Morning Insight JUNE 25, 2020 % Chg News Highlights 24-Jun 1 Day 1 Mth 3 Mths International Monetary Fund (IMF) projects sharp contraction of Indian Indices 4.5% in Indian economy in 2020; a historic low citing the SENSEX Index 34,869 (1.6) 13.7 22.2 unprecedented coronavirus pandemic that has nearly stalled all NIFTY Index 10,305 (1.6) 14.0 23.9 NSEBANK Index 21,427 (3.8) 24.0 25.3 economic activities, but said the country is expected to bounce back NIFTY 500 Index 8,496 (1.5) 14.6 33.5 in 2021 with a robust 6% growth rate. The COVID-19 pandemic has CNXMcap Index 14,810 (1.4) 20.8 38.5 had a more negative impact on activity in the first half of 2020 than BSESMCAP Index 13,140 (1.1) 16.6 33.2 anticipated, and the recovery is projected to be more gradual than World Indices previously forecast. In 2021, global growth is projected at 5.4 per Dow Jones 25,446 (2.7) 4.0 20.0 cent, as per the report. (ET) Nasdaq 9,909 (2.2) 6.3 34.2 FTSE 6,124 (3.1) 2.2 7.7 Checks on Chinese imports throw domestic industry into tizzy: The NIKKEI 22,379 (0.7) 7.9 14.5 sudden move of the customs authorities to carry out 100% checks Hangseng 24,782 (0.5) 8.0 5.3 of import consignments coming from China at the ports has thrown Shanghai 2,980 - 6.0 7.0 the domestic industry into a tizzy at a time when it’s still far from full Value traded (Rs cr) 24-Jun % Chg Da recovery from the impact of lockdown. Though such a move by the Cash BSE 7,588 (66.0) authorities would adversely affect several industrial sectors, but the Cash NSE 74,690 15.0 immediate pinch is being felt by the electronics player. (FE) Derivatives 22,55,548 63.1 Department for promotion of industry and internal trade (DPIIT) Net inflows (US$ mn) 23-Jun MTD YTD seeks views of e-commerce firms on mentioning 'country of origin' FII 17 2,796 (2,119) on each product: This move comes against the backdrop of calls to Mutual Fund 104.0 (253) 5,083 boycott Chinese goods following border clashes between India and Nifty Gainers & Losers Price Chg Vol China in Ladakh. The government procurement portal GeM has 24-Jun (Rs) (%) (mn) made it mandatory for suppliers/sellers to specify the country of Gainers origin while registering new products on the portal. According to the Asian Paint 1,748 3.8 11.5 sources, mentioning the country of origin would help buyers take an ITC 192 3.4 54.7 informed decision while purchasing the item. (ET) Eicher Motors 18,450 3.1 0.3 Losers Bharti Infratel has extended long stop date for Indus Towers deal till ICICI Bank 349 (7.1) 58.0 August 31. Board said that conditions precedent to be fulfilled for Indusind Bank 486 (6.6) 43.3 the Indus Tower merger to become effective cannot be completed Power Grid 178 (5.1) 18.5 by June 24. Each party retains the right to terminate and withdraw Advances / Declines (BSE) from the scheme. The uncertainty around Vodafone Idea’s financial 24-Jun A B T Total % total position has left the Indus Towers deal hanging in a limbo. (Mint) Advances 139 353 136 628 100 Declines 353 572 54 979 156 Reliance Industries: CCI has approved acquisition of 9.99% stake in Unchanged 2 16 9 27 4 Jio Platforms by Facebook’s arm Jaadhu Holdings. (BQ) Commodity % Chg Blackstone sells Embassy Office Parks REIT units for Rs 22.7 mn 24-Jun 1 Day 1 Mth 3 Mths and raised $300 mn to monetise part of its investment. Embassy Crude (US$/BBL) 40.0 (5.7) 12.5 42.7 Office Parks REIT is the country’s first Real Estate Investment Trust Gold (US$/OZ) 1,771.0 (0.9) 2.5 6.2 (Reit), which was launched last year by Embassy group and global Silver (US$/OZ) 18.0 (2.9) (0.2) 20.5 investment firm Blackstone. Post this deal, Blackstone stake will Debt / Forex Market* 24-Jun 1 Day 1 Mth 3 Mths come down by around 9% from around 55% shareholding earlier. 10 yr G-Sec yield % 6.3 1.0 2.0 (63.0) (BS) Re/US$ 75.7 (6.0) (12.0) (11.0) *Change, basis points Page Industries on Covid-19 impact: Company’s manufacturing Nifty operations, in all 15 facilities, have resumed work on different dates 12,500 from May 4. The response from the market has been healthy. As 11,500 restrictions get lifted in the market, expect to get back the momentum and accelerate in the coming quarters. (BQ) 10,500 9,500 Fitch Ratings has revised the Outlook on Power Finance 8,500 Corporation, REC to Negative from Stable, and has affirmed the 7,500 Long-Term Foreign-Currency Issuer Default Rating at BBB-. (BQ) Jun-19 Oct-19 Feb-20 Jun-20 What’s Inside Source: NSE Result Update: Finolex Industries Ltd Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. JUNE 25, 2020 Result Update FINOLEX INDUSTRIES LTD (FIL) Stock Details PRICE RS.498 TARGET RS.536 ADD Market cap (Rs mn) : 61802 52-wk Hi/Lo (Rs) : 635 /283 Finolex Industries (FIL) reported weak Q4FY20 result led by a decline in Face Value (Rs) : 10 volume and lower margin in PVC resin business, however margin in the PVC 3M Avg. daily vol (mn) : 52,432 pipes business was better than our estimates. The company reported a Shares o/s (m) : 124 decline of 20.5%/29%/39% yoy in standalone net sales/EBITDA/PAT, Source: Moneycontrol, BSE respectively which in management’s view was on account of poor market Financial Summary condition. Y/E Mar (Rs mn) FY20 FY21E FY22E Revenue 29,860 28,349 32,920 Key Highlights Growth (%) -3.4 -5.1 16.1 EBITDA 4,481 4,124 5,164 FIL reported 20.5% yoy decline in net sales at Rs 7.7 bn (Vs our estimates of EBITDA margin (%) 15.0 14.5 15.7 Rs 9.6 bn) driven by 22.7% yoy decline in volume due to weak demand PAT 3,242 2,705 3,502 particularly on the agri side where the volume declined by 25% yoy as against EPS 26.1 21.8 28.2 11% yoy decline in the non agri category. Q4FY20 volume was also impacted EPS Growth (%) -7.3 -16.6 29.5 by Covid-19 led lockdown towards the end of the quarter. Realization BV (Rs/share) 156 167 186 increased by 3.3% yoy led by change in product mix. Dividend/share (Rs) 10.0 10.0 10.0 ROE (%) 14.5 13.5 16.0 EBITDA margin declined by 160 bps yoy in Q4FY20 to 13.6% (vs our ROCE (%) 15.5 15.1 18.8 estimates of 15.2%) due to 720 bps yoy decline in EBIT margin in PVC resin P/E (x) 19.1 22.8 17.6 business to 7.3%, offsetting 230 bps increase in EBIT margin of PVC pipes EV/EBITDA (x) 14.3 15.0 11.8 business. As per management, operating leverage factor impacted resin P/BV (x) 3.2 3.0 2.7 business’ margin as resin volume declined by 21.5% yoy. Source: Company, Kotak Securities - PCG PVC-EDC delta has declined by 3.2% qoq to an average of USD 574 per tonne Shareholding Pattern (%) in Q4FY20. As per management, PVC-EDC delta has now improved to USD (%) Mar-20 Dec-19 Sep-19 640 per tonne, which augurs well for margins in resin business going ahead. Promoters 52.5 52.5 52.5 FII 2.3 2.3 2.9 As per management, the PVC pipes’ demand is good on agri side and has DII 13.0 11.8 10.0 not tapered off even during the monsoon season. The company expects Others 32.2 33.4 34.6 good demand to continue post monsoon as well. The management has Source: Moneycontrol, BSE indicated that the channel inventory is fully exhausted and it is now building Price Performance (%) up new inventory. As per management, the company has operated at the rate (%) 1M 3M 6M of 95-110% over the last year in terms of the number of days operated post Finolex Industries 22.0 32.0 -8.4 reopening, however this may not be able to compensate for volume lost Nifty 14.4 21.3 -14.4 during the lockdown. Source: Moneycontrol, BSE Outlook and valuation Price chart (Rs) We believe that, FIL would be a major beneficiary from government’s focus on 700 irrigation, providing piped water to all by 2024 and improvement in rural 600 consumption in the long term. We believe that the demand for the PVC pipes 500 from rural segment is expected to remain strong in the coming quarters based 400 on strong agri season, higher reservoir levels, normal monsoon forecast for the 300 current year and increased farm income which is also supported by various government schemes for boosting rural economy.