure order announcements are down 30% in FY20E. Including Power T&D as well, the same is down ~20%. The big disappointments have come from (a) water segment, down 33% to USD2.5b, (b) buildings and factories, down 43% to USD2.3b (base had good order inflows from airports), and (c) heavy civil infrastructure down 52% to USD1.1b.
International OB continues robust growth; domestic orders surge lately International OB update: International order inflows in core E&C have been quite strong in 9MFY20 to ~INR280b (+29%), on top of 30%+ growth witnessed in FY19. This has led to rising share of international orders in the overall order book to 24% at 3QFY20 end, up from 21% at 1QFY20 end but still below peak 29% witnessed in FY17. At end-3QFY20, the international order book stood at record high of ~INR726b with OB/Rev ratio of 2.5x. We note that execution rate in international orders are higher than domestic orders, especially given the strong inflows in the hydrocarbon segment. Surge in domestic orders over past one month pleasant: The strong order inflow announcements over the past one month were largely driven by the domestic market, though it still declined YoY. Order wins have been dominated by Power T&D, Water and heavy Civil Infra segment, but Buildings and Factories have witnessed sharp decline in orders compared to last year.
Order book not a concern; choice between working capital cycle and rev growth Order book stands tall at INR3t+: Strong order inflows over the past two years has helped build up the order book to over INR3t (FY18-20E CAGR at 10.8%). This implies FY20E OB/Rev ratio of 3x, providing strong revenue visibility. We are confident of the company’s ability to expedite execution of the order book (despite the vast size), provided the macro environment stabilizes and remains supportive. We recall that just a year ago in FY19, the company clocked core E&C growth of 16%. However, given the uncertainty around the macro
environment, such strong execution may not be possible in near term. We expect L&T to focus on working capital rather than just top line growth: The COVID-19 scenario has made execution of projects challenging given uncertainty around migrant workers, operations under social distancing norms and precautions, and limited fiscal room to support capex by the government. Moreover, L&T would have to continue supporting its vendor base, including sub-contractors, in these tough times as it has been doing over the past many months. This is likely to increase its working capital further. Thus, we expect L&T to focus on working capital management in the near term. As the situation normalizes in due course, it may shift gears toward higher revenue growth. Thus, we expect core E&C revenue to be flattish in FY21E, followed by strong
growth of ~20% in FY22E, helped by a lower base.
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Many levers to capitalize on; position stronger compared to FY12-14 period E&A deal conclusion to provide strong buffer of USD2b of cash proceeds: While sale of the E&A business to Schneider has been delayed for quite some time now, the conclusion of the same would result in cash proceeds of USD1.8- 2b providing L&T strong cash buffer in these uncertain times. We do not see any risk of deal cancellation as all parties (Schneider, Temasek and L&T) have devoted significant time into this deal over the past two years and are currently in the last phase of deal conclusion. More importantly, from Schneider’s (Buyer) point of view, the deal is quite strategic and provides long-term opportunity in the highly organized switchgear market of India. The deal valuation remains cheaper than the current valuation of the other two competitors (ABB, Siemens) as well as the other smaller deals (acquisition of C&S by Siemens) in the sector. Thus, despite the COVID-19 uncertainties, we believe the deal makes a lot of sense for the buyer, i.e. Schneider and Temasek. Re-emergence as a pure EPC company to help tide over challenging times: We draw comfort from the fact that since FY16, the company has taken multiple steps to emerge as a pure-play engineering, procurement and construction (EPC) company. We recall that post the Global Financial Crisis of FY08, capex growth was driven by the private sector and even L&T forayed into the development business. Thus, over FY10-16, while revenue/EBITDA growth stood at 15%/8%, PAT declined at 4% CAGR as depreciation and interest expense surged. With no major capex planned except for maintenance, we believe that L&T would be able to tide over the current challenging times and would emerge stronger. However, we do see risk for some mid-cap contractors with high leverage; these companies may face the uphill task of mending their balance sheets post the current economic slowdown. Positive over L&T’s long-term prospects, but push growth further by a year: L&T remains the best play on India’s capex story. We note that without the capex cycle, it may be difficult for economic growth to achieve/sustain higher levels. However, with delays in the capex cycle, the vendor base including sub- contractors are facing serious challenges to survive and L&T may have to support them in the near term. Once the situation improves, we believe L&T would be able to improve its working capital cycle as it has done in the past. For instance, L&T’s working capital improved from 25% in FY15 to 18% in FY19. Valuation and view: We maintain our earnings estimate and TP of INR1,200 with target multiple of 16x on the core business (25% discount to long-term average to capture near-term uncertainty). While FY21E looks challenging from growth perspective, we do expect a bounce-back in FY22E, helped by a lower base and stabilization of working capital. At CMP, the stock trades at FY21E/22E P/E of 14.8x/10.7x (adjusted for valuation of subsidiaries). Maintain Buy.
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5 May 2020 Update | Sector: Metals
Jindal Steel & Power BSE SENSEX S&P CNX 31,454 9,206 CMP: INR86 TP: INR150 (+75%) Buy
India steel production up 5% YoY in Apr’20
Highlights from Jindal Steel and Power’s (JSPL) Apr’20 operational update: Stock Info
Bloomberg JSP IN Equity Shares (m) 1,016 India steel operations M.Cap.(INRb)/(USDb) 87.7 / 1.2 JSPL produced 550kt steel and related products during Apr’20 (up 5% YoY). This 52-Week Range (INR) 202 / 62 was on the back of record high production from the Angul Blast Furnace, which 1, 6, 12 Rel. Per (%) 22/-14/-33 produced 298kt hot metal, clocking 10kt daily. Other related products include 12M Avg Val (INR M) 2863 granulated pig iron and other intermediary products. Free float (%) 39.6 Though domestic demand remained dry during the month, production was Financials Snapshot (INR b) boosted by large export orders, primarily of billets from China due to the shortage Y/E MARCH 2020E 2021E 2022E Sales 371.1 351.0 411.3 of intermediates there. EBITDA 76.0 92.2 87.5 Apr’20 sales stood at 335kt, of which 248kt (74% of total) were exports. Adj. PAT -6.7 8.4 9.0 Exports were up 109% MoM while implied domestic sales were down ~80% MoM. EBITDA Margin (%) 20.5 26.3 21.3 The balance production in Apr’20 is at the ports, waiting to be exported out; sales Cons. Adj. EPS (INR) -6.5 8.3 8.8 would be booked in May’20. EPS Gr. (%) -299.4 -226.8 6.3 BV/Sh. (INR) 317.6 325.9 334.8 We note that while these export volumes would earn lower EBITDA margins Ratios (likely ~INR5,000/t), it is still positive as this should help recover fixed costs if Net D:E 1.1 0.9 0.8 plants earn positive cash flows, which is critical in this environment. RoE (%) -2.0 2.6 2.7 RoCE (%) 4.6 7.1 6.7 India Steel and related products – production and sales Payout (%) 0.0 0.0 0.0 Valuations Steel and related product sales Steel and related product production P/E (x) -13.1 10.4 9.8 1560 1570 1580 1610 1540 P/BV (x) 0.3 0.3 0.3 1350 1360 1320 EV/EBITDA(x) 5.7 4.2 4.1 Div. Yield (%) 0.0 0.0 0.0 550 1,670 1,520 1,510 1,460 Shareholding pattern (%) 1,300 1,320 1,270 1,400 As On Dec-19 Sep-19 Dec-18 335 Promoter 60.4 60.4 58.7 DII 13.0 11.1 9.3 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Apr-20 FII 14.4 15.3 17.8 Others 12.2 13.3 14.3 Source: MOFSL FII Includes depository receipts Oman operations Stock Performance (1-year) JSPL’s Oman operations reported production of 106kt, down ~40% over the Jindal Steel Sensex - Rebased normal monthly run-rate. However, the decline in sales volumes was lower at 33% 210 as the company sold ~120kt of steel during the month. 170 130 90
50
Feb-20
Aug-19
Nov-19
May-19 May-20
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Oman sales and production volumes
Sales Production
570 570 570 500 484.5 500 390 410
106
460 470 450 460 410 370 570 530 120
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Apr-20 Source: MOFSL
Valuation and view – steel business available virtually free JSPL’s ability to export volumes during Apr’20 provides confidence to our expectation of ~2% decline in FY21E volumes. Restructuring of debt in Australian operations during 4QFY20 should help JSPL meet its debt obligations comfortably in Indian and other overseas operations. We expect JSPL to reduce its net debt by INR77b over FY20E-22E to INR272b. This would be achieved through free cash flow generation on the back of higher earnings and lower capex.
At CMP, the stock trades at 4.1x FY22E EV/EBITDA. We value JSPL stock using SoTP methodology and value the steel business at 4.0x. The power business is valued using DCF method. We arrive at a target price of INR150/share. Our valuation of the power business translates to an EV of INR40m/MWH capacity, which is at ~40% discount to the replacement value. Equity value of the power business (JPL’s estimated net debt at INR60b FY22E) works out to INR76/share. Hence, the steel business of JSPL is available virtually free at the current stock price. Reiterate Buy.
Target price calculation Y/E March FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Steel Business
A. EBITDA 72,496 64,410 78,936 71,611
B. Target EV/EBITDA(x) 4.0
C. EV (AxB) 2,86,445
Jindal Power (JPL)
D. PV of JPL's FCFF 1,37,449
Consolidated
EBITDA 54,598 34,410 46,613 64,691 84,056 75,972 92,187 87,482 E. Enterprise Value (C+D) 4,23,894
F. Net Debt 4,43,617 4,63,928 4,61,427 4,38,319 4,04,306 3,48,708 3,00,736 2,71,629 Equity Value (E-F+G*(1-H%)) 1,52,265
Target price (INR/share) 150
Source: MOFSL
6 May 2020 7
6 May 2020 4QFY20 Results Update | Sector: Technology NIIT Tech
Estimate change CMP: INR1,188 TP: INR 1,370 (15%) Neutral
TP change Rating change Surprisingly upbeat commentary Execution is the key monitorable; Maintain Neutral Bloomberg NITEC IN Despite the disruption caused by the COVID-19 crisis, revenue from key Equity Shares (m) 61 service offerings (ADM) remained largely stable. IP Assets/Managed Services M.Cap.(INRb)/(USDb) 74.3 / 1 generated the entire incremental revenue in Mar’20. Margins remained 52-Week Range (INR) 2057 / 739 stable, partly aided by currency. Good order intake was encouraging. 1, 6, 12 Rel. Per (%) 1/-2/13 Management’s upbeat commentary around growth in FY21 and limited 12M Avg Val (INR M) 782 margin contraction (up to 80bps) was a positive surprise given the current situation and the company’s high exposure to the Travel, Transportation, Financials & Valuations (INR b) and Hospitality (TTH, 27% of revenue). However, execution is the key Y/E Mar 2020 2021E 2022E observable given the continuously evolving nature of the situation. Sales 41.8 45.0 51.6 We keep our estimates over FY21–22E largely unchanged.
EBIT Margin (%) 13.7 12.5 14.0 Largely in-line growth and margins; Good order booking PAT 4.6 4.4 5.8 In 4QFY20, revenue (USD) / EBIT (INR) / PAT increased 17%/15%/2% YoY v/s EPS (INR) 73.5 71.0 92.3 our estimates of 17%/18%/11% YoY. EPS Gr. (%) 11.0 (3.3) 29.9 Across verticals, Insurance/Others reported robust growth of 6%/11% (QoQ, BV/Sh. (INR) 384.1 429.9 488.6 USD). On the other hand, BFS/TTH declined 4%/5%. Growth was largely led Ratios by ramp-up in large deals won in Dec’19. RoE (%) 20.5 17.5 20.1 The Americas and RoW reported decline of 2% and 4%, respectively. Despite RoCE (%) 20.3 16.9 19.3 the disruption witnessed toward the end of the quarter, EMEA reported Payout (%) 42.2 29.6 30.3 Valuations strong growth of 11%. P/E (x) 26.2 27.1 20.8 IP Assets/Managed services largely contributed to incremental revenue P/BV (x) 5.0 4.5 3.9 during Mar-20, while core service offerings (ADM) remained stable. EV/EBITDA (x) 14.9 14.0 10.8 Despite the COVID-19 disruption, order intake remained sound at USD180m Div Yield (%) 1.6 1.1 1.5 (run-rate over 1HFY20), with the executable order book over the next 12 months increasing to USD468m (v/s USD424m at the end of Dec’19).
Shareholding pattern (%) Surprisingly upbeat commentary As On Mar-20 Dec-19 Mar-19 The company expects growth in FY20 despite ongoing pressure in the Promoter 70.1 70.1 30.5 Airliners sub-vertical (~13% of revenue). While single-digit revenue decline is DII 6.8 7.7 16.2 expected in Jun’20, management foresees recovery in Sep’20. FII 14.5 13.4 40.6 Strong order intake over 2HFY20 and the executable order book is driving Others 8.6 8.8 12.7 this confidence despite the expected sharp decline in revenue from Airliners. FII Includes depository receipts Additionally, the company is confident of gaining due to vendor
consolidation opportunities presented by the current situation. Management is optimistic that the Airports sub-segment may witness resilience in IT spends given the expected uptick in digital spends. Company guided for up to 80bps EBITDA margin contraction (pre-RSU).
Valuation view – Execution is the key monitorable NIIT Tech’s commentary has been a clear outlier, given the current context of COVID-19 disruption and the company’s relatively high exposure to Travel, Transportation, and Hospitality (27% of revenue). However, given the continuously evolving situation around COVID-19, execution is the key observable. The stock is currently trading at 17x on depressed FY21E earnings. We value the company at 15x FY22E EPS.
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Quarterly performance (IND-AS) (INR m) Y/E March FY19 FY20 FY19 FY20 Est. Var. (Consolidated) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QFY20 (%/bp) Rev. (USD m) Ex. forex & bought outs 121 131 135 132 138 149 151 155 519 593 154 0.5 QoQ (%) -1.3 8.5 3.0 -1.9 4.4 7.7 1.7 2.3 11.9 14.3 2.3 10bp Revenue (INR m) 8,005 9,074 9,717 9,319 9,597 10,385 10,734 11,093 36,115 41,809 11,125 -0.3 YoY (%) 12.9 23.1 28.4 18.1 19.9 14.4 10.5 19.0 20.7 15.8 19.4 -35bp GPM (%) 33.8 35.0 35.4 34.7 33.9 34.6 34.1 34.3 34.8 34.2 34.3 3bp SGA (%) 17.7 17.0 16.8 17.1 16.8 16.3 16.1 16.5 17.1 16.4 15.9 62bp EBITDA (INR m) 1,287 1,634 1,805 1,641 1,641 1,898 1,940 1,971 6,367 7,450 2,043 -3.5 EBITDA Margin (%) 16.1 18.0 18.6 17.6 17.1 18.3 18.1 17.8 17.6 17.8 18.4 -3.3 EBIT (INR m) 980 1,315 1,491 1,343 1,240 1,451 1,491 1,538 5,129 5,720 1,588 -3.1 EBIT Margin (%) 12.2 14.5 15.3 14.4 12.9 14.0 13.9 13.9 14.2 13.7 14.3 -41bp Other income 206 215 5 45 75 76 130 180 471 461 60 200.9 ETR (%) 25.3 23.7 29.7 17.5 20.5 18.1 20.7 20.3 24.1 19.9 22.5 -10.0 PAT 841 1,118 1,002 1,111 1,022 1,195 1,233 1,136 4,072 4,586 1,235 -8.0 QoQ (%) -2.3 32.9 -10.4 10.9 -8.0 16.9 3.2 -7.9 45.3 12.6 0.2 -805bp YoY (%) 63.9 66.6 32.4 29.0 21.5 6.9 23.1 2.3 11.2 -894bp EPS (INR) 13.7 18.2 16.3 18.1 16.6 19.2 19.7 18.2 66.2 73.7 19.8 -7.9
Key perf. indicators Y/E March FY19 FY20 FY19 FY20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenue (QoQ CC %) 3.3 7.6 4.2 1.3 4 8.5 2 3.0 10.5 18.1 Margins Gross Margin 33.8 35.0 35.4 34.7 33.9 34.6 34.1 34.3 34.8 34.2 EBIT Margin 12.2 14.5 15.3 14.4 12.9 14.0 13.9 13.9 14.2 13.7 Net Margin 10.5 12.3 10.3 11.9 10.6 11.5 11.5 10.2 11.3 11.0 Operating metrics Headcount 9,764 10,025 10,144 10,263 10,297 10,800 10,849 11,156 10,263 11,156 Attrition (%) 10.1 10.8 11.7 11.7 12.9 12.3 11.9 11.8 11.7 11.8 Deal Win TCV (USD b) 151 160 165 170 175 176 218 180 646 749 Key Verticals (YoY USD %) BFSI 3.2 6.2 3.0 -4.1 6.8 14.9 -3.0 24.4 17.6 19.1 Travel and Transport 2.5 8.5 -0.8 1.8 8.3 7.7 4.9 19.0 9.9 21.2 Key Geographies (YoY USD %) North America 12.0 11.8 13.3 10.5 12.2 13.6 9.4 9.9 11.9 11.4 Europe 9.8 33.8 27.1 11.6 25.2 23.6 25.2 41.9 20.1 29.2
6 May 2020 9
RESULTS
FLASH 6 May 2020 Results Flash | Sector: Technology Persistent
BSE SENSEX S&P CNX 31,454 9,206 CMP: INR466 TP: INR594 (+27%) Buy
Conference Call Details COVID-19 impact on IP drags down topline, drives th Date: 06 May 2020 beat on margins Time: 17:00 IST Healthy performance in Services masked by IP decline Dial-in details: In 4QFY20, revenue (USD) / EBIT (INR) /PAT increased 7%/-4%/-1% YoY v/s +91-22-7115 8006 our estimates of 6%/-19%/-13% YoY. For FY20, revenue (USD) / EBIT (INR) / Financials & valuations (INR b) PAT increased 4%/-23%/-3% YoY. Y/E Mar 2020 2021E 2022E Sequential decline of 24.3% in the quarter was entirely driven by IP-led Sales 35.7 36.1 38.6 segments. This was attributed to the severe impact of the ongoing COVID- EBIT (%) 9.2 7.4 9.5 19-led lockdown imposed in March, a crucial month in the quarter for IP- PAT 3.4 2.7 3.6 related sales. EPS (INR) 44.4 35.7 47.5 The Technical Services Unit (TSU), on the other hand, grew at 4.2% QoQ on EPS Gr. (%) 0.9 -19.6 33.2 BV/Sh.(INR) 302.2 328.5 366.7 broad-based growth in both sub-segments, ISV (5.0% QoQ) and Enterprise Ratios (3.7% QoQ). RoE (%) 14.3 10.5 12.6 Segmental highlights RoCE (%) 10.2 7.7 9.8 Geography-wise, the key market, North America (80% of revenues), Payout (%) 27.0 22.4 16.8 declined by 1.7% QoQ. Europe saw sharper decline of 18% QoQ. On the Valuations P/E (x) 10.5 13.1 9.8 contrary, the APAC partially offset the fall in Europe and North America as P/BV (x) 1.5 1.4 1.3 ROW and India grew 3% and 19% QoQ, respectively. EV/EBITDA (x) 5.3 6.6 4.5 In terms of verticals, only BFSI edged up to 0.8% QoQ. Healthcare and Life Div. Yield (%) 2.6 1.7 1.7 Sciences came in largely flattish. Decline was driven by the Tech Companies and Emerging vertical (-3.9% QoQ, ~51% of revenues). The top client contribution to revenue declined 12% QoQ. While growth in the top 2–5 clients stood strong at 5% QoQ, clients in the top 6–10 category (-6% QoQ, USD) dragged down growth. Clients below the top 10 mark grew ~1% QoQ. Margins beat estimates Sequentially, utilization decreased ~110bp QoQ. While the impact from this may have been offset by INR depreciation and reduced IP royalty purchase expense (-53% QoQ), overall gross margins expanded ~70bp. SGA was largely flat, resulting in an overall EBIT margin of 9.2% (~50bp expansion sequentially, way higher than our expectation of a ~70bp contraction). Valuation and view: PSYS’ performance in the quarter saw a strong negative impact from COVID-19 on IP-led revenues. However, healthy growth in services was a key positive. We look forward to management commentary on recovery in the IP segment, deal wins, and guidance for FY21. The stock currently trades at 13x FY21E EPS. We would revisit our estimates and target multiples post the earnings call tomorrow. Maintain Buy.
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Quarterly performance (IFRS) (INR m)
Y/E March FY19 FY20 FY19 FY20 Est. Var. (Consolidated) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QFY20 (% / bp) Revenue (USD m) 123.6 118.2 120.8 118.3 119.6 125.5 129.4 127.1 481 502 125.5 1.2 QoQ (%) 5.7 -4.3 2.2 -2.1 1.1 4.9 3.1 -1.8 2.2 4.3 -3.0 116bp Revenue (INR m) 8,343 8,356 8,642 8,319 8,321 8,846 9,227 9,264 33,659 35,658 9,039 2.5 QoQ (%) 10.9 0.2 3.4 -3.7 0.0 6.3 4.3 0.4 -2.0 243bp YoY (%) 14.6 9.8 9.1 10.5 -0.3 5.9 6.8 11.4 11.0 5.9 8.7 270bp GPM (%) 30.8 30.5 33.6 32.3 30.1 29.9 28.6 29.3 31.8 29.5 28.0 129bp SGA (%) 18.8 18.1 18.5 21.6 20.3 21.0 19.9 20.0 19.2 20.3 20.0 5bp EBITDA 1,400 1,436 1,703 1,266 1,202 1,216 1,234 1,277 5,805 4,930 1,126 13.4 EBITDA Margin (%) 16.8 17.2 19.7 15.2 14.4 13.8 13.4 13.8 17.2 13.8 12.5 132bp EBIT Margin (%) 12.0 12.4 15.1 10.7 9.8 8.9 8.7 9.2 12.6 9.2 8.0 125bp Other income 187 231 -12 224 282 364 334 274 631 1,254 262 4.6 ETR (%) 26.4 30.5 29.2 24.1 24.9 25.5 22.9 25.9 27.7 24.8 25.0 PAT 873 881 917 845 825 861 879 838 3,517 3,403 739 13.5 QoQ (%) 18.5 0.9 4.1 -7.9 -2.4 4.4 2.2 -4.7 -16.0 1132bp YoY (%) 16.3 6.7 0.1 14.6 -5.6 -2.3 -4.1 -0.8 8.8 -3.2 -12.6 1178bp EPS (INR) 10.9 11.0 11.5 10.6 10.7 11.3 11.5 11.0 44.0 44.4 9.7 13.5
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5 May 2020 Retail
Expert Speak
Apparel manufacturers to see prolonged pain
To understand the issues of the Apparel Manufacturing sector in India in the wake of the COVID-19 crisis, we hosted an interaction with Mr Rahul Mehta, former President of the Clothing Manufacturers Association of India, to discuss the impact of the current lockdown on the Clothing Manufacturing industry and the potential aftershocks of the crisis. Here are the key highlights from our call with him: Mr Rahul Mehta, Former President, On business sustainability: As per a CMAI survey, 31% of members expressed the The Clothing intention to exit the Apparel Manufacturing industry as 70–80% of these were Manufacturers MSME players, with a low holding capacity; 60% anticipated that 40% of their orders Association of India would stand canceled post the lockdown. Mr Rahul Mehta served at On India’s position to attract global players: Southeast Asian nations are in a better CMAI as President for more position to attract global manufacturers, while India is in a less favorable position than a decade. With a due to the lack of favorable business policies and skilled labor. membership base of over 20,000 companies, including On supply constraints: Some portion of migrant laborers may not return from their readymade garment villages due to unfavorable risk-reward for safety/health issues v/s pay, thus leading manufacturers, exporters, to a shortage of workers and retailers, CMAI is the leading trade body in the On demand recovery: China brands saw <40% of LTL sales post two weeks of the Indian apparel industry. lockdown being lifted. India would witness a similar impact, with rampant store closures, as retailers would try to curb inefficiency; also, some part of the business would revive only by winter as even factories are expected to open by late July–August.
Detailed takeaways Clothing Manufacturing largely unorganized India’s annual clothing exports have been ~USD16b. While the Domestic Clothing market is highly fragmented and unorganized, it is estimated to be INR2–20t; moreover, the lack of official statistics in clothing industries makes it difficult to gauge the accurate size of India’s Clothing market.
High share in unorganized market 70–80% of the domestic market is unorganized in the MSME sector, while micro and small enterprises form ~50% of this unorganized market. As per a survey conducted by CMAI on 80,000 households, the size of the Domestic Clothing market excluding Innerwear and Winter Wear is estimated to be ~INR5.6t, whereas the total market including Innerwear and Winter Wear stands at ~INR6.5t The Clothing industry employs ~12m people, with ~4m employed in the Export segment. Moreover, ~8m people are employed in the Domestic segment. Surprisingly, women account for ~40% of the total employment in the industry.
Industry in pain even before onset of COVID-19 Domestic Clothing was earlier growing at 8–10%, but industry growth has since decelerated due to hiccups such as the demonetization and introduction of GST. Also, a large section of the industry has seen growth tapering on account of rising challenges in business operations. Hence, the industry was feeling the pain even before the COVID-19 crisis.
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Apart from malls and shopping complexes, high-street stores (which account for a large share of readymade sales) are likely to be closed for a longer period. Furthermore, the Retail sector is expected to be the last segment to fully recover from the lockdown. Post the lockdown, it would take at least six to nine months for sales to return to normal levels.
Grim supply-side outlook
Many manufacturers look to exit industry and lay off workers As per a survey ending March’20 (1650 members) conducted on members by the CMAI, 20% of members in the Clothing Manufacturing industry expressed intent to exit the industry on account of the COVID-19 crisis. The same survey conducted three weeks later in April’20 revealed 31% of members expressed intent to exit the industry, which highlights the grim situation in the supply side of the Retail sector in India. 60% of members anticipated 40% of their orders to stand cancelled due to the lockdown, resulting in similar sales loss for the year. Other members (not willing to shut their businesses) were looking to lay off 15–25% of their workforce and expected the remaining employees to take a pay cut of 25–45% Expect winter orders to see revival in the next few months and factories to open up by late July–August.
Large order cancellations Exporters are witnessing cancellations in large orders; the apparel ministry is attempting to work things out along with the exporters. Most of the Middle East is also in lockdown; hence, export orders from these nations would be impacted. Dubai depends heavily on tourism; thus, demand from Dubai would be majorly disrupted for a longer period. Domestic market orders that are WIP have not been canceled; orders for which materials have not been purchased have largely been canceled. The CMAI has advised retailers and vendors to discuss issues on common grounds so the overall industry does not suffer, and avoid legal recourse over such matters.
Expect Retail business to see revamp The Apparel sector is expected to change its strategy and business models and focus increasingly on the domestic markets. The Domestic sector has become organized in the past few years to a great extent, with larger players such as TATA, ABG, and Reliance, entering the sector. India sees limited manufacturing of winter wear, uniforms, etc. (which hold a large share in the global sector), although manufacturing of cotton wear is high in the country. Expect business changes around the pace of store openings, store sizes, focus on consignment sales v/s private label sales, online sales, and so on. China brands saw <40% of LTL sales post two weeks of the lockdown being lifted; India is not expected to see more than 50–60% sales in the weeks following the lockdown. Retailers might see store closures due to the lack of efficiency and reckless store re-openings.
Innerwear / Leisure Wear / Casual Wear look promising Expect huge opportunity in the Innerwear segment, especially in the tier-3 and rural markets. Leisure Wear and Casual Wear have witnessed a rise in sales, with the category expected to grow across demographics, driven by demand from a younger population; on the other hand, the Formal Wear category is trending downward.
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Southeast Asian nations a hotspot for manufacturers Vietnam, Cambodia, and Bangladesh are in a better position to attract global manufacturers; India is in a less favorable position to attract them, due to the lack of favorable business policies and skilled labor. Expect near-shoring to rise and efficiency to increase, resulting in smoother supply chain management among retailers.
MSMEs call on government for relief Expect relief packages for the Retail sector and generous packages for MSMEs over larger corporations. Expect some portion of migrant laborers to not return from villages due to the lack of safety and the risk-reward issue over pay v/s health benefits and preference to stay in villages, thus leading to a shortage of workers. Smaller corporate entities would not be able to pay creditors within 45 days of sale, whereas large corporate entities would; thus, MSMEs dealing with smaller corporate entities would face WC issues. A wage subsidy is demanded from the industry as MSMEs lack the cash to pay salaries to their employees. MSMEs have appealed to government authorities for relief on GST, taxes, WC loans, and other refunds.
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In conversation
LIC HOUSING FINANCE: LESS THAN 15% CUSTOMERS APPLIED FOR MORATORIUM; Siddhartha Mohanty, MD Discussions are on with banks to get funds at a cheaper rate. Recently launched Home loans at 7.5% interest for customers with 800+ CIBIL score. Have taken advantage of reducing cost of funds. On boarded a special task force to monitor moratorium customers. Do not expect much spike in credit costs IN 1QFY21 Regular income group constitutes 60-70% of the customer group. Less than 15% of the customers have opted for the moratorium. Do not expect a huge impact on cash flows. There is stress on the developer side. Small developers have approached for a moratorium (Developer book constitutes 6-7% of the book) Expect demand revival for the affordable housing segments after two-three quarters.
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From the think tank
JIO, FACEBOOK RAISE THE STAKES AGAINST AMAZON IN INDIA’S E-COMMERCE GAME The seeds were sown early this year. On 15 January, the world’s richest man and Amazon founder Jeff Bezos said the e-tailer would invest $1 billion in India over the next five years, bringing 10 million small and midsize local businesses online. While US companies are known to be tight-lipped about their investment plans, there is a reason why Amazon keeps announcing them. In it, there is always a message for its competitors. This time, it was for Reliance Industries, which had just a month before, in December, rolled out an early version of JioMart—its much-anticipated online retail service, which seeks to use its technology platform to tap into India’s vast network of small neighbourhood stores known as kiranas. Therefore, Bezos’ appeal to woo such businesses could be understood. Game theory is about how you make moves in competitive situations where the outcome depends critically on your competitor’s moves. Here, signalling is just as critical as the actual action. That was Bezos’ turn. Now, Reliance has come back with a $5.7 billion deal with Facebook in lieu of a minority stake, wherein it gets a lot of money to lengthen its runway, and ensures a mention in the joint news release about unleashing “JioMart"on Facebook owned WhatsApp’s mammoth 450 million user base to turbocharge ‘kiranas’. Jio’s ammunition has now only gotten stronger with SilverLake–the Menlo Park headquartered private equity firm and backer of tech companies like Skype, Ant Financial, Dell, Didi Chuxing, Expedia, Twitter, Airbnb—cutting a huge cheque of about $746.8 million in lieu of 1.15% stake giving it a valuation of $65 billion a premium of about 12.5% to the valuation implied by the Facebook investment.
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N O T E S
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