Ultratech Cement (UTCEM: IN)

Equity Research INDIA

August 18, 2020

Virtual Conference 2020 ICICI Securities Limited is the author and Day 2 Highlights distributor of this report

We hosted 15 large cap corporates at I-Sec Virtual Conference 2020 on August 18, 2020.  Infosys (INFO: IN)

 ITC (ITC: IN)

 Sun Pharma (SUNP: IN)

 Ultratech Cement (UTCEM: IN)

 Godrej Consumer Products (GCPL: IN)

 Aurobindo Pharma (ARBP: IN)

 United Spirits (UNSP: IN)

 Lupin (LPC: IN)

 Hindalco (HNDL: IN)

 UPL (UPLL: IN)

 United Breweries (UBBL: IN)

 ACC (ACC: IN)

 Voltas (VOLT: IN)

 Dr Lal Path (DLPL: IN)

 Kajaria Ceramics (KJC: IN)

Research Analysts: I-Sec Equity Research [email protected] Please refer to important disclosures at the end of this report

Virtual Conference August 18, 2020 ICICI Securities

TABLE OF CONTENT

Infosys (HOLD, CMP: Rs968) ...... 3 Sun Pharma (BUY, CMP: Rs526) ...... 4 Ultratech Cement (BUY, CMP: Rs4,169) ...... 6 Godrej Consumer Products (ADD, CMP: Rs691) ...... 7 Aurobindo Pharma (ADD, CMP: Rs872) ...... 8 United Spirits (ADD, CMP: Rs589) ...... 9 Lupin (HOLD, CMP: Rs981) ...... 10 Hindalco (BUY, CMP: Rs196) ...... 12 UPL (BUY, CMP: Rs500) ...... 13 United Breweries (UNRATED, CMP: Rs1,004) ...... 14 ACC (BUY, CMP: Rs1,432) ...... 15 Voltas (HOLD, CMP: Rs645) ...... 16 Dr Lal Path (BUY, CMP: Rs1,881) ...... 17 Kajaria Ceramics (HOLD, CMP: Rs422) ...... 19

Virtual Conference August 18, 2020 ICICI Securities

Infosys (HOLD, CMP: Rs968)

Hardik Sangani (+91 22 6637 7504) [email protected] Price chart  In the past six months, on account of Covid-19 crisis, spends across sectors have 1,100 1,000 come down significantly. However, as clients are looking to save on spending, they 900 are looking for vendors who can help them with their cost takeout initiatives. 800 700 (Rs) 600  As the ongoing pandemic is resulting in increased WFH environment, services 500 pertaining to cloud and cybersecurity are becoming key areas of spending. 400 300  Infosys’ focus on localisation initiatives in the US, building six digital centres have helped it meaningfully de-risk itself from visa-related issues as currently majority of Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 headcount is not visa dependent.  Even in a tough environment, healthy orderbook, recent large deal wins and a robust pipeline give comfort about the company being able to meet its revenue guidance range (0-2% growth in CC terms in FY21).  In light of the ongoing pandemic, there has been a greater push to perform work more remotely. With utilisation and quality of work not getting significantly affected, clients may be open to greater offshoring going forward.  Infosys has a well laid out capital allocation policy with 85% FCF to be returned to shareholders through dividends and buybacks. The company has capacity to use both cash post shareholder distribution and cash in balance sheet to do acquisition which complements its digital strategy. Amongst other things, tuck-in acquisition would be a focal point as it is easier to integrate and targeted digital capabilities can be acquired. (Recent acquisition in space of cloud-based SAAS services providers, design studios have helped Infosys expand its offerings in various geos and segments)  Discretionary costs such as travel shall gradually inch up as economies open albeit at a slower pace.  Onsite utilisation is largely at the same level as Q4FY20. Offshore utilisation was meaningfully affected in Q4FY20 to early Q1FY21; however, it improved later. Hiring is still low as the company already has a bench which can take up incremental demand. It has not resorted to laying-off people due to the pandemic; however, performance related involuntary attrition in normal course and pyramid optimisation exercise continues.  Vendor consolidation is the key trend picking up in current environment as clients look to engage with larger vendors who are amongst industry leaders and have end-to-end capabilities in place to help both legacy and digital part of the business.

Virtual Conference August 18, 2020 ICICI Securities

Sun Pharma (BUY, CMP: Rs526)

Sriraam Rathi (+91 22 6637 7574) [email protected] Vinay Bafna (+91 22 6637 7339) [email protected] Price chart  Acquired Ranbaxy in 2015. Gradually improved the productivity of the combined 800 business. 700 600 o MR productivity has improved significantly post integration. 500 (Rs) o So the overall profitability has been reasonable. 400 300 o Synergies have been achieved very well. 200 o Profitability for most markets acquired from Ranbaxy would have improved.

Feb-18 Feb-19 Feb-20  Aug-17 Aug-18 Aug-19 Aug-20 EM and ROW

o As a portfolio are reasonably profitable. o Don’t expect a massive delta in the profitability from the current levels.  Investment in specialty business is dragging the profitability. Its loss making at the moment (ex-Absorica and Levulan). o R&D is another expense/investment that is not generating any revenue or profitability for few years. o As revenue from specialty grows, there will be operating leverage from the segment since most of the cost is baked into the business. (Marketing, branding, HR, etc.). o Expect specialty to ramp up in the next few years. o Peak sales from the specialty product would happen in the first 4-5years. o China and EU are entered via partnership. Hence, those costs would be borne by partner. o Japan – Ilumya preparing for launch. Cost will be borne by the company. Front end set up came with Pola pharma. IL-17/23 market is very small at the moment as most patients are treated using the 1st generation or small molecule products. Hence, we need to track the incidence of the ailment. o Rx shifting to Absorica LD remains slow as the pandemic fear keeps the physical interaction low. Will not be able to shift all the Rx by Dec’20 as time is short. o Ilumya has done well. Feedback from doctors and patients is positive. It is doing well in EU and US. No plans to dramatically increase the field force in US. Dusa sales force are not common with that of Ilumya as the indications are different. However, Odomzo can have some synergy with Dusa sales force.  India o Digital initiatives are completely dependent on how the market opens up from the lockdown. o 90% of the field force is active at the moment.

Virtual Conference August 18, 2020 ICICI Securities

o Some part of the cost saving was due to lack of travelling, branding promotion. All the saving won’t sustain for a long time. o More OPDs are operating at the moment but the patient flow is still low as the pandemic fear is still present. o First few weeks were difficult to adopt, but they are now comfortable with the digital medium.  EU o The business was largely due to Ranbaxy acquisition. Present is UK, Germany, France and other larger markets. o Trying to bring in more differentiated products wherever possible.  Dubai consolidation is being done at the subsidiary levels. It should not impact financials in any manner.  Most of the data requested by SEBI was pertaining to the distribution set up of Aditya Medisales and FCCB issues.  Halol’s relative importance in terms of financial terms has reduced over the past few years. Have 19 ANDAs pending from this plant.  Taro’s pipeline has been built post acquisition. Its quality of products remains differentiated.  General maintenance capex is 1200-1500crs in a year.  50-55% API that is manufactured is utilised in-house. Remaining part is outsourced to companies in India, China and EU. o Changing API vendors is a time consuming process.

Virtual Conference August 18, 2020 ICICI Securities

Ultratech Cement (BUY, CMP: Rs4,169)

Krupal Maniar, CFA (+91 22 6637 7254) [email protected] Dharmesh Shah (+91 22 6637 7480) [email protected] Price chart  Demand: Capacity utilisation stood at ~60-65% in Jul’20. Rural / semi-urban 5,150 demand is likely to remain strong during FY21; while urban and infrastructure 4,750 4,350 demand are likely to recover during H2FY21 with return of migrant workers. 3,950 (Rs)  Prices: Cement prices have seen seasonal price correction of 4-5% QoQ in Jul’20 3,550 with the onset of monsoon. 3,150 2,750  Cost saving initiatives: UTCEM is targeting 10% fixed costs rationalisation from FY21 by cutting discretionary spends, re-negotiating existing contracts etc which Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 could provide cost savings of ~Rs5bn p.a. (Rs60/te).  For Century assets, management maintained its guidance that ~84% of the production would be transitioned to UTCEM brand (vs 65% in Mar’20) and costs would be in line with existing UTCEM assets (excluding Rs70/te royalty cost) by Q3FY21. EBITDA/te doubled QoQ to >Rs900/te and it still has scope to improve with brand transition and cost levers (declined by Rs105/te in Q1FY21).  UTCEM has divested non-core Binani’s assets in China in Jul’20 at an EV of US$120mn. The transaction is likely to complete by Aug’20 with net receipts of Rs7bn.  Capex guidance at Rs15bn for FY21 on improving cash flow visibility. Commissioning of 1.2mnte grinding unit in East and 2.3mnte Dalla clinker units are delayed by 3-6 months to Jun’21; while 2.1mnte Odisha grinding unit likely to commission by H2FY22E.

Virtual Conference August 18, 2020 ICICI Securities

Godrej Consumer Products (ADD, CMP: Rs691)

Manoj Menon (+91 22 6637 7209) [email protected] Vismaya Agarwal (+91 22 2277 7632) [email protected] Karan Bhuwania (+91 226637 7351) [email protected] Price chart  Consumer trends visible are 1) consumers have paused discretionary 1,020 920 consumption, and 2) shifted to value for money brands 820  720 Management guided towards double-digit top line growth in the medium term

(Rs) 620  Resurgence in HI driven by 1) category tailwinds (consumers’ disease prevention 520 420 mind-set), and 2) gaining market shares from illicit incense stick players. The 320 efforts have been to sustain reason-to-buy (RTB) in the category by educating consumers and innovating. Long-term opportunity in HI is taking it beyond home, Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 non-mosquito portfolio and increasing penetration in rural markets. In HI, however, consumers are currently more concerned towards vector borne diseases, hence non-mosquito portfolio will take time to scale up. GCPL also recently launched HI in Africa, introduced non-gas aerosol in Nigeria. Illicit incense sticks are expected to come back but probability of success is low due to 1) increased import duty for raw material imported from China, 2) availability of similar products offered by organised players and 3) distribution reach of these players getting disrupted.  In Soaps, strategy is to gain market shares by micro marketing strategy in the regions where GCPL has weak presence. Further, Cinthol is focused towards driving premiumisation, Godrej No. 1 soap is focused towards volume growth and newly launched Godrej Protekt is focused towards health. Management believes that consumers do prefer beauty soaps over health soaps and have shifted recently to health (at the expense of beauty soaps) due to coronavirus. Management believes consumers are likely to shift back to beauty positioned soaps in the long-run.  Hair colour and air fresheners are sequentially improving but still struggling due to their discretionary nature.  Strategy in new hygiene products launched is to create differentiation and leverage on GCPL’s distribution for growth. Management said that there is a possibility of new launches not succeeding in these times but the upside is that there has been very little investment done behind these brands both in terms of back-end infrastructure/ manufacturing and ad-spends. However, secondary sales for these new launches have been higher than primary sales. Margin of these new categories is somewhere between HI and soaps and should lead to company gross margin expansion if they scale up.  The focus international markets for GCPL have been Indonesia and Africa. In Africa turnaround is expected with 1) leadership change – appointment of Dharnesh Gordon, 2) GTM strategy – right now distribution is more dependent on wholesale and focus is to increase direct distribution and have some strategic tie- ups with modern trade players, 3) acquisition of right talent, 4) portfolio rationalisation and 5) country presence rationalisation. Indonesia has been a growth driver given better macros in South-East Asian countries. Focus is to increase penetration of HI outside Jakarta and Java islands.  Incentives for GCPL employees have been rationalized towards performance of 1) top-line growth and 2) incremental EVA instead of just incremental EVA earlier.

Virtual Conference August 18, 2020 ICICI Securities

Aurobindo Pharma (ADD, CMP: Rs872)

Sriraam Rathi (+91 22 6637 7574) [email protected] Vinay Bafna (+91 22 6637 7339) [email protected] Price chart  US 1000 900 o 150-160 OSD products are under development. Have not seen any major 800 700 pricing pressure at the moment. 600 (Rs) 500 o 50-60 ANDAs run rate to continue for the next few years. 400 300 o Taking all possible steps to grow the base business. 200  ARV Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 o Adoption of DTG combination has increased. o Q4 onwards saw the shift from EFV to DTG combinations. o API is internally manufactured but can be procured locally if capacity is an issues. This can be done at reasonable profitability.  Company has achieved pre-COVID injectable sales of $50-60mn/quarter. o Plan is to launch 15 injectable products in India and reach a quarterly run rate of $75mn by year end. Currently, 40 products are under development. o Injectable products are largely hospital business. o Have limited presence in EU in this segment. Gradually increasing the reach and product basket. o Demand for injectable has improved month on month. Unit 4 is completely utilised to cater to US market. o Depo injections would take 18 months to receive approval. Expect commercial launch in F23.  Biosimilars o Currently have 14 products in development. o Will initiate ph3 trials in two months for the 1st molecule with possible launch in FY22. 2nd and 3rd molecules will be filed in FY21. o EU approval pace for biosimilars is faster than US.  Expect FY21 capex to stand at $200mn. It will be largely utilised for improving capacity, de-bottlenecking and augmentation.  OTC launch of 5-6 products is expected in FY21.  No inorganic approach on API. o The recently announced PLI scheme is focused on scaling up the domestic consumption. Company is reviewing the scheme and products.  Company expects that the revenue mix will have a higher proportion of specialty products in few years.

Virtual Conference August 18, 2020 ICICI Securities

United Spirits (ADD, CMP: Rs589)

Manoj Menon (+91 22 6637 7209) [email protected] Vismaya Agarwal (+91 22 2277 7632) [email protected] Karan Bhuwania (+91 226637 7351) [email protected] Price chart  1,000 Operational status: The business has become fully operational – in terms of manufacturing capacity and off-trade distribution channel. Demand however 800 remains weak. 600 (Rs) 400  Company is discussing with other states to allow online ordering and home

200 delivery model – showing them the benefits of such a model being implemented at a few states across the country. Hip Bar has partnered with Flipkart for online Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 delivery.

 Price hike conversations with some states have been delayed during these times as management believes this is not the right time. Management further believes that price hikes in these states will not happen for 3-6 months and next excise cycle.  Input cost remains benign but not deflationary. However management expects it could turn inflationary in 6 months. They plan to absorb most parts of inflation through cost savings given that price hikes are difficult in the industry in the current situation.  Ad-spends in the medium term is expected to be in the range of 8-9% of sales. Relaunch of brands is to make brands stay relevant to the consumers.  No material downtrading has been observed in the past few months. Management did comment that the on-trade channel which is currently locked down has a higher salience of premium products. Further, having a comprehensive portfolio of products is helping them mitigate any such issues. The long term strategy to drive premiumisation, however, it is difficult to do so in these times.  Competitive intensity: Likely to get lower, similar to most other industries, due to the liquidity pressures being faced by the smaller, regional players.  Beer industry has been impacted as occasions for consumption have significantly reduced – on-trade channel is shut and consumers are wary of drinking cold beverages.

Virtual Conference August 18, 2020 ICICI Securities

Lupin (HOLD, CMP: Rs981)

Sriraam Rathi (+91 22 6637 7574) [email protected] Vinay Bafna (+91 22 6637 7339) [email protected] Price chart  Plan was to bring enough products in the US market to compensate the decline in 1500 Metformins. It couldn’t fruition due to plant issues and delay in launches causing

1100 the decline in product opportunities.

(Rs) o Issues accelerated due to buyer consolidation. 700 o Gavis acquisition has also not performed upto mark. Hence, the writeoff. 300 o Specialty portfolio is taking time to grow. Front ended costs are hitting the Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 profitability.

o Metformins (mid-single digit contribution in US). Expect to relaunch Glumetza in US soon. Relaunch of Fortamet would take time.  2 years ago started the cost control initiatives. Most of the cost saving measures were coming from direct cost by improving plant and working efficiency such as freight, idle costs, etc. o These efforts are bearing fruit with successful cost reduction as visible today.  India has been doing well by consistently outperforming the industry. o Continue to invest in the business. o MR productivity, expansion of reach and adding newer therapies remains the focus. o Over the past few years in-licensing deals have done very well. 14-15% of domestic sales. But these products will be going off patent. So working to manufacture internal brands or acquire them from the partner to not lose market share. . Most of the in-licensed products would be in the chronic therapy. o Expect 80% of cost saving of the quarter to reverse with normalisation in coming quarters. Q2 would be similar to Q1 but thereafter it would change.  US o Specialty – Solosec didn’t have a great start because of strategic decisions. . Co-pay program was far too wide to garner benefit. . Got in new head from Bayer in Sep’19 that helped relaunched the product and things have started to improve thereon. Have 7-8years of exclusivity. . COVID-19 delayed the recovery. Hence rationalised the field force. . It was costing $12-15mn losses on a quarterly basis. But this would reduce by 40-50% in the coming quarters. Digital media has also helped. . Since utilisation is low with one product, profitability is lower. Trying to add more products which would help this metric. . Expect Q2 to be similar to Q1 but targeting breakeven in FY22.

Virtual Conference August 18, 2020 ICICI Securities

o Inhalation pipeline is important for growth – ProAir, Fostair, Spiriva, etc. are key products. o RoCE has reduced as the growth has reduced over the past few years owing to lesser growth triggers and growing base. Higher compliance costs also weigh down on the business. o Don’t expect historical profitability to return as market is more competitive. o Albuterol market still remains at 65mn units. Have capacity to take up 20% market share. Will be very disciplined with pricing. . Large part of the market is interchangeable. . Expect to reach peak sales in 4-5 quarters. Product would remain limited competition for a while.  ETR was high due to the legacy structure. As the specialty business would improve the tax rate would start improving.  Divested in Japan as saw challenges in the market for the next 5 years. Valuation that was offered was within acceptable limit, hence it was divested. o Net cash inflow was used to reduce debt.  India or smaller assets in US (specialty) are only being considered for M&A.  Nov-Dec’19 onwards companies have tried to find alternate sources in India for formulations and API. Hence the sector outlook improved.  Biosimilars o Searching for strategic partners as the cost of development is high. It will also help reduce the risks. o Etanercept has been launched by Mylan in Germany and other few markets (Aus, EM, etc.). o Intend to file Pegfilgrastim by end of FY21. Development cost has been drastically reduced with the new guideline from USFDA. o Initiated trials for Lucentis (Ranibizumab) and expect to file it in 2 years.  Completed the CAPAs and awaiting USFDA response for all the plants. Expect Somerset to be inspected earlier since its locally situated.  Long acting injectable would start generating revenue from FY22-23.

Virtual Conference August 18, 2020 ICICI Securities

Hindalco (BUY, CMP: Rs196)

Abhijit Mitra (+91 22 6637 7289) [email protected] Price chart We hosted Hindalco management for one on one and group meetings in our 300 conference. Majority of the discussion expectantly revolved around Novelis. 250

200  Novelis plans to achieve US$35mn out of US$75mn of operational synergies (ex- (Rs) 150 China synergies) with Aleris acquisition. It will be a three year process to achieve

100 the operational synergies. Management is targeting US$250mn of cost savings in Novelis. Management also expects to achieve US$450-475/te of EBITDA/te in 50 FY22, while not explicitly guiding for the sane in FY21. Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20  Management does expect to achieve US$580mn of FCF in FY21 (Novelis + Aleris), similar to what Novelis generated in FY20. Capex for FY21, for Novelis and Aleris combined has been US$450mn. Novelis is close to completing the three announced projects in Kentucky, Brazil and China, expects return ratios to improve further once project completes.  Management highlighted the low volumes from JLR which suppressed return profile for European operations.  Management is quite clear that there is no policy on method/timing of repatriation of dividend from Novelis. The first target is to delever Novelis operations from current Net Debt to EBITDA of 3.8x to below 3x. There are no plans of additional capital deployment in Novelis till the time the leverage profile is achieved. There are also no plans of listing Novelis as a separate entity  Even in India, the focus has shifted to downstream assets. While Covid has delayed the downstream expansion, the same will see incremental capital allocation. There are plans to substitute series 6/7 production of Korea from India (Hirakud facility) while freeing up Korean capacity for Autos. The same has been delayed on account of Covid.

Virtual Conference August 18, 2020 ICICI Securities

UPL (BUY, CMP: Rs500)

Aniruddha Joshi (+91 22 6637 7249) [email protected] Price chart  th 800 The company is 5 largest agrochemical player globally. It is growing at twice the 700 rate of global market. Hence, its market share will inch up in next 3-4 years. The 600 company has 14-17% market share in India. 500 (Rs) 400  The disruption in supply from China started three years ago. However, UPL 300 200 procures raw materials from others countries too. If the China issue escalates, it may cause problems to various global companies and not just UPL. The raw Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 material cost will increase for all companies.

 The growth momentum remains strong in India. There is healthy growth in Kharif season as the monsoon is good and there is 10%+ sowing. With higher reservoir levels, there is high probability of good Rabi season too.  While the global GDP growth is impacted, the agrochemicals are classified as essentials in most countries. Hence, there will be limited impact of lockdown on business of UPL.  There is healthy momentum in Europe this year due to better weather conditions and there is higher sowing in North America. UPL can generate healthy growth in these regions in FY21.  The company has slightly different approach to its business. It invests extensively in the field surveys and trials of agrochemicals. This has allowed the company to gain market share from its peers.  The herbicides is a new segment in India. There was almost no awareness of herbicides five or six years ago. With rising awareness and education to the farmers, the demand of herbicides is on the rise.  The company discounts some of the receivables. It helps to reduce the investment in working capital. While discounting has some cost, the company benefits as (1) there are savings in interest cost on working capital debt and (2) there are lower bad debts. The customers (generally) do not default while dealing with banks.  There are multiple synergies to be unlocked from Arysta. The cost synergies will be unlocked in due course but there are revenue synergies also possible due to merger of distribution of UPL and Arysta.  The company also does some outsourcing work for global agrochemical companies. If some agrochemical manufacturing work moves out of China, it will be an opportunity for companies like UPL.  The company indicated that it plans to impair the goodwill as per the accounting standards. However, it will write off the product registrations over a period of five years.

Virtual Conference August 18, 2020 ICICI Securities

United Breweries (UNRATED, CMP: Rs1,004)

Manoj Menon (+91 22 6637 7209) [email protected] Vismaya Agarwal (+91 22 2277 7632) [email protected] Karan Bhuwania (+91 226637 7351) [email protected]

 Operations: There have been gradual opening of businesses from May 3. Outlook is still very uncertain.  Excise duty hike: Some states had introduced COVID taxes higher than usual but from those states, Delhi and Orissa have rolled back these tax hikes.  Cash position: Increase in net debt of Rs1.2bn as compared to March’20 due to weakness in performance; working capital is well under control in terms of inventory and payables. Receivables has seen good collections, however, 2-3 states are lagging (due to low recovery rates in those states).  Mild beer has performed well in some regions; however, Strong beer has been impacted. Craft beer consumers continue to mature with taste profiles and choices, which helps the overall industry to expand.  Non-alcoholic beverages witnessed 3% growth driven by E-com and home delivery gaining traction as well as continued operations even during lockdown. Radler and Heineken 0.0 are also doing well as taste is accepted by consumers. Internationally, non-alcoholic beverages have healthy share of 5-10% of total beer market in some European markets. Therefore, potential is there but current revenue contribution for India is below 1%.  Input costs: Situation is better now as compared to last year when there was high inflation in both barley and glass. 1Q had flat prices in new glass bottles and malt. Management expects some softening of prices going forward with roughly 10% reduction in barely and low inflation in glass. New glass usage is 33% of contribution and remainder is recollected glass bottles. Strategy is to maximise the portion of glass collected back.  Wheat beer: Internationally also there is limited consumer demand and occasion for this segment. Management does not see this reaching 10% of the segment. UB is more focused on making sure of its presence in the segment.  Inventory write-off: No write off as of yet but had entered the COVID period geared for a big season. Lot of it has been sold, depleted, etc.  Learnings from global: India is yet to open on-trade while global markets has seen on-trade opening up with consumers showing confidence in venturing out. These are on the back of good practices – social distancing, register on apps, mandatory reservations, etc.  Cost savings: Discretionary spends will remain compressed till demand improves, A&P has been scaled back in 1Q and management is ready with plans as things improve. IPL will be a crucial event and management will see how things go during that.

Virtual Conference August 18, 2020 ICICI Securities

ACC (BUY, CMP: Rs1,432)

Krupal Maniar, CFA (+91 22 6637 7254) [email protected] Dharmesh Shah (+91 22 6637 7480) [email protected] Price chart  Demand: Cement demand was broadly flat YoY in Jul’20. However, it has 2,000 1,800 weakened little in Aug’20 with the onset of monsoon. Demand continues to remain 1,600 strong in East and Central region. Management expects demand in West and 1,400 South regions to improve led by pent-up demand once urban and non-trade (Rs) 1,200 1,000 demand recovers in coming quarters. 800  Cost savings initiatives Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 o ACC has witnessed nearly Rs2bn cost reduction in other expenses in Q2CY20 and expects Rs500mn cost reduction likely to be structural (Eg. Warehousing cost, rent, third party services etc.). Discretionary spends (like ad spends, conveyance, travelling etc.) are likely to normalise by Q1CY21 with volume recovery. o ACC launched project ‘Parvat’ to improve cost structure and unlocking efficiencies. The Company is targeting Rs200/te cost savings and has already achieved savings of Rs100/te under said scheme till date. o Company has targeted savings of Rs2.5bn under material supply arrangement (MSA) with ACEM to be shared equally by both by CY21E-end. It has already achieved savings run rate of Rs150mn p.m. (1/3rd through network optimization and balance through incremental volumes) as volumes have tripled under MSA which is to be shared equally between the company.  Value added products (VAP) contributes ~20% of trade volumes and management targeting it to increase to 1/3rd of trade volumes in next 3-4 years. Company enjoys incremental pricing of Rs25/bag and incremental contribution in the range of Rs10-15/bag.  Project update: ACC’s 1.4mnte grinding unit at Sindri may go on stream by Mar’21; while 4.5mnte expansion may be delayed by 6-9 months to H2CY22E owing to Covid’19 pandemics. Total project capex for 3mnte clinker unit at Madhya Pradesh and 5.9mnte grinding unit in Central and East regions stood at Rs30bn. Project capex for CY20 likely to be at ~Rs4bn in addition to maintenance capex of Rs2.5bn.  Cash flow utilisation: ACC has net cash of Rs47bn as of Jun’20. Management evaluating a various option for utilisation of the same like any inorganic opportunities, higher dividend payout etc.

Virtual Conference August 18, 2020 ICICI Securities

Voltas (HOLD, CMP: Rs645)

Renjith Sivaram (+91 22 6637 7340) [email protected] Vipin Goel (+91 22 6637 7397) [email protected] Price chart  Overall touch points in India for Refrigerator and washing machine are 45,000. 800 700 Voltas is targeting 10% market share for which they are targeting one-third share in 600 touch points at 15000-1600 500

(Rs)  400 Phased manufacturing program (PMP) is about increasing import duty in a phased 300 manner on complete finished products. Hike in custom duty may go up to 30% in 200 next 5 years and will still be within WTO guidelines of 35%-40% hike. However, due to absence of any manufacturing ecosystem, it will take time for local players Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20 to build manufacturing capabilities, hence government has given sometime before

increasing the custom duty on components like compressor, controller, motors and PCB.  For controllers and motors, OEMs can be developed in India. However compressor will continue to be sourced from China in near term given its complex technicality and high expertise  GMCC is coming up with a compressor manufacturing facility in India which was expected to start commercial production in FY21 and has delayed by six months due to Covid-19  Import duty is increase expected in 1-2 months and PLI expected in 3-4months. Benefit from PLI will take 6-8 months to accrue during which the cost will increase for the industry  Performance Linked Incentive (PLI) scheme is expected to start initially for PCB/ chips and laptop manufacturing. AC and electronic units are expected to come in later (within next 6 months). If these players set up manufacturing facility in India, it will benefit the AC players in terms of inventory holding cost and logistic costs due to localised sourcing.  Project segment has been more susceptible to pandemic than product business and has been impacted from availability of labour, productivity, impact on collections etc. This will lead to increase in costs of project business For project business, management expects order intake to reduce drastically and expect the order intake volume and value to get impacted in near term.  On Voltbek, company is expecting 3 years to breakeven and further funding will be needed for brand building which will largely drive upon Voltas brand. Target investment in JV remains at Rs10bn of which Rs3.5bn has been done  Engg. product segments margins were high in Q1FY21 as the business largely included revenues from sale of service contracts which are high margin, however sale of products in textile machinery (where LMW is focussing on expanding post- spinning) and Mining was muted

Virtual Conference August 18, 2020 ICICI Securities

Dr Lal Path (BUY, CMP: Rs1,881)

Sriraam Rathi (+91 22 6637 7574) [email protected] Vinay Bafna (+91 22 6637 7339) [email protected] Price chart  Initially there was a sharp fall in the business in Q1. COVID-19 tests started 2200 2000 contributing Ma’20y onwards. Regular business recovery began Jun’20 onwards. 1800 Company expects full recovery in the regular business over the next few months 1600 1400 (Rs) 1200  Q1 also had the benefit of some pent up demand and hence it is not entirely 1000 reflective of the actual business performance. 800 600  Company expects COVID-19 testing to reduce in the coming months as GoI builds its own capacities. Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20  Pick up points have seen growth month on month and have largely regluarised.  Home collection has done well in the current quarter as more and more patients have consciously opted for it in the pandemic environment. Another benefit was the closure of smaller local labs due to COVID-19. Franchisees are also witnessing a rise in home collection and fall in walk in patients. Margins on home collection patients are similar to walk-in patients. Revenue contribution from this segment has increased significantly from ~6% in pre-COVID times.  Online diagnostics remains sub-scale at the moment. Despite easy prescription generation via online portals, most of the pilot programs for the online aggregators to move to full service programs have not been encouraging.  Company is supporting its franchisees in the current challenging times by supporting digital promotion, providing extra manpower where possible, extending their credit days, etc.  Company continues to explore inorganic opportunities for useful cash utilisation and business expansion. However, level of consolidation has been lower than anticipated in the current times. o While company is focusing on increasing its presence in Western and Southern regions of the country, it is also searching for more areas to open in the established areas. o Rationalisation is an important aspect in expansion but for labs scale up takes time. Hence, company is not looking at shutting down labs at the momet. o Delhi remains as an extremely competitive market and company is taking steps to increase its market share.  Consumer behaviour has been encouraging towards preventive healthcare as focus has shifter to higher level of hygiene due to the fear of pandemic. Customers are wanting better quality of tests at more competitive prices, hence are trying to engage with larger and more organized players.  Company expects COVID-19 testing to become a large part of the product basket. However, nature of test remains uncertain. Although RT-PCR remains the gold standard, the demand for anti-body tests are on the rise. Rapid testing may be useful to conduct surveys but is less accurate than the RT-PCR tests.

Virtual Conference August 18, 2020 ICICI Securities

 Margins in COVID-19 business are volatile. COVID-19 test are witnessing a drop in reagent costs but the fall in prices in commensurate to it. Even if the testing cost reduces the cost of servicing remains at normal levels. Hence, don’t expect high profitability from these tests.  Company is open to developing a collection centre network. However, there is a hesitation by in converting labs to collection centres as the system becomes difficult to manage. Company doesn’t want the labs to increase routine tests as quality gradually deteriorates.  Price remains the key USP for any pathology tests. If company is able to reduce costs without sacrificing quality it will attract larger patients. Larger players have the benefit of scale to manage costs despite increased inefficiencies.

Virtual Conference August 18, 2020 ICICI Securities

Kajaria Ceramics (HOLD, CMP: Rs422)

Nehal Shah (+91 22 6637 7235) [email protected] Jigar Shah (+91 22 6637 7416) jigar.shah@@icicisecurities.com Price chart  KJC expects 85-90% capacity utilisation levels and sales at 80%+ in Q2FY21 800 compared to corresponding quarter of previous year (Q2FY20). 700 600  Collections remains robust. Company has not opted for any channel financing 500 (Rs) scheme. 400 300  Channel inventory continues to remain lean and more and more dealers are 200 moving towards cash and carry model as confidence in the market remains low at present with intermittent lockdown being announced in different cities. Feb-18 Feb-19 Feb-20 Aug-17 Aug-18 Aug-19 Aug-20  Company balance sheet remains strong with impressive cash flow generation. KJC has recently invested Rs1.5bn in banks FD’s.  Rural areas and tier 2 & above cities continue to drive demand for bathroom solutions while demand from tier 1 cities remain subdued with limited activities.  Cities like Delhi, Bangalore and Hyderabad have started to open up.  Cities like Mumbai, Pune, Chennai and Kolkata still remains impacted.  Majority of the cost cutting initiatives taken by the company are likely to be reinstated post Sep’20 – particularly the employee costs.  Direct A&P expenses have been cut down from Rs400mn to Rs200mn this year. Spends related to dealer showrooms are likely to be down by 50% from Rs250- 300mn to RsRs120-150mn.  Overall cost savings to the tune of Rs600-650mn are likely in H1FY21.  KJC’s retail sales proportion has increased to 90% vs. 70% in pre-covid environment largely due to subdued activities in new construction activities.  KJC is not looking at any capacity expansion in any of its product segments in FY21. Two year rolling capex likely at Rs1-1.5bn (largely maintenance capex driven).  Faucets is operating at 100% levels currently and company expects bathware segment to grow at 20-25% over the next 2-3 years.  JVs are likely to break-even by end-FY21 as it is targeting to recoup Q1 losses incurred by its JVs over the next 3 quarters.  The only business which is likely to run into loss in FY21 is plywood business. It is likely to incur loss to the tune of Rs60-70mn in FY21.  Currently out of 675 plants in Morbi, 400-425 plants are only operational due to issues related to labour and other financial matters.  Working capital days in near future will go up as company is expected to ramp-up production from Q1FY21 levels.  Gas prices in North stands at Rs25/SCM (vs. 30/SCM YoY) while it is at Rs29/SCM in Morbi down from Rs31/SCM YoY.

Virtual Conference August 18, 2020 ICICI Securities

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New I-Sec investment ratings (All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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