February 2021 Compendium of conference calls: Q3FY21
Quarterly Quotes
Headwinds galore
On a firm footing to Debt ride the trend woes Challenges ahead Policy push Growth levers in place Demand swing Consolidation Debt to be wave f rolled over Rising ad spends
Costs in control cus
Edelweiss Research Team +91 22 2286 4400 Edelweiss Securities Limited research@edelweissfin.com Q3FY21 conference call highlights
Dear Investor and Corporate,
Quarterly numbers matter; they lend a quantitative as well as qualitative sheen to what has been (Q3FY21 review). But management quotes go far beyond plain-vanilla numbers: they offer deeper insights into what individual companies are doing, how they are thinking and how market participants are perceiving them. That one can benchmark them to industry peers or their previous observations and/or collate them by sector extends their relevance well beyond the results or near-term influences. Management quotes are, hence, far more significant and relevant than mere numbers for the market.
Ongoing management commentaries also entail links and threads to a bigger picture as to what’s happening—not only at individual companies, but also in the sector and markets. Besides, they contain a key element of guidance, helping investors identify winning ideas and shed potential losers. So, more than the numbers, it’s the linkage across numbers that’s of bigger import. We try to tie the threads via links to previous quarters (Q2FY21; Q1FY21 was not published in the wake of covid-19).
Q3FY21 results were eagerly awaited. Investors were keeping an eye out for corporate India’s resurgence from the chaos caused by covid-19, particularly since Q2FY21 was more about the nature and extent of recovery after the lockdown in Q1FY21. And India Inc. did pass muster. Earnings momentum accelerated in Q3FY21 with our coverage universe posting 33% YoY PAT growth – a multi-quarter high – despite flat top-line growth. More importantly, breadth of profit growth is encouraging with most sectors (especially cyclicals) posting double-digit growth. This is attributable to: i) receding credit costs in financials; ii) cost rationalisation across sectors leading to ~400bps YoY EBITDA margin expansion; iii) market share gains from unlisted players; and iv) pent-up demand. Nifty companies turned in 21% YoY profit growth, and are likely to report a decadal-high 15%-plus EPS growth in FY21E.
For those in a hurry, a round-up of key takeaways, quotes and notables that could be reflective of the issues that matter is included. The compendium captures the essence and nuances of what companies are saying bottom-up.
We do hope you find this product useful and, as always, welcome feedback to make it better and more relevant for you.
Edelweiss Research Team
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
A roundup of key takeaways
Best of both worlds again – strong revenue + cost control. But cost pressure is building up. Pricing power would be key hereon. Automobiles
Aviation A long runway to a smooth take-off.
Slippages – rather pro forma slippages – and restructured pool have been much lower than expected. Actual stress has panned out much Banking lower than projected at the beginning of the pandemic.
Demand scenario across segments faring much better; this coupled with strong
Consumer Durables consolidation is benefitting leaders.
“Rural and smaller towns continue to lead the growth while the metros and big cities are improving progressively.” FMCG
—Sanjiv Mehta, Chairman and MD, HUL
2 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
— "As far as demand is concerned, it's positive. Every month, it's positive," — Ashok Kajaria, Chairman Home Decor and Managing Director, Kajaria Ceramics
“Cloud adoption is driving a multi-year technology spending cycle, and this will remain a secular growth driver for TCS for the next three–five years with the transformation IT playing out over multiple horizons.”
— Rajesh Gopinathan, CEO, TCS
Ordering momentum picking up led by core infra. Stable supply chain and cost initiatives to ensure better Industrials execution and OPM scale-up.
“We have restarted allocating capital on margin expansionary growth projects in India within the contours of the targeted financial framework.”
— Mr. Kaushik Chatterjee, ED & CFO, Metals & Mining Tata Steel
City gas distribution companies record all-time high margins with unabated growth. Oil & Gas
Getting into the groove: Long-awaited domestic Pharmaceuticals recovery, US stability and cost normalization visible. Q3FY21 to pave the way for FY22 stability.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Abrasives
Carborundum Universal...... 11
Coromandel International ...... 15
Agri Inputs
Dhanuka Agritech ...... 18
PI Industries ...... 20
Rallis India ...... 22
Sharda Cropchem ...... 24
UPL ...... 25
Auto & auto components
Ashok Leyland ...... 28
Bajaj Auto ...... 29
CEAT ...... 33
Eicher Motors ...... 38
Hero MotoCorp...... 42
Mahindra and Mahindra ...... 46
Maruti Suzuki ...... 51
Minda Corporatieon ...... 54
Motherson Sumi Systems ...... 56
Suprajit Engineering...... 58
Tata Motors ...... 61
Banks, financial services and insurance
Aavas Financiers ...... 67
Axis Bank ...... 68
Bank of Baroda ...... 70
Bajaj Finserv ...... 71
DCB Bank ...... 73
Federal Bank ...... 74
HDFC Bank ...... 76
HDFC Life Insurance Company ...... 78
ICICI Bank ...... 80
ICICI Lombard General Insurance ...... 82
ICICI Prudential Life Insurance ...... 85
IndusInd Bank ...... 87
4 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Kotak Mahindra Bank ...... 89
LIC Housing Finance ...... 91
Mahindra Finance ...... 92
Multi Commodity Exchange...... 94
Muthoot Finance ...... 95
Shriram City Union Finance ...... 97
State Bank of India ...... 98
Bearings
Schaeffler India ...... 101
Cement
ACC ...... 104
India Cements ...... 105
UltraTech Cement ...... 106
Construction
Ahluwalia Contracts ...... 108
Ashoka Buildcon ...... 109
Capacit’e Infraprojects...... 111
J Kumar Infraprojects ...... 112
KNR Constructions ...... 114
NBCC ...... 115
NCC ...... 116
PNC Infatech ...... 117
Titagarh Wagons ...... 118
Consumer Durables
Amber Enterprises ...... 121
Bajaj Electricals ...... 124
Crompton Greaves Consumer Electricals ...... 126
Havells India ...... 128
KEI Industries ...... 130
Polycab India ...... 132
Symphony ...... 134
Voltas ...... 135
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Engineering & Capital Goods
ABB ...... 139
AIA Engineering ...... 140
Cummins India ...... 142
Greaves Cotton ...... 144
Kalpataru Power ...... 146
KEC International ...... 148
Larsen & Toubro ...... 150
Thermax ...... 152
FMCG
Asian Paints ...... 155
Bajaj Consumer Care ...... 157
Britannia Industries ...... 160
Dabur ...... 163
Emami ...... 167
Godrej Consumer ...... 169
HUL ...... 172
Marico ...... 175
Pidilite ...... 180
Tata Consumer Products ...... 182
United Spirits ...... 186
Healthcare
Apollo Hospitals ...... 189
Dr Lal PathLabs ...... 192
Healthcare Global ...... 193
Fortis Healthcare ...... 194
Hotels/Hospitality/Aviation
Indian Hotels ...... 196
InterGlobe Aviation ...... 197
Lemon Tree Hotels ...... 198
Mahindra Holidays & Resorts ...... 200
Home Décor
Century Plyboards ...... 203
Kajaria Ceramics ...... 206
6 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Greenlam Industries ...... 209
Somany Ceramics...... 212
Supreme Industries ...... 215
IT
Eclerx ...... 219
HCL Technologies ...... 220
Infosys ...... 221
Cyient ...... 222
L&T Infotech ...... 223
L & T Technology Services ...... 224
Mindtree ...... 225
Persistent Systems ...... 226
Tata Consultancy Services ...... 227
Tech Mahindra ...... 228
Wipro ...... 229
Lubricants
Castrol India ...... 231
Gulf Oil Lubricants ...... 233
Media
Inox Leisure ...... 236
PVR ...... 238
Sun TV Network ...... 242
Zee Entertainment Enterprises ...... 244
Metals & Mining
Coal India ...... 248
Hindalco Industries ...... 251
Jindal Stainless ...... 254
Jindal Steel & Power ...... 256
JSW Steel ...... 258
NMDC ...... 261
SAIL ...... 263
Tata Steel ...... 266
Vedanta ...... 268
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Oil & Gas, Petrochemicals
Bharat Petroleum Corporation ...... 271
GAIL ...... 272
Gujarat Gas ...... 273
Hindustan Petroleum Corporation ...... 274
Indian Oil Corporation ...... 276
Mahanagar Gas ...... 277
ONGC ...... 278
Petronet LNG ...... 279
Pharmaceuticals
Aurobindo ...... 281
Biocon ...... 283
Cadila Healthcare ...... 285
Cipla ...... 287
Divi’s Laboratories ...... 289
Dr. Reddy’s Laboratories ...... 290
Glenmark Pharmaceuticals ...... 292
Ipca Laboratories ...... 293
Lupin ...... 295
Natco Pharma ...... 297
Sun Pharmaceuticals ...... 298
Torrent Pharmaceuticals ...... 299
Power
Adani Ports and SEZ ...... 302
Gujarat Pipavav Port ...... 306
Indian Energy Exchange ...... 307
India Grid Trust ...... 309
JSW Energy ...... 310
NTPC ...... 312
Tata Power Company...... 314
Real Estate
Brigade Enterprises ...... 317
DLF ...... 318
Godrej Properties ...... 323
8 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Oberoi Realty ...... 325
Sobha ...... 327
Sunteck Realty ...... 329
Retail
Aditya Birla Fashion and Retail ...... 331
Jubilant FoodWorks ...... 333
Shoppers Stop ...... 336
Titan Company ...... 339
V-Mart Retail ...... 342
Specialty Chemicals
Aarti Industries ...... 345
Galaxy Surfactants ...... 347
SRF ...... 348
Textiles
Arvind ...... 351
Page Industries ...... 353
TCNS Clothing ...... 354
Welspun India ...... 356
Miscellaneous
Balkrishna Industries ...... 359
Bharat Forge ...... 361
CCL Products ...... 363
EPL ...... 364
Heritage Foods ...... 367
Sheela Foam ...... 368
Solar Industries ...... 371
Supreme Industries ...... 373
VIP Industries ...... 376
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Abrasives
10 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Carborundum Universal
Financial Revenue grew 13% YoY (10% above estimates) and up 6% QoQ. Sales grew 15% YoY across abrasives, 19% across EMD and 5% YoY across ceramics.
However, gross margin dipped 39bps YoY to 64.9%. Operating leverage across abrasives and better product mix in EMD resulted in EBITDA margin expansion of 283bps YoY.
Robust profitability resulted in APAT growth of 40% YoY to INR876mn (43% above estimates).
Capex incurred during 9MFY21 stands at INR770mn as the company focused on vital spends.
With the PLI schemes announced by the government, management anticipates better demand with opportunities across the abrasives, ceramics and EMD divisions in automotive, electronics, pharmaceuticals and alloy steels, among others. However, the PLI schemes are also likely to result in higher competitive intensity for the company. Performance by segment Abrasives (41% of Q3FY21 sales) Abrasives witnessed growth of 15% YoY on a consolidated basis. This was driven by strong resurgence in demand from construction, auto and auto ancillaries. While Q3FY21 is traditionally a low-export quarter, shipping delays and low container availability exacerbated the weakness. Sterling Abrasives reported a robust performance with good demand from the agro-processing and industrials divisions. Overseas subsidiaries also clocked a good performance with large customers gained in the Americas and coated abrasives picking up in Russia.
EBIT margin grew 460bps to 16.5%, at the highest level as product mix was optimised and higher volumes resulted in better coverage of fixed costs.
CUMI America saw higher volumes than last year. Furthermore, the company has gained large customers, which have placed the scheduled orders with the company.
CUMI Middle East displayed a good performance with controlled fixed costs aiding margins.
Sterling Abrasives (~50% subsidiary) has a strong outlook with its focus on agriculture and industrials; it should continue to do well.
The Russian subsidiary is mostly domestic-focused, which was impacted by the pandemic. However, the standalone division exports Coated abrasives to Russia, which have started seeing a pick-up.
Automotive and feeders to automotive form broadly 25-30% of the product mix. Products of precision engineering in steel, medical equipment, pharmaceuticals and roads construction along with mass market products like wood working and construction each are 7–10%.
Sanguine outlook for the domestic abrasives market is owing to lower Chinese imports amid geopolitical tensions, stricter implementation of environmental
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
norms in China, shipping delays on low container availability has augured well for domestic players. Tightening of the GST regime has improved the outlook further for domestic players.
During Q3FY21, CUMI took a price increase of 1.5%, while the balance growth was on account of volume growth. The company has thus gained market share in the domestic market.
Current capacity utilisation across abrasives is above 75%, versus pre-covid-19 utilisation of 55–60%.
Long-term outlook: Management is focusing on expanding distribution and product development (super abrasives, a clutch of products in coated abrasives) for higher penetration in the user industry. It is venturing into adjacencies, viz. masking tapes, power tools, etc to secure a bridgehead in major markets such as the US and Europe through technical partnerships. Over the long term, management expects coated abrasives to grow at 10–12% and bonded abrasives at 7–8%. Ceramics (22% of Q3FY21 sales) Revenue growth of 5% YoY while EBIT margin expanded ~195bps YoY to 21.4%, resulting in 15% YoY EBIT growth. This was attributable to a favourable mix.
During the quarter, domestic demand remained strong on wear ceramics from repairs and maintenance while refractories demand improved sharply. However, the weakness sustained on project orders.
Technical abrasives had a strong quarter with demand across automotive and clean energy.
CUMI Australia suffered owing to freight delays with an acute lack of shipping containers. Further, geopolitical tensions and the impact on coal mining affected CUMI Australia. The division is looking at other opportunities in mining across non-ferrous mining along with gold and iron ore.
Metz cylinder: Metz cylinder (70% of engineered ceramics): Currently, CUMI is operating at full capacity and increasing production from ~1.7mn units/year to~2.2mn units/year, for which it has already invested INR150mn. Management anticipates delays in commissioning of this line. This new capacity is expected to contribute incremental INR400mn to sales. Further, it commissioned a pilot facility and is currently working with organizations such as ISRO to develop applications for the same. Demand for Metz cylinders improved in Q2FY21, and should continue to pick up in Q3FY21, as it caters to power generation and T&D sectors.
Management expects largest transformation in the ceramics division, with increased usage in aerospace, defence and electronics manufacturing industries, accentuated by newer products in wear ceramics and composites where the company is expanding.
Long-term outlook: Leveraging cross-divisional competencies and domain expertise, the industrial ceramics division in a synergistic collaboration with electrominerals is working on new age technologies in powder processing and characterisation, molding, sintering, machining and other related processes.
CUMI is focusing on product development (thin ceramics – products for tape casting technology, composites) and efficiencies.
12 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Electrominerals (40% of Q3FY21 sales) Consolidated revenue grew 19% YoY as end-user industries (mainly abrasives and refractories), picked up. EBIT margin expanded 202bps YoY owing to higher exports and favourable product mix. As a result, EBIT grew 48% YoY.
Foskor Zirconia divestment is underway and closure of the transaction is expected by Q3FY21. The subsidiary remained loss-making during the quarter.
Silicon Carbide division saw growth with demand reviving and is expected to be on a stronger footing hereon.
VAW Russia saw marginally lower volumes in Q3, impacted by the pandemic, however, realisation also increased during the quarter.
Fused alumina volumes remained strong as demand increased from refractories.
Specialties in EMD like for the diesel particulate filter were better especially in the Russian subsidiary. This business is sustainable and should aid in maintaining sales and margins.
While shipping delays impacted the industry, the input costs have also increased and management plans to undertake selective price increases across the value- chain.
Long-term outlook: CUMI’s vision is to be a co-creator of things that go into the experience world. Like materials for the batteries that will drive the EV revolution, silicon carbide for electronic applications, high surface area powders for 3D printing, etc—the possibilities are immense as management sees it.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Agri Inputs
14 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Coromandel International
Industry Agri-backed by kharif season driving economy
Spending by govt. on rural sector.
15% above normal rainfall in southern India have led to good reservoir levels. Southern market-paddy up 3%
Telangana: Increase in irrigation activities. Some excessive rains delayed rabi season.
Govt. 0.65 trillion additional subsidy, commenced from Jan. Budgeted allocation at INR 0.79 trillion versus INR 0.71 trillion for fertiliser subsidy.
Record INR 13.5bn collection from government.
Phos-manufactured volumes 4% down for coromandel
Phos-acid: Q4FY21: USD 795/ tonne versus USD 689/tonne in Q3FY21
Q3FY21- better sales mix led to margin jump
No pricing action taken by industry for DAP/NPK…
Phos-acid: 795/Q4FY21- delay in prices to adjust-prices for phos-acid import higher. Opening inventory+ conversion-margin impact to be lower.
FCFF: aggressive plans in place-open for growth opportunity if it complements business. Fertiliser Market share: 14.3% (up 1.6%)
80% capacity utilization
Market share of 9m: 15.3% versus 15.6%
Phos-acid: 80% utilization-production impacted by lockdowns
Margins-annualized level-(INR 4000-4200-4500)/MT-EBITDA/Ton.
Direction- selling/farmer-won’t impact marginal (below 2hectares)- Multiple aadhar cards-ii) Pre-buy: Big farmer will pre-buy. Govt. to cap on divergence on Urea. Crop protection Strong turnaround-domestic b2c robust growth
New producys-25% revenue in domestic business
Herbicide-soybean registration given
Better product mix helped
Bio-pesticide-> impressive growth in overseas
Revenue CAGR : Growth expected in double digit, margins expanded over FY20- momentum to sustain (17-18% EBITDA Margins)
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
FY22: Mid to high double digit growth
Domestic-company’s market share is low at present. (i) Portfolio more towards insecticides- trying to expand portfolio-crops. (ii) focus-sales & distribution- 5 states-60% consumption (3-ap, Karnatak, Telangana)-fast-tracking penetration and distribution-increase own presence in these states.
Endeavour-fast-track growth of newer products- done brilliantly-Mancozeb (East India)-scope better- working on sustaining growth Q3FY21 Annual turnaround to be taken up in Q4FY21.
Phos-acid: softer sales in Q2
SSP- 4% volume growth, 0.24 million tonne
Good rabi-> main focus in building brand
Revenue share Subsidy: Non Subsidy - 78:22 (77:23)
9mFY21: Revenue Subsidy: Non Subsidy -79:21(81:29)
EBITDA share Subsidy: Non Subsidy - 74:26 (76:24)
Subsidy outstanding: INR28.5bn (INR16.50 bn last year)-includes INR 5.5bn channel stock, INR 20.bn is pending from department of fertiliser
Debt/equity: 0.1
Q4FY21-Raw material-non season-As Season starts, company is working on couple of strategies to increase throughput from current facility: Vizag
Working on Alternative acid sources (sulphuric acid-long term contract)
Coromandel-DAP will get imported- farmers restore to balance nutrition- Unique grades positioned well to capture…
SSP- Local sourcing-‘Growplus’-useful for farmers
Subsidy/mt: higher 1000 rupees. NBS-april-uptick possible. In the recent past- DAP price. Migration to complex grades-low P-grade.
Farmers using more agri-inputs-assured market-agri throughput gone by 2.5times (irrigation assured)-Poloworm project-Rayalseema get into irrigation. Agri-input to increase. Balance sheet Capex: Mentioned-INR 3.5-4bn for 2021-Slow down on capex due to covid-19.
Average overall capex-INR4-5bn in FY22.
Non-fertiliser business(Crop protection)-Increasing capacity-adding MPP plant- number of molecules identified for technical manufacturing-
Govt. announced to clear previous backlogs-additional subsidy-past dues will get cleared- disbursement to happen in FEB/Mar. Only DBT claims to be claimed online-unlike past lag.
Sustainable receivables: INR(7-10) bn, inventory in channel-(ii) DBT Claim, iii) Freight claims
16 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Currently focused-debottlenecking- improvement in mix-grades having better yields. Backward integration activity going on currently. Post which will look into capex expansion.
Backward Integration-Kakinada facility- phos-acid: evaporator-not fully integrated-getting more operational activity.
Current plant-no envisage-Kakinda plant.
Additional capacity-storage for Vizag. Crop protection Outlook: Healthy growth to remain-new product-exports+ domestic
Strengthening team-connect with global geographies- combination molecule in B2b and B2C markets.
Subsidy: past dues to clear… 2021-huge backlog to clear-DBT-II: Sooner than later but depends on govt.
DBT claim-30-45 days initial period over H1, DBT- dues from govt. will come down. INR 7-10bn collection if paid by government will be helpful on WC. Guidance Fertilizer: demand better due to back to back seasons-NPK consumption up(good import-DAP+Complex): Normal monsoon-water levels-consumption to continue
Raw material prices-continued trend-prices increase to pass-on. April- subsidy(NBS rates get fixed)-demand standpoint
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Dhanuka Agritech
Key highlights Muted industry growth due to southern India (1/3rd agrochemical sales)
Insecticide side-lower pest infestation impacted top-line
Herbicide and Fungicides-doing well
Targa, Chempa-done well during Q3FY21
Operating leverage helped in margin expansion. New capex Backward integration at Dahej (37 acre land Facility on land acquired in 2013). Capex outlay estimated at INR2bn which will be funded through internal accruals.
Setting up unit so as to reduce dependence on imports and expand market share. Avenues of export of Intermediates to global innovators will also open up post commencement of facility. Project to get framework in next 6 months.
Project will take at least 2.5 years for completion.
It is not initially thought as CRAMS project, however company still in discussion with Japanese innovators.
Imports exposure currently- 25% of raw material. Post plant commencement Technical dependence to reduce to 20%
INR2bn capacity (Capex):- 6 month time to streamline, Export opportunities- technical mainly. Q3FY21 Products:-Introduced 6 new product offerings- FY22 (2 new 9(3) products in pipeline). Both Herbicide in nature.
Initially- it would be for backward integration.
Other expenses- there can be an increase, employee cost- 10-11% YoY growth.
Sowing- Telangana and Andhra- good improvement in sowing- Achieve targeted growth of 22-25% on FY21
ITI Index:- less than 12% YoY- FY19-20: no product launch, FY22: It will improve. Company plans to keep it above at 15%.
Regional contribution: North -20%,East-13%,West-27%,South-39%
Insecticide-37%,fungicide-19%, herbicide-31%, others-13%
Share capital reduced by 2mn.
18 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Guidance Factories-non-availability of containers-freight cost (3000$/container)-freight prices have increased. Prices on rise-Comparison to last quarter-avg. cost increase by 6-7%YoY.
Gross margin:- Q4FY21-similar to last year(passing on price hikes to customers).
Product pipeline:- backward integration for generic (Japanese companies- export/institutional/self-consumption)
FY22- 10-12% growth (high base of FY21)-normal monsoon.
EBITDA margin:- 16–17%.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
PI Industries
Q3FY21 Demand for new molecules healthy- Four molecules commissioned - specialty chemicals - production to commence soon.
Integration of Isagro domestic brand with PI.
5–6 new molecules to be commissioned during FY22.
Domestic-Highest sales in Nominee Gold and Osheen.
Launched a rice herbicide.
Couple of priority products would be launched in coming years.
Capacity utilization at pre-covid-19 levels.
Capex-IRN3.4bn, Order book: USD1.5bn.
INR3.1bn-cash generation from operations
Two MPP to get commercialised over FY22-23.
The company continues to invest in chemistry capability, process capability,
Augmenting- more human capital while increasing scientific talent pool: Have 15 scientist in pharma-4 PhDs in leadership team
Challenges:- (1) world in volatile estate, (2) Regulatory challenges, (3) Pre-invest in Human capital, (4) geopolitical situation
Other expenses: Expenses incurred on covid-19, acquisitions-related cost also built in number.
Employee cost- Higher cost due to covid-19 management-building talent.
R&D pipeline-45, Commercial: 24-25-Synthesis-Winning business-converting enquiries.
Active MPPs-15 plant-1 to get commercialized. (pipeline: MPP-10).
Cash flow from operation: INR6.7bn. Pharma Not allocated QIP proceedings towards pharma/non-pharma.
Aim: To differentiate itself from peers through technological driven approach
Differentiator- technology-less competitive products-complex chemistries-cost leadership. Domestic market
Isgaro growth -20% in 9mFY21. PI organic business growth: 17%
10% of top line came from Isagro.
AWKIRA to grow substantially in coming times.
20 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
CSM Sticking to 20% growth guidance
5-6 new products to be launched in FY22.
Commercialized molecules scale-up increasing- Higher rate of commercialization to happen in coming years with-15-20 new molecules likely to be commercialized over the next two years.
Pace has increased-R&D pipeline and flow of inquiries have increased. R&D pipeline (composition diversified towards non-agrochem and more towards specialty chemicals).
Strong relationship-geographical expansion by innovators: Large market to have greater expansion.
Growth opportunity is there. Ccapex intensity to slow down technology initiatives. More benefits will be realised going forward and capital efficiency would improve. Asset turnover-to remain 2–2.5x.
Order book: Higher patented product-substantially in asset build-out.
3-4 products in specialty chemicals, others in agrochem from molecules.
New MPP facility to get commissioned in FY22. QIP Evaluating a couple of options-1/2 quarters- actively evaluating.
Pharma – The company has entered into domain 4 years back and has been building technology and resources. For example, supplied covid-19 drug intermediate. 8-9 early intermediates are being worked upon.
Scaling up the pharma side of business. Capex Plan for organic expansion. However, pace of capex might slow down. The company has a rich R&D pipeline with clear visibility of introducing 12-15 new products- Engineering technology-increasing throughput of existing capacities.
One plant in Q4FY21, two plants in FY22–23.
Peak utilization levels: 85-90%, working at 80%.
Two FY20 commercialized plants-capacity utilization: 70% and below-50%
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Rallis India
Q3FY21 The rabi season, despite the cyclone, panned out well. Some crop damages were seen in the southern market.
Domestic agro-chem industry is set to grow 10–12%. The pace may taper down given a strong base of FY21.
Performance in-line with widening distribution and product launches.
Working capital: 79 days (Inventory levels higher due to stocking of key raw materials).
Receivables days: 73 days, cash & cash equivalents: INR3.8bn.
Product launches index (ITI Index): 12% (9M FY21); FY20: 15%.
Imports from China account for 50–55% of total procurement. Appreciation of the yuan impacted the company’s gross margins.
Depreciation of INR110mn versus INR200mn in Q2FY21 due to re-classification of entries under Ind AS 116. Domestic crop care Strong growth of 15% YoY driven by the good rabi season.
Low pest infestation in some geographies; still the company turned in more than industry average growth of 10–12%.
Two new 9(3) products to be launched every year till FY23.
The company has launched two bio-pesticides and couple of products in the crop nutrition space.
Price increase have been taken across some product categories in the B2C business. International business Demand for metribuzin continued to be challenging during Q3FY21.
Revenue: INR1.84bn versus INR1.82bn last year. (Volume growth: 18%; price correction: 17%). Major volume growth was seen in Acephate, Hexaconazole, metribuzin 75WDG.
Contract manufacturing revenue of INR300mn versus INR480mn last year. The polymer business dropped as well.
Capex: INR650mn additional capex (MPP plant-total INR1.45bn), annual capex- INR900mn (9MFY21), confirmation of purchase order: INR1.5bn. FY22 capex to be greater than FY21.
Pricing of metribuzin: Firming up over the last few months.9MFY21: Significant drop in pricing from INR2100/kg to currently INR1300/kg (down 40%). Within Q3FY21, pricing has seen an improvement.
Demand positive in even metribuzin, reached the same revenue as last year. Maintain GC at similar levels. Pricing action and focussing on demand.
22 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
15% market share in Metribuzin. Single plant manufacturing for metribuzin will take place from FY22. Building up inventory of metribuzin. Maintenance shutdown in April.
Two new products to be introduced over H2FY22.
PEKK demand to remain soft. Over the next one year, the situation can improve; looking to supply it other than airline. Seeds Small base of Q3FY20.
Volume growth in maize and bajra. Double-digit growth: cotton (FY21 is an exception; expect growth in FY22). Vegetables: Strong growth over FY22. Paddy and maize: positive growth drivers.
Hybrid maize: INR1bn milestone along with paddy.
Mustard seeds volumetric pickup.
Two products launched in maize, one in bajra. Capex INR5.3bn capex planned, out of which proceeds will go towards MPP, debottlenecking, new R&D, investment in automation and modernisation. Projects are on track.
Lambda cyhalothrin and hexaconazole (expansion completed; running at full capacity). No price compression observed for other molecules.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Sharda Cropchem
9mFY21 Volume grew 11% YoY in 9m FY21. Currency: 6.7%, price: -1.8%
Gross profits improved to 4.2bn versus 2.56 bn due to lower input costs over 9mFY21
NWC: 71 days versus 84 days
Non agro: de-growth of 4.1% due to covid.-19
Cash: INR2.14bn versus INR1.2bn
Capex: INR 1.7bn(1.2bn last year)
NWC: higher amount of creditor days- better credit from suppliers, Account receivables has also improved.
Company remained proactive in procuring raw materials at a time when competition assumed agri sector to take a hit of Covid-19
Decline in ROE and ROCE due to increase in cost of registrations.
Impairment costs: 9mFY21-INR 87mn. Q3FY21 Robust growth due to weak base of Q3FY20. Q4FY21 outlook promising but it would be on high base of Q4FY20
Freight rates- have increased exponentially-smoothen down over rest of time.
Registration cost is increasing.
Volumes growth :17%YoY , fx impact :7%YoY , price gain: 5% YoY
Newer product helped deliver gross margins above 34% Raw material Prices of inputs have started to increase but company remains protected till FY21
Gross margin: Europe( 41%), NAFTA(32%), LATAM: (21%), ROW(21%) Guidance Tax rate to remain at 30-35% in FY21
Write off: Wont’ be significant than last year (INR570mn)
Revenue growth : 10%+-2% YoY for FY21
EBITDA-18% for FY21
Gross margin guidance: FY21 to be better than FY20
24 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
UPL
Q3FY21 Significant delay in Brazil (dry weather in Oct-Nov) and adverse currency impacts thwarted growth during Q3FY21
Clethodim facility commissioned in Gujarat-post emergent herbicides – Arysta Life Science – increased demand required to be taken care of.
Q4FY21: Trend positive with good agronomical conditions, margins to improve.
Volume growth:7%YoY, positive price up 1% YoY, Q4-positive price variance expected.
9mFY21: volume growth: 9%. Price impact: -1%, Fx:-3%.
Exceptional items:-Favourable verdict on agro-fresh (INR1.15bn written back provision).
Cost Synergy: 200mn USD for FY21(achieved 35mnUSD in Q3FY21)-Cumulative- USD185mn.
LATAM: Brazil-delayed planting of soybean, entire industry impacted. Gaining market share in Brazil, Q4FY21-great performance anticipated. Soybean prices-4 year high-margins solid.
Innovation rate: 21.7% from 20% last year.
Mancozeb- small share of UPL in Europe. Enough products to fill gap if it gets banned.
Fixed cost higher: 11% due to intra-quarter movement of Cost. Also there’s one time provision of INR 395mn for a litigation issue pertaining to state of Jammu (apr, 2008-dec, 2013) for excise duty provision.
Interest+ Financial charges: INR4.60bn versus INR3.9bn in Q3FY20 (increased by 0.72bn). One time due to prepayment of USD 410mn bonds. Additional Interest cost: INR 750mn. Company gained INR320mn in finance cost on account of prepayment. Rest costs: INR 2.85bn-hedges cost on FX advance contracts (last year: INR 1.28bn) Gross margins Favorable mix, price increase led to 240bps YoY margin improvement
Price increase in local currency, cost savings and synergies-product mix.
Gross margins for 9mFY21: 42%.
Raw material prices: Commodity prices base materials-sharp increase (sustain till Q4FY21)-availability-Increasing prices of products.
Interest cost: INR 7.45bn versus INR 5.15bn (Increase of INR2.3bn).
LIBOR+2%-cost of selling the receivables.
Receivables sold: USD600mn.
Q3FY21-peak WC-Q4FY21-cash conversion-reduction in WC to 90 days to bring cash in-flow. H2FY21 to be profitable to reduce net debt/Ebitda: 2x .
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
EBITDA margins- deliver 24-25% margins over next 2-3 years(manufacturing expenses to be cut by 2%/yr).
FY22: Positive on next year outlook. Debt Gross debt: 278.3bn(reduced by INR39.8bn from Sep-20 levels)
Net debt: 242bn (Dec-20)
Net debt/EBITDA: 2x (Repayment of debt+ WC release)
Perpetual debt:-part of equity. Working capital WC days: 117 days in 9mFY21 versus 136 days in 9mFY20
Payables increased by 20days
Receivables days increased-In-line with growth
3-5 day WC reduction over FY21. WC to remain at 90-95 days by FY21 end. Europe Overall growth-Strong performance in Europe-Aragos biological product-potato- good margin profile. Confident with respect to market share gains.
Europe:-Confident of growing abilities- high margin-stable business
Margins increasing qtr. to qtr.-Q4FY21 to be good. LATAM UPL-market share gains sustainable- combined portfolio- Soybean- new products-gaining traction in Brazil. Sustainable trend
Growth in Sept-market down-outperformed market.
Non-recourse discounting- cashflow will come by March,21 for sales down during Q4FY21. Guidance Expect to deliver: 6–8% YoY
EBITDA growth: 10–12% YoY
Net debt/EBITDA: 2x (reduction of USD1bn net debt)
Growth:- Newer regions/India/Brazil-No.1 in Mexico, Chile, Columbia-first two year of synergy is initial period. 3-4 years-double digit growth possible.
Capex: INR 13.6bn-9mFY21, FY21:17.5bn
26 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Automobiles
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ashok Leyland
Key highlights M&HCV truck volumes have grown by 16% YoY (for industry) in Q3FY21. AL’s truck market share has increased to 28.1% in Q3FY21 versus 24.9% YoY.
Bus volumes remain subdued still. Government has announced a scheme to increase the share of public bus transport. This can help boost bus demand, and AL can be a key beneficiary thereof. Besides, as the economy further recovers, bus demand should revive.
LCV volumes have received a strong boost due to e-commerce, agriculture and the Swachh Bharat Mission.
Thrust on infrastructure investment (in the budget) will help economic growth and consequently boost M&HCV demand.
Scrappage scheme – Positive step, but details are awaited.
Semiconductor shortage to impact near-term demand – If constraints are not eased, this could be a significant challenge. Engaging with suppliers to manage their supply chain. In the medium term, this could give pricing a boost; however, on an immediate basis, need to assess postponement risk by customers in case of a price hike.
Commodity price - Closing monitoring the spiking commodity prices. Taking steps (price hikes) to mitigate its impact (detailed below).
In absolute terms, discounts increased in Q3FY21. In order to neutralise the impact, AL is also taking price increases. The company is also looking to boost sales of better-value products to conserve margins.
EBITDA margin – Besides revenue, mix plays a vital role in driving EBITDA margin. The company is focused on lowering the breakeven levels.
In Q3FY21
o Inventory of 3,171 units versus 1,853 in Q2FY21.
o Generated negative working capital of INR5,250mn (flat QoQ as level of inventory went up – finished goods as well as raw materials).
o Investment was INR2,600mn (INR900mn in HLF and INR1,500mn in Optare (renamed to Switch) .
o Net cash generated - INR1,600mn; versus INR1,200mn in Q2FY21
o Debt was INR28,800mn (lower from INR30,760mn in September). Gearing at 0.43x.
o Share of Domestic M&HCV in revenue – 56% versus 45% in Q2FY21. Share of exports was 7.5%.
Capex incurred till December 2020 was INR4,500mn versus INR8,600mn. Capex incurrence was towards a modular platform, Bada Dost, etc.
28 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Demand update
Sequentially seeing demand increasing
Tipper, tractor trailer are seeing good momentum due to economic growth (driven by revival in mining and infrastructure actives).
Seeing good traction in LCV products; Bada Dost being received very well. Addressable market has increased from 18.3% (in Q3FY20) to 20.3% (in Q3FY21). And volumes have grown by 30% (addressable market grew by 17%). Partner and Mitra are small currently, but the company believes they have a strong outlook.
Export revival
o Driven by new products, and increasing range (offering RHD and LHD products) and opening up of markets.
o In Africa, appointing important distributors to widen the reach in some of the key markets to boost sales.
o The company is positive about exports outlook.
Material cost increase
Sequentially RM to sales have increased by ~300bps to 74.4%.
Reasons are twofold:
o Sharp spike in steel prices (unseen in the past). Taking price hikes to offset impact. Took a price hike of about 2% in October. Q4FY21, taken a price increase of 1.5%.
o Second part is mix – In Q1 and Q2 share of non M&HCV business (which is a higher gross margin business compared to M&HVs) was much higher. As the share of M&HCV increases, margins were impacted adversely.
Prima facie, it seems steel prices would increase in Q4FY21. However, the entire steel price is not uniformly distributed. For example, if the company is procuring higher volumes from one vendor, could get some discount and lower the procurement cost.
Still in discussion with vendors/steel companies to negotiate prices and manage costs.
The company has given price increases to vendors in Q3FY21, and may have to give price increases in Q4FY21 as well.
Besides that, also looking to improve the mix to support gross margin.
Staff costs increase
Had two one-offs (totalling to about ~INR320mn).
o Leave encashment provision for employees taking VRS (impact of INR110mn) has to be a part of wage cost.
o Gave the same allowance to regular employees as well (impact INR210mn)
In difficult times, the company allowed leave encashment to be deferred rather being lapsed.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
No increase in staff payouts; the increase is simply because of the one-offs.
In Q3FY20, had reversed some variable provisions given the weak industry outlook. This has also affected YoY growth number.
Lower other expenses
Under the Reset programme – AL has been able to optimize costs and driving operating leverage benefits.
The company is running this at 37 satellite war rooms with more than 200 people deployed, with the purpose of lowering cost and boosting the bottom line.
Managed to deliver significant administrative overhead savings.
From about INR8,000mn in administrative overheads (three years ago), they have been lowered to INR4,500mn. This is still lower by one–third compared with last year.
Scrappage policy
AL is seeking an incentive-based scrappage policy.
Even without the policy, with increasing share of electronics in CVs, natural scrappage should also see a boost.
For the time being, there is no plan to invest in scrap yards.
Investment
May need to make marginal investment in Switch; invested INR1.5bn in Q3FY21. Investment foreseen in Financing in Q4FY21 or Q1FY22 primarily for growth.
May need to invest in HLF in Q4FY21 (for business growth).
Hinduja Leyland Finance (HLF)
Collection efficiency is higher than 90%.
Almost all the moratorium accounts have started to making regular payments.
Gross NPA is 4.3%.
Book is INR236bn.
Capital adequacy is 16.3%.
30 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bajaj Auto
Key highlights
In domestic 2Ws, BAJUT has taken price hikes. However, will have to spread out price increases as demand recovery is still fragile. The company will gauge demand and take calibrated price hikes. To that extent, margins could be adversely impacted (further detailed below).
Q4FY21 EBITDA margin will be lower than Q3, but directionally working towards achieving 19.5%.
With a return to normalcy gradually, expects all business expenses to return to their usual run rate. So far, does not envisage any major permanent savings, especially in advertising/promotion.
In the quarter, the focus was on capitalising on demand revival (domestic and export markets) as well as preserving margin through: 1) cost focus; 2) selective pricing actions; and 3) increasing share of premium motorcycles.
KTM had a stellar quarter, which added INR1,500mn to consolidated PAT. While KTM’s motorcycle volumes were weak, its e-bikes are doing well.
Product launches: From the end of March, BJAUT has a strong pipeline (new as well as upgrades) across all cc segments. Can expect one or two launches/upgrades in each quarter in FY22.
Shipping container availability challenge
o Expected to persist in the near term given the high demand on US – China and EU- China route.
o Almost every month, 15% of sales are getting spilled over to the next month.
o BJAUT has entered into long-term contracts to ensure safety of sales.
In Q3FY21 total spares revenue was INR9.9bn; exports revenue (including spares) was INR40.8bn (or USD520mn) and USD realisation was INR73.4.
Outlook
o Expects double-digit (15-20%) growth in domestic motorcycles (partially attributable to low base effect) in FY22. Volumes can come back to FY18 level.
o Export 3Ws - Expects 15% growth in Q4FY21.
o Domestic 2W: Should see a low single digit demand growth in Q4FY21 adjusted for favourable base effect of last due to BSVI transition.
Domestic 2Ws
Demand back to normal (pre-covid level).
125cc segment update.
o Pulsar125cc, KTM 125cc continues to do well. While the latter is a lower volume product, it helps realisation.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
o Pulsar 125cc has continued to expand the whole 125cc segment. From last year, when the domestic 125cc segment was at 19% market share, it has now spiked to 23%.
o BJAUT’s market share in this segment moved from ~13% to 23% currently. Exit market share in December was at 28%.
o Recently seeing competition launch promotion schemes (exchange bonus for example) to shore up their sales in the 125cc segment.
125cc has offset loss of market share in the entry segment. BJAUT has not only improved their product proposition in entry segment (offering electric start versus self start, disc versus drum brake for example) but also taken price hikes.
In the quarter, KTM and Husqvarna grew by 35%.
BJAUT is using the KTM, Bajaj and Husqvarna brands to build its presence in the 250cc or sports segment.
Domestic 3Ws
Demand remains weak. Sales have recovered only 40% (hope they recover to 50% in Q4FY21) as schools and offices have not completely opened.
Vehicle services are at 90% of pre-covid levels
Cargo demand is now back to 70% of pre-covid.
Once the economy completely opens up, expects demand recovery to be quick (could return to normalcy within a quarter).
If financing and driver salaries return to normal, these could help drive growth.
Exports
In Q3FY21, 2W exports saw strong overall (across geographies) growth. South Asia (ex Sri Lanka and Bangladesh) is almost back to normal, LatAm is at 80-90% demand recovery and ASEAN (where Philippines is one of BJAUTs major market) is at 50%.
In 3W – LatAm is at 50% demand recovery, ASEAN is close to 25%, while the rest of the markets are now back to pre-covid level.
Improvement in international business
From April to June, BJAUT had corrected inventory in export markets. On- ground inventory still remains below retails. Expects this situation to persist till early next year as well.
Besides that, BJAUT has a strong competitive position in these markets. Pre- covid, 85% of BJAUT’s revenue came from markets where it was in the podium position / top quartile in these markets.
Assembly units, digital marketing platforms and a deep network have ensured that BJAUT has a strong mind share among consumers.
Price hikes and raw materials
In Q3FY21 took 1% price hike in domestic 3W. No hike taken in January given the demand scenario
32 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Domestic 2W – 1% price hike in Q3FY21. In January took another price hike higher than 1%.
Raw material
o Compared to Q3FY21, expects commodity cost to increase by ~3% QoQ led by base metals. For the time being, expects commodity prices to be high. Does not have visibility on impact of commodities for Q1FY22.
o Early in the quarter, BJAUT hiked prices to offset impact of MEIS withdrawal in international markets. Later, took price increases to offset impact of raw material prices.
o In Q4FY21 expects margin to be weaker due to lower operating leverage as well as unrecovered cost increases.
o If government announces export scheme, should see a boost of 1-2% to EBITDA margin.
Margin commentary
Selling more Pulsars (globally and in India) and faster growth in export 2Ws versus domestic 2Ws are two key drivers. To a certain extent, this will be offset by a weaker 3W share.
Between Q2FY21 and Q3 FY21, 1% margin improvement can be attributed to operating leverage.
If the domestic market picks up, margins will depend on mix.
Employee cost: No employees have been asked to leave. However, the company has managed to find ways to optimise costs. Current staff cost is normalised run rate for this quarter.
Other expenses: Lower expenses in advertising and promotions versus last year. BJAUT and competition have managed to keep these expenses in check.
Market share strategy
No meaningful pivot in market share strategy from the company’s vantage. Company continues to remain focused on premiumisation.
For instance, the Pulsar 150 Neon was launched at attractive prices, since BJAUT did not have any product proposition in the 125cc segment (and that segment was seeing good momentum). Post the launch, has corrected the pricing of Pulsar Neon. Since its launch in May 2018, price of the 150 Neon has increased by ~40%. Overall, gained much more market share in the 125cc segment than was lost in 150cc.
CT100 was launched when the M1 category was expanding and BJAUT did not have a credible offering. So launched a no-frills offering to compete in that segment. Since then, BJAUT has worked towards premiumisation. For e.g., from last year, the share of electric start has moved from 65% to 75% this year. From 6%, the share of disc brake has increased to 27% in the M1 segment.
Focussed on maintaining a balance between a strong value proposition and sensible pricing.
Over the next three years, the company will ensure that it is able to bring premiumisation across each of the categories.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Capex
Announced capex of INR6.5bn to set up new plant, which will make highend (Triumph, Husqvarna and KTM) motorcycles.
Plant will be capable to make EVs as well, but that is not in the plan for the moment.
Capex will be over and above their typical annual capex, spread over FY22/23. Very little spend will be incurred in Q4FY21.
Financing
Financing penetration in 2Ws is now at 63% (versus normal of 70%). Collections are also returning to normal level.
Bajaj Auto Finance continues to have a share of 50% in BJAUT’s finance mix.
Tax rate
On a blended level, expects a tax rate of 23.5%.
Other Income: Not the entire amount is taxed a lower tax rate than the blended tax rate.
Hedges
If rupee remains range bound (around INR73), BJAUT will realise spot rates.
Electric vehicles
Actively pursuing plans to bring electric 3Ws and the Qute.
Working to address range anxiety and boosting operating profitability for drivers.
Launching an electric 3W is not really a challenge for the company, but BJAUT is still studying the industry to understand finer nuances including lower of over cost of vehicle.
Expects BJAUT to show case an electric 3W in H2FY22.
Chetak
o Closed bookings on December 27 and not re-opened them.
o Product received overwhelming support.
o But supply chain hassles (sourcing from Wuhan, semi-conductor shortages) have weighed on the product’s supply.
Working on localising the supply chain and hoping to re-launch the bike again next year. Aim is to be present in 25 cities.
34 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
CEAT
Key highlights
In Q3FY21
1. Volume growth was 28% YoY. OEM demand improved by ~15%, exports by ~25% and replacement demand by ~35%. For the first nine months, total volume growth would be sub 5% (with OEM and exports being negative).
2. In replacement market, saw good demand growth in CVs, followed by PV and then 2/3W.
3. Mix this quarter should have started to normalize due to pick up in OEM demand. Mix in the quarter should be close to 60% (replacement) / 25% (OEM) / 15% (export).
Replacement demand in Q3FY21 was strong due to pent-up demand as well as move to personal mobility (saw good growth in urban and rural markets).
While CV OEM demand remains subdued, replacement demand has spiked in this segment as existing trucks continue to ply more. While both Truck Bias and Truck Radials continue to grow (at over 30%), Radial clocked better growth than Bias. In trucks, current mix would be 60/40 Bias/Radials.
Farm segment continues to grow impressively.
Festive season saw good pick up in PV demand. Import restrictions have also helped volumes. Excluding the restrictions, would have grown by ~30% YoY in replacement market versus 35% YoY growth.
Demand outlook
1. Expect to sustain current level of volume growth in Q4FY21 as well.
2. Overall demand scenario continues to remain positive. Trend in replacement demand remains robust. In OEMs, seeing some weakness in 2W demand. Expects CV demand (weak so far) to pick up gradually.
3. Overall, expects demand to remain robust for at least the next nine months (partly attributable to base effect). In the past couple of years (Ex FY21), volume growth was sub 5% CAGR.
Q3FY21 revenue mix by category– truck ~35-40%/ 2W 30% and PV close to 15%. Balance was farm and off highway tyres.
CEAT currently has about 5k dealers and a much larger number of sub-dealers (largely for 2W).
Current level of finished goods inventory in the market is much lower than the normal level of one month. Even raw material inventory is below normal. CEAT is working towards increasing inventory. Normalised inventory stands at around 40 days.
During the quarter, partnered with Nissan (for Magnite), Hyundai (i20) and RE (Meteor).
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Raw material and pricing
Raw material cost rose 150bps QoQ. This, coupled with adverse mix (higher OEM sales), hurt gross margin.
Took price hike of ~1% and 2-3% in early and late December, respectively, to mitigate raw material cost. Price hike was taken in all categories, except 2Ws. On portfolio basis, blended price hike was ~3%. Did not take price hike in 2Ws because as per CEAT’s benchmark pricing, its pricing was already higher by 3-5% and CEAT does not want to increase the price premium.
Did not see any impact on demand due to price hike.
Needs to take another 3% price hike (at a portfolio level) during Q4FY21 to offset commodity pressure (detailed below).
Raw material price outlook:
Rubber price has jumped from INR130 per kg to INR160 per kg, crude price has also spiked from US42 to USD56. Spike in international rubber prices due to steep increase in freight rates. While local rubber prices have eased, does not expect it to last unless global rubber prices also correct.
QoQ, expects 10% spike in raw material price basket. By the end of March 2021, buying price could be higher than 10% plus.
Capex and debt
Capex
Of the initial layout of INR35bn, has spent INR23bn.
Capex spend will be targeted towards completing Chennai expansion.
Capex for FY21 – INR5bn for projects. Of this, CEAT has incurred INR2.5bn in the first nine months. Will look to spend the remaining INR2.5bn in Q4FY21.
Maintenance capex for the year is typically around INR1.5bn is over and above the INR5bn.
FY22: Targeting capex and maintenance capex of INR7bn and INR2.5bn, respectively
Debt
In Q3FY21, consolidated gross debt fell by INR2.5bn to INR15.5bn despite capex spend (about INR1.75bn). Consolidated debt to equity improved to 0.49x versus 0.59x in the previous quarter.
For the first nine months, debt has dipped by INR3.7bn. Working capital reduction has been around INR3bn. Capex for the period is INR4bn.
Does not expect debt levels to shoot up from here. Could see some spike in debt due to working capital. Level of inventory and finished goods is very low currently. To that extent could see a spike in working capital and so debt.
Market share
Continues to improve, due to stable production capability as well as deep network reach.
36 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
In the first two quarters, CEAT would have gained atleast 2% market share across categories. Market share gain would be higher in PVs.
German R&D center
Has been operational for over three years now. CEAT gains market intelligence on new products, global capabilities from this center. In the future, if it looks to enter Europe, this center will play a key role.
Others
Higher staff costs due to additional employees engaged in Chennai/Nagpur and certain performance related payout. Productivity benefits to flow over the coming quarter. If volumes increase, employee cost could be higher than Q3FY21 level. Otherwise, Q3FY21 is the steady state run rate for employee cost.
Offered VRS of ~INR123mn during the quarter (routine exercise). While this will not lead to any reduction in employee costs, it should halt any increase in staff cost. A few older plants are still high on employee costs especially TBB plants. These plants, except for the current quarter, have always been underutilized.
Advertising cost in Q3FY21 was higher than 3.0% of sales. In the full year, will maintain advertising cost at 2.5% of sales.
Consolidated deprecation went up to INR870mn in the quarter.
Consolidated finance cost reduced due to easing interest rates and reducing debt level.
Plant utilisation continues to remain high. Timely capex has ensured that plants are ready to comfortably service demand.
ESG is key area of focus for CEAT. Over 20% employees in its new factories are women operating on the shop floor.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Eicher Motors
Royal Enfield (RE) Automotive industry finally had a good festive season. Seeing signs of growth come back. At RE, seeing strong demand from across the country, aided by the launch of the Meteor. Overall bookings (stand at more than a month) are substantially higher than last year. Matured states such as Tamil Nadu and Maharashtra have also started to come back. Exports have also seen a good demand bounce-back (was up 30% YoY this quarter). RE opened its first standalone flagship store in Japan. Will now address the middleweight motorcycle segment there. Managed to ramp up production to 75k units per month in December and January. Ramped up production of the Bullet, Classic and Meteor. This has also helped lower the waiting time on some of these models. The supply situation continues to be a bit of a concern. While there were challenges pertaining to parts earlier, now ECU shortage is a challenge. Absent any supply challenges, can service higher demand. Recent commodity price cost increase has been a cause of concern. RE has taken 3–5% price hikes over the last few months. Took one more price hike just two days ago. Will maintain pricing discipline to offset commodity price increases. Well placed to launch one motorcycle per quarter.
ASP increase - combination of one mix and price increases. Production ramp-up / supply challenges From a ramp-up perspective, RE has hit 70–75k units and RE does not see any challenges thereof. Some minor challenges however persist. The company will look to increase capacity, de-bottleneck and improve supply chain management. Make it Yours (MIY) It is a digital initiative, which was launched with the Twins. No impact on capacity utilisation due to this initiative and maybe only a marginal increase in time taken to produce a bike. However to compensate for that, with customers ordering accessories (windshield for example) from RE directly, RE is able to boost parts sales and is extremely profitable business. Going ahead with full force with the Meteor. RE believes this will help them significantly improve customer’s purchasing experience. The MIY app allows customers not just to customize the bikes, but also apparels and accessories. MIY has been great help in cutting out the middle man. As customers can now directly order desirable parts from RE (for example, choosing spoked wheels instead of cast wheel). RE is therefore able to realise revenues on the spoked wheel (which it lost out in the past).
38 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
RE’s target will be to deliver customized bikes within 24-48 hours of order. However, given high demand now, the wait time is longer.
Since the RE app was launched in August 2020, daily usership has now tripled and the customer is spending more than double the time on the app versus last quarter.
Continued to increase digital engagement pickup versus the last quarter. Online inquires have increased three times versus pre-covid-19 level, and the bookings have increased by 5x.
Decided to launch the MIY facility for all the new launches.
MIY also helps in better supply chain and inventory management as the company knows beforehand what a customer wants. RM costs/commodity cost inflation impact Raw material commodity costs impact on gross margin was ~ 80–100bps in Q3FY21 largely in December 2020.
Taken a price increase of 2-3% (in Q4FY21) to counter this (although this does not fully help mitigate raw material pressure). Pricing actions will continue as and when deemed appropriate.
Besides there is focus on bring in VAVE benefits to lower material cost. EBITDA margin expansion Key margin drivers going ahead
o Pricing (will help mitigate raw material pressure in the near term). RE will leverage its brand equity and decide how much of the price increase can be passed on.
o Increasing non motorcycle business (spare and accessory sales)
o Increasing the share and mix of the international business.
o Besides this, RE is continually focussed on lowering costs via VAVE benefits. Post COVID, RE has re looked at some of the fixed costs Meteor Meteor was a successful digital launch.
Customer feedback has been very encouraging.
Meteor booking continues to trend at a much higher level than Thunderbird.
There isn't an element of cannibalization due to Meteor.
With Meteor, RE sees potential for expanding in the middleweight segment both in India as well as international markets. So have launched it in Europe, Australia, and as well as in Thailand.
Earlier 350cc models were primarily designed for Indian markets and not for international markets. Now this is likely to change going ahead. Meteor is the only 350cc product that is EU6 compliant as of now
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Waiting period and cancellations RE has not seen much in terms of cancellations (remains in single digits) despite high bookings.
Channel inventory continues to be low (less than two weeks).
RE retailed around 70k bikes in December and January each.
As retails are picking up, waiting list is also coming down. On some models (Meteor for example), the waiting list remains high. Exports 650cc twins were always RE’s lead products for the international markets.
Interceptor and Himalayan continue do to very well internationally.
RE will continue to operate in markets where there is demand for 350cc bikes. While RE’s 350cc products didn’t do very well in Europe, doing very well in ASEAN.
In international markets, RE is branding their 350cc products for City+ driving (as they are not suited for highway driving in those markets). RE has priced them accordingly as, well and believes that these bikes will create a niche of their own.
350cc models were earlier sold in ASEAN and Latam markets but now it will be suitable across the globe. Network expansion Opened 43 large stores in India, and 129 studios stores in the quarter. RE now has ~1,900 touch points across 1,500 cities in India.
Outside India, opened 13 exclusive stores bringing the total to 100 exclusive stores. RE continues to focus on LATAM and ASEAN regions.
Network expansion remains a key area of focus. RE has more than doubled our network in the last two–three years. Top 10/20 cities Pre-covid-19; Top 20 cities used to contribute ~37% that had fallen to about 20% in the first two quarters largely because they opened late.
This mix has already gone back to 25%. Others Employee costs increases - largely due to increments, plus increase in temporary manpower.
Higher depreciation – Due to Meteor line getting capitalized. VECV VECV inaugurated its all-new fully digital and state-of-the-art manufacturing unit in Bhopal (a couple of years ago). VECV now supplies BSVI trucks to about 40 countries from Bhopal.
VECV also has an extremely strong digital focus. It is the only truck-maker to have trucks that are 100% connected.
Using the data coming through, they are able to perform diagnostics in advance.
40 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
VECV has added 41 touch points in the past nine months.
VECV acquired the Volvo bus last quarter along with Volvo’s distribution network and now runs a very integrated process.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Hero MotoCorp
Key highlights Continued to gain market share in domestic (190bps) and export markets (90bps). In domestic markets – gained market share in the deluxe segment as well. Margins on deluxe and 125cc are not meaningfully different
For Glamour, Gaining market share across India except AP, Telangana and East. HMCL has taken cognizance of the same and is working towards improving this
Hero is the only Indian company has been included in the Dow Jones Sustainability Index
Company is optimistic about medium term volume growth
Semi Conductor issue – As a result of better storage and supply chain management, ensured that production has not been impacted. So far, HMCL believes the issue is under control. 2Ws have lower dependency on semi conductors compared to 4Ws
Over the next 3-5 years, there will be conscious effort to increase premiumisation. As such, HMCL continues to create newer variants / refreshes (Splendor Canvas, Pleasure Platinum for example), which are more premium in nature.
Xtreme160R has helped expand the market pie in rural markets.
Re-iterate focus on creating a bouquet of premium motorcycle portfolio over the next 3-5 years.
Company is still planning to launch >10 refreshes and new launches each year.
Inventory post festive came down to lower than 4 weeks. Ideal inventory range is 4 -6 weeks (based average 3m forecasted sales). This is the usual level of inventory, HMCL is comfortable with.
FY22 capex is likely to be in the range of INR8-10bn.
Through working capital (receivable) management, HMCL is now at a cash investible surplus even compared to pre-COVID level. WC has now shifted back to negative.
On a longer term basis, dividend payout will be maintained at 60%
VAHAAN is consistently lower than actual sales largely because they don’t cover some regions.
In Q3FY21
o Spare Parts revenue is INR10.29bn (YoY growth of ~29%)
o Other operating revenue INR1,920mn
ASP growth
o Combination of price increase (from 1st October), improving mix (towards premium) and better spare part growth
42 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Demand outlook Saw good festive demand
Looking ahead, healthy economic indicators (GDP growth, financing, strong rabi crop, soft interest rates etc) all bode well for demand. Besides that, as economy opens up, consumer confidence will go up and further aid volumes. Reviving student demand (as school / colleges open up) is also helping. In-fact, company is already seeing some pre-buy due to the same.
There can be monthly seasonality in demand due to shifting of marriage season for instance. Marriage season demand has shifted to Q1FY22. Generally it would have been in Q4FY21 also
HMCL is confident that near term demand remains robust
YTD basis, contribution of replacement buyer has been very low. HMCL is working to improve this.
Retail sales in January were not as strong due to the inauspicious period. Positive about Feb/March outlook
Q4FY21
o Marriage season has moved from Q4FY21 to Q1FY22
o This time, only 1 day of the marriage season in Q4, versus 24 days last year Costs RM cost spike is not new, similar cycles have been seen in the past as well
This quarter, should have seen an impact of close to 100bps.
Will focus on cost streamlining as well as judicious price hikes to overcome this challenge
Other expenses - spiked to a certain extent due to higher A&P spend during the festive. This will noramlise going forward
LEAP 2 programme
o Generated more than 125bps of savings just this quarter.
o Sustainability of these savings is expected to persist going forward Spare part sales Around a year and half, changed the method of selling/distribution of spares
Emulated some of the best practices of FMCG companies in supply chain management
Number of parts distributors is up about 50%. There is a huge push to increase penetration.
Besides part, also increased focus on selling accessories
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Harley Davidson partnership update Partnership is icing on the cake and a step ahead for HMCL’s premiumisation aspiration.
Product development has already started and HMCL is accelerating the process.
A full team has been put in place to take this partnership ahead.
Apart from distribution, the association helps HMCL’s brand image in the premium market. Export Had a two Phase strategy
Phase 1 – entering more markets and learning from on-ground experience
Phase 2 – Introduce customized products as well as focus on the high potential markets.
As a result, saw a good market share in Colombia. In-fact Columbia has achieved breakeven this quarter.
In Nigeria, introducing longer seats (since it’s a commercial vehicle market) has helped improve HMCL’s traction,
About 2/3rd of the focus and attention is going towards the top markets.
Going forward, Mexico is the next big opportunity. HMCL’s partner there has a sizeable presence, so HMCL expects to leverage this Weakness in Glamour sales Post COVID, saw consumers moving within brands.
So, while Glamour sales are weakening, Splendor is doing well
Originally, 125cc customers were looking for bikes with better power. These customers are now migrating towards more deluxe vehicles. While the 125cc segment has seen downtrading from more premium customers. Scooter Have seen a double digit market share growth here.
HMCL has lined up product and micro level market interventions to continue this trajectory Financing Financing penetration is about 50%. Share of FinCorp is at 40%
Adding more financiers so that they can continue to improve the share of financing. Consolidated performance Seen a loss of INR1bn from associates
This is largely because Ather is increasing its distribution network and launched new products and hence there is cash burn.
Further investment on Ather will depend on how the new product launches pan out.
44 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ather has a sharp focus on achieving EBITDA breakeven.
Besides that, due to some NPA adjustment (post moratorium) there is some loss attribute to Hero FinCorp. However, collection buoyance for Fincorp is improving. EV strategy Have accelerated production of in-house EV product R&D spend R&D spend will continue at current clip (2x of closest competitor)
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mahindra and Mahindra
Key highlights Management change
o Dr Anish Shah will assume the role of MD and CEO from 2nd April 2021.
o Mr. Manoj Bhat (currently CFO of Tech Mahindra) will take over as Group CFO.
Increase in operating margins was driven by cost optimization and operating leverage.
Demand buoyancy continued in the Auto and Tractor segment in Q3FY21
Tractor volumes grew by 19.6% YoY on the back of a robust rural story. This trend is expected to continue. Expect volumes to remain strong in Q4FY21 as well as Q1FY22. Intuitively, high reservoir levels and strong rural momentum should ensure FY22 demand is stable.
The UV business grew 11% YoY, though production was lower than demand due to ECU and steel shortage (explained in detail below). New car launches planned for Q1FY22 can get delayed due to ECU shortage. With the W601 launch, M&M is at a reasonable level of readiness, but not sure if will go ahead with the launch.
High negative working capital (in both divisions) aided cash generation in the quarter.
Capital allocation decisions are almost complete; so the company will soon be able to turn its focus on driving growth. Clarity shared on the categorisation of key subsidiaries in A, B, and C category in the presentation
Core capex spend for next three years will be INR90bn (starting FY22) versus INR120bn in the past cycle.
With regards to investment, will have more clarity once capital allocation decisions are completed by the end of FY21.
Scrappage policy - M&M believes that unless the policy is incentive-based, it won't work. Subsidiary classification and capital allocation On a consolidated level, losses from international subsidiaries have reduced from INR34,290mn in FY19, to INR30,000mn in FY20 and INR3,000mn in FY21. By FY23, these subsidiaries will be profit making and hence move towards growth trajectory.
Category A – have a clear path to 18% RoE (MAgNA, Peugeot Motorcycles).
Category B – no clear path to RoE, but are a clear strategic benefit (Mitsubishi, Sampo Rosenlew).
Category C – No clear path to 18% RoE and no strategic benefit. So M&M will exit from these (SYMC, GippsAero, GenZe, MFCS).
46 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
MANA, Automobili Pininfarina are currently sitting between Category A and B as M&M is still deciding their status. It shall communicate the same in due course.
Current WIP (clarity to emerge soon) are – Erkunt and Hisarlar – not yet decided on its positioning.
For all these companies, M&M has set a six-month milestones to regularly monitor their progress.
MagNa update
o Will record a INR1300mn loss in FY21, but will break even in FY22; thereon, the growth path should begin.
o The business has strong product pull, retail growth momentum and a strong right to win.
o Should achieve 18% RoE by FY25.
Peugeot Motorcycles
o Has started to do very well. Should become profitable in CY22.
o EVs, personal mobility in Europe, strong growth in China, etc are some of the key drivers of growth for this business.
o This business also has a very strong investor interest. Three-pronged strategy to accelerate growth Pillars for growth (self-funding businesses)
o Farm – Tractors and implements
o Autos – Core SUV and new electric car platform
o Besides these, TechM, Financial Services, Hospitality, Real Estate and logistics are included in this segment.
Growth GEMs (two examples detailed in presentation)
o Susten – is an EPC services company, will not require significant capital.
o Accelo - Generating good cash presently. May not require a lot of investment from M&M.
New Age Platform
o First Cry - Already a unicorn. M&M is a small investor in this company, but believes the company has very strong growth prospects.
o Porter and First Choice are two maturing businesses. Looking for investors for First Choice. SsangYong impairment update SYMC filed an application before the Bankruptcy Court for commencement of rehabilitation proceedings on 21st December 2020. It is now preparing and plans to submit a pre-packaged rehabilitation plan (“p-plan”) with equity investment from an investor and debt from local lenders. There is no increase in M&M exposure as compared to Q2FY21.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Deal with potential investor is moving forward. However, they are looking at p- plan versus ARS earlier.
The company has taken an impairment of INR12.14bn in the current quarter. Believe the rest will be receivable.
Losses from SYMC will not show up from next quarter. It has been classified as discontinued operations. FES Recorded highest-ever PBIT of INR12.4bn and RoCE of 242%.
FY21 could end with a 20% YoY growth in tractors in India (highest in past decade).
In domestic markets – M&M has lower system stock at the end of Q3FY21 versus Q2FY21 and much lower than beginning of the year. This is largely due to supply chain challenges.
Consequently, near-term market share has been impacted. In specific products like 4W drive, power drive, etc, M&M has not been able to cater to demand. Southern markets (AP, Tamil Nadu, etc) are growing at a very strong rate. These markets typically prefer higher horsepower and power steering vehicles. Due to shortage of these vehicles, M&M has lost share.
Demand in northern markets is strong but not as buoyant as the south. South, especially AP and Telengana, have also benefited from a low base.
The company believes market share loss is wholesale market share, and not retail market share.
Tractor growth momentum was supported by positive sentiment in rural India. Specifically – 1) Good monsoon, 2) healthy reservoir levels, 3) record kharif production, 4) good rabi sowing and 5) continued high central government spending.
On the back of these positive factors, it is expected that tractor demand will remain robust during the coming quarter as well.
Rural economy’s reliance on agriculture is now only 30%. Hence, if other segments of the rural economy do well, it can compensate for a lower allocation for rural spend by the government in the recent budget.
Subs
o International subsidiaries broke even on PBIT for the second consecutive quarter.
o International subsidiaries + Gromax have recorded a PBIT of INR10mn in Q3FY21 (second consecutive quarter of recording a profit), versus loss of INR1,970mn in Q3FY20
In USA, retails grew by 25%, billings grew by 9%. This is largely due to supply chain challenges. Over the last 3 quarter, retails have outpaced wholesales by a huge margin. As such, inventory is much lower than normal levels.
48 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Auto business Auto business margins were resilient, despite supply issues.
Similar to tractors, system stock has dramatically reduced (down 50% YoY). So there is a good opportunity to re-fill the channel inventory
New XUV300 has also been received well. Currently sitting at only three digit dealer stock, implying good retail demand. XUV300 recorded 41% YoY growth in retail volume for Q3 FY21 and its current order book exceeds two months.
Success of Thar
o Cumulative bookings crossed 38,500 mark on 1st February 2021 with 6,000+ new bookings in January.
o Seeing 200 booking per day, with a long waiting list.
o Currently at 3k units per month production for Thar. Will ramp up to about 4k units per month by April-May. However, if demand sustains, may consider ramping up production even higher.
o Automotive subs (ex of SsangYong) have reported a profit of INR1.65bn with an RoCE of 11%.
LCVs
o The company has a very strong presence in up to 3t category.
o On the pick-up portfolio, system inventory is at 1000+ units, largely due to supply challenges. If company could produce more, they would be able to retail all of it.
o Retail demand is very strong, driven by better last mile connectivity and e- commerce. Supply chain challenges Shortage of semi-conductors impacted availability of ECUs, due to a high dependence on one supplier.
While M&M has managed this in Tractors (running at full capacity), the Auto segment is likely to be impacted.
Don’t expect situation to improve significantly till June–July.
In tractors
o Supply chain issues have not impacted production.
o M&M pre-builds inventory in the early months prior to peak season of May/June as well as Oct/Nov. For example, M&M will pre-build inventory from Jan to March to cater to the peak demand of May-June. Following that, will pre-build inventory again, to cater to peak demand from October.
o This year, they were not able to do that, initially because of the lockdown. Besides M&M’s plants were much more impacted due to COVID severity in Maharashtra.
o Finally, demand continued to remain strong even post July (post peak season) and hence, M&M once again did not get a chance to pre-build any inventory for the October season.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
o Opened the October quarter with only a few thousand tractors.
o Will now build inventory in Jan – March for the upcoming seasons
Very similar story in pick-ups. Demand has turned out much stronger than expected. Producing at peak capacity. But demand overtook peak producing capacity
In Autos
o M&M was unable to make BSVI transition in February and March of 2020, as certain imports did not come through (due to covid lockdown internationally).
o Started 1st April with almost nil inventory.
o As such, M&M was not able to build inventory due to supply challenges. However, as all other supply challenges were overcome, semi-conductor and steel shortage is now impacting them. Raw materials Steep increase in commodity prices (not seen in a very long price), partially offset by a sales prices increase (take in Q2FY21) and value engineering actions.
However, passing on the margin may be challenging given the extent of increase in raw material. EVs Will look at making larger investments in this segment
Made significant movement in the last mile vehicles. Mahindra Treo Zor for example. M&M believes that there is very clear cost-benefit in this segment. These products are better on a per km metric versus ICE platform. Once, the new Atom is also launched, M&M will have a complete portfolio on this front.
The company is already working on the eXUV500 (as a medium-term approach).
Finally, the born EV platform – will help M&M develop an EV strategy for a bouquet of products (in their core SUV products). This should prepare M&M to deliver products from FY25 and beyond. The company will look to develop more than one platform. Working with R&D centres in Detroit to develop these products. One-time items INR900mn - Investment subsidy received for the Chakan government. M&M typically receives this every quarter. However, due to certain changes in GST regulations, received a sizeable amount of subsidy in Q3FY21.
INR300mn - An insurance claim that was rejected last quarter was settled last quarter.
50 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Maruti Suzuki
Key highlights
Demand momentum continued in Q3FY21 as well, buoyed by festive season. Urban demand saw a pick up in the quarter, while rural sales continued to do well. Rural penetration at the end of the quarter stood at higher than 40%.
Auto sector has been seeing a structural weakness even prior to COVID as the volume growth had stagnated before COVID. MSIL is unsure how long the slowdown will continue. MSIL believes that a broad based economic pick-up is key to revive growth.
MSIL’s marketing team is still unsure of demand resilience (as well as underlying sentiment) and hence they are wary of taking necessary price increases. Company does not want to dent the ongoing demand recovery. Hence, they are taking very cautious and calibrated price hikes.
The company made full utilisation of the capacity to service demand, despite supply bottle neck
Steel / semi-conductor supply shortage
o It is a clear risk, which MSIL is monitoring on a very regular basis.
o So far, MSIL does not expect any risk to their production schedule due to the same.
At an ex-showroom level, took a price hike from INR6k to INR34k (including taxes). Price hike is effective from end of January.
Over 9MFY21, MSIL’s CNG sales grew by 18.9%
Commodity cost pressure remains unabated. It were witnessed in Q3 and are expected to be witnessed in Q4 – especially steel and rare metals
In Q3FY21
o Discounts were at INR20,185
o Exports revenue was INR13,180mn
o Sourcing from Gujarat plant – Plant has an annual capacity of 500k units and the plant is currently operating at full capacity.
o Royalty was at 4.9% (versus 5.0% in Q2FY21). By FY23/24, more than 95% of models will be priced at INR basis. Besides this, as volumes pick up, MSIL will also reap benefits of a volume discount, which should ease royalty rate.
o Financing penetration remain unchanged at ~80%.
Demand outlook
Post festive demand
o Contrary to expectation, post festive demand has been extremely robust. Order book currently is 215k vehicles. MSIL has not seen any fall in conversions.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
o MSIL is constrained by lower inventory at the time being. Channel stock at the beginning of January were 21k with very low factory inventory.
Replacement demand
o For MSIL and the industry, replacement demand saw a sharp fall. Share of replacement demand (for MSIL and industry) now stands at ~19% now from about 26% Q3FY20, as people continue to withhold car purchases. This is further exacerbated, by the fact that average age of pre-owned car has gone up from 8 years to 9.2 years
o Expect replacement demand to normalise over time, as demand bounces back post impact of COVID receding.
o Share of first time buyers has increased from 43% to 48-49%. Share of additional car buying has also been increasing by 2%
SUV demand
o Share of SUVs has gone up from about 27-28% to close to 32% now. Expect it to increase further to ~36% in the current year.
o This is the only segment where MSIL is losing share.
Commodity costs and margin update
In addition to precious metals, higher steel prices also weighed on margins. Given the demand environment, MSIL was unable to pass on the pressure due to commodity price spike.
In Q3FY21, saw ~300bps of impact due to commodity costs. Besides this, there was an impact of 30bps due to fixed cost incidence attributable to inventory correction. To a certain extent this was offset by cost saving initiatives, under control discounts and operating leverage as volumes were up QoQ by ~26%
For MSIL, impact of commodity prices comes with a quarter’s lag. Expect commodity prices to be higher in Q4FY21 as well as precious metal prices continue to remain high. Steel prices are also expected to remain high. Right now, difficult to quantify impact of commodity costs in Q4FY21.
Demand is still far below the peak (lower by 30%). While demand has seen recovery MoM since last 5 months, there needs to be a fine balance between volumes and pricing. Excessive price increase can dent demand.
Measures to offset commodity costs / preserve margins
o Steps taken to streamline costs are helping
o MSIL has also taken price hikes in the quarter, so expect margins to receive some benefit due to the same
o As demand increases, capacity expansion will also be a major driver of cost evolution. The last few years, MSIL has been increasing capacity. As capacity utilisation continues to increase, MSIL expects to see benefits of operating leverage to come through. MSIL believes at current production levels, it should start realising operating leverage benefits
o So far, marketing costs have also been kept under check to preserve margins. However, that said, MSIL can’t afford to under spend on this front
52 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
as it impacts future sales as well. These costs would increase going forward. Will therefore find other levers to lower margin impact.
Staff costs increase
o Spike in staff costs is largely because increments not given in the first half have started to come through
o Besides that, there was a one off – Had to make provision of INR200mn pertaining to certain retirement benefits
CAFÉ norms and Hybrid vehicles
Given limitation of charging infrastructure, MSIL believes an alternative is required to pure electric vehicles
MSIL is in discussion with government to try and delay the implementation of the CAFÉ norms, given the challenges due to COVID 19
Four major constraints to EV adoption
o Current battery technology makes cost of EV adoption very high. Battery cost is ~50% of EV cost
o Poor charging infrastructure
o MSIL’s research shows, consumers have a very high range anxiety.
o Parking hassles – In Japan/China more than 80% of cars are parked in the same spot every night. On compare, this number is at 12-15% in India
Hence, MSIL firmly believes that the path to electrification is via hybrids
Jimny
The company commenced the exports of the Jimny 4 wheel drive to Middle East and Africa.
Right now, targeted for export markets only.
Will study the Indian markets, before a decision can be taken to launch it in India.
For the time being MSIL is not exporting Europe, as there are a lot of non-tariff and regulatory challenges to exporting to that geography.
Focus on digital sales
Conversion ratio in digital sales is lower than the overall conversation ratio of ~12-15%.
That said, digital enquiries have gone up from 3% in FY16, to about 15% last year and close to 35% currently.
Digital initiatives have also helped lower launch costs
Company has recently amended its Memorandum of Association (MOA; signed in 1984), which did capture efforts to sell via digital measures.
In the current environment, MSIL has now introduced multiple measures to boost digital sales, hence amended the MoA to reflect the same.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Minda Corporatieon
Key highlights In Q3FY21
o Aftermarket division grew by 55% YoY and exports by 25% YoY. Growth in aftermarkets driven by better growth in target markets, customer friendly polices, etc. Going forward, expect this demand to grow by about 20%. Currently more than 98% of aftermarket business is domestic business. Focussing on markets like Latin America to increase share of exports.
o Content per vehicle increased due to BSVI in wiring harness, also boosted performance.
o Die casting business grew by 28% YoY (9MFY21 revenue stands at ~INR2,750mn versus ~INR2,900mn for 9MFY20).
o Delivered highest ever PAT in the company’s history.
Announced an interim dividend of 15% on face value of INR2 – translating to dividend of INR0.30 per share.
Supply challenges - Seeing demand softening across vehicles classes (2W, PV and CV) due to semi-conductor shortage. Besides that, seeing a general slowdown in 2W demand.
PLI scheme – MCL complies with all the minimum standards set by government to qualify for the PLI scheme.
Going forward, electric vehicle will be a key area of focus. Will work towards developing new (and unseen) products, solutions and complete systems.
Started production of a new product - Intelligent Transport System in this quarter. This system is majorly used for public transport (while include direction boards, mobile apps etc). Content per vehicle Already starting to see increasing content per vehicle due to 2W wiring harness business.
However, they also sell wiring harness for CVs and tractors, where the content growth is not as significant.
Besides this, 2W exports are still BSIV. Hence not seeing any content benefit on that front. In total, 75-78% of the total business has moved to BSVI, the rest is still BSIV. Capex For 9MFY21, have spent INR910mn. Some of this has gone to brownfield expansion towards expanding capacities in Gujarat. Rest is for maintenance
Going forward, will maintain capex at 4-6% of sales (as been the traditional range).
54 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Gross / EBITDA Margin Gross margin
o Going forward, spiking price of copper (this quarter and next one) will hurt margins. Customer indexation will not really be able to abate the impact of the same.
EBITDA margin
o EBITDA margin was positively by cost control measures, offset by raw material indexation (impact comes with a lag), product mix, labour productivity, higher cost of operations (premium freight for example) and transition to BS VI
o Improving traction in CV business, should be a margin booster in Q4FY21 and going forward
o Information & Connected Systems - RM lag has impacted EBITDA margins by 100bps. While MCL will be able to recover some of this price inflation from OEMs, since prices are still going up, there will be an adverse impact. Company has back to back arrangements with OEMs, which they are now have a re-look at so that they can gain from indexation benefits. Besides this, they are also trying to negotiate with their suppliers to change indexation from monthly to quarterly. For the time being, will making efforts to achieve the previous high (achieved in Q3FY20). Will take about a year to achieve this. New orders (in Q3FY21) Total orders won in the quarter were INR16,490mn (of which 60% or INR11,520mn are replacement orders). Typically orders once received, are executed after 15-18 months. Wiring harness has the shortest lead time of about 9 months. Mechatronics: Won orders worth INR,870mn (42% replacement). ASEAN business is doing well (have an order for INR500mn for locksets here). Die casting is also seeing good traction. However, it is very capex heavy business, so company is looking to optimise spend Information & Connected Systems: Won orders worth INR11,160mn (86% replacement). Of the total, INR8,858mn was for wiring harness business Exports: Of the total order book, INR2,241mn is for exports. Will look to form a new office in Europe, to strengthen their presence Wiring harness: Booked orders worth INR1,410mn in this quarter. The company is focused on localising production of wiring harness. The process is however time consuming, since a lot of customer approvals are essential for the same. Should start to see results of the same from Q3FY22. Capacity utilisation Die casting is 85% Locking system (for 2W) at 75-80% Wiring harness (for 2Ws) – 80% By vehicle class, utilisation for tractors is close to 100%; 3W/CV is at 60%. However have already started to see improving orders in CVs, so expect utilisation to improve.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Motherson Sumi Systems
Highlights Operations have normalised, with most facilities running at pre-covid levels.
So far, not seeing any slowdown in orders from carmakers due to semi- conductor shortage. Going forward, there could be some slowdown for a couple of months. But believe that inherent demand continues to remain strong.
Sustained improvements in performance of Greenfield plants with a continued focus on cost reduction and efficiency improvements.
Similarly, not seeing major impact due to second wave of COVID in Europe.
Managed to achieve meaningful cost reduction in fixed cost. This is an ongoing process. Besides that, with volumes coming back have been able to increase utilisation, which has helped margins.
Custom duty increase – MSS has a very strong local supply base and is also deeply vertically integrated. While there are some imports (as requested by OEMs), as such, there should not be a significant impact
FY21: Capex guidance of INR20bn (actual spend would be lower). FY22 outlay will also be around INR20bn. Current order book can be serviced by current plants.
Reorganisation – Post improvement in SMP, believe that the reorganisation should be EPS-accretive in FY21 (versus earlier guidance of FY22). Also, believe reorganisation will improve opportunities to cross-sell.
Seeing a lot of inorganic opportunities and evaluating them. While government grants did give some potential targets additional lifeline, MSS is now seeing that debt at some of these companies has shot up. Greenfield performance There is definitely more potential for improvement at both these plants.
While they broke even on EBITDA in Q2FY21 (maintained in Q3FY21), MSS believes there could be further upside still.
Improvement in SMP performance is not just due to Greenfields. Other facilities have also managed to curtail cost and boost margins.
In the next 3-6 months, there should still be improvements at Greenfields. Post that, expect these plants to perform in line with average margins (if not better).
For the time being, don’t envisage any more greenfield plants. But if there is a strong order book, then will not shy away from adding more plants. EV order book At EUR2.7bn as on September 2020 (21% of total SMRPBV order book) versus EUR2.4bn in March 2020 (18% of total SMRPBV order book).
MSS has not started execution of these orders.
Content is higher in EVs (pricing can also be potentially better – higher electronic content and light weighting).
56 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bumper, dashboard, mirrors, etc are some of the products being supplied. SMRPBV/SMR/PKC/India SMRPBV - With tooling inventory going down, have been able to lower working capital in this business.
SMR - Looking at new avenues of growth in SMR (including newer markets including Japan, Russia and South Africa). Seeing a lot of opportunities to grow in these market.
PKC - Seeing revival in order booking in international markets.
India business – Ex-DwH, standalone margins are close to 18%. Raw materials RM costs have been spiking.
Wiring harness business has passed these through.
But other businesses will look to optimize costs (increasing bundling, automation, etc) to keep costs in check.
Impact on plastic price due to crude – so far not seeing a major impact on plastics, as the company uses very specialised plastics (factory-made) Net debt Standalone net debt has increased from INR14,190mn (31.03.2020) to INR46,390mn now.
This is due to inter-company debt movement. This is because, MSS has decided to increase debt in India to take advantage of the lower interest rates
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Suprajit Engineering
Highlights Performance across businesses was very encouraging.
Commodity cost pressure is tremendous. Inbound and outbound freight rates are a significant challenge.
ECU shortage has impacted WESCON. One of the sensors they use, is seeing some supply challenges. Team is confident of overcoming these challenges
Near-term challenges – Spiking commodity costs, increase in shipping and port costs, and above-mentioned ECU shortage
Direct exports doubled in this quarter (although on a lower base). Besides, exports in January were also very strong.
Overall, group-level debt has reduced from INR3,803mn on March 2020 to INR3,128mn in December 2020.
In order to increase distribution to shareholders the Board has approved a policy to consider buybacks once in 2–3 years. Coupled with dividend, overall distribution to shareholders would aggregate 30–40% (versus 20-30% earlier)
Demand outlook
o The initial assessment (a couple of months ago) was that demand was largely due to pent-up demand. However, even post-festive, outlook looks better than expectation.
o The outlook for February and March remains good. That said, January figures (retails were lower YoY) is a slight cause for concern.
o SEL’s performance has also been helped by lowering share of unorganised market, increasing distribution network and also quality of products.
Capex update
o Two urgent (and additional) capex spends, which will be incurred are: the domestic cables and the Phoenix lamps business to the tune of INR250mm totally (detailed below).
o This is to cater to better-than-expected demand and ensure that there is enough supply in the next peak season.
Inorganic opportunities – Pursuing them continuously. Post-covid-19, there are multiple opportunities.
In Europe – seeing some (5-7%) reduction in schedules from VW and BMW, due to covid-19. However, both these customers are confident of coping up lost demand when situation normalises.
No meaningful change in content per vehicle in EVs versus ICEs. Raw material and pricing So far, no change in pricing. But SEL is now going back to customers to renegotiate pricing (given raw material inflation).
The company also plans material cost very judiciously.
58 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The company is also negotiating with its own suppliers to lower input cost.
That said, margins next quarter will be impacted adversely due to raw materials, especially in the global business wherein SEL does not have any cost pass- through. Domestic cable business The Pathredi and Manesar plants were marginally impacted by farmers’ protests.
Rest of the plants were operating at more than 85% capacity.
Will increase capacity at the Narasapura plant. Capacity increase in cables will be largely by re-organising of capacity. May add about 5mn units of annual capacity.
Aftermarket is showing tremendous growth (in this quarter both cables and Phoenix have shown 25% growth). To capture this potential, the company is putting in place a centralised fulfilment centre.
Cable market share - In 2w – 65% and PVs is at 30%; overall, in India, market share should be 40–45%. Export cables Still struggling with certain challenges due to Brexit (container shortages, port issues, etc).
Two of the key customers - VW and BMW – have not been affected at all. Wescon/SENA Operation Catalyst (launched to improve performance) has been paying off.
The company has set weekly/monthly calls/ reviews to ensure that the business is on line.
Gear box for seeding cable is a new product introduced by this business.
COVID still weighs on the outlook and creates uncertainty. Mexico remains in the red zone.
Juarez and Wichita are performing better than expected. Exports from India are also picking up, which is aiding margins.
Margins in this business were impacted due to an adverse mix. Besides that, the company has given some pricing discount to customers for certain volumes. Currency has also adversely impacted margins.
SENA margins outlook – Should be able to deliver a double-digit margin. Phoenix Lamps (PHLL + Trifa + Luxlite) At PHLL – Noida and Chennai plants are operating at full capacity. The company needs to expand capacity to meet demand, so will undertake those activities. Will add capacity of about 7mn lamps (HS1 lamps) at the Noida plant.
Noida plant recorded double-digit volume growth.
Looking at YTD margins of Phoenix business is not accurate as the Chennai plant was acquired last October (from Osram). Hence, it is not a like-to-like comparison.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Offtake from Osram continues to remain healthy. Besides buying from the Chennai plant, they are also buying from the Noida plant.
Trifa + Luxlite
o Seeing a lot of challenges due to COVID second wave in Europe.
o Aftermarkets (which is a forte of these two businesses) is seeing some weakness due to COVID. Hence, there is a drag on margins. Currency 50-60% of currency is typically hedged.
If INR appreciates significantly, then there will be a short-term impact on dollar revenue.
But, on the other hand, it will help lower pressure on imports.
So, on a net basis, SEL is reasonably protected.
Besides that, if there is a significant change in currency, the new contracts will price in the risk. There could be intermittent quarters where currency can have some adverse impact
60 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Motors
Key highlights This quarter saw an improvement across all business divisions.
Net automotive debt down to INR547bn from INR615bn last quarter
Promoters exercised their warrants amounting to INR26bn in Jan 2021 (exercised yesterday) increasing Tata Group shares (voting) to 45.82%
JLR delivered a positive free cash flow (FCF) of £562mn (a Q3 record)
Growth remains a key area of focus. Capex will therefore be managed dynamically to manage debt as well. Net debt neutral target in 3 years is key diktat. For eg, in India, originally planned capex of INR15bn, expect to end the year with spend of ~INR18.5bn. Spike is to cater to surge in demand. TML (domestic and JLR) will not compromise on growth. JLR business update The current quarter saw ~750bps YoY swing in favour of LR’s (share of ~84%). This is driven by higher share in USA and China sales. Also sale of RR RRS and Defender is higher in US and China. Expect a normalised mix as EU/UK demand normalise. Currently only 60% of retailers are operating in these region as compared to 95% in China and USA. Normalized run rate for LR mix should be around 80%.
Q4FY21 will be a true representative of sales mix (regional and model wise) as currently more sales were in China and US as other regions are not fully operational
EBIT positively impacted by certain lumpy impacts (reversal of CO2, improvement in residual value in US for example) to the tune of ~1.5%.
Normalised EBIT margin is around 4%, which was the guidance pre-covid. The decision on new guidance (upping the guidance) will be taken only after 2 months post normalisaton
For the time being, JLR is not meaningfully impacted by semi conductor shortage. That is because JLR is diversifying supplier base. Plus as a niche player, JLR is not meaningfully impacted
In 2021, JLR will bring significant model upgrades for Jaguar E-Pace, F-Pace, Velar and Land Rover Discovery.
Defender – JLR is targeting a minimum of about 5k-6k units per month. Broke that barrier in Q3Y21. Order book for Defender is at 14k units, so expect to maintain the target of selling 5k units per month
Current weakness in Discovery sales is due to – 1) Cannibalization due to Defender; 2) focus to resume post MY21 rather than MY20; MY21 Discovery will be a significant refresh.
XE volumes are also expect to improve however with different positioning and focus. IN Q3FY21 XE sales were around 500 units only.
Expect UK retails to be significantly higher in Q4FY21 - partly due to seasonality and partly due to base effect.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
However as of date expect Q4 retail sales to e marginally higher than Q4 as EU/UK are facing intermittent lockdown. Even JLR’s Halewood plant is facing production issue due to lockdown. Have inventory in the system, hence there will be a drawdown in Q4
Inventory levels achieved in Q3FY21 are a sustainable run rate. Will aim to maintain inventory at this level
R&D capitalisation is currently at about 64%, which is expected to go back to around 70%. It was low in Q3FY21 as certain employees were still on furlough
CJLR update
o CJLR loss in Q3 primarily reflecting reserve changes. On a YTD basis, margins continue to improve.
o Company has aspirations to increase sales in China, but won’t compromise on quality of sales.
o CJLR has 2 months’ worth of stock, which is higher than usual. As a result, discounts have spiked. Company is working to improve this situation. Should see impact of company’s steps over the next 6 months. However, the stock of imported vehicles is very low
o Will target about 5k units per month sales going forward, with the aim to improve
VME and warranty cost
o VME is reducing with headline VME at 5% and underlying VME at 5.7%.
o Most of residual value (impacting VME) reserves has been unwound. Besides with COVID reserve reversing, expect some benefit to VMEs.
o Going forward, this should help VMEs, which should be at around 5% level.
o However, regional and model mix would still continue to impact VME.
o Warranty in the quarter was at 3.2% (lower than the 4% benchmark) as share of 2020 year models increases. Expect the benefit of these new models to flow through for at-least 3 more years.
o Going forward, expect VME and warranty together to be less than 10- 11% of sales
GBP appreciation o Adverse impact already flowing through. In the current quarter, negative impact was £46mn, which was however more than compensated by JLR’s hedge.
o In the near term, expect GBP to continue having a negative impact.
o JLR hedges 75% of 12 month revenue
EVs and regulatory compliance
o Share of PHEVs is increasing in the overall mix, as new models become part of the overall portfolio. In UK – share of PHEVs is 30%. Expect share of PHEVs to be higher in Q4FY21
62 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
o In FY21, 12 out of their 13 nameplates are already electrified (includes BEVs/PHEVs/MHEVs)
o As a result of Covid sales impact and PHEV, MHEV timing changes, JLR has reduced the provision for EU CO2 fines for CY20 from £90m to £35m, reflecting increased BEV, PHEV and MHEV deliveries, in the last quarter.
o JLR expects to be compliant across all regions in 2021.
Brexit
o Deal agreed, is the deal JLR was hoping would come through
o However there will be huge amount of customs declaration and paper work that will need to be undertaken. Company is aggressively working to ensure that vehicle delivery is smooth and relatively unaffected
o Expect to satisfy Rules of Origin criteria (55% local sourcing for ICE, 40% for EVs, increasing from 2024, with a one year phase-in). Within the rules of origin, ICE and MHEVs are classified together, while BEVs and PHEVs are classified together.
Covid-19 update
o In USA - 95% retailer showrooms open, 65% are fully open
o In UK - Retailer showrooms closed at present. JLR working to sell via remote / digital methods
o In Europe - Restrictions vary by country, some in full lockdown (e.g. France and Germany). 60% retailer showrooms open, 53% are open fully
o In China - 95% of retailer showrooms fully open
Outlook
o Expect to deliver positive FCF in Q4FY21
o For FY21, targeting – 1) Positive EBIT margin; 2) Investment under £2.5b; and 3) Near breakeven cash flows
o Q4 retail volumes will be marginally higher than Q3 given the current lockdown scenario.
Hedging
o More than 2/3rd of USD and RMB are hedged. EUR is hedged at 50%
o About 40% of commodity costs are hedged India business Off the INR60bn cash savings targeted, ~INR51bn have already come through.
Overall, while M&HCV sales have picked up, PV sales have improved better, which is weighing on overall mix / cash profits. That said, within PVs seeing mix improve (selling higher number of Harriers for example). However as overall sales and mix starts to improve (CV sales are also expected to improve), seeing value growth faster than volume growth.
Current quarter’s revenue does not include ~4k units (M&HCVs) sold to the AP government.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
M&HCV business
o Seeking CV market share improve across all 3 segment (M&HCV, ICV and SCV), as supply chain issues start to ease.
o M&HCV Demand - Recovery led by MHCVs and ICVs as demand is driven by mining and infrastructure activities. Towards the end of Q3FY21, seeing a pick-up in demand from small fleet operators also (from M&HCVs). Seeing a revival in urban demand as well. So far, not seeing any demand surge in replacement demand (BSIII and IV owners) as those customers are still evaluating the performance of BSVI vehicles. Expect this to pick up, as consumers become more aware of the benefits (lower TCO) of owning BSVI vehicles versus BSIII and BSIV
o Fleet utilisation is at 90-100% levels
o Buses and vans demand remains muted (an area of concern).
o Semi-conductor update – Seeing some shortage from Q3FY21. Could impact volumes in the current quarter. Company is constantly engaging with semi-conductor manufacturers to lower the impact
o Raw material price hike is a cause of concern. Company has taken a price hike in Q3FY21 and already taken a price hike in early Q4FY21 to negate the impact of the same. Besides this, ongoing cost reduction efforts will also help.
o Financing availability - seeing a good pick up in financing. Financiers have come up with multiple new and innovative products, which has helped improve share of financing.
o Per company’s internal sentiment index, TML believes that current sentiment is still below FY19 (previous peak)
PV business
o An entirely refreshed product coupled with strong measures to improve front end savings, is helping boost volumes. Short term market share target is to reach double digits (about 8% now). The newly launched Safari and the upcoming Hornbill will help achieve this target.
o Action on 3 key fronts – 1) Demand generation – strong focus on retails and supply planning; 2) Channel partner margins were enhanced, which helped boost retails and lower strong on working capital and 3) Economies of scale was biggest focus for margin improvement
o Very low inventory in PVs, as company is able to retail all their wholesales. Expect Q4FY21 to also see good demand.
o Company has tweaked pricing to ensure that demand has moved towards more profitable models.
o EBIT has improved to -6% versus -20% in Q3FY20. Operating leverage has been a key driver of demand. Focused on achieving EBIT breakeven in this business.
64 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
EV margins In India – contribution margins for EVs is in line with average category margins. So don’t see it becoming a drag on margins. Besides, as volumes recover expect margins to improve
In JLR – Q4 volumes will be higher and margin will be lower due to higher volume contribution from EU/UK and also EVs Tata Motors Finance Made a PBT of INR550mn and a pre-tax RoE of 7.3%. AUM now at INR411bn
Disbursals grew Q-o-Q by 35% to INR44.5bn, and on a Y-o-Y basis up by 14% led by higher CV sales
Collection efficiency has been consistently improving
GNPA at 5.6% is as per IFRS.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Banking
66 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Aavas Financiers
Asset quality
Gross – stage 3 at 1% - this includes 0.59% given Supreme court dispensation – so while these accounts are not classified as GNPLs but are moved to stage-3 and provisions are created on them
1+ DpD has risen to 8.21% from 6.2% in previous quarter, this was in line with expectations
This 1+ DpD is driven by Maharashtra which is 12% and rest is at 8% levels. The similar trend is witnessed in Gross stage-3 assets with Maharashtra @1% plus while rest is at sub-1% levels.
The management expects this to normalise in subsequent quarters, as a) SC orders comes then unwind will be faster b) underlying industry of hospitality and travel are seeing signs of improvement.
Within this 1+ dpd, the 30-90dpd is 3.8% in December versus negligible in September, 2020.
10-15% slippages from 1+ dpd is already reflected in Gross-stage-3
Collection efficiency has increased from 95% in September to 98.8% in December, 2020 ( in line with pre-COVID levels) - this is in line with estimates.
Further to this the company highlighted that as of September 5.8k accounts which did not pay the instalment has come down to 2k account as at December, 2020. Moreso, most of these accounts are in early buckets.
An additional provision of INR42.9mn has been made to deal with stress caused by covid; This takes total additional provision to INR190.3mn as of Q3FY21
Growth momentum
Continued improvement in economic activity and people getting used to new normal , the growth has been improving. The company expects to trace 25% plus AUM growth or FY21.
The income from securitisation was higher this quarter, as EIS spread of the pool sold is 6.5%.
10bps of benefit from funding cost was passed on to the customers starting 1st Jan, 2021 and some will also be passed between April and May.
On liquidity the company maintained that in normal steady state environment they will maintain liquidity of 3-4 months , which was ramped up to 7-8 months post COVID stress.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Axis Bank
Asset quality Collection efficiency at 96% levels. Collection efficiency levels across all segments are back to pre-covid levels.
Non-specific provisions as a proportion of Gross NPLs at 116%
Restructured loans amount to INR27.09bn (0.42% of advances). The bank is not granting restructuring requests going forward.
Coverage on restructured assets at 26% levels, 100% coverage on unsecured retail loans.
As per internal stress test, bank estimates for slippages are down 45-50% from original estimates
Pro-forma slippages of INR67bn during the quarter, of which INR8.2bn from BB and below book.
The balance are from the retail segment and split 50-50 between secured and unsecured.
The management expects slippages in Q4FY21 to be lower than current levels.
Average ticket size in the BB and below book (fund based) at INR600mn
Write-offs during the quarter are pertaining to corporate accounts. Business segments Wholesale:
83% of the portfolio rated A- and above
94% of incremental lending to A- and above rated corporates
71% of incremental lending to AA and above rated corporates
SME:
80% of the portfolio rated A- and above
84% of incremental lending to A- and above rated businesses
Average ticket size of INR35mn
This portfolio is spread across 35 sectors and 120 locations
Sanctions under ECLGS scheme at INR105.8bn, of which INR88.75bn has been disbursed.
Sanctions under ECLGS 1.0 scheme at INR82.89bn and INR5.86bn under ECLGS 2.0 scheme
Sanctions under this scheme has been done on the basis of due diligence as well as bank’s underwriting framework
Retail:
83% of incremental lending to mortgages
68 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
LTV on mortgages is 58%
The bank remains cautious on unsecured retail segment
Collection efficiency at 98% levels (94% as at Sept end and 97% during pre-covid)
However, bounce rates higher than pre-covid levels Operations Profitability is lower by INR14bn on account of prudent accounting policies and excess provisions.
Staff cost has registered 19% growth QoQ due to increments and bonus.
Non-staff cost has gone up due to higher collections costs, promotion expenses and normalization of business.
Fee income reversal from credit card business at INR1.34bn
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bank of Baroda
Asset quality Restructured book came in at 1.38% and excluding NPA accounts it stood at 0.8% There are 6 accounts with amount outstanding over INR5bn The bank holds Covid-19 provisions of INR17bn Collection Efficiency at 93% (91% last quarter) and over 95% in corporate loan book. International slippages came at INR40bn, of which INR27bn was from a single account which had already slipped earlier and upgraded. This account is a chemical company from the middle east The bank expects normalized slippages to be in the 1.5-2% range. Pro-forma slippages for the quarter was INR86.3bn – INR6.8bn from Agri, INR56.7bn from Corporate and INR22.8bn from Retail The major segments from corporate segment were from Construction, Power, Textile, Real estate etc Direct exposure to DHFL is INR20b and of this the bank expects recovery of INR8bn The management expects more stress in MSME and retail segments as compared to Corporate segment. SMA-1/2 (above INR5bn) is at 4.4% of the book; ex of pro-forma slippages it came at 3.6%. Business segments Emerging business will be from secured retail loans and higher rated corporate lending 75% of incremental lending is to A rated/Govt entities/PSUs 73% of retail accounts have a credit score of 725 score or above Unsecured retail is less than 1% Gold loans are 20-21% of overall Agri loans, and form more than 40% in incremental Agri loans. ECLGS sanctions of above INR80bn More than 50% of incremental MSME loans towards ECLGS Other highlights The bank is planning a QIP during this quarter of INR20-40bn Merger The merger with Dena and Vijaya Bank has been complete with all branches being migrated to the core platform of Bank of Baroda as at Dec 12th, 2020. The bank aims to achieve INR100bn savings in the next 5 years 1300 branches of the combined entity have been closed 1000 low performing ATMs have been shut down
70 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bajaj Finserv
Current environment
Momentum is picking up with improvement in broad economic indicators.
Continues to focus on adopting digital means as a way of conducting business.
Digital penetration has improved across all processes for both insurance arms.
General insurance (BAGIC)
GWP increased 11% in Q3FY21 compared to industry growth of 2% as the company continues to grow in preferred areas of private cars, two wheelers and property.
Motor insurance has turned around and is now gaining decent traction.
CV sales fell 19% driven by high exposure in the profitable passenger carrying vehicle segment, which is still below pre-covid level.
Demand for retail health insurance has moderated as Q1/Q2 was supported by covid related policies along with recent price hike by the company and peers.
Remains cautious on group health.
Fire continues to drive growth by rate increases; more profitable segments have seen lower rate hikes.
Crop has remained stable over the past six years; underwriting is important here as it is not a float business–depends heavily on reinsurance due to inherent volatile nature.
As a company, wants to be active in all lines of insurance.
Combined ratio improved by 750bps YoY in Q3FY21 to 96.1% primarily due to lower claims.
Motor OD claims are almost at pre-covid level as the situation on ground normalizes.
Court closures have led to delay in Motor Accident Tribunal cases, TP claim settlement and could lead to interest cost on such claims.
Non-covid retail health claims are inching back to pre-covid level as people have restarted going to hospitals for non-emergency services.
Covid claims have reduced significantly over the past few weeks and are in proportion to overall health market share, that is 4%.
Health claims should be seen in aggregate as people were avoiding going to hospitals a couple of months back for procedures which could be delayed.
Health business is at a nascent stage and the company has committed INR1bn to build this forward. This will eventually help customers in their healthcare journey right from booking a consultation to making a claim.
Life insurance (BALIC)
Continued to focus on sustainable and profitable growth by maintaining balanced product mix and investment in retail growth engines.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Optimistic going into Q4, typically a strong quarter.
Demand for ULIPs has improved on strong equity markets.
Protection has seen moderation due to price hike and strong Q1/Q2.
Guaranteed products continue to do well led by customer preference.
Protection will continue to be an important part of strategy.
Comfortable with current hedging strategy on interest rate risk pertaining to guaranteed products.
Institutional business is in growth mode with momentum build up in new partnerships like Axis Bank, IDFC First Bank, RBL Bank and India Post Payments Bank.
Consistently reported industry beating individual rated premium growth.
Group protection business fell 12% due to lower disbursements by banks and NBFCs.
Persistency ratio in near term cohorts (13th and 25th month) dipped, while other cohorts (37th, 49th and 61st month) held up well.
Slight dip in persistency for ULIP policies above INR0.3mn.
5% dip in persistency for segments where unemployment has been affected.
Self-employed segment has also been affected as people prefer to conserve cash to invest in business or set aside for liquidity.
72 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
DCB Bank
Asset quality Guidance for restructured portfolio at upto 5% of loan book. More requests are coming from LAP and CV and lesser from Home loans and SME/MSME.
Restructured accounts upto Dec end are at INR6.8bn
Accounts under NPA standstill are INR4.48bn for which the bank holds Covid-19 provisions of INR2.3bn (INR860mn created in this quarter). For these accounts, adequate provisions have been made but not interest reversals.
The bank aims for steady state credit cost of 50-55bps
LGD for the bank not beyond 30-35% as it deals with mostly secured business.
The management plans to make provisions depending on evaluation of situation/portfolio from a time to time basis. Currently they believe there are adequate provisions for the potential stress.
Recoveries in the quarter at INR300mn and the management expects this run rate to continue till the time legal proceedings/court processes resume. Business segments and operations Target segment for the bank has been small ticket size self-employed secured loans.
The bank aims to garner more small ticket size retail term deposit in the range of 0.15-0.2mn
Steady state NIMs of 3.6-3.75%, Opex/Assets at 2.2%
The bank does not aim to lend under ECLGS scheme to unviable borrowers.
Focus areas are Gold loans, home loans, Tractors, KCC
Increased focus on home loans (bank has increased workforce for the segment)
The bank maintains cautious stance on Corporate, and measured approached new SME/MSME business
Stabilize CV business over next 1-2 quarters and then build on it
The bank aims to achieve RoA of 110bps and RoE of 14% in 4-6 quarters.
Unsecured book comprises of BC/MFI/Fintech
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Federal Bank
Asset quality Restructuring expectations are at INR15-16bn, much lower than expectations of INR35bn earlier.
Do not expect loss rates to be not worse than 10% of original loss rates in restructured loans.
Retail restructuring is 50-55% in home loans and the balance is LAP
More than 90% of restructured loans are from the moratorium book.
Steady state PCR at 60-65%
SMA book is at 2.5-2.6% (60bps higher than pre-covid)
Slippages (ex- ILFS) amounted to INR2.34bn in Q2FY21 and INR6.29bn in Q3FY21
Interest reversal (INR730mn) on pro-forma slippages has been accounted for.
Collection efficiency ex of pro-forma NPAs is 95% as at Dec 2020, same as last quarter Business momentum Gold loans, auto loans, housing loans are seeing good demand and Retail and digital started have started picking up in the quarter.
Corporate loan slowdown due to softer working capital cycle and unfeasible pricing. The outlook is positive as working capital cycle is picking up and liquidity is easing.
Sanctions under ECLGS total to INR26bn
Guidance for credit growth at 8-10% for FY21
On track to achieve the retail-wholesale mix of 55-45% in the next 2 years.
Gold tonnage has gone up by 45 metric tonnes (20-22% YoY in tonnage terms, 60% + YoY in value terms)
Gold loan LTV is 72%
For Commercial banking, FITL sanctioned is INR540mn.
Strategy for credit cards is to start off with issuances to staff on a pilot basis followed by existing customer base and later to new customers. Operations Fee income supported by gold loan processing, higher cross sell and some opportunities in the corporate banking.
Staff expenses were higher by INR4.3bn due to wage hikes and gratuity provisions. Expect this expense to rationalize in two quarters if yields remain constant.
The bank does not have plans for capacity build up in the near future.
Expects margins to be in the range of 3.15-3.20% in the near future.
74 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The bank has INR10bn spends in debit cards, ranking 4th in the private banking space, which provides good opportunities in the fee income space.
The bank aims to reach RoA levels of 1.1% Other highlights There are no plans of capital raise in the immediate future but it will be considered during H2CY21
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
HDFC Bank
Asset quality Restructuring requests to the tune of 0.5% have been received by the bank. The bank has followed a policy of providing restructuring to all customers applying for the scheme.
The bank doesn’t expect higher future corporate restructuring due to ICAs.
Some portion of restructured customers are included in the pro forma GNPLs.
Pro forma slippages of INR51bn during the quarter.
The bank holds provisions (including specific/general provisions/contingent provisions) of 260% of gross NPAs and 140% of pro forma gross NPAs.
If the bank had classified borrower accounts as NPA after August 31, 2020, pro forma gross NPA ratio/ net NPA ratio would have been 1.38% / 0.4% as at December 31, 2020 (vis-à-vis 1.37% / 0.35% as on September 30, 2020)
Interest income reversal on pro forma slippages has been carried out. Business performance Collections have been improving QoQ and stood at 97% at end-December versus 95% at end-September. Pre-covid-19 collection levels were a little over 98%.
The bank added liability customers to the tune of 2mn in the quarter.
Amount sanctioned under ECLGS 1.0 is INR221bn and under ECGS 2.0 it is INR5.8bn.
Retail disbursals crossed pre-covid-19 levels.
Wholesale and SME disbursements are on a par with pre-covid-19 levels.
The CASA ratio stood at 43%. Performance by segment Corporate loans
New to bank customers added during the quarter are 2,000 (up 30% YoY).
Collections for the quarter increased 11% YoY while December collections were up 20% YoY.
60% of the portfolio is rated A and above.
79% of externally rated portfolio rated AA or above, 90% rated A and above.
SME loans
SME limits’ utilisation steady around 70%.
The bank expects 2.3% of the book as potentially stressed versus expectations of 3% in September.
FITL in SME is 0.7–0.75%.
Retail loans
76 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Home loans: Good demand on the back of stamp duty cut, fall in interest rates.
Gold loans: Good demand as gold prices are at record highs.
Auto loans: On an upward trajectory; car sales volume up 32% sequentially amid festive demand.
Unsecured loans: Increased sourcing from internal customers, government employees and higher market share in higher-income segment.
Strategy for cards is to increase customer engagement and spends.
Merchant acquisition up 20% QoQ.
MFI: The bank had a cautious stance earlier, but expects to reach normalised run rates from January. Operational performance Cost/Income was 36% for the quarter, but will revert to 38–39% in the near future driven by promotional expenses and investments.
On the restrictions imposed by the RBI on December 2nd, the bank has made progress as per the plan provided to the regulator. The bank expects to complete the process in 10–12 weeks, which will then be subject to RBI inspection.
Average LCR was 146% for the quarter. Macro outlook House view of GDP of -7% to -7.5% for FY21.
Core inflation of 5.5%, expect it to reduce to 4–4.7% in Q4FY21.
Expect the RBI to keep rates constant till the end of FY21.
Expect the RBI to use OMOs to manage the yield curve.
The fiscal deficit is expected to touch 12.3% of GDP for Centre and states.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
HDFC Life Insurance Company
Business performance
Optimistic about sustained performance on key metrics backed by improving economic environment
Confident about beating industry growth and expanding market share
Health, life and need for annuity are some of the top requirements on customers mind
Aim to simplify customer buying and service experience
Continue to invest in technology and training of employees, agents; Investment in tech helps in cost efficiency and convenience in dealing with customers
Overall Covid claims received well within estimated range and hence there is a positive impact on mortality experience
October, 2020 was a peak in terms of claims; Still monitoring the situation closely
Usually there is a lag of 6 to 9 months after the pandemic for sustainable protection demand
Continuously strive for new business premium growth and upward trajectory in VNB margin as vaccination drive begins and economic momentum strengthens
Tax is no longer a reason for people to buy insurance; Its #7/8 reason and seasonality has also reduced with Q4 sales slightly higher compared to the rest of the year
Younger people prefer to buy term while people above 45 years prefer savings led protection
Several levers available to grow VNB margin – Product innovative features, cost, persistency, risk based underwriting – all these adds bits and pieces to margins
Huge opportunity in retirement products
Product structure
Focus remains on maintaining a balanced product mix
Muted sales in protection in Q3FY21 due to a cautious stance taken on underwriting
Aims to build the business brick by brick by taking good quality business
Increase in price by reinsurers is an early warning to be careful with respect to quality of business
Launched a new term product yesterday with innovative features and will help target the protection opportunity
Searches on term insurance / protection have started to gather momentum again since Dec
Protection opportunity remains extremely strong and nothing has changed from a medium to long term perspective
78 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Will remain calibrated in the short term to avoid taking undue risk on capital along with reinsurance capital
It is difficult to price a pure term product in the middle of a pandemic
Annuity business has done really well; Confident that this will become a bigger product than protection over the medium term
Annuity continues to do well with a 42% growth
Huge potential in retirement related products
Persistency on ULIP has shown some stress; However, there is still a positive variance due to stronger assumptions taken last year
Intensity to sell ULIP remains low relative to other products as it is a low margin business
Balance mix to provide natural hedge against mortality and interest rate risk
Interest rate sensitivity continues to be range bound
13 month persistency of guaranteed products is slightly more than 90%
Non-par savings has been intentionally cut down due to spirit of maintaining a balanced product mix; There is ample demand to grow at a higher pace; Hedging is not an issue as the company is perfectly matched in both cash flows and duration
Participating products continue to do well with the momentum in Sanchay Par
Distribution mix
Focus remains on having a balanced distribution mix
All distribution channels are encouraged to sell the entire product suite and not focus on a select category only
Strong growth in banca channel Within banca, hdfc bank does well maintaining market share
Among banca partners, HDFC Bank continues to do well with share of HDFC Life stable
Agency channel has started to pick up momentum and is contributing similar volumes as Q3 of last year; Reasonably confident of ending the year with a positive growth
Continue to work with new partners like Yes Bank / Bandhan
Targeting new customers through online channel
Focus remains on expanding to tier 2/3 cities
Continue to strengthen and enhance distribution mix by constantly adding partners, agents
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ICICI Bank
Asset quality Accounts totalling INR82bn have not been classified as NPLs as per SC’s directive.
INR75.2bn were from retail and the balance from corporate and SME portfolio.
Conservative provisioning policies of providing higher in early bucket accounts have led to higher provisions by INR21bn.
This provisioning policy is going to continue going ahead.
New provisions of INR30.12bn created for pro forma NPAs and INR18bn of earlier provisions have been utilised taking the balance contingency provisions at INR99.84bn.
The total of all excess provisions (including excess standard provisions, contingency provisions and covid-19 provisions) stands at INR164.02bn (2.3% of book). Management believes these provisions should be sufficient to cushion any probable stress.
Restructured accounts (ex-NPA) were at INR25.46bn (0.4% of book). Of this, INR8.37bn were from the retail segment (provisions made of INR3.85bn).
Corporate and SME accounts under resolution are forming a part of the BB and below book.
The bank holds provisions of INR3.8bn, which is higher than the requirement as per the RBI’s guidelines.
BB and below book has four accounts above INR6bn in industries of construction (two accounts), telecom and power.
Steady state credit cost at 1.2–1.3% of loans.
In domestic corporate book, overdues are less than 2% (3% at Sept end).
Business banking is performing at pre-covid-19 levels.
Retail portfolio overdues are 1.5%, higher than pre-covid-19 levels. Business segments Till Jan 27, the bank had disbursed INR120bn under the ECLGS 1.0 scheme and disbursed INR6bn under the ECLGS 2.0 scheme.
One-third of it is from the SME/BB book.
The bank aims to bring down its overseas portfolio to NIL in a systematic way.
The overseas non-India linked corporate portfolio reduced by 48% year-on-year from USD3.13bn at Dec 31, 2019 to USD1.63 at Dec 31, 2020; decreased 14.1% sequentially at Dec 31, 2020.
On the growth front, the bank will lend to clients that fulfil the returns criteria outlined in the bank’s risk management framework. The bank is not targeting a set growth in the portfolio.
Proportion of the NBFC and HFC portfolio internally rated BB and below or nonperforming at Dec 31, 2020 was about 1%
80 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
About 13% of the builder portfolio at Dec 31, 2020 was either internally rated BB and below or classified as non-performing. Operations The bank will continue to build its franchise leading to higher employee, technology and business expenses.
Debit card transactions are falling but UPI transactions are increasing, still providing data to the bank for customer profiling and identifying new opportunities.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ICICI Lombard General Insurance
Current environment
High frequency indicators like E-way bills, motor registration, GST collection are encouraging and suggest economy is on track to grow in coming quarters
General insurance industry has fared better compared to other industries in terms of recovery
ICICI Lombard will continue to outperform industry growth and therefore improve market share going forward
Bharti AXA merger is on track and currently the company is awaiting CCI approval; So far INR0.36bn has been spent on the deal
Regulator has pro-actively implemented several measures to boost wellness and widen the health portfolio in terms of coverage; Simultaneously they have allowed insurance companies to hike prices where there is a need
Continue to strive for further digital adoption in business operations from sourcing of policies to claim settlement
Significant investment in technology and enhancing people ability will lead to long term benefits
Company is well positioned to navigate through the chaos and remains focused on long term wealth creation for shareholders through prudent risk selection and constant profitability
Launched dedicated website for small and medium businesses; first in industry
Growth of 9% in GDPI due to focus on preferred segments
Have revised HR policy allowing employees to work from anywhere post the pandemic in a secure business environment
Remains focused on increasing distribution network to penetrate tier 3 cities
Whenever growth comes back, there is always an issue of upfronting of expense as the benefit is realized over the next few results – much like new business strain for life insurance companies with a shorter duration
Health business
Health insurance continues to do well due to the pandemic; However growth rates have moderated in current quarter compared to the previous one
Retail Indemnity business grew by 26% for 9MFY21
In Q1 the company grew at 25% compared to a growth of 24% for the industry
In Q2 the company grew at 35% compared to a growth of 42% for the industry
In Q3 the company grew at 17% compared to a growth of 23% for the industry
Loss ratio of 83% for retail health indemnity in 9MFY21 compared to 70% for 9MFY20 – increase is mostly due to covid claims
82 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Loss ratio for corporate indemnity is higher but comes with a much lower cost of acquisition (low single digit); In case of retail, the trend is opposite as the cost of acquisition is high while loss ratios is better
Slight moderation in Covid claims reported in the month of December
Claim intimation for non-covid claims has started coming back; This is something which was expected to happen with reduction in covid claims
Retail Benefit business continued to suffer in current quarter due to low contribution from ICICI Bank as the Bank plans to focus on scaling up core businesses; Consequently share in overall health insurance fell from 40% to 23%
ICICI Bank contributes a large part of benefit business and the company is reasonably hopeful that this business will come back next year as things normalise
Benefit business also comes from non-ICICI Bank partners;
NBFC/HFC partners have started to do well with a growth of 13-14% in current year; However this cannot replace the loss from bank due to sheer size
Typically this segment operates with a loss ratio in the range of 35-50%
Idea is to operate overall health insurance book at a combined ratio of close to 100%
Loss ratio in health insurance has moved up due to spike in COVID claims and change in mix (lower share of benefit business which operates at a much lower loss ratio)
Health insurance written in 9MFY21 of INR22.8bn vs. INR25.1bn in 9MFY20
Indemnity at INR6.3bn vs. INR5.4bn – riding on the tailwind from the pandemic
Benefit at INR2.9bn vs 6.4bn – due to lower contribution from ICICI Bank
Growth in health indemnity is due to a combination of several factors such as
Continuous investment in terms of product as well as distribution
Tailwind from the current pandemic
Practice of sourcing policies digitally since last few years; This helps agents in conducting day to day business
Existing agents contributed 65-70% of the growth in indemnity business while the residual 30-35% came from new agents
Motor business
Turned more cautious since the month of December, 2020 with respect to new business; In the first 7-8 months of FY21, there was a strong intention to gain market share in motor insurance segment
Growth of motor segment at 14% was much higher compared to overall company (9%)
In motor OD business, situation is similar as last year as some portions of incremental business are under severe pressure and there is a need for price
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
corrections (hikes) to happen; ICICI Lombard has selectively started conversations around it
Frequency of motor claims are rising and are at pre-COVID levels
Benefit of lower frequency of motor claims was not fully taken in Q1FY21 as the management preferred to take a conservative approach in this aspect
Optimistic that a hike in premium of Motor TP will happen this year as it did not happen last year
In the current quarter, some amount of Motor TP reserve has been released leading to a better loss ratio
Fire/ property business
In wholesale lines, market share gain is visible in every large segment be it fire, marine; This gain is driven by both SME and large corporates
Fire/Property insurance has done well due to a combination of better pricing and improved market share
Growth in this segment should normalize going forward
Handholding of agents to market new products has helped as it leads to new to industry premium/growth
Loss ratio has increased in fire segment due to some catastrophe claims; however there should be an improvement by year end
Nature of claims in fire can be sporadic due to such events
Other operational information
Increase in solvency ratio from 2.74X in Q2FY21 to 2.76X in Q3FY21
Shifted fixed investment book to a longer duration as the investment team felt shorter duration bonds were over priced
Investment leverage dropped to 4.05X at the end of Q3FY21 from 4.16X (Q3FY20) due to a combination of
Claim payout related to crop business underwritten in 2018-19; Premium for the same was received in Q1 and Q2 of CY
o Absence of dividend payments in current financial year due to regulatory restrictions
84 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ICICI Prudential Life Insurance
Business performance
Maintain ambition of doubling VNB (of FY19) by FY23 by focusing on 4P elements of business
Confident of achieving this because of improvement in margin in short-term from a higher share of more profitable products in business mix and growth in top line (APE) over the medium term
Aims to be the most admired digitally enabled insurer – Launched several tech initiatives to achieve this. For ex, video verification in vernacular language, more responsive IT infrastructure and personalized video product brochure, to name a few
Pension subsidiary has gained significant traction and size
Mortality experience in line with expectations; An additional INR1bn covid reserve exists and has been not been utilized so far
Death claims due to Covid have peaked out
Persistency has seen slight dip in most of the cohorts due to pressure on linked business
Improvement in 61M persistency ratio bodes well as it is a testament to long term quality of business
Protection and non-linked savings persistency are at similar levels as last year
Continue to closely monitor ALM and liquidity closely
Expense ratio has improved as discretionary and employee cost has gone down
Non-par guarantees only 0.7% of total liabilities and minimal ALM mismatch
Continue to invest in people, process and technology
Focus on ESG continues
Product mix
Premium growth assisted by a wide range of products for both retail and group customers
Continue to capitalize on existing opportunities without compromising on risk
Protection
Individual protection has seen some moderation while group and credit life has seen strong pick up
Margins in protection business are at similar levels as last year
Remains a structural opportunity
Company does not include RoP under protection category unlike peers; They include it in non-par/non-linked savings
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Company remains a leader in terms of Sum Assured, with a market share of 13% for 9MFY21 and the company is more cognizant to not lose this leadership
Encouraging customers to opt for critical illness also
ULIP has shown a sequential recovery with 20% growh QoQ due to strong capital markets performance
Sustaining this momentum will be key
Non-par
Recently launched deferred annuity products with an expansion of product tenure from a max of 15 years to ~20 years
New product launches will further boost sales of this category
There is no change in outlook with respect to deferred annuity products. Adequate availability of hedging instruments has allowed to offer a new product and capitalize on the opportunity without compromising on risk
Continues to hedge through FRAs, cash market instruments and other derivatives
FRAs upto 10 years have ample liquidity under the current structure – foreign banks are the counter parties to these transactions
Distribution
Added 83 partners in current year with a focus on both traditional and new age partnerships
On banca relationships, IDFC First Bank and Indusind Bank have started to deliver as IPru Life now enjoys a meaningful share of their shop
Also added RBL Bank and AU SFB during the quarter; With these, branch and customer base has seen a meaningful increase
Due to a change in strategy, ICICI Bank is now more focused on selling annuity and protection as key products – products which contribute to more to VNB than top line
Sharp growth in sales of annuity by ICICI bank
34% of total APE is contributed by ICICI Bank
Also partnered with PhonePe and BSE Ebix Insurance broking
Protection and non-link savings are being increasingly sold in the direct channel
86 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
IndusInd Bank
Asset quality Vehicle, MFI and secured loans showing collection efficiency better than industry
Unsecured retail book saw some signs of stress
Pro-forma slippages were INR25.08bn
20% from Vehicle book, 20% from MFI, 15% from other secured retail, 30% from unsecured retail and 15% from corporate book
CV segment slippages of INR5.02bn
On a prudent basis, the bank has provided INR11bn for covid-19, taking overall provisions to INR32.61bn
Restructuring requests have been lower than estimates and came at 0.6% and invoked but not finalized requests are another 1.2%
30% of restructuring requests came from vehicles, 13% from non-vehicle retail and balance from corporate
CV restructuring of INR1.2bn
Corporate restructuring from Travel, retail, hospitality,
No portfolios have been sold or bought in the quarter
The bank has fully provided for the pro-forma MFI and unsecured retail slippages
Net interest income reversal of INR1.85bn due to pro-forma slippages which impacted margins by 4bps Business momentum Headline FD rates reduced by 50bps in December and margins benefit should flow from current quarter.
The bank will look to calibrate fixed deposits and savings rates going forward while trying to maintain customer acquisition rate
Disbursements have increased in Vehicles and MFI book to pre-covid levels
Portfolio in diamond industry reduced in line with strategy of granularisation
The bank aims to grow the corporate bank after one more quarter of shedding lumpy accounts.
ECLGS sanctions at INR42bn and disbursements at INR29bn. This option given only to viable businesses.
INR8bn towards retail (mostly CVs) and balance in Business banking
Aim to open 500 branches in the next year
Retail LCR growth of INR100bn during the quarter
Vehicle:
Disbursements have reached pre-covid levels
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Some stress in the luxury bus segment
Tractors, 2W and Construction equipment are also seeing pick-up in demand
MFI:
Had tightened underwriting standards and ticket size in January of last year itself
Exposure in Assam is INR450mn
Have been reducing exposure in West Bengal (now at 13% of MFI book) and ticket size has been reduced to INR12k, much lower than ticket sizes in rest of the country.
Expecting not more than INR1-1.2bn of NPLs in this segment in the next quarter.
Unsecured retail:
Collection efficiency at 97% levels Operations and other highlights The bank introduced their new planning strategy for FY20-23 where the central theme is sustainability
Surge in retail deposits
Continue investing in digital platforms and deepening penetration
Sharpening of corporate bank (granular and specialization)
Lending in rural areas through Micro banking
Adding growth through SME, NRI banking and affordable housing
Not considering para banking into the strategy as the regulatory guidelines are unclear.
The bank remains interested in pursuing opportunities in Non-life insurance, AMC and brokerages.
Retail-Corporate mix of 55-62% in favour of retail and 38-45% for corporate.
The bank aims to maintain NIMs in range of 4.15-4.25%
88 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Kotak Mahindra Bank
Commentary by Mr Uday Kotak, MD & CEO, Kotak Mahindra Bank Macro outlook:
High probability of normalization in H1FY22 from Covid-19 with the rollout of vaccine.
In CY21, overnight rates to come close to the repo rates and flattening of yield curve.
Not projecting a sharp rise in interest rate in CY21, but a gradual tightening during the year.
Some inflationary pressures to exist.
On the bank:
Loan growth improving with 4.5% QoQ, which leads to an annualized growth rate of 18%.
Focus on secured lending and on better rated corporate; continue conservative approach on unsecured retail segment.
Corporate book remains robust.
Share of Unsecured retail consumer on incremental pro-forma Gross NPAs is 40% (Unsecured retail consumer book constitutes 6% of the book).
Restructured book- either invoked or approved is 0.28%.
Appropriate provisioning done on pro-forma NPLs and interest reversal.
In the CV portfolio, some stress seen in Bus segment (10–15% of CV). Asset quality The bank has classified all accounts of a defaulting borrower as NPL even if a single account has defaulted.
Total non-specific provisions amount to INR22.6bn.
There have been no sale to ARCs in the quarter.
The bank would not be interested in buying distressed assets at this point of time as NCLT process is under standstill; there will be more opportunities once NCLT process resumes.
Pro-forma slippages of INR20bn during the quarter Business momentum NIMs would have come down to 4.31% if adjusted for interest income reversal on pro-forma slippages.
Sanctions under ECLGS scheme is INR97bn (disbursements to 50-55% of the eligible pool)
80% of the sanctions are to commercial banking clients and the balance is to higher-ticket borrowers.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Management is of the view that current provisions are suitable for probable stress in the segment.
86% of the portfolio is rated above investment grade. Commentary by segment Consumer durables:
Good demand seen during festive season.
Collection efficiency improving on a MoM basi.s
Commercial Vehicle:
Sale of CVs have been better than other vehicles.
Capacity utilization almost back to normal.
Operator dynamics have been dampened.
Passenger Vehicles:
Sales have been down
Staff transportation/bus segments impacted negatively.
CE:
Improved demand due to government/government entities’ infra spending.
Equipment demand for mining sector is good.
Tractor:
Sales volumes are strong and disbursements are picking up.
Corporate/SME:
Lending to better-rated corporates and consequently RWAs have fallen.
SME segment is seeing an uptick on the back of better utilization of limits and new client underwriting.
Increase in NBFC lending this quarter to AAA-rated HFC. Deposits SA rates for balances under INR10mn is 4% and above that has been reduced to 3.5% to deter wholesale liquid funds inflow.
Term deposits (under INR10mn) stands at INR700bn. Other highlights Gross NPL in Kotak Mahindra Prime is at 2.46% and pro-forma NPLs at over 4%.
Cost expenses higher in the quarter due to promotion and advertisement costs, recovery costs, credit card cost and insurance charges (due to improvement in deposit base)
Margins will sustain as surplus liquidity to get deployed and yields will start picking up once the interest rate cycle tightens.
90 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
LIC Housing Finance
Asset quality The stage-3 stood at 2.68% - over the past three quarters, the company has increased the coverage gradually – to now 40%.
The internal assessment suggest that ex-court injunction the gross stage-3 will rise by around 1%.
Total ECL provision stood at INR29.5bn.
Covid-19 related provision stood at INR2.1bn.
Provisions for impairment stood at INR1.9bn.
Stage-3 composition – individual @ 1.62% (core home loans @ 1.07%), developer @16.22% (no fresh addition, with some positive movement this quarter).
Stage-2 composition – individual @ sub-7%, developer @8–9% ( of this developer book, the company expects that INR5bn will be in stage-2 and another INR5bn in restructured book, which is currently in stage 2).
To date, the company has not implemented any restructuring. Some restructuring is being invoked by the company to the tune of INR20–30bn, which the company is evaluating.
Stage-2 has risen to 7% levels, the normal level of stage-2 is 5% levels – the rise is partially on account of SC’s injunction.
Collection efficiency has been consistently improving and stood at 98% for December – LAP collection efficiency is 96–97%. Business momentum Disbursements during the quarter improved – supported by both the individual (affordable housing) and non-individual segments.
Growth has improved every month since June 2020 to date – disbursement growth in December was >30%. The company expects sustained improvement in ensuing quarters.
Balance transfer cases of this quarter is sub-5% levels.
Incremental home loan rates at 7% levels – on the book, the yields is 7.5-7.6%, which has come down following the re-pricing that has been happening.
Incremental yields in builder loans is 11–12% levels.
Significant improvement in funding cost – incremental cost has also come down significantly and is at 5.25% for Q3FY21.
Liability maturity of INR160–170bn over the next 15 months.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mahindra Finance
Current environment and business
Expect a strong Q4 supported by harvest income
Infra is opening up but not aggressively; Mining, coal auctions and road construction adds to the momentum in rural markets
When both farm and infra cash flow are strong, rural does phenomenally well
Second half is always stronger for rural markets
Volumes getting better but not at pre COVID due to
o Non-availability of vehicles
o Cash purchases have gone up as full allocation helps in better allocation
o Certain segment (schools, mining / infra) of customers still shying away from purchases
Not too much competitive pressure in these segments
However competition is very active in Car segment, especially salaried opting for 7 year loans; Demand has shifted in favor of SBI
OEMs have confirmed a pick up in volume in Q4 and hence strong growth visibility is there in Q4
Demand for pre-owned vehicles should also pick up.
Borrowing available through multiple sources and hence cost of funds has gone down
Adequate liquidity present and hence cost of carry is a drag. Revaluating and will calibrate it to a lower level in a couple of months
As a result, margins should improve going forward
Continue to rationalize cost and it should eventually settle down at 2.4-2.5% of assets over a period of time
Asset quality
Collection efficiency has improved further with Oct/Nov/Dec levels at 84%, 88% and 96% respectively
Aim to keep Gross NPA in the 6-7% range with Net NPA sub 4% along with high provision coverage ratio
Gross NPA had moved to 11% during demonetization and fell substantially back in Q4. So sudden disruption results in customers holding funds instead of servicing loans. And when situation improves, servicing starts. Similar situation is expected this time.
Taxi, school bus, goods carrying and people carrying are still lagging
Tourism sector vehicle owners are trying to utilize vehicles elsewhere
92 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Spike in NPA is a temporary phenomenon in Q3 as restructuring cases were low and some part of this slipped into NPA; Confidence also supported by substantial movement in collection in different stages of assets in Q3FY21
Restructuring of 1.5 lakh customers was expected initially. As of today, negligible amount has been restructured. Most of them have opted against it as it increases burden
Close to 55% of this have paid full EMI
Therefore expect them to get reversed in Q3
Pain still exists in stage 2 assets of 300k customers as 6% of them did not pay a single instalment; However 2% have credit and 2% have a single or two EMIs outstanding. Many accounts in tractor segment where money will come in during this quarter
In Stage 3, there are approx. 151K customers. 26% of these have started making payment but not enough to roll them back in stage 1 and 2.
Moratorium was given to 15lakh customers. 94-95 percent have serviced loans. The ones who have not paid have moved to NPA
Also wrote off INR3bn in Q3FY21
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Multi Commodity Exchange
Total ADT came in at INR321.8bn versus INR308.5bn YoY
SEBI has permitted to reduce crude oil margins from 130% to 50% and will seek permissions to reduce it further as internationally they lie in the 10-15% range. Despite this cut, crude oil activity has not been as robust as the company would have expected.
ADT in crude oils is INR9bn versus INR130bn last year; this is because investors have shifted to Natural gas
Un-availed MAT credit is INR160mn and will be utilized in the next few quarters, post that the company will avail the new tax structure.
Energy segment ADT is INR67bn
First two bullion refiners have been identified and after approval from SEBI, they will also be made available on the exchange
Electricity contracts has been filed with regulatory and upon approval, contracts will be launched.
Revenue sharing with IEX for electricity contracts is confidential at this point of time.
5.5tonnes of open interest on gold options
The company has also initiated spot trading platform for Bullion, Coal, etc.
ADT on options for the YTD stood at INR8.6bn (INR8.88bn for previous year). Exchange will permit charging once volumes of approx. INR50bn is reached.
The company expects the commodity mix to remain on similar lines in the next few years.
New version of trading software enabling trade in negative prices has been introduced.
94 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Muthoot Finance
Current performance
Extremely satisfied to cross INR500bn in standalone loan assets.
Expect 25-26% growth in overall AUM for FY21.
Steady state growth of 15% can be achieved over the medium term.
See growth momentum continuing into the next quarter and going forward also.
Disbursements for the quarter were focused on customer additions, fresh loans to active and inactive customers, and top-up loans to existing customers.
Fresh loans to 0.39mn new customers in Q3FY21 – O/S Loan amount of INR29.8bn.
Fresh loans to 0.44mn inactive customers in Q3FY21 – O/S Loan amount of INR29.6bn.
Restructuring is extremely negligible for the overall book.
Gold loans are usually short-term loans and, therefore, customer churn rate is high; maintaining relationships and loyalty becomes more important due to this reason.
Competition for gold loans has seen an increase in intensity from banks; NBFCs are not a serious competition.
This competition has always existed; management is not very worried as these small-ticket businesses take time to specialise and there will be a tendency to return to main product categories for banks once demand picks up.
Gold loan will be growing well while other lines have low prospects for this year.
Continue to make investments in tech and digital tools.
Launched an app called ‘Home at Loan’ in July-20, which enables customers to opt and avail for a gold loan from the comfort of home. Digital conversion of customers is gaining traction.
Extremely comfortable with current liquidity position.
Collection efficiency has consistently increased on a month-on-month basis.
LTV of close to 70% in incremental lending on average.
Due to lower gold prices, average LTV has increased optically.
Tonnage is lesser as new customers require lesser gold to borrow the same amount as before; tonnage is also a function of the gold price.
Performance of subsidiary
Growth prospects have been dim for subsidiaries in FY21 due to a cautious approach towards lending in these segments.
Non-gold loan portfolio in subsidiaries constitutes about 10% of consolidated loan portfolio.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Decline in AUM on home finance subsidiary due to a cautious stance; similar caution exercised at the vehicle finance subsidiary.
Microfinance subsidiary turned in low single-digit growth.
For the Sri Lankan subsidiary, strategy is to increase gold loans in mix to 85–90% over the next two–three years. Currently, it is less than 50%.
Collection efficiency for the home finance business is 88%, microfinance is at 98% and vehicle finance at 84%.
During Q3FY21, insured more than 1mn lives with a premium of INR734mn under Traditional, Term and Health products compared with 835K lives with a premium INR580mn in Q3FY20.
96 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Shriram City Union Finance
Business performance
AUM growth should be flat or in low single digits (2-3% growth) due to conservative stance some segments of the portfolio.
Disbursements have picked up in almost all segments other than small enterprise finance.
Gold loans continue to do well; gold loans have also been introduced to non- South regions.
LTV in gold is 60%; incremental lending 70%; these are mostly existing customers or customers where a prior relationship exists.
No plans to add branches as of now; however, 100 odd rural centres added recently may be converted in to branches, if the need arises.
Will add 500–600 employees going forward.
App launched for funding two wheelers continues to be traction.
Highest-ever quarterly mobilisation of resources in Q3FY21.
Cost of funds further moderated
IT investment continues with an aim to improve processes.
Digital marketing endeavours have also gained pace for both assets and liabilities.
Working towards bringing in a digital option for garnering recurring deposits.
Asset quality
Collection efficiency has been steadily improving, rising to 98% in Q3FY21 from 95% in Q2FY21 and 85% in August.
Slowly getting back to pre-covid-19 level in terms of collections.
Credit cost should be in the 2.5–3% range.
Restructuring demand is low at INR1.5bn – better than initial expectations.
The SME segment must be monitored closely.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
State Bank of India
Asset quality The bank has received restructuring requests to the tune of INR181.25bn (INR117bn from corporate, INR8.6bn from Retail and INR25.5bn from SME).
INR45bn restructuring requests have already been implemented out of INR182bn of total requests.
60% of retail loan restructuring on account of home loans
Management does not expect any material spike in retail/SME slippages in Q4FY21.
Net increase in Q3FY21 pro-forma slippages of INR20.7bn, gross increase was of INR70-80bn.
Slippages recognized during the quarter came at INR22.3bn from the international book
The total slippages and restructuring requests stood at INR412bnm lower than initial estimates of INR600bn.
General contingency provisions stood at INR60bn.
Retail/personal loans are to Govt/quasi govt/PSUs/ well rated corporate employees which has helped maintain asset performance in this book.
Expect steady state credit cost of 2% levels Business segments 75% of the book linked to MCLR and 15% to External linked rates.
INR260bn has been disbursed under ECLGS of which INR230bn has been disbursed.
INR4.88bn is sanctioned under ECLGS 2.0
Credit Growth came at 6.73% YoY, mainly driven by Retail advances (15.47% YoY), SME (5.62% YoY) and Corporate Advances (2.23% YoY).
SME sector growth is driven from other segments and not ECLGS during this quarter as sequentially ECLGS sanctions have improved by only INR10bn.
Total Deposits growth at 13.64% YoY, out of which Current Account Deposit grew by 11.33% YoY, while Saving Bank Deposits grew by 15.99% YoY.
Of the total retail individual loans (unsecured+ gold+ education loans) , 40% comes from YONO platform.
About 60% of personal loans from YONO platform.
Express loans have an average tenure of 3-5 years given to existing salaried customer base. Penetration levels to this customer base is at 40% levels.
98 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Operations and other highlights In future quarters, provisions for wage hikes of INR30bn per quarter will subside and there will only be quarterly expense for retirement benefits.
Expect quarterly decrease of INR10bn on employee related expenses.
Pro-forma slippages would have an impact of 9-10 bps on margins. Interest reversals have been provided in provisions and from interest income.
Tier-1 Capital adequacy of 11.7% includes profits YTD21
The bank waived off account maintenance charges owing to current situation.
Other income from LC/BG and remittances to improve going ahead as economic activity improves.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bearings
100 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Schaeffler India
Q4CY20 conference call: Key highlights Revenue growth and margin Overall net sales grew 23% YoY as the company saw improving demand from automotive and industrial sectors during the quarter. Overall revenue share in Q4CY20 was 82% from mobility and 18% from non-mobility.
Gross margin expanded 177bps YoY and 95bps QoQ to 37.9% as a result of price hike taken by SCHFL. Peer SKF India’s margin was up 1230bps YoY due to reduced transfer pricing from parent.
SCHFL reported EBITDA margin expansion of 380bps YoY and 106bps QoQ to 18% as a result of the cost flexing programme and higher localisation. However, margin is not likely to sustain at these levels due to raw material cost pressure.
PAT jumped 68% YoY with improved profitability. FCF grew 84% YoY driven by a sharp reduction in working capital.
Capex: SCHFL announced capex of INR3.0-3.5bn for CY21. Over the long term, 70-75% of capex will be spent towards capacity expansion. Certain capex has also been earmarked for rationalisation and replacement. Key highlights The mix at the end of CY20 stood at 48% from automotive, 42% from industrials and 10% from exports.
Demand increase from Q3CY20 sustained this quarter as plant level utilisations improved.
Localisation remained key focus, with localisation at 75.5% from 72.0% in CY19. SCHFL has set up two new plants in the past three years and the parent continues to pay attention to the geography considering the huge potential. By segment Automotive (48% of overall sales in CY20) Industry performance – Production of OEMs: The 2W segment was down 25% YoY, while CV segment plunged 35% YoY in CY20. The PV segment fell 24% YoY. The tractors segment reported a strong performance in CY20 with 10% YoY. However, Q4CY20 growth rates for 2W, CVs, PVs and tractors stood at 6%, 12%, 18% and 62% YoY, respectively.
Auto aftermarket: Price hikes in the aftermarket automotive sector in Q4CY20 aided margin. This was also led by new product launches.
While there were raw material cost pressures, SCHFL had sufficient inventory to tide over the quarter. SCHFL plans to pass on input cost increases to customers as current levels are sustainable.
SCHFL remains strong in transmission and engine-related parts. The company has strong presence in PVs and LCVs due to which there was a strong pipeline from transition from BS4 to BS6.
Content per vehicle expanded to EUR38 versus EUR33 in CY18. This was on account of new products, mainly for the BS6 range like hydraulic lash adjusters,
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
overrunning alternative pulley, valve trains systems, and other products for gasoline engines.
TruPower: SCHFL launched a new brand during the lockdown TruPower, which is backed by German technology with products targeted under the BSVI range. The first product – engine oil – was rolled out in 30 locations and should scale up to 70 locations. The products will be manufactured in India and the company plans to leverage the same for exports.
Shift from diesel to gasoline: Stabilisation of the mix (diesel and gasoline) with a shift in production mix in favour of gasoline cars is accretive for the company, as BS VI-compliant gasoline products have higher content. The company has seen content per vehicle rise as part of the same. Industrials (42% of sales in CY20): Industry performance: Cement and steel production declined 15% YoY each in CY20. Coal production saw a marginal uptick of 1% YoY, while electricity generation dipped 1.6% YoY across CY20. For Q4CY20, the growth rates for cement, steel, coal and electricity production stood at -5%, 4%, 5% and 8% YoY, respectively.
Industrial aftermarket: This was slightly weak as management catered to OEM side of the business. Management plans to focus on this segment to aid growth.
Railway opportunity: Railways contribute 10% of SCHFL’s industrial sales (~5% of overall sales) with sales evenly spread between railway and metro applications. During CY20, the company saw slower recovery post easing of lockdowns as well as projects were postponed. The budgetary stimulus on Dedicated Freight Corridor should spur spending with SCHFL’s Class-K portfolio under testing at present. With government focused on network expansion within pre-primary areas like performance safety reliability, company believes it is well placed as they have products there. SCHFL will continue to develop and invest in newer products. Exports segment (~10% of sales in CY20) Management remains optimistic on the exports opportunity in Asia-Pacific in CY21, however, sales remains at a mere 10% of sales as Europe slowed down owing to the pandemic.
The company has plants in industrial sales for localization. Further, it has competence in cylindrical, large size bearings and chassis within products and 2W within segments. Since SCHFL has been classified as part of Asia pacific at parent level, it expects exports to increase within Asia Pacific to South East Asian countries like Japan, Korea.
102 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Cement
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ACC
Q4CY21 conference call takeaways
Macro updates ACC emphasised on India being a growth market for the Group. While it expects cement demand in CY21 to bounce back 15–17%; from a long-term perspective, it sees huge growth opportunity given India’s low per capita cement consumption vis- à-vis other countries.
Efficiency
ACC’s focus on product mix optimisation and working capital management has yielded positive results.
The efficiency enhancement target under Project PARVAT is a huge INR200/t, and ACC is on track to not just achieve that but also excel over period.
The success seen in the Master Supply Agreement (MSA) so far is just the tip of the iceberg, and there lies a huge opportunity on that front, says management.
Capex update
The 2.7mtpa clinker and 4.8mtpa cement grinding unit in Central India is scheduled for commissioning by Jun-22.
Other updates
ACC booked asset impairment of INR1.76bn for its Madukkarai unit given concerns around the quality of limestone for this unit. However, did not comment on the vulnerability of similar such impairment at any of its other old plants.
ACC reported specific carbon emissions of 493kg/t in CY20 versus INR512 kg/t in CY19. As per the company, they are the lowest in terms of carbon emissions in India.
ACC reported a cash balance of >INR58bn. It announced a dividend of INR14/share for CY20.
ACC did not see any major issue related to the extinction of its mining leases by year 2030. Given it is likely to be an industry-wide problem, they expressed confidence towards finding a resolution within the framework laid out by the government
104 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
India Cements
Industry and company operation
Demand is inching up slowly across urban regions with good growth prospects guidance in Q3FY21. Strong demand is coming up from Eastern region with growth in double digits. West demand is inching up with Maharashtra, Rajasthan and Gujarat showing signs of recovery. While central and North demand is optimal, South is still a laggard with capacity overhang.
ICEM was able to maintain optimal realisation led by firm prices, though input petcoke prices were on the rise.
Total capacity utilisation stood at 51% in Q3FY21 (45% in Q2 and 35% in Q1).
Volumes, prices and variable cost
The company sold 2.37mt in Q3FY21, which will increase sequentially in Q4 led by seasonal increase in demand.
According to the company, its variable cost of production has dipped from INR2,250/t to INR2,150/t.
Going forward, prices will rise in East in a short period of time led by muted prices since log and strong demand traction seen over there. Management has decided not to sell its cement below a threshold price, which will certainly aid profitability.
Operating details of other segments stood as below: Shipping: Revenue INR73mn; EBITDA ~INR45mn Windmill: Revenue (which is same as EBITDA) at ~INR19mn RMC business: Revenue INR276mn; EBITDA INR35mn Trade and non-trade mix stood at 51% in Q3 (56% in Q2, 73% in Q1).
Net debt
Net debt fell to INR32bn till Dec’20 from INR35bn in Mar’20 and management has guided for further reduction of INR4-5bn in FY22.
Capex
Total capex incurred during FY21 would be INR0.7bn and guidance of INR1.7bn (INR1bn for WHRS plant and INR0.7bn for the maintenance work) in FY22.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
UltraTech Cement
UTCL clarified that there is no plans of any Equity issuance towards the proposed INR30bn fund raise. They are looking to raise only debt for re-financing opportunities given the low interest rates. The co cited an example of having raised some NCDs at 4.54% in December 2020.
UTCL has no plans to hive-off the white segment business to Grasim Industries (we mention this in the context of Grasim foraying into the Paints business, by mainly leveraging on the distribution network of UTCL’s white segment). UTCL did not see any synergies with its main business of grey cement and hence did not foray into Paints. Says is open to work on an arm’s length basis in case Grasim wants to leverage the white segment network to sell its Paint products.
Cement demand remained strong with growth seen across all segments driving 14% volume growth. From an industry perspective, believes incremental demand will outstrip supply driving tighter utilisations in the coming 2-3 years.
Capacity utilisation for UTCL stood at ~80% for Q3FY21 with December being >85%.
Work on its 19mtpa capacity expansion plan has commenced in full swing and in on track for commissioning in FY23 in phases.
ROE for the qtr stood at 14% and is on course to rise >15% with benefits from new projects.
While fuel cost is going up, bulk of the impact will be felt in Q1FY22 onwards. Also, co is working aggressively towards adding WHRS capacity of ~175MW by FY24 (in phases) – which will help reduce costs going ahead.
106 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Construction
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ahluwalia Contracts
1. Covid-19 impact: Though there has been an improvement, labour productivity remains a challenge due to measures put in place by the government.
2. Management indicated that 85% of the contracts in the order book have some sort of an escalation clause; this will provide some cushion against rising commodity prices.
3. EBITDA margin: ACIL made a provision of INR850n towards receivables during the quarter (~INR137mn in 9MFY21). It expects an additional INR70–80mn of provisions in Q4FY21, and believes that bulk of the provisioning will be completed by end-FY21. Overall ECL provisions stand at ~INR250mn.
4. Capex: ~INR100mn in Q3FY21 (~INR190mn in 9MFY21); likely to be INR70– 80mn in Q4FY21.
108 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ashoka Buildcon
Guidance
5. Order inflow: INR20–30bn by end-FY21 and INR50–60bn in FY22.
6. Revenue growth: Flat YoY in FY21.
7. EBITDA margin: 11–11.5%.
8. Capex: INR800–850mn in FY22 (INR150mn in 9mFY21).
Order book visibility: ABL ended the quarter with an order book of about INR91bn; its order book-to-bill stands at ~2.5x.
Q3FY21 revenue breakdown: INR7.2bn from roads, INR740mn from railways, INR40mn from the CGD business and ~INR1.2bn from power T&D/others.
Q32FY21 order book (OB) breakdown: Road EPC (33%), road HAM (43%), railways (8%), power T&D (16%) and CGD (1%).
Margin: EBITDA margin during the quarter were adversely impacted by change in revenue mix. In addition, certain projects did not reach the revenue recognition threshold.
The company expects financial closure and the appointed date for the Tumkur Pkg III by end-February. For Tumkur Pkg IV, land availability is ~60% only, so it will take some time for work to start there.
It expects to start work on the two EPC projects won in Bihar soon.
Debt: Debt at the consolidated level is INR59.8bn (up ~INR3.4bn QoQ). Standalone debt is ~INR3.5bn (INR2.2bn at end-Q2FY21), which comprises ~INR1.7bn of equipment loans and INR1.8bn of working capital loans.
Debt on BOT/HAM/annuity projects stands at ~INR54.8bn (INR52.7bn at end- Q2FY21).
Working capital cycle: Management mentioned that payments from projects in Uttar Pradesh have improved while those from Bihar are still facing some issues.
Equity infusion:
1. Equity infused in Q3FY21: INR100mn (~INR1bn in 9mFY21).
2. Equity commitment: ~INR1.6bn, each in Q4FY21 and FY22.
Asset monetisation: Management mentioned that it is talking to various potential investors that have given binding offers. It expects to complete negotiations over the next few weeks and documentation by end-FY21. It plans to sell all the completed projects currently with an understanding that the projects under construction will be sold upon completion.
The conclusion of this deal will be a major monitorable, in our view.
Solar EPC contract: The company has done smaller projects (3-4MW) in this segment in the past. It hopes to make 10–11% margins on the new contract and to grow this segment in future.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Loss funding in FY22: ABL believes that loss funding will be limited to the extent of INR350–400mn for the Sambalpur project and INR450–500mn for various other projects.
CGD business: The company expects revenues to reach ~INR260mn in FY21, ~INR0.9bn in FY22 and INR3.5bn by FY25.
Bank limits: Working capital limits of INR3.5bn and non-fund based limits of INR80bn.
110 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Capacit’e Infraprojects
CIDCO project: Work on all the sites has commenced.
BDD Chawls project: The government is planning to increase the height of the buildings and to build multi-level car parks here. It also wants to complete the project in 4.5 years instead of eight years. Management expects to receive approval for the same soon and to commence billing from Q2FY22.
Provisioning: Provisioning for expected credit losses (ECL) stands at ~INR510mn. Capacit’e believes this is sufficient to take care of any issues going ahead.
Capex: The company has incurred ~INR400mn in capex during 9mFY21 including the CIDCO project. Total capex on CIDCO project is expected to be INR850mn spread over two years.
Margins: 98% of order book has a full-price escalation clause; hence, the company does not anticipate any negative impact of the hike on commodity prices.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
J Kumar Infraprojects
Guidance Order intake: INR40bn in FY21E; INR40bn-plus in FY22E.
Revenues: INR24–25bn/INR35bn in FY21/22E..
EBITDA margin: 14% for FY21E and 15–16% in FY22E.
Capex: INR0.8-1.0bn/INR0.7-0.8bn in FY21/22E (INR600mn in 9mFY21). Order inflow ramps up The company won the INR10.5bn Worli Sewri Connector project during the quarter. In addition, it won an INR9.4bn order for underground metro work for the Surat Metro project in January 2021 and has emerged L1 in an INR13.9bn order for elevated metro rail project for the Mumbai Metro Line 2B.
Management indicated that it will target metro rail tenders in Mumbai, Nashik, Surat, etc. to shore up its order book. It is also looking at orders in the High Speed Rail segment and urban transport projects in NCR and MMR. Order book remains robust The company ended Q3FY21 with an order book of ~INR109bn. With a book-to-bill of 4.4x, the current order book implies revenue visibility for the next couple of years.
Metro rail projects account for more than half of the company’s order book.
Margins improve in Q3FY21 With operations normalizing, EBITDA margin rose ~90bps QoQ to 14.1% in Q3FY21; margins, however were still down 70bps YoY. Net debt rises Gross debt decreased from INR5.8bn at end-Q2FY21 to INR5.7bn at end-Q3FY21. With cash levels falling from ~INR5bn at end-Q2FY21 to INR4.3bn at end-Q3FY21, net debt rose to ~INR1.4bn (~INR0.9bn at end-Q2FY21). Net debt to equity stands at a comfortable 0.08x (0.05x).
Due to weak H1 execution, trailing twelve month (TTM) revenues have fallen; consequently, working capital cycle rose from 153 days in Q2FY21 to 166 days in Q3FY21. Other highlights Mumbai Metro Line 3: Tunneling work on the project is set to be completed in the current month. Management expects the entire project to be completed by October 2022.
Mobilisation advance: The outstanding mobilisation advance is INR4bn; of this, ~INR2.8bn is interest-free (mainly from MMRDA, metro rail bodies etc) while the balance is interest-bearing advance from the NHAI for the Dwarka Expressway project. The company expects to receive another INR3.8bn in mobilisation advance going ahead; of this, ~INR1.3bn will be interest-bearing (from the NHAI for the Dwarka Expressway) while the balance will be interest-free.
Banking limits: Fund-based limits are INR10bn (~50% utilised) while non-fund based limits are ~INR30bn (~80% utilised).
112 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Coastal Road project from CIDCO: The INR4.1bn project is yet to receive forest clearance; management expects that it would take four–five months for work to commence here.
Surat Metro order: The company will use its existing tunnel boring machines (TBMs) to execute the project.
Non-fund based charges: LC/BG charges were INR70mn/INR280mn in Q3/9mFY21.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
KNR Constructions
Revenue breakdown: During Q3FY21, irrigation projects contributed 29% to revenue while HAM projects contributed 49%. EPC road projects made up the rest of revenues.
HAM project portfolio: KNR has an overall portfolio of five HAM projects: four from NHAI and one from K-SHIP (Karnataka). Work on all the five HAM projects is underway. The company expects to receive PCOD for three HAM projects by Q1FY22.
Completion status of HAM projects: Chitoor–Mallavaram: 72.1% (63.8% at end- Q2FY21); Ramsanpalle-Mangloor: 64.2% (55.9%); Trichy-Kallagam: 58.9% (49.9%), Oddanchatram-Madathukulam: 14% (nil) and K-SHIP project: 22.4% (13.9%).
Equity contribution: The total equity required for the five HAM projects is about INR6.2bn. The company has already invested ~INR3.5bn in equity and needs to invest an additional ~INR0.9bn in FY21, INR1.4bn in FY22 and the rest in FY23.
Kaleshwaram irrigation projects: Of the two projects for Kaleshwaram irrigation, work has commenced on one project while that on the other one is expected to commence in Q1FY22.
114 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
NBCC
Order book guidance: Management expects to win orders of ~INR80bn, and award work of INR100-120bn in FY22.
Revenue guidance: ~INR80bn in FY22, and ~INR90bn in FY23.
Amrapali projects’ status: Of the total 24 projects, two have been completed while construction is in progress on the remaining ones. Amrapali projects have total revenue potential of ~INR80bn, per management.
Jaypee acquisition: The order has been reserved in Supreme Court; management expects the verdict soon.
Delhi colonies’ redevelopment: Execution for the Nauroji Nagar project is in full swing, and is expected to be completed by July 2022.
Total realty sales to date achieved at Nauroji Nagar is INR27.5bn, of which ~INR7.4bn was achieved during the pandemic. While the sales have been very slow in the past, the company has now started aggressive marketing to boost sales here.
Forest clearances have been received for the Netaji Nagar and Sarojini Nagar projects. The company is gearing up to commence construction work at these projects.
Real Estate: Total real estate inventory stands at INR4bn, most of it is in Gurgaon. Management expects real estate sales to be ~INR1bn in FY22, and profit margins to be in the range of 10–15%. The target IRR is ~16% for the company’s real estate segment.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
NCC
Order book: Order inflows during the quarter were at ~INR119bn (INR29.6bn in Q2FY21). NCC ended the quarter with an order book of ~INR392bn (book-to-bill of 5.5x).
Going ahead, management is targeting orders in affordable housing and water supply (refer to Union Budget: A bagful of goodies), among others.
Q3FY21 order book breakdown: Buildings (58%), roads (5%), water and environment (17%), electric (8%), irrigation (6%) and mining (6%).
Margin dip QoQ in Q3FY21: Reduction in gross margins led to EBITDA margins declining ~110bps QoQ.
Pending orders in Andhra: A total of ~INR43bn worth of orders are pending in Andhra. The share of the state in overall order book has declined to ~10%.
Payment status in Andhra: Management indicated that it has received payments of ~INR4bn on Andhra projects during CY20; it expects to receive another INR1.5–2bn in payments during the current quarter.
NCC’s net exposure to Andhra stands at ~INR7bn (including ~INR3bn of retention money).
Debt: Debt declined QoQ to ~INR19.7bn (INR20.0bn at end-Q2FY21). Management expects debt to reduce going ahead and reach INR17–18bn by end-FY21.
Exposure to subsidiaries: Loans given to subsidiaries decreased sequentially to INR5.3bn (INR5.6bn at end-Q2FY21). Investments in subsidiaries stood at INR8.9bn (flat QoQ), which means the total exposure to subsidiaries stood at INR14.2bn (INR14.5bn).
Management believes it can get INR1.5bn annually from NCC Vizag Urban over FY22/23 in case a deal, which is in the works, goes through. NCC Urban can also potentially repay INR0.8–0.9bn to the company in FY22.
Capex: Capex during Q3FY21 was about INR790mn (INR280mn in H1FY21 and INR1.4bn in FY20). Expected capex during Q4FY21 is INR200–300mn.
Average ticket size has increased to INR4.6bn during 9mFY21.
International business: The company has just INR200–250mn worth of works left to be done in its international subsidiaries (in Oman and Qatar). These orders are likely to be completed by May-21. NCC is in the process of winding down its international operations; it believes it will not have to undertake any significant write-offs on accounts of this.
Interest costs have declined due to the reduction in interest rates and lower utilisation of bank guarantees post-covid-19 related stimulus provided by the government.
116 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
PNC Infatech
Ghaziabad-Aligarh project: PNC had entered into a share purchase agreement (SPA) with Cube Highways for sale of its 35% stake in the project. The SPA lapsed during the pandemic, and the parties decided not to extend the validity further. The company is now looking forward to enter into an SPA with another investor for sale of 100% aggregate stake held by all partners in the SPV shortly. The investor has already completed the due diligence.
HAM projects: For the Meerut – Nazibabad, Jagdishpur-Faizabad, Aligarh- Kanpur, Unnao-Lalganj HAM projects, over 80% land has been acquired. NHAI has transferred the money for land payments and the process of distributing amounts to land owners is underway. Expect 90% land availability and consequently AD by end of FY21.
Vadodara EPC projects: Expect AD by end of FY21.
Equity for HAM projects: Total equity required for all HAM projects is about INR9.3bn (INR 3.1bn on under-construction projects and INR6.2bn on projects expecting AD). Of this, INR3.5bn/INR1.7bn/INR1.2bn is estimated to be infused in FY22/23/24, respectively. Internal accruals should be sufficient to fund balance equity, per management.
Labour availability: Labour availability is at pre-covid levels.
Impact of recent rise in input prices: All projects have escalation clauses, hence, there will not be any major impact on margins due to the recent rise in commodity prices.
Mobilisation advance: Interest bearing mobilisation advance is ~INR1.6bn at 4.25% interest rate.
Water supply / irrigation projects: In the water segment, the company will first consolidate its current portfolio and only then bid for new water projects. Non- road segments will not exceed 20% of order book.
Margins in irrigation and water supply segment are similar to that of roads.
For water projects in Uttar Pradesh (UP), the funding is 50:50 from Centre and State. In some states, Centre is funding 90% of projects. The execution period for these projects is around two years.
The company intends to focus on UP and other neighbouring states for water supply projects.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Titagarh Wagons
Covid-19 impact: The Indian operations have recovered well. The Italian business was heavily hit as Italy was one of the worst impacted countries during the pandemic; this affected sales while tender announcements were postponed.
Operations in Italy have now started stabilising since January, and management expects the business to clock growth February onwards.
Consolidated order book breakdown: Around INR51bn (end-Q3FY21), out of which ~INR24.5bn-worth of orders are in India, and the balance at Firema, Italy. Out of the INR24.5bn India order book, INR11.3bn pertains to wagons, INR12bn to metro rail/propulsion systems, and the remaining INR1.2bn to bridges, foundries, etc. The share of private wagon orders in the current order book is 15–20%, while Indian Railways accounts for 80–85%.
Wagon dispatch: In India, non-availability of critical inputs during the initial lockdown in March 2020 impacted wagon dispatches. While there were negligible dispatches in Q1FY21, the company dispatched ~1,000 wagons each, in Q2FY21 and Q3FY21, taking the total wagons dispatched to over 2,000 in 9MFY21.
Wagon order intake: There were no major tenders awarded to the company during the quarter, barring a few private orders. Management expects Indian Railways to float new tenders soon.
Wagon demand outlook: Demand for private sector wagons had declined during the pandemic; however, enquiries picked up during the quarter. At present, private orders constitute 15-20% of the wagons order book.
Pune Metro order: TWL, along with Firema, had won the INR11.4bn tender floated by Maharashtra Metro Rail Corporation (Maha-Metro) for the design, manufacture and supply of 102 metro coaches for Pune Metro Rail. Production of prototype has commenced in Italy, and should be dispatched by May 2021. Plant set-up work is underway for production in India, which is expected to start in H2CY21.
Bridges: The company has received its first order from the NHAI, and certain other orders from PWDs (Maharashtra etc) aggregating INR700–800mn. Management plans to scale up this business in FY22.
Shipbuilding: TWL has completed all its existing orders. It has been participating in new tenders, and expects finalisation of some orders soon.
Firema: Firema had turned in positive EBITDA for 9MFY20; however, covid- induced disruption dragged Q4FY20 and FY20 EBITDA into negative territory. In 9MFY21 too, Firema reported EBITDA losses due to the covid-related disruptions in Italy. However, the situation has stabilised now, and management expects Firema to be EBITDA-positive in FY22.
Impact of increase in steel prices: Increase of steel prices is a concern for the entire industry. Although IR orders have price variation clauses built in, they are based on wholesale prices, which move with a lag of 6-8 weeks. Private orders are usually at fixed price, with no price variation clause. Hence, there will be some impact on margins (1–2% EBITDA margin decline for private orders). However, management expects the blended EBITDA margin to remain in the normal range of 9–11%.
118 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Capex guidance: Annual capex will remain around INR1bn for the next few years.
New design centre: TWL has set up a new design centre in Hyderabad for railway and metro rolling stock in India (this was earlier done in Italy).
Debt: Net debt at the India level declined to INR700mn; the company is on track to become long-term-debt-free. Net debt at Firema stood at ~INR7bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Consumer Durables
120 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Amber Enterprises
General overview
Durables Industry witnessing positive momentum
RAC industry momentum continued in Q3 buoyed by festive season
The Industry achieved normalized Inventory levels on the back of sustained Retail & OEM demand
Some brands have pushed sales as prices were to be raised
Demand in metro and Tier 1 cities showed resilience
Demand uptick for AC’s in the Tier 2/Tier 3 cities continued
5-7% finished goods price increase should be taken by industry due to input hikes as demand is good. However, there exists some resistance from dealers.
Performance highlights
Volumes in Q3 were 543k versus 572k YoY
Components 163Cr revenue contribution
Have been able to pass on input cost hikes
At 24%/70% RAC/ODM market share
Import ban & PLI
The ban on imports with refrigerant filled ACs has opened up new opportunities for the domestic manufacturers and for Amber.
Amber is fully geared up to support OEMs with refrigerant gas filling in the first phase and also geared up to provide solution in completely Built Units (CBUs) of RACs and supply of its components.
The Company has already signed 6 new customers since the notification has been announced
2mn units of imports have started shifting for gas charging right now
INR50bn PLI announced by government for AC and component manufacturing which opens up a big opportunity for Amber. Details of scheme are likely to be announced by government shortly
Total 16 manufacturers in country catering to 7mn market in India right now
Brands who manufacture themselves would like to take advantage of PLI
Big MNCs are talking of shifting exports manufacturing to India to take advantage of PLI. This will benefit Amber through component opportunity
Compressor manufacturing – Depends on PLI on it. Might look at some JV with other player for it
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Subsidiaries
Sidwal:
o INR440mn/INR90mn/21.4% Revenue/EBITDA/EBITDA margin for Q3FY21
o INR690mn/INR182mn Revenue/EBITDA in Q3FY20
o INR1.2bn/INR270mn/22.5% Revenue/EBITDA/EBITDA margin for 9MFY21
o Acquired new orders and further strengthened the order book
o Sales was sluggish in Q3 due to slow offtake from railway factories due to covid
o Grabbed order from two new metro clients
o INR4bn order book to be covered in two years
PICL:
o INR350mn/30mn/7.7% Revenue/EBITDA/EBITDA margin in Q3FY21
o INR430mn/INR30mn Revenue/EBITDA for Q3FY20
o Margin expansion expected from product offerings and enhanced shipping capability
o Exports are 20% of revenues right now. Keeps on changing as per product mix. It should go up to 35% gradually
Iljin & Ever:
o Iljin Revenue/ EBITDA margin - INR910mn/6.3% for Q3FY21 and INR1.89bn/5.3% for 9MFY21
o Iljin Revenue/EBITDA of INR660mn/INR42.8mn for Q3FY20
o Ever Revenue/EBITDA margin - INR330mn/6.6% for Q3FY21 and INR950mn/3.8% for 9MFY21
o Ever Revenue/EBITDA INR590mn/18mn for Q3FY20
o Added 4 new customers in Iljin and few more are in pipeline
o Added Voltas in Iljin and Ever. Bluestar already a customer here.
Exports:
PICL has been able to crack orders which has helped margins
Finished goods exports – CY21 will be submitting samples for US markets as they have different products
Expect orders to come next year from US
It takes 18-24 months to get validation done from customers. The process has started across products with PICL crossed the validation
Exports are miniscule right now but should contribute significantly in medium term (10-15% of revenues)
122 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Capex and balance sheet
The Company has bought land in Supa region near Pune and the construction activity will be started soon
Bought 10acre land here and is adjoining to large brand facilities
1mn unit along with components capacity to be present here
Q4FY22 expected commissioning of Supa plant
Both capex should be able to take advantage of PLI. Subsidiaries also getting ready to take advantage of PLI
Consol net debt at INR2.63bn versus INR3.43bn YoY
Gross debt at INR4.71bn versus INR4.97bn YoY
Debtors at INR6.50bn versus INR5.50bn YoY
INR3bn earmarked for two plants capex. INR150mn already done for land, etc. Rest to be done over the next two years.
Outlook
January 2021 has been positive and expect Q4 to be good
Optimistic on growth from our component business with addition of new customers and demand from newer geographies
Outlook for Mobility application business remains optimistic due to new order wins and strengthening of Order book
See good opportunity in own space and so want to be focused here for the medium term and be more aggressive here itself rather than testing new waters
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bajaj Electricals
General overview
Intend to deliver higher bottom-line growth than top line.
Operating leverage is a bonus on internal efficiency measures, which have reduced costs.
Employee costs to go up in Q4 due to increments.
Consumer segment
Q3 growth - Appliances 36%+, fans 22%, lighting 18%, Morphy Richards 69%+
Market share gains seen for top 3-4 players, including Bajaj, at the expense of smaller players as industry hasn’t grown as much.
Margins have expanded sharply – combination of internal measures and operating leverage
Expect a fair amount of margin expansion to sustain.
Ad expenses have been brought back in in Q3 strongly.
Input cost impact to be seen in Q4 as prices rose in December.
Price hikes taken across products in January (5-9%). which should partially offset this.
Will invest in R&D and brand for the long term and will not be in the nature of high capex.
These investments should not come at the expense of margins.
Expect growth to be resilient without sacrificing on margins.
EPC
Continue to reduce losses in the segment as costs have been cut back sharply.
Losses from the segment are no longer a large drag on the company at large.
Receivables – 15.97bn (UP is INR6.9bn) in Q3 currently versus INR19.73bn in March 2020 (INR17.2bn in Q2FY21).
INR6.5bn is retention money.
Legacy receivables are being collected and cleaned up. Expect to see QoQ improvement.
Future strategy:
o Have scaled down the business substantially. Comfortable with the current level of EPC on an absolute level.
o Will look to change composition of EPC away from distribution towards other segments.
124 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Balance sheet
For the nine months ended FY21, the company generated positive OCF of INR6.1bn against INR5bn YoY.
Debt has reduced from INR9.6bn at 31st March, 2020 (INR5.5bn in Q2FY21) to INR4.4bn as at 31st December, 2020.
INR1.42bn OCF generated in Q3FY21.
Expect to reduce debt in Q4 as well driven by EPC receivables drawdown and CD cash generation.
Total receivables currently at INR21.14bn.
Other comments
Supply-side challenges continue to persist, though its nature has changed over the year.
Ad spends – INR450mn in Q3FY21 versus INR350mn YoY. Margins were better despite high revival in ad spends.
530 distributors currently versus 501 YoY.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Crompton Greaves Consumer Electricals
General comments
Most of the macro indicators have been reflecting a strong recovery for the Indian economy in Q3, higher liquidity in the markets and uptrend in recent GST collections point towards restoration of normalcy
With migrant labourers returning back, factories & Logistics continue to operate above last year levels
Regions that were hit hard due to prolonged lockdown (West) and natural calamities (East) in Q2 has returned to normalcy and has shown positive outlook
Rural Economy seems to be more resilient and promising, further aided by our investment - Rural Channel has witnessed exponential growth
Certain supply chain disruptions were witnessed in northern states due to farmer’s agitation. However, our agile processes and nimble approach ensured no market opportunity was lost
Company faced minor commodity headwinds in Q3 and the same are expected to increase further until commodity prices ease in the future
ECD
Broad based growth across all business
Strong performance by Fans (36% growth) driven by premium fans growing 51% YoY
Premium fans is 17-18% of fans revenue now
Among major players, only Crompton is likely to have gained market share in fans
Fan market growth was 9% in October and November versus around 5-6% pre- covid
Appliances business continues exponential growth with Geysers growing 50%
Sold more than 125k geysers in Q3. Rapidly moving towards leadership position here.
Domestic pumps business grew by 25%. Various new launches have been made.
Appliances continue to be a great opportunity for the company where it continues to focus on innovation
Within a few quarters should be able to take margins higher
Lighting
B2C Lighting LED continues to witness healthy volume growth of 13%
Price erosion in B2C has stabilized
Lighting B2G business grew on back of KSEB tender & Odisha Project execution
Lighting B2B business continues to face challenges due to slow order pick by institutions
126 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Focused largely on ceiling lights as a growth area
Conventional lighting (15% revenue mix) declined by 17%
Market share and channel
E-commerce and MOR channel witnesses 53% growth in Q3
E-Commerce revenue doubled YoY
Rural channel continued its superior growth of 88% in Q3
Continued to gain market share in Fans (1%) and Appliances
Price & Margins
Benefits accruing from cost optimization program
Lighting sustained double digits EBIT margins
Unprecedented input cost hikes are a near term headwind
Price hikes of 5-8% taken by company and industry effective January 2021
Others
Open to enter new categories
Supply chains are much better QoQ
Factory utilisations are up 30-40% YoY
Less than 5% of materials is imported which is largely for lighting segment
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Havells India
Overview
Encouraging business performance with secular growth across divisions and regions led by:
o Improvement in consumer sentiment, festive season and reduction in Covid- 19 cases
o Increased penetration in smaller towns and a higher rural reach
Supply-chain disruption faced by suppliers with high import dependence have further supported market share gains
Healthy growth across categories, primarily led by:
o Expanding distribution footprint
o Robust supply chain
o Gains from unorganised sector
Consumer and Residential portfolio registered ~40% growth, whereas Industrial and Infra grew in mid-teens.
Significant AC growth due to:
o Perceived change in industry dynamics consequent to import prohibitions
o Better availability from own production
o Wider network coverage through regional retailers
o Select pre-buying
Retail demand has been quite healthy even if we exclude the pre-buying seen in last few weeks of December
Real estate demand is improving, project completion picking up.
Demand for Havells’ real estate dependent products comes with a lag
Structural tailwinds witnessed in Q3
Market share shift seen picking steam from unorganized to organized. Once market share shifts, it’s difficult to change unless there’s a disruption.
Witnessing a shift towards make-in-India products from trade, consumers, brands, etc.
Margins and prices
Margins:
o Commodity impact on margins still not fully reflected
o Segment profitability improved substantially YoY owing to operating leverage
o Would strive to maintain these contribution levels in segments although short-term commodity price impacts might accrue
128 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Price increases are to varying degrees based on input cost
o Wires up 15% in Q3 and more so in Q4
o Switchgear: Domestic 5-7%, industrial over 10%
o Full impact of price hike not reflected in Q3 as price hikes were taken throughout the quarter
ECD
Domestic appliances did very well from enhanced distribution strength, better festive demand, strong water heater performance, etc.
Fans have done extremely well. There was some pre-buying in December but demand was good throughout Q3.
Higher supply-chain disruptions has definitely led to market share gains from unorganised
Lloyd
Efforts of re-building brand and channel are bearing fruits
Not pumping wholesale channel in past quarters, it’s the retail demand
Have regained and expanded market share in AC
Dealers have started stocking ACs post Diwali for upcoming summer in anticipation of price hikes due to import restriction
Things are looking very positive
New launches of WMs, refrigerators giving confidence to channel w.r.t. Havells being an all-round player in home appliances
B2B segment
Construction and industrial segments are definitely looking up
Industrial switchgear and cables demand has recovered very well
Professional luminaries demand is yet to revive
Outlook
Price increases may not impact demand as much. However, impact of pre-buying seen in December due to price hikes & import restrictions (AC) may be seen a bit in Q4
Expect trade inventory to be depleted fast and to normalize
Employee costs have normalized in Q3 and can be expected to remain around that
Ad spends are looked at absolute levels. On absolute levels spends have come back but due to higher sales it might be lower in percentage terms.
Have always been aggressive in capacity building and will continue to do so
Don’t need to acquire something just for growth. There has to be a strategy behind it.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
KEI Industries
General
Revenue declined 12.27% YoY in this quarter, mainly because of lower revenue from EPC and execution of one large export order in PY.
MoM demand improvement being seen. Institutional and dealer sales both are seeing traction
Cables & Wires
Total Wire & Cable business of the Company has reached approx. 90% YoY in Q 3 and in 9M approx. 85% YoY
Domestic Institutional Cable Sale increased marginally by approx. 3% YoY in this quarter, while growth in QoQ was 22%.
Total Institutional Cable Sale including export contributed 51.95% in Q-3 and 54.75% in 9M
EHV Cable Sale stood at INR1.55bn in 3rd quarter and INR3.45bn in 9 months
EHV Cable sale posted growth by 14.81% YoY and 51.96% QoQ in this quarter, while in 9M growth was 12.01% YoY
In 9M Export sale of cable declined by 31.23% YoY due to execution of one large export order
EPC and SS Wires
EPC Sale (apart from Cable) decreased by 32.97% YoY in this quarter. Presently EPC contribution is 10.58% in 3M.
During the 9M EPC contribution reduced from 15.94% to 11.35%, which will reduce working capital requirement of the company
Export Sale of EPC is INR210mn in this quarter and INR500mn in 9 M.
SS Wire sale increased by 24.24% YoY in this quarter.
Export Sale of SS Wire is INR180mn in this quarter and INR400mn in 9M
Have not booked EPC orders in past one year
Target to keep EPC within INR4-5bn per year
Distribution
Sales through Dealer/ Distribution market increased by approx. 11% YoY in this quarter
Sales through Dealer/ Distribution contributed 36% of overall sale in Q-3 and 32% of overall sale in 9M
The total active working dealer of the company as on 31.12.2020 was approx. 1645
Sales through Dealer/ Distribution market decreased by 13.55% YoY in 9M, mainly because of Covid-19 restrictions in Q-1.
130 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Debt, cash and WC
Collection in EPC has improved and expect working capital to be at normal level going ahead
INR3.1/2.2bn gross/net debt as of Q3FY21 versus INR3.7/1.5bn in FY20
Acceptances stood at INR3.1bn in Q3 versus INR7.7bn in FY20
130mn interest cost – 6.7mn term loan interest, INR50mn WC interest, INR17mn LC interest, INR10mn bank charges on LC, INR23mn bank charge on bank guarantee and INR25mn processing charges
INR1.75bn capex estimate for FY22
Will do a total capex of INR6bn over next 4 years which will take total capacity of company in C&W to INR100bn.
Outlook
Export to remain weak in near term due to lower economic activity in foreign markets and travel restrictions of sales team hindering new business
INR5bn of export can be expected on an annual basis
Entry into FMEG is being discussed and should be finalized in 2-3 months
Expect 30-40% growth in housing growth segment in value terms next year
Others
67%/ 57% cables utilization for 9M. For Housing Wire it was 76%/61% in Q3/9M.
35% market share in EHV cables in India
Dangote order execution – 9MFY21 was INR1.47bn and INR1.93bn in 9MFY20. It was INR1.2bn/1bn in Q3FY20/Q4FY20. The order got completed in H1FY21
Q3 Exports was INR1.39bn - cable INR900mn, EPC INR210mn, SSW INR180mn. It was INR3bn YoY due to Dangote order
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Polycab India
General overview
Revenue increased by 12% YoY and 32% QoQ in Q3 with healthy underlying growth across segments and rising share of B2C business
EBITDA grew by 11% YoY with flattish margins led by leverage benefits and cost saving initiatives
PBT and PAT was up 22% YoY and 19% YoY. PAT margin was up 59bps to 9.4%
ROCE at 30.6% was broadly stable on YoY basis while Net Cash doubled to over INR13.3bn as of December end
Cables & Wires
Wires and Cables business posted 6% YoY growth despite a high base
Construction activities are progressing, albeit at a slower pace
Consumer demand remains strong with improving sentiment
Business from distribution channel saw healthy double -digit growth however institutional business continues to face headwinds
Within domestic distribution channel sales, Wires grew faster than Cables. Housing wires continued its strong momentum led by distribution expansion, pickup in renovation activity and gains from unorganized segment
Export revenue stood at INR2.9bn or 10.5 % of overall sales in Q3. Revenue declined by 33 % YoY due to higher base of Dangote order ( INR1.4bn in Q3FY21 vs INR3.2bn in Q3FY20 ). Excluding that, exports portfolio posted a healthy 29 % YoY growth led by Australia, Asia and UK
Share of unorganized players have been declining. Pandemic has accelerated it due to lack of availability of capital, labor, etc.
Wires is 40% of segmental revenues.
FMEG
FMEG witnessed strong traction with total income growing by 41 % YoY on the back of buoyant consumer demand, distribution expansion, better product mix and pricing actions
FMEG contribution to overall sales increased 215bps YoY to 10.8 % . Growth was broad based across categories and regions
Fans grew strongly gaining leadership position in few geographical clusters. Overall demand for Lighting products remained upbeat led by festive season
Switches, Switchgears and Pumps posted healthy growth
Profitability in Q3 improved considerably despite higher A&P spends and input cost pressures on account of improved product mix and calibrated pricing actions.
Segment EBIT margin stood at 5.9% and 4.7% in in Q3 and 9MFY21, respectively
Expect margins to reach high single digits in 2 years
132 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
East has grown better than other regions
Gaining market share in fans. In lighting, gaining momentum due to increased B2C distribution reach.
Fans is 40% of segment and lighting is 30%
Others segment
Other segment which largely comprises of our EPC business was down on account of a stronger base
Total income and segmental EBIT in Q2FY21 declined by 53% YoY and 71% YoY, respectively
Annual sustainable operating margin in this business is expected to be in high single digit over mid to long term
Prices and margins
Demand spurt coupled with disrupted supply chains led to harp commodity price hikes globally
September to December saw 15-50% price hike in input costs
Consequently, product price hikes were taken by the company
Price hikes were not commensurate to input cost hikes as product prices are hiked in a phased manner. This impacted gross margins in Q3
On annualized basis, should be able to maintain C&W margins between 11-13%
Other comments
Acceptances are dollar denominated and benchmarked to LIBOR which gives interest arbitrage over Indian rates
60-65%/25% of C&W/FMEG channel uses channel financing facility
B2C is 40% of total revenues versus 30% earlier
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Symphony
General
The worldwide outbreak of Covid19 has impacted the business severely since it hit during peak summer. However on quarterly sequentially there has been uptrend demonstrating strong brand and trade confidence.
The Company has succeeded on protecting its gross margin % in India, Impco- Mexico and GSK China despite steep rise in input cost and challenges of Covid19. This has materialised due to cost rationalisation and launch of new innovative models.
Demand is robust with very positive sentiment at channel level
Domestic business
No overstocking at company level and in some models there has been stock outs.
Channel inventory is back to last year levels as there has been reduced offtake by channel in past two quarters
Retail sales pickup expected to pick-up in Q4 onwards only
Industrial segment: Not a significant revenue contribution. Expect it to grow steadily going ahead.
Subsidiaries
Increased domestic sourcing, higher transport costs (air freight used) and increased labor costs led to Climate Technologies' (CT) margin dip.
Expect Q4 to be a turnaround for CT in both revenue and profitability terms due to various initiatives taken.
Would’ve been positive in Impco, Mexico in 9MFY21 if there was no provision for bad debt
Expect GSK China to break even next year.
Won’t be supplying cooler components to CT Australia. Fully built coolers will be sold.
Outlook
Witnessing very strong trade sentiment in rural and semi-urban areas
Trade collection in December was higher YoY. Due to high ordering, lot of unbilled sales are due to be booked in Q4
Price hike made effective January 1 and wasn’t announced early in December. So don’t expect much of December demand to be pre-buying
Expectation of February being a hotter month so expect good growth going ahead
No acquisition planned right now and don’t see any in foreseeable future
Cash would be utilized for dividend payout only
134 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Voltas
Opening remarks Q3 witnessed healthy upswing in business. Sales across all the 3 segments have improved compared to the corresponding quarter of previous year.
Substantial increase in commodity prices (copper, aluminium, steel, plastic and oil) and sea freight were a cause of concern.
On the exchange front, the USD remained largely range-bound.
Unitary cooling products Record sales of INR8.3bn in the Unitary Cooling segment, representing 40% increase over the corresponding quarter of the previous year, is indicative of the considerable brand pull and traction enjoyed Voltas.
Aided by pent-up demand, channel partners were also keen to secure their share of inventory amidst fears of supply chain disruptions and price escalation.
Appropriate focus on the inverter sub-category with competitive pricing and larger number of SKUs has yielded a favourable outcome–inverter growth was 75% ahead of the previous year and contributed over 60% to all ACs sold compared to 49% for the similar period in the previous year.
Voltas has also achieved leadership position in the inverter category with an exit market share of 21.8% as of December 2020.
In terms of the overall AC market, Voltas continues to retain undisputed leadership with YTD market share of 26% at multi-brand outlets.
The commercial refrigerator vertical has delivered a stellar performance in Q3 by registering 101% volume growth. Stronger emphasis on building relationships with B2B partners combined with Channel expansion and revival of demand from some OEMs have yielded good results.
Performance of the air cooler vertical was satisfactory with a growth of 11% over the previous year, which was aided by increased number of variants and SKUs, along with with appropriate trade schemes has helped secure a wider distribution footprint across the sub dealer network.
Based on Nov 2020 exit numbers, Voltas is now at the No. 2 position with a market share of 13.2%.
Due to commodity price increase, changes in custom duty rates and enhanced supply chain costs, the business has taken 5-6% price increase across all UCP categories. The company believes this is sufficient given the current scenario. If required, Voltas may take further price hikes.
Demand outlook for Q4 remains good as the summer season picks up.
Electro mechanical projects and services Segment revenue for the quarter increased to INR10.2bn compared to the previous corresponding quarter of INR8.1bn, increase being largely across international operations.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Segment result was lower at INR320mn reflecting a conservative margin recognition policy, amidst liquidity stress resulting in delayed collection against the receivables.
Carry forward order book of the Segment stood higher at INR72.8bn as compared to INR70.2bn last year.
Over INR7bn each of fresh orders were added across both Domestic and International markets, helping provide suitable revenue visibility in the periods ahead.
The carry forward order book for domestic projects at INR48bn contained orders across Water, HVAC, Rural Electrification and Urban infra activities.
International order book of INR24.8bn represents MEP work, mainly across UAE, Qatar and Oman.
Progress across new projects in the Middle East has improved given the availability of labour and better access to project sites. However, some of the older projects continue to be delayed, resulting in cost overruns from extended physical presence at site and cost provisions to cover completion / defect liability periods.
On the domestic front, enquiries, particularly for infrastructure projects including Metros, Electricals, Water treatment, etc., have picked up. The allocation of INR 5.5 Lakh crores in the recently unveiled Union Budget is also widely expected to help revive investments with resultant infrastructure construction activity.
There is rising demand for solutions in the indoor air quality space, including UVGI products, automated duct cleaning, filtration, etc.
Engineering products and services Segment revenue and results for the quarter were at INR1.2bn and INR320mn, respectively, registering growth in excess of 40% compared to the previous year’s performance.
The Mozambique operation (Vale) has remained largely unaffected and continues to contribute handsomely to the performance of the mining and construction vertical.
The push by the Government of India on infra projects has re-energized demand for crushing and screening equipment, although the announcement opening up commercial mining is yet to manifest its desired potential.
Voltas Beko The factory at Sanand has completed its first year of operation. Despite various disruptions and multiple limitations on production and supply chain caused by the pandemic, the factory successfully produced over 2,10,000 units of high quality DC refrigerators.
Plans have been made to begin manufacture of frost-free refrigerators over coming months, followed by top load fully automatic washing machine and dishwashers.
Accelerated introduction of exclusive outlets & experience zones along with cost effective digital marketing should help in increasing reach and augmenting brand awareness.
136 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Voltas and Voltbek have a joint presence in 195 EBOs, up from around 90 in the previous year.
Distribution and other synergies with Voltas continue to be aggressively leveraged, costs are well in line with the budget and business is confident of meeting its targets, including that of 10% market share by year 2024-25.
Focus is on increasing production as the factory at Sanand has settled down well. Similar price hikes as the AC products (5-6%).
Restructuring The Board has approved the transfer of its domestic project business relating to MEP / HVAC and Water projects, M&CE business and TMD to its wholly owned subsidiary Universal MEP Projects & Engineering Services Limited ('UMPESL') (formerly known as Rohini lndustrial Electricals Limited), by slump sale through a Business Transfer Agreement.
The transaction is expected to be completed by September 2021 and the purchase consideration is estimated to be in the range of INR10-12bn.
International project business continues to remain in Voltas main company and the management is looking at options to integrate it in a better manner.
Other comments The company expects to gain advantage of the PLI scheme but it does not expect a sizeable inflow from the scheme and are awaiting further details about the scheme.
Lot of investment opportunities due to Make in India as importing might not be sustainable.
Industry size for ACs currently at INR180bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Engineering & Capital Goods
138 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ABB
Opening remarks Higher focus on products than projects is driving better cash accretion.
Witnessing large-scale demand on robotics owing to the shift of manufacturing for some large customers into India.
In line and on track with parentco’s vision and target to see a strong improvement in profitability. Bookkeeping In power generation, Turbochargers which is less than 5% of business is being phased down as focus improves towards renewables.
INR930mn one-off in the Industrial automation division, including VRS impact in Q4, is likely to improve given conservative accounting/review by management. Outlook on business Targeting OPM expansion in line with parent’s 15% long-term margin guidance.
Next two quarters, new orders will remain soft; management remains more bullish on H2 recovery.
What’s doing well: Data centres, electronics and renewables will continue to see high growth for ABB. Food and Beverage (mid double-digit), pharma, power distribution, water & wastewater, rail-metro, etc are seeing double-digit growth. Expect auto to see improved growth going ahead.
What’s not doing well: Building and infra, oil & gas chemicals, cement, etc stay muted, but should pick up over coming period. On Q4/CY20 results Robotics, motion has seen consistent sequential growth in new orders. OPM expansion in motors/electrification reflect a good order mix, cost initiatives, etc. What’s new? Launched new motor series, IE induction motors with a lower footprint, which helps OEMs to package and deliver compact products.
Started new robotics facility in Bangalore recently. Globally, ABB’s digital portfolio is at USD450mn plus versus USD200mn a few years ago.
ABB India is using many global platforms to drive service/asset-based digital revenues. Signed NDAs with many large customers, who are shifting manufacturing base to India, which offers high opportunity for ABB. 2W segment is seeing large-scale traction, and ABB is placed favourably in such new orders.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
AIA Engineering
Financials Revenue remained flat YoY at 6.9bn, 2% ahead of estimate. Volumes, at 65,173MT, were up 8% YoY with mining volumes up 5% YoY, whereas cement volumes grew 14% YoY, with government thrusts on infrastructure.
For 9MFY21 sales volumes stood at 186,925MT, with 1% growth over 9MFY20. Management refrained from giving volume guidance due to challenges in terms of inability of engineers to travel for procuring new business.
With production up 10% YoY, inventories of 8,500MT were restocked during the quarter.
Realisation (per kg) slid 5% YoY, to INR105. Realisations are a function of raw material costs, product mix and cross-currency translations.
For Q3FY21, gross margin rose 133bps YoY, 149bps QoQ due to a restocking of inventories. EBITDA margin dipped 25bps YoY, 98bps QoQ to ~24.7%, owing to higher shipping rates with EBITDA per MT down 8% YoY to INR26,431.
Adjusted PAT was down 1% YoY in Q3FY21 owing to lower profitability.
MEIS benefits expired at the end of August, and RoDTEP benefits are to be applicable from 1st January. In the interim, the company can claim export benefits of INR25mn of which INR20mn were claimed in Q3FY21. Duty drawback benefit at 2% continues for the company.
Working capital days increased slightly as AIAE stocked up raw material inventory due to increase of raw materials with inventory days at 133 days versus 118 days at the end of Q2FY21.
Order book, as on 1 January, 2021, stands at INR5.6bn.
Net cash stood at INR18.35bn at the end of Q3FY21 (vs INR14.6bn at the end of FY20).
Capex for FY21 has been cut to INR2.2-2.3bn, owing to a slight delay in commissioning of the mill linings capacity to H1CY21. Capex for FY22 is anticipated to be INR1.5-2bn. Operations The company saw ferrochrome and scrap prices increase during the quarter, and hence, these were stocked up. AIAE is able to pass on raw material prices with a lag.
An investigation has been initiated by Canada Border Service Agency on alleged dumping and subisidising of certain grinding media from India. This matter is being reviewed and remains subjudice at present. Since the additional duty is a cost for customers, there could be a volume loss of 25,000MT of volumes. The agency could impose an interim duty by March-April with final assessment by June-July.
Status quo remains at the customer in Brazil, with final import duty at 11.8%, from an interim duty of 36%.
140 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
New customer acquisition continues to remain slow with inability of AIAE teams to travel and lower number of engineers at customer sites. While ongoing trials continue, management remains cautious on incremental growth.
The company continues its engagement activities virtually with the key focus being cross-selling and branding as a comprehensive solutions provider. Others Mill liners – Expect 80% utilisation in next four years: Management guided for capex worth INR2.5bn to increase liner capacity by 50,000MTPA, which will be commissioned by June 2021. The mill liners are under trial with various miners; however, management is awaiting commissioning of the facility to take firm orders. Management aims to achieve 80% utilisations in mill liners in four years (market size of 300kt at present).
With the introduction of mill liners, AIAE has become a comprehensive consumables solutions provider, helping miners achieve lower costs, better throughput and higher yields.
Grinding media capex: The company has deferred grinding media capex to FY22 owing to a delay at the mould supplier and changes in design. Management has enough capacity to defer the project by six–nine months. More updates are expected at the end of Q4FY21 on the 50,000MT expansion timeline. The project is going to incur a capex of INR2.5bn.
AIAE has maintained its estimates for grinding media market at 2.5mt over the past few years, owing to conversion of several customers from forged to high chrome. Of the forged media market, 50% is with iron ore miners, while balance is with gold and copper customers. Management believes there is significant head room to grow in the same.
The stated dividend policy remains at 20% of consolidated profits, however, the company distributed higher cash in FY20. The dividend policy is likely to remain the same for the foreseeable future.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Cummins India
Financial performance Commodity price headwinds – Commodity price impact has started to impact. The impact will be visible from next quarter. Management will look at price hike in the next year to mitigate this.
Supply chain issues - ECM and other parts suffering in supply. Cummins India impacted to a smaller extent as we are still at CPCB II
VRS – Across levels and departments in the organization.
MEIS provision – No provision in the current quarter.
Cost control – Trying to hold the line for costs, employee cost reduction and other costs.
Other income – Higher dividend from Subsidiary (INR 380mn) and exchange gains led to higher other income
Other expenses – QoQ had an impairment charge and that is not present in the current quarter.
New CPCB norms – There is likely to be a 6 months delay and will likely be pushed to early 2022. Pre buy demand is strong.
CTIL – Constantly looking at what makes the best for stakeholders of business being in the listed and unlisted entity. Nothing in the short term but over the long term.
Guidance - Not providing full year guidance as markets are still stabilizing. There was 100 days impact due to lockdown in the current year.
Product launches – When parent has made new investment in products, then there is a split between CIL and CTIL.
Cummins is the largest player in the world for supply to data centers.
3 main manufacturing hubs - North America, China and India and India is one of the most favourable cost hub. Segment wise performance Domestic powergen Expect gradual recovery over the subsequent months.
Domestic powergen recovery was faster than expected. Key segments driving growth - Data centers, industrial, infrastructure, rental business. Segments which lagged growth - Medium HP business, hospitality, some segments of retail & commercial realty.
Some supply chain concerns due to imports impacted performance, or else the performance would have been better than reported.
Residential realty demand is slowly getting strong. The demand should pickup once summer kicks in, as demand for AC etc increase.
Exports ME and Africa are gradually picking up.
142 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Industrials Participating in most of the large tenders in the countries.
Construction segment will continue to remain strong over the next year.
Revenue mix Power – INR 4.22bn, Industrial INR 2.56bn, Distribution INR 3.65bn; Exports INR 3.74bn
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Greaves Cotton
Opening remarks Share of non-automotive business increased to 25%-plus from ~8% in FY18.
Restructured into five verticals – Automotive, Non-automotive, E-mobility, Greaves Retail and Greaves Finance.
E- mobility – 80 new outlets added post-unlock and continue to grow. Growth in both retail and customer engagement. Additional capacity addition in south India planned for e-mobility.
Permanent structural 10% fixed-cost reduction. Financial comments Capex – Engine mega site at Aurangabad (two plants in Aurangabad) and EV megasite in southern India. INR120–150mn a quarter, which is expected to continue.
Ranipat plant closure completed.
Cash stood at INR 2.12bn.
NWC days have reduced to 27 (down 7 days YoY).
Some more exceptional costs to be incurred up to H1FY22 pertaining to restructuring. Commentary by segment Covid-19 impact on shared mobility continues to impact 3W segment. Industry still down 60% YoY. However, higher realisations aided revenue, which restricted engine revenue decline to 16% YoY.
Crest engine –Technology is much more efficient than the conventional engine. The engine is ahead of its time. Fuel efficiency norms key for this engine to gain traction.
Automotive business was down by 56% on the back of delay in opening of school and colleges, gradual opening of economy. Revival expected in coming quarters. Have signed up with international OEMs’ and will announce regarding the same at appropriate time.
Auto aftermarket back to pre covid-19 levels. Foresee robust growth.
Gensets – Genset units grew 17% YoY (industry grew 3% YoY). Growth in smart genset is helping gain traction.
Non-auto engines – 44% in Q3. Light equipment grew more than 26%. The non- automotive business is back to pre-covid-19 levels. Ampere Ampere 300 plus stores today – 80 stores added post-unlock. Focus on both B2B (50-plus customers) and B2C (75,000-plus customers).
Product mix (high speed and higher technology) is helping drive growth. High speed is currently 50% of portfolio.
EV megasite in southern India to meet growing demand.
144 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
20–25% of sales currently come from Greaves Care Network and the balance from Ampere dedicated network.
Digital initiatives undertaken, which is helping drive growth.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Kalpataru Power
Operational highlights Operations have reached complete normalcy with site and manufacturing back to 95%. Issues persist in execution in neighbouring countries.
Consolidated revenue grew 11% YoY with EBITDA margin of 10.9% (contraction of 120bps YoY).
Consolidated order book stands at INR313.8bn (including L1) with 73% being domestic and balance international orders.
Net debt at the consolidated level has dipped to INR23.4bn from INR36.8bn a year ago.
Order inflow for the quarter at INR39.2bn and INR15.9bn in Q4FY21 YTD.
While T&D business grew 5%, railways and oil declined.
Bid pipeline looks promising with order book of INR30bn L1 with 80% of that being in the transmission segment and majorly domestic. International business to grow in double digits, while domestic is expected to grow in single digit.
Electrification and track widening projects attracting bids post budget in the railways segment.
Capex guidance of INR20bn for the current financial year and to be range bound (INR20-25bn) for the next financial year.
Completed sale and transfer of Jhajjar KT Transco (JKTPL) to India Grid Trust for an enterprise value of INR3.1bn. Cash from sale received in Q2FY21.
Transferred Alipurduar Transmission (ATL) to Adani Transmission for Enterprise Value of about INR12.9bn. Cash from sale received in Q3FY21.
Fully commissioned Kohima-Mariani Transmission (KMTL) in Q3FY21. Deal in place with CLP India to sell KMTL and closure is expected in Q4FY21 / Q1FY22.
Proceeds from sale of transmission assets to be utilised to reduce debt, capex and support future growth.
Strategic acquisition of Fasttel Engenharia provides access to large power T&D market in Brazil.
Promoter pledge targeted at 45% from current 55%.
KPTL Revenue growth of 1% YoY to INR19.9bn with EBITDA margin of 10.4% (contraction of 10bos YoY).
Net debt down to INR6.12bn compared to INR9.96bn a year ago.
Management expects margin to be sustainable at 10.4-10.5%.
Order book stands at INR133.2bn as on December 31, 2020, with order inflow for the quarter at INR28.7bn and INR8.35bn YTD Q4FY21.
146 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Q3 collections were lower by INR2bn, which are expected in Q4. This led to increase in working capital days to 105, but for the full year they are expected at around 90-100 days.
Indore real estate 35% of units have been sold (46/129) and OC is expected very soon.
INR200-250mn is the balance cost of completion. The total investment in the project was INR3.8bn and management expects to make that back in the next 12-15 months.
JMC JMC reported best-ever quarterly revenue with 15% YoY growth, this was led by better execution in B&F and infrastructure businesses.
Additional transportation and accommodation cost due to covid led to single digit margin of 9%. The company expects margins to be back to double digits.
Net debt reduced to INR6.61bn compared to INR7.35bn in March 2020 due to better collections and efficient working capital management.
YTDFY21 order inflow stands at INR74.8bn with L1 of INR7.5bn which are expected to be awarded before 31st March 2021.
Cash inflows were good in Q3 and management expects the trend to continue in Q4.
SSL 31% YoY growth in revenue to INR370mn with EBITDA margin at 23% (contraction of 230bps YoY).
82% average utilisation.
Management is confident of delivering profit for the full year.
Outlook 15-20% growth with double digit margins expected for the next financial year.
The focus remains on debt reduction through restructuring and divestment of non-core assets and improving RoC.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
KEC International
Opening remarks Revenue growth 7% YoY despite challenging environment, which was led by strong performances in the railway and civil business.
SAE Brazil issues is due to commodity unavailability, COVID related site issues, logistic cost and cost overruns. SAE is likely to be under pressure over next 2 quarters.
Covid is impacting international execution of projects due to visa/quarantine issues leading to delay in international projects.
Three metro sites are impacted in India due to NGT issues and farmers agitation, which had held up supply of cement and steel. Commodity prices Higher commodity prices has led to some impact in EBITDA margins but there is no big impact as such. Steel prices are slowing down gradually now but is a key monitorable.
The company does not plan to focus on fast tracking projects till raw material prices normalize. Margins Margins were down 130bps YoY which were majorly impacted due difficulties faced in Brazil leading to shortage of raw material and high logistics cost along with some commodity pressures.
Commodity prices rising further can be a problem and impact margins even more but the management sees prices cooling down, has increased inventory and have included cost variation clause in some L1 pipeline contracts to counter that.
This level of margin to continue in to the next few quarters. No guideline in terms of double digit margins returning. Business mix De-growth in SAE business and flattish T&D revenue contributed to increase in non T&D share from 32% to 45%.
Due to the high-growth expectations of 20%/50% in the railways/civil business in the next few years could lead to this mix being sustainable and also possibility of non T&D to reach 50% of revenues. Order book Order book + L1 pipeline at INR240bn. The company expects EPC contracts worth INR10-20bn from the green energy corridor.
Order book next year should be strong based on INR500bn worth of bids placed for contracts.
148 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Railways The railways business was up 44% YoY in spite of witnessing delay in project awards. Robust order pipeline at INR100bn.
Facing competitive pressure in smaller value railway contracts (sub INR100cr). The management expects the business to clock 20% growth for the next few years.
Management expects double-digit growth to continue in Fy22 in Railways business with a double-digit margins profile. Cables The cables business witnessed a strong rebound and clocked a 22% growth YoY on the back of additional new products. This growth is expected to continue led by capacity expansion.
This quarter, raw material cost headwinds impacted margins and this impact could continue in to the next quarter as well. Civil Expect the civil business to hit double-digit margins going forward. Received first time orders in chemical, water pipeline industries complimented by repeat orders in cement, metals industries.
Civil segment expected to grow by 50% in the coming years. Working capital, debt and CWIP INR26.4bn net debt in line with targeted level of approximately INR25bn and interest cost brought down by (2% of sales) 60 bps.
Stocking done due to metal prices leading to increase in inventory, leading to increase in Working Capital which should normalize in the next quarter on the back of expected collections in Q4.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Larsen & Toubro
Macro environment and way forward Opening remarks – Most of the parameters are returning back to pre-Covid levels. GDP to grow in H2 as against a contraction in H1. In Q3, there is a strong sequential recovery, with strong orders in infrastructure and hydrocarbon segments. FY21 is a tale of two halves: decline in H1 and growth picking up in H2.
Divestment of E&A business – Have completed the sale of E&A business.
Government borrowing program – Enhanced borrowing program in Centre and State and improving tax collections resulted in better working capital.
Working capital – Customer collections improved aiding cash flows. NWC to sales appears high due to lower revenues. This will result in a higher ask rate for collections in Q4 with pickup in execution.
Hyderabad Metro – In Q3, INR5bn infused in Hyderabad Metro. INR20bn set aside to fund Hyderabad Metro. Till this infusion, L&T should be in a good position to refinance/restructure debt.
Commodity price rise – The commodity price rise is unsustainable and should stabilise. ~50% of the L&T contracts are on cost-plus basis and should provide some hedge.
Workforce – Workforce available at 100% of requirements for the 900 sites in India. Financial comments Revenues – Strict work protocols impacted productive resulting in 2% YoY decline in revenues.
SG&A - Credit provisions partly offset by overhead savings
Advances - INR4.5bn advance against the HSR order
C&CE balance – INR70bn L&T Finance, INR70bn IT and balance in core business.
Debt – INR50bn debt reduction. Net debt to equity at parent level is close to 0.1x and by March expect it to be almost negligible.
Other income – Higher due to higher investible surplus and better treasury management.
Collections from AP - Collection from AP receivables is slow. All the orders in AP are removed and the provisioning is already done
Hyderabad Metro
1. Quarterly run rate - INR500mn (INR300mn from passenger ridership). EBITDA is INR500-600mn, depreciation INR750mn, interest – INR3,650mn. Cash shortfall INR3,750mn.
2. Debt INR140bn and equity INR25bn.
3. 300,000–400,000 monthly ridership is a stable ridership level, which was witnessed during the pre covid levels.
150 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Realty - 2600 units sold and transferred. Out of the balance 3,000 units, ~1900 have been contracted to be sold and balance unsold inventory is 1,100. Favorable response for Navi Mumbai and Bangalore projects. The company expects good prospects from Mass Housing, Healthcare, data centres, etc.
Nabha Power – Pursuing but have not yet identified a buyer yet. Also will look at divesting Uttaranchal later. Order inflow and order book Order prospects for Q4FY21- INR 2.65tn as at Dec 2020, of which INR2.2tn is from the domestic market. Key segments to witness ordering - Metro, HSR, renewables, water, power T&D. International orders mainly in the water, renewables and power T&D segments. Mid and downstream, petro chemicals orders in the Oil and gas space.
INR 2.2bn – Infra verticals maximum, INR 150bn hydrocarbon, INR 80-90bn others.
Management remains optimistic on ordering in the infrastructure segment.
Order book mix – Centre 12%, State 34%, PSU 41% and Private - 15%. INR 900bn worth of orders are multi-lateral funded.
Most orders secured in the 9months period, financing has been secured and there are no significant RoW issues.
Infrastructure As execution picks up, under recoveries of cost will be absorbed resulting in better margins. Power Muted order intake in 9 months due to deferments in award of contracts. Heavy Engineering 60% of order wins in the segment is from exports. Defence Engineering Multiple small value orders replenish opening order book
INR 280bn worth of projects have been cleared by DAC.
Q3 revenues driven by final stages of execution of a large order. Out of the 100, ~87 have been delivered (~13 in Q3).
Ordering in defence is patchy and sketchy. Whenever they come they are generally large contracts that come. Hydrocarbon Domestic order win drove order book growth Development projects Lower PLF in Nabha, coal supply shortage impacted Nabha power plant operations for almost a month.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Thermax
Consolidated order intake Energy - INR 12.9bn
Environment - INR 1.7bn
Chemical - INR 1.0bn
Total – INR 15.7bn (down 3% YoY)
Consolidated order book Energy – INR 36.0bn
Environment – INR 15.3bn
Chemicals – INR 0.8bn
Total - INR 52.1bn (down 4% YoY)
Order inflow and order book Last order – INR 3.5bn from Assam Bio refinery. This has aided order inflow in the Energy segment.
Order pipeline is good (not spectacular). It’s slightly higher than last year. Seeing good traction in cement, steel, refinery, food etc. Most other segments are back to where they were a year ago.
A few large orders are coming for ordering now.
There is a pipeline of FGD projects coming but the competitive intensity needs to be seen. Thermax will not participate if the margins and cashflows are not optimal.
Water – There is good pipeline but the execution for quite a few projects in this segment has not been good. Will selectively look at projects in the municipality and government projects.
The nature of energy is changing dramatically outside India and in India. While this change is a big threat to thermax (captive plants), the share of coal based plants is reducing.
Chemical industry in India is going through a very positive cycle atleast in the near term. When setting up a new plant, there is a lot of additional business that Thermax gathers.
Captive power business – Is reasonably large portion of the business.
Data center should be a growth center for Thermax, but not a very good area.
152 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Financial performance Resumption of operations and cost control measures aided revenue and margin expansion.
Salary cuts have now been reversed.
Exceptional items – Impairment of goodwill in Netherlands B V.
Majority of contracts are fixed price contract. For the product and service portion of the business, there is scope to increase the prices if prices increase.
Cash balance - INR 16.8bn. It has improved over the last 2 quarters, given management focus on cash collections.
Commodity price increase starting to impact margins. Management taking steps to control impact on bottom line.
Energy segment margins – Mix was favourable (one international order) and higher volumes with similar base costs aided margins.
Chemicals – Limited by supply than by demand. In exports, before taking an order need to ensure management can deliver and hence supply side comfort remains key.
Spares / service business – Business has grown faster than the average business. This has been profitable growth.
Capex – FY21 will be lower than the annual average.
International subsidiary and market - Few international geographies continue to witness challenges and will recover only gradually.
Danstoker – Danstoker has not performed to management expectations. The losses in the business were earlier expected to be manageable, but due to next wave of lock down and hence Danstoker again had a loss during Q3 and hence the goodwill on the books has been written down. Plant in Denmark and Poland – That whole business used to do business in district heating market and due to new regulations, the whole district market has changed.
South East Asia – Plant in Indonesia – This has also underperformed against management expectations. Pipeline of opportunities remain fairly good. Expect improvement in sequential quarters.
US – Chemicals seeing good traction with healthy margins.
International mix hasn’t change – 30-40%. This can improve in the future.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Consumer Goods
154 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Asian Paints
Overall
Market conditions are getting normalised as covid-19 cases have come down from peak.
Q3 has witnessed a real rebound in terms of demand conditions.
Recovery supported by festive demand, a good marriage season, real estate/construction activities starting, and pent-up demand. Tier-I and urban demand recovery led to incremental growth and supported the Premium range sales.
Paint market has improved – tier-ii and -iii cities doing well. Urban and tier-I demand has also bounced, shift from the previous quarter.
Volume growth remained strong through the quarter.
Institutional business growth was also seen in Q3.
Product mix becoming favourable now. Growth seen in premium and luxury range. Décor – Good traction seen in the beautiful home service.
Domestic decorative business saw 33% volume growth/26% value growth.
Opened 16 new home décor stores this quarter.
Surface segmentation has not worked in India due to low customer awareness.
The high growth is not likely to continue going ahead. Difficult to comment on where growth will stabilise.
Rural demand was strong in Q3 as well.
No inventory in the pipeline as dealers won’t stock till price hike happens.
Divergence in value and volume growth due to segments such as waterproofing, emulsion coating, etc growing at a much higher pace, which balances out growth in the premium range.
Strategy of getting more share of space remains intact.
Home décor segment is highly tech-led to provide better customer experience. Tech will be the competitive strength for this business in addition to getting in confidence on execution.
Interest rates is one of the catalyst for demand, but not the primary factor. Need other factors in place as well for demand growth.
Don’t have plans for backward integration with respect to RM.
Capacity utilisation at 60% currently.
Looking to grow the project business, and make a larger footprint in India as the opportunity is quite large
International business
IB witnessing good recovery in all parts of Asia and the Middle-East; all regions reporting double-digit volume growth – Ethiopia, Bahrain exceptions.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Waterproofing and premium/luxury segments doing well
Margins supported by low RM prices and cost control.
22% YoY revenue growth; PBT growth of 171% YoY.
Launched the Bath business in Nepal and Bangladesh.
Institutional business
Auto sector sales - Continued to recover well. OEM business reported double- digit growth
AP-PPG: growth led by the powder segment.
Home improvement
Double-digit growth for components and full kitchens segment.
EBITDA breakeven in Q3 for the Kitchen business.
Bath business – strong recovery seen during Q3.
PBT profit of INR10mn in Q3, supported by GM improvement.
Won’t need new capacity for 6m at least.
Q4 demand expectations remain strong – covid-19 could put this at risk.
Cost optimisation remains in focus going ahead as well.
Real estate trend
Certain triggers led the growth –pent-up demand, registration fees. Would watch out for more information to point out as a trend in real estate.
Believe growth to be secular as market penetration remains low.
Margins
Raw material prices have moved up in the coating industry since December owing to crude price movement. Impact to be seen in next quarter.
Forex movement has been supportive.
GM were high this quarter; however prices are likely to be inflationary in the coming quarter; around 6–9%. Will take a call on pricing after observing the emerging trends, but will keep customer value in focus
156 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bajaj Consumer Care
Overall
ADHO Formulation upgraded. Formulation Supported by 2 new TV commercials.
ADHO SKUs Launched across price points. Low-priced packs for increasing accessibility of the brand. Large pack for alternate trade.
Urban has shown signs of recovery with positive growth of 7% YoY in Q3FY21 and Rural is growing by 37% YoY.
ADHO in Q3 saw an overall growth of 14% YoY with larger packs doing well on the back of geography level initiatives.
Amla Hair oil continues to steadily scale up volumes doing well in most Northern states.
Retail loyalty programme in select cities in Urban has helped retail grow in Q3FY21 after significant decline in H1FY21.
Rural growth is supported by scale up of Van operations across the country including the Southern states.
Volume growth of 17% YoY.
Secondary sales growth at 19% YoY for the overall company.
The company recorded highest ever MS at 11.4% in December 2020. MAT’20 MS at 10.3%.
International business has grown by 17.6% YoY in Q3FY21.
The company is looking to get into brands and looking sustainable invest behind brands.
The company wants to continue to dial up ADHO, distribution and getting new customers using social media.
Next year looks like a good growth for urban growth while rural growth will continue.
Last year, Urban contributed 56% while rural contributed 44% vs now it is 50%- 50%.
There is no official dividend policy however last year was an aberration and higher dividend will continue.
Demand is higher for value for money products.
LHO MS has moved from 63% to 65%.
The company expects growth to be robust for at least the next year.
Van operations have been rolled out in southern states as well including Karnataka and Andhra Pradesh. Company has rolled out van operations pan India.
Amla hair oil
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Focus on Distribution and Marketing Ramp up of New SKU’s launched in Q2FY21 (3ml / 300ml /500ml).
Bajaj Amla Hair Oil MS moved by 0.2% to 0.4% in Dec 20.
Distribution – Availability increased to 236k outlets in Dec 20 vs 121K in Dec 19.
Amla hair oil contribution is now 3%-4% of turnover.
The company has restaged Amla hair oil and it will hit the market by the end of the month. It will be one of the company’s growth drivers.
Amla market in roughly in 10 states in the country UP, MP Rajasthan etc where company is already strong.
Bajaj Zero Grey
Listing on all Major Ecommerce platforms and few Modern Trade Retailers completed.
Display + Search Marketing has been a thrust area for scale up in Q3FY21.
Social Media awareness Campaign along with digital marketing on various ecommerce platforms.
Will continue to remain a focus brand for the company in the future.
RM cost and margins
Upward trend due to supply issues in input RM.
LLP Q3FY21 price about 17% above Q2FY21.
Crude prices crossed USD 50 levels against ~USD40 levels in previous quarters.
All edible oils on an increasing trend.
RMO Q3FY21 prices about 8% higher than Q2FY21.
Gross margin 3.2% dip was down to 1.1% impact of one time sanitiser sales and 2.2% on account on inflationary raw material.
The company has taken price hike of 1.5% YoY increase in Q4FY21.
The company’s focus is on growing EBITDA as an absolute number mainly driven by sales growth.
EBITDA might see a couple of % drop in the next couple years due to investment in brands.
Ecommerce new launches will need digital advertising which costs less however other products will require ASP support and hence ASP as a % of sales will move up. It will be supported by sales though.
Company has some inventory buffer from Q3FY21 in raw material as LLP has hardened.
Modern Trade
Q3FY21 saw recovery of Modern Trade business to pre-Covid 19 levels.
Good traction was seen in business during Diwali Festival.
158 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Placement of new brands like Zero Grey, Amla Hair Oil with more Retailers.
New 650 ml SKU launched exclusively for Modern trade in December 2020.
Institutional business
CSD business has seen recovery during this quarter with regular flow of orders.
Brahmi Amla Hair oil product has got reactivated with CSD.
Concerted effort to leverage the Institutional Channel.
E-commerce
E-commerce business grew by ~3x for the quarter contributing to 2.5% of sales.
Optimising and increasing Digital Marketing on various platforms.
Focus on increasing our brand presence on different Grocery, Beauty and Pharma platforms.
Expanding product portfolio on relevant platforms.
External agency appointed to help us improve our brand presence and business in Ecommerce.
Building capability and strengthening team structure for managing the growing E-Commerce business.
Ecommerce was 0.5% of sales last year. Company’s ecommerce contribution is now at par with its competitors for the hair oil category.
Company is doing detailed consumer research for ecommerce specific products. Next 2-3 quarters company will be launching ecommerce specific products.
Company is looking to setup ecommerce team.
Company will only be launching products where it has right to win on ecommerce platform.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Britannia Industries
Overall
Robust General Trade & rural growth; however modern trade and Institutional business are muted.
Diversification of purchase basket as consumers transition to a normal life
Normalized pantry stocking & diversification of diet as more products get on the shelf.
Probably 36–37 quarters straight of MS gains.
Direct reach at 2.29mn outlets.
Rural distribution is also picking up.
Most of the company’s pillar brands are back on air.
The company is focussed on e-commerce as the channel is growing exponentially.
New launches have been muted, however, the company did launch a few products.
The company is looking at accelerating its pace of innovation and launches.
With covid-19 led disruption, the company will focus back on strengthening distribution infrastructure and reach.
The focus on brand building and visibility will continue.
Ongoing large IT transformation will end over the next three months.
Health and wellness trend is here to stay. Companies will need to align portfolios to this trend.
Exit growth is similar to the quarter’s growth.
600 trains running out of 13,000 in Q3FY21. Over 1,000 trains running now but occupancy is still 50%. Transit clusters not performing, which is big for the company.
Parle has executed well during covid-19 times. Also down-trading worked in Parle’s favour.
A slew of product launches are lined up for core and adjacencies at both affordable and premium price points.
Only two players have gained share in this quarter – Britannia and Parle.
Wafers has done well, growing 30%+ YoY.
Croissants growing well in test markets. The company is rejigging its product as well.
Growth rates are below what the company expected.
By channel, Future Group was a big partner and now it is not there.
160 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Traditional and rural growth were above pre-covid-19 levels. If urban and institutional business had grown at normalized level, growth would have been higher than pre-covid-19 levels.
E-commerce contribution is about 1%. Used to be 0.5%.
Modern trade contribution would be about 10%. Lower than pre-covid-19 levels.
Capex is 60% of normal levels in FY21 at about INR2bn. In FY22, the company will review the Bakery capacity and demand, and then take a call on capacity addition. Going ahead on the dairy project as planned.
A good deal of company’s growth is coming from rural India, and thereof smaller pack contribution is high. The company is geared for both small and large packs.
Wafers used to work on high discount and high retailer margin model. The company persisted with its model of no discounts and reasonable channel margin and has made inroads. The company is the no. 2 player in the category and no. 1 as far as distribution is concerned. Building a plant in Tamil Nadu, which will spur its innovation in this category.
11% YoY volume growth YTD. Growth rates will revert to pre-FY20 levels.
35%-40% of the market are four Hindi belt states (Rajasthan, MP, UP and Gujarat). The company was under-indexed with only one–third of the national market in these states. Now it is half of national market share. So still plenty of room to grow.
Pre-covid direct dispatches was 8% and it is now at 22%. Direct dispatches aid transportation cost.
The ERP system is being upgraded. Dealer manager system (12–15 years old) is also being upgraded. Vendor management is also being upgraded. All these systems will be integrated; hence, we will have more data for business decisions.
INR7bn capex done at Ranjangaon. Total capex planned is INR15bn, which includes the dairy project as well. The company has until 2024 to complete it. All of the company’s categories are present there. 110% incentive from Maharashtra for capex.
International business
Healthy growths in the Middle East & Africa.
Rest of International continues to grow at a healthy pace.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Adjacency business
Improvement in Bread profitability.
Stable growth & improved profitability in rusk.
Rusk has grown by a solid double-digit growth, but cake hasn’t grown in double digits.
Cake innovations have done well, but core category is down due to schools being shut and it being more urban-centric. The company has gained MS in cake.
Cheese continues to grow in double-digits
Recovery in Drinks as out-of-home consumption is picking up gradually.
Milk prices have come off, which has led to improved profitability.
The company will be open to inorganic acquisitions; however, valuations are high.
Raw material and margins
Steep inflation in certain commodities like palm oil.
The company will look to maintain these high margins to whatever extent possible.
162 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Dabur
Overall
Standalone business revenue grew by 18.5% YoY (FMCG India saw 19.5% YoY growth) on the back of 18.1% YoY volume growth.
Ecommerce grew 150% YoY and now contributes 6% to company’s revenue.
New products in the last few quarters have evinced good response and now contribute 4-5% to company’s revenues. YTD it is around 6%.
Innovation will continue to be a strong driver of growth for the company.
Sanitizers have not done well this quarter. Revenue, which was INR500-600mn in Q1FY21, is now down to INR20-30mn. Company will look at discontinuing sanitisers.
Healthcare juices are doing well. Health drops are doing well as well.
Ecommerce initiatives are doing well except for Odomos racquets.
New range of hair oil also doing well.
Will restrict cold pressed mustard oil to ecommerce and then look at scaling it to modern trade.
Ecommerce will help modern trade as modern trade chains also have online portals. B2B ecommerce is also doing well. Ecommerce will structurally keep growing.
Company is specifically focusing on ecommerce, modern trade and cash and carry channels.
Ecommerce was always a cradle for premiumisation. Cost of failure is high in GT. Ecommerce can be more targeted as well.
Cost of creating consumer awareness much lower on ecommerce than on GT.
In order to promote exports, company has a set up 100% owned subsidiary. Healthcare demand has picked up in a lot of countries. White label and company’s own brand to be exported across all categories.
Company should be able reach 1.4 mn direct reach by the end of the FY.
Margins and topline growth needs to be managed. Company will invest in A&P when costs are benign and cut down on A&P when costs are inflationary.
A&P spends a % of sales is around 10%, company will want to go up to 11.5-12%.
Company has created a ecommerce vertical hence ecommerce contribution has sharply moved up. The company has to connect with the millennials. Company is working towards it but still is not completely satisfied with it.
Supply chain infrastructures is geared for new launches. Company has also rationalized warehouses. 36 warehouses have come down to 25 warehouses post GST implementation. Company has also tweaked its GTM model as well.
Some cross pollination opportunity exists in distribution.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Company will look at capex going forward for exports and as well for Domestic business. Domestic business will see capex in FY22.
Company picks up new products on the basis of category size, capability, profitability and right to win etc.
Channel inventory has gone down from 21 days to 13 days.
Next 2-3 years healthcare should drive growth. Next year healthcare base might lead to slower growth however other categories which haven’t fired will step up.
Company is trying to cover more and more ayurvedic chemist.
Company had already augmented capacity across brands.
Company is also automating a lot of its factory operations.
Company always looks to cut tail end SKUs and rationalize it. Company will trying line split at distributor end.
Healthcare
Healthcare grew 28.1% YoY
Recorded strong growth on the back of robust double-digit growth of Dabur Chyawanprash and Dabur Honey.
Market share in Chyawanprash category increased by ~120 bps. Penetration of Chyawanprash is now about 6%.
Market share in Honey category increased by ~700 bps. Honey penetration is 24- 25%.
Exponential growth in Honey might come off however company will endeavour for growth to continue.
New launches are aimed to provide more value added products. Company abides by FSSAI rules and its Honey confirms will all the FSSAI laws.
Honey is INR15bn market size. Chyawanprash category is about INR10bn
Didn’t see significant impact of the Honey controversy.
Growth in Chyawanprash will continue. Exponential growth might come off.
Ayurvedic study with ministry of Ayush points towards Chyawanprash helping with immunity.
Pudin Hara portfolio saw strong double-digit growth in Q3FY21.
Hajmola portfolio was impacted due to lower outdoor activity, reduced outside food consumption and closure of restaurants - seeing sequential improvement. (-50% YoY vs now -15% YoY)
Out of home sachets contributes about 70% to Hajmola. That isn’t growing due to kids not going to school etc.
Driven by strong growth in Honitus, Lal Tail and Shilajit Portfolio.
NPDs like Dabur Health Drops, Health Juices and other immunity boosting products added to the momentum of the portfolio.
164 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ethicals grew in double digits on the back of distribution expansion, visibility initiatives and activations.
Immunity@Doorstep initiative entered phase 4 with an addition of 10 cities.
Shift happening from Allelopathy to Ayurveda and company is capitalising on it.
Company is trying set up a portal to connect Vaidya and consumers.
HPC
HPC grew 15.9% YoY.
Red Toothpaste continues to see good demand momentum.
Meswak and Babool Franchise also reported robust double-digit growths.
Dabur Red contributes 70% to toothpaste business. Rest of brands contributes the remaining 30%.
Dabur Red has grown 30% YoY. Other portfolio has grown by 20-25% YoY.
Toothpaste market share improved by ~120 bps.
Herbal category growth has benefitted Patanjali and Dabur. MS gain is cost of the leader.
Oral care category has grown 9% YoY in value terms and 3% YoY in volume terms. Herbal category is growing 14% YoY. Company has gained MS in all of its oral care brand.
Pipeline filling could only contribute 4-5% to oral care growth so most of the growth is structural. White toothpaste consumer increasingly moving to non- white.
Opportunity to garner market share in Modern trade. Expect oral care to grow faster in MT than GT.
Witnessed a strong recovery in hair oils.
Perfumed oils and coco oils portfolios reported double digit growth. Market share improved by ~20 bps.
Shampoos portfolio registered strong growth in spite of decline in the category.
Market share in shampoo category increased by ~50 bps to touch 6.5% MS. Bottle saliency is 15% of the shampoo business.
Air freshener category continued to be impacted being more discretionary in nature. However, Odonil’s MS improved by ~210 bps.
Mosquito repellant creams also saw a decline, but Odomos’ MS increased ~250 bps.
Driven by strong growth in Fem Handwashes portfolio.
Gulabari and Fem are seeing sequential improvement as mobility and social activity are going up.
Foods
Foods grew 4.7% YoY.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Juices business excluding Enterprise (HORECA, FS and CSD) saw a growth of ~8% YoY.
Structural issues are behind for the company in the juice business.
INR 10 price point is doing very well. PET bottle has also done well.
Market share of Real increased by 20 bps.
Activ Coconut Water reported strong double-digit growth.
Recent launches of Real Mango Drink in PET, Dabur Amla Plus and Real Frappe showed good traction.
Hommade brand performed well driven by increased cooking at home.
Excluding the HORECA business, Culinary business recorded growth of 43% YoY.
Recent launches like chutneys & pickles added to the growth momentum.
Growth should be robust in the juices business. Business should trend in double digit.
International business
International Business reported a growth of 13% YoY (CC growth of 14.1% YoY)
MENA saw a turnaround and clocked a growth of 11.1% YoY.
Egypt recorded an increase of 9.5% YoY.
Hobby had a strong quarter, growing by 33.4% YoY.
Namaste business posted 8.2% YoY growth.
Nepal business grew by 12.9% YoY and Bangladesh saw a growth of 17.4% YoY. Growth is sustainable
Most international markets doing well.
RM and margins
Raw material prices firming up. Agri and crude linked prices are trending up.
Company will take calibrated price hikes to combat inflation.
Company will balance cost increase using price hikes, lowering promotion and cost optimisation.
Company is witnessing 5-6% inflation. There is inflation is herbs and spices.
Healthcare contribution will keep increasing and hence gross margin will keep increasing but company is spending highly on advertising as well so EBITDA margin might not expand a lot.
Cost savings of INR500mn accrued this year and another INR1bn savings will come in next year. Company is working with an external consultant as well.
Ad spends will normalise from Q4FY21. Didn’t necessarily spend A&P on NPDs as they had intrinsic demand. Core brands got most of the A&P.
166 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Emami
Overview
13% YoY volume growth in Domestic Business, 16% sales growth
International business grew by 26% YoY
Institutional business dipped 27% YoY
Healthcare Range grew by 38%, BoroPlus grew by 21%, Kesh King grew by 16%, Pain Management Range grew by 12% and 7 Oils in one grew by 32%. Zandu Honey became 2.5x. Chyawanprash portfolio grew by 24%.
Male Grooming range recovered and posted positive growth led by the relaunch of Fair and Handsome Range – grew 5%.
While rural markets continued to perform better, growth in urban markets also picked up.
All the channels continued to perform well and posted convincing growth with e-commerce channel growing by 3.5x during the quarter.
E-commerce now 3.1% of domestic business.
Modern Trade also registered a strong growth of 51% during the quarter.
Board of Directors declare 2nd Interim Dividend at 400% i.e. INR4/- per equity share
Looking to close the year with a high single digit YoY growth
Honey: Market has been growing fast, riding the growth momentum. Impact of controversy has died down.
EMASOL: Challenging category, strong competition. Focusing on pricing – lower margins, but not significant in the overall portfolio and selection of distribution channel – e-comm, MT, and some rural markets.
Raw material prices as of now remain benign, don’t see the pressure on gross margin. Some price increase has happened for a few RMs in the last 30 days. Pricing revision is also due, will take a call once the RM prices stabilise.
Zandu healthcare portfolio doing very well. New products are likely to be added in the portfolio. Will be expanding the market for this portfolio.
Seven oils in one is present across geographies. Kesh King largely present in the Hindi belt
Pilot started in the 4 new states, have budgeted INR700-800mn for this. Post this, will be looking to expand in 12 other states which the company has identified.
Penetration for most brands has increased post-pandemic
Believe volume growth is likely to sustainable as the growth in broad-based and not only due to the winter portfolio.
Committed to bring down the share pledge to zero. Currently at 36%.
First three weeks have been good in Q4. Navaratna sales to pick up once the summer sets in.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Margins
Gross margin expanded by 214bps YoY
EBITDA was up 28.9% YoY with EBITDA margin expansion of 395bps YoY.
Margins increased due to stringent cost control measures and benign raw material prices.
Highest ever EBITDA margin of 36.4% in Q3
Margins to remain similar going ahead as well. Don’t see big change.
Benefits from cost optimisation are likely to reflect in the coming quarters. Would prefer to re-invest the extra margins towards growing brands.
30% EBITDA margin guidance going ahead
Innovation
30+ New launches in 9MFY21; 60+ SKU’s launched in 9MFY21
During the quarter, the company launched a new brand – “EMASOL” which offers a complete range for home hygiene products. EMASOL is the first Home Hygiene Range to hit the Indian market that apart from killing 99.9% germs, also has BGV24 advanced antimicrobials action that offers upto 24 Hours protection from virus, germs and bacteria.
Apart from EMASOL range of home hygiene products, the company also launched Zandu Ortho Vedic Oil for knee and joint pain relief. The product is first in its category to provide “7 Days Visible Improvement”. Overall, new launches contributed to 4% of Domestic sales in 9MFY21; 3% in Q3FY21.
The quarter also marked the relaunch of Fair and Handsome with fresh packaging, communication and strategy as Fair and Handsome Radiance Cream and Fair and Handsome Instant Radiance Face Wash.
A new differentiated packaging design for Fair and Handsome Facewash was launched in line with Men’s Face Wash category codes
Zanducare.com growing well
International business
The company’s International business also grew strongly by 26% led by MENAP and SAARC regions during the quarter
MENAP grew by 82% while SAARC grew by 8%
Special focus on immunity boosting products & launch of hygiene range during the ongoing COVID pandemic helped in boosting sales
Further, the strategy of identifying & tapping opportunities in markets with high hair oil usage, with brands like Kesh King & 7 Oils in One paid off well in International markets.
The CSD business however declined by 27% during the quarter
New Launches incl. Immunity Boosters, Sanitizers and Hygiene products contributed 4% of International sales in Q3 and 6% in 9MFY21
168 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Godrej Consumer
81% of global portfolio comprises household insecticides, hygiene and value-for- money products; it delivered 14% YoY growth.
Second consecutive quarter of double-digit growth; India 11%, Africa, USA & Middle East 17% (CC), and Latin America & SAARC 35% (CC); Indonesia declined 2% (CC).
Strong growth led by soaps and a sharp recovery in hair colour.
Steady performance in HI.
Doubling down on chemists and e-commerce; ramping up rural distribution.
Continue to scale up hygiene.
Scale-up in e-commerce continues and modern trade continues to recover.
Hygiene is a broad-based play and not just sanitisers. The company will play in the sanitiser category, but will do so with innovation.
Organic growth is the company’s focus. In India and Indonesia, however, the company is open to an appropriate inorganic opportunity.
The company is looking for inorganic opportunities in places such as Bangladesh and Nigeria.
Household Insecticides
Consumers do not want to take any chances with their health; vigilance against mosquitos and protecting themselves against malaria and dengue has gone up.
Full portfolios across formats and price points in India and Indonesia.
Continue to pivot advertising more towards disease prevention.
Multiple growth opportunities in the category: penetration, innovation in burning formats, scaling up non-mosquito portfolio and upgrades, premiumisation.
The company isn’t happy with HI’s growth rates.
HI penetration has gone up.
Premium formats are growing in double digits. High twenties growth in non- mosquito portfolio as well.
Illegal incense sticks are back in the market, impacting burning formats.
Natural incense sticks have worked somewhat, but not completely.
Saliency of Gold Flash machines is going up with 30mn machines already seeded and looking to seed another 10mn more machines.
In burning formats, the company is lining up launches to combat illegal incense sticks. The company will take illegal incense sticks head on over efficacy.
There will be innovation in coils as well.
Innovation pipeline is on molecule and product part as well.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Soaps
Second consecutive quarter of double-digit sales growth of 15%.
Continue to gain market share.
Continued focus on micro marketing initiatives to drive growth.
New launches in Health are scaling up well.
Sebamed’s PH issue shouldn’t impact GCPL. The company is confident of its soap’s quality. It is rated grade one.
Historically, the company has gained market share in soaps in an inflationary environment.
The company is planning for a steady performance in the soaps category to continue next year.
2/3rd volume and 1/3rd price growth in Soaps’ growth.
Can’t pass through 30–50% hike in palm oil in a short period of time. So, the company will use multiple levers.
Hair colour
Sales growth of 14% YoY driven by an uptick in the overall category growth.
Continue to gain market share.
Godrej Expert Rich Crème continues to perform well by leveraging Do-It-Yourself (DIY) trends through influencers.
Godrej Expert Easy 5 Minute Shampoo Hair Colour performing well post-national scale-up.
Indonesia
Market share gains in Household Insecticides continues.
Targeting bottom end of the pyramid with the launch of HIT Expert Piramida 4 hour revolutionary paper-based mosquito repellant (4x less smoke and up to 10 hours of overnight protection).
Gradual recovery in Air Fresheners. Higher competitive intensity in Wipes.
Strong traction in Hygiene continues.
Launched Saniter Health Soap that provides 99.9% protection from germs and viruses.
Wet wipes 14–15% of Indonesia business. New player has come in the market and has adopted a price warrior strategy. Growth would have been 3–5% higher had this issue not happened.
The strategy in Indonesia is also to build GT distribution up there.
Burning is more than 25% of HI in Indonesia. The company’s new launch should set it up well.
Reach has increased from 85,000 to 120,000 outlets and the endeavour is to reach 200,000 outlets.
170 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
General trade is about one–third of the company’s business.
The company will look at inorganic opportunity in Indonesia as well.
Hair colour business in Indonesia is doing very well. Hair colour is a styling business in Indonesia and not just a ‘grey coverage’ business.
GAUM
Strong sales growth in South and West Africa. Strong performance in Dry Hair.
Seeding new go-to-market initiatives.
Test piloting Good Knight Power Shots in Lagos, Nigeria.
Launching the Darling range of hair extensions in the USA with Walmart.
Low hanging go-to-market initiatives have helped strong growth.
Growth rates are sustainable over the medium term.
Building blocks are still being put in place.
The company is ramping up local manufacturing to make up for the shortage in dry hair.
The company is working towards increasing direct reach.
Margins
The company is calibrated in taking price hikes.
Gross margin compression will also be mitigated by cost optimisation.
The company won’t compromise growth over margins. On a consolidated basis, the company has multiple margin levers.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
HUL
Overview
Growth in the quarter was competitive and profitable with Reported Turnover Growth of 20% YoY and Profit after tax growth of 19% YoY.
Domestic Consumer Growth (excluding the impact of merger of GSK CH and acquisition of ‘VWash’) grew at 7%.
Higher mobility, consumer relevant innovations and investments behind market development are driving business momentum.
Company’s business fundamentals remain strong with 86% of its business gaining penetration. Health, hygiene and nutrition forming 80% of company’s portfolio continues to grow in double digits and company has seen significant improvement in discretionary categories.
Inflationary pressures elevated in select commodities
Crude, palm oil and tea prices have moved up sharply
Launched hygiene products under the Lifebuoy brand – laundry sanitiser, germ kill spray.
Have strong e-commerce exclusive product portfolio. Gained share in e- commerce. E-commerce channel contributed 2x YoY.
Significant improvement seen in discretionary and OOH product consumption and demand
7 of the existing categories grew in double digits in Q3
Cost improvement of 90bps seen sequentially
Media rates coming back to normal gradually.
Will continue to invest behind building and scaling distribution of brands. Other expenses higher on account of that.
Took a price hike of 2.5% in DQ. Will be taking another pricing action in the coming time. Overall price hike to be around 5% incl Dec price hike
Both Horlicks and Boost saw double digit growth. Taken Boost national. For Horlicks, experimenting with LUPs. HUL’s reach has surely helped to develop the brand and the market as whole
Looking at opportunity in terms of a naturals product in oral care
Rural and GT doing well. Urban and MT picking up, but slow. Believe urban demand/MT to recover once vaccination drives are done.
Beauty products seen strong bounce back as lockdown restrictions are coming off and public gatherings have resumed.
Not worried about near-term margins. Have multiple levers to maintain margins. Looking at longer term play as ample headroom available.
Growth and protecting the business model to be the priorities for the coming quarters
172 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Looking to give value to consumers. Wont flinch from running promotions for certain products.
Home Care
With increased mobility, Fabric Wash performance in the quarter improved sequentially. Company’s focus on driving market development has enabled it to grow Liquids and Fabric Sensations segments strongly.
Household Care continued its strong performance across segments delivering double-digit growth. The company continues to step up innovations and have launched ‘Nature Protect’ a range of multi category hygiene mix powered by plant-based actives.
The company has also entered new demand spaces with launch of ‘Vim Matic Dishwash’, ‘Surf Excel Smart Spray’ and ‘Surf Excel Active Hygiene’ to cater to its consumer’s needs.
Household Care: Consecutive quarters of double-digit growth across segments led by penetration gains
Launched Nature Protect and Vim Matic
Fabric Wash: Competitiveness sustained, performance improving sequentially with increased mobility
Liquids market development continues to yield good results;
Surf Excel Smart Spray and Active Hygiene launched
Purifiers: Stable performance led by strong execution in e-commerce
Beauty & Personal Care
Beauty & Personal Care grew 9% with robust performance across categories and strong double-digit growths in Skin Cleansing, Hair Care and Oral Care.
Skin Cleansing performance was led by ‘Lifebuoy’ and double-digit growth in the premium segment. Skin Care portfolio growths were led by good demand pick- up in the winter portfolio.
Company’s consumer-focused portfolio interventions in Hair Care are yielding strong results.
‘Close Up’ and ‘Pepsodent’ accelerated as contextual communications drove brand salience.
Color Cosmetics performance is improving sequentially.
During this quarter, company launched ‘Vaseline Anti-Bacterial Hand Cream’ and a new range of ‘Dove’ body lotions.
Skin Cleansing: High double-digit growths led by Lifebuoy. Premium Skin Cleansing (Dove & Pears) revives; grows double-digit. Lux growth momentum sustained
Judicious pricing to manage commodity inflation
Hair Care: Robust double-digit growths, broad-based performance across brands. Consumer focussed innovations yield good results
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Skin Care: Winter portfolio picks up momentum with strong performance in Vaseline; Facial Cleansing & Talc continue to do well.
Foods & Refreshment
Foods & Refreshment sustained the high growth momentum growing at 19%.
In Tea, all of company’s brands continue to grow in high double-digits and well ahead of the market.
Coffee saw launch of ‘Bru Veda’, a new variant, with infusion of ayurvedic ingredients. In Foods, Ketchups and Soups performed strongly growing high double-digits.
Company’s Nutrition business too grew in double-digits as business returned to normalcy post restoration of disrupted supply lines.
With relaunch as ‘Plus’ range from the house of ‘Horlicks’, company made strategic intervention into the high sciences space of adult nutrition.
Ice Creams, Foods Solutions and Vending businesses are improving progressively as out-of-home consumption occasions increase.
174 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Marico
The domestic business delivered a turnover of INR 16.27bn, up 18% on a YoY basis, on the back of a strong underlying volume growth of 15%.
The operating margin was lower YoY at 21.6% in Q3FY21 vs 23.2% in Q3FY20, owing to the residual impact of inflationary input costs after the Company increased effective consumer prices in select portfolios, rationalized advertising spends in discretionary categories and realized accruals of annualized targeted cost saving initiatives of INR1.5bn in the current year.
Parachute Parachute Rigids clocked a robust 8% volume growth in Q3FY21, ahead of its medium term guidance, reaffirming its leadership position and ‘trusted brand’ equity.
Rationalization of consumer offers enabled the brand to counter the inflationary trend in copra prices to a certain extent, with prices effectively increasing by ~5% in Q3.
Given the market construct and brand equity, the Company expects to deliver 5- 7% volume CAGR in Parachute Rigids over the medium term.
Saffola For the fifth consecutive quarter, Saffola refined edible oils delivered double digit volume growth, posting a healthy 17% YoY volume growth in Q3FY21.
Increased household penetration and relevance of healthy cooking continued to lend impetus to the franchise. ~65% of the growth was attributable to increase in overall penetration
Owing to inflation in key raw materials, the Company took price increases of ~15% in multiple rounds over Q3 to recover a part of the cost hit.
Foods portfolio The Foods portfolio posted a robust value growth of 74% YoY in Q3FY21.
The Oats franchise continued to ride the health tailwind and posted a value growth of 50%.
Delivering on the promised “100% pure” claim, nutritional value and immunity boosting benefits to the consumers, Saffola Honey scaled up across channels. The brand has been tracking well-ahead of expectations, despite facing intermittent capacity constraints during the quarter, exiting with a close to double digit market share in key Modern Trade chains and crossing a 20% market share in E-Commerce.
Saffola Arogyam Chyawan Amrut, launched in select markets during the quarter, is tracking in line with launch estimates.
In line with its aim to strengthen its presence in the healthy foods segment, the Company entered the plant-based protein category with the launch of Saffola Mealmaker Soya Chunks
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Expect the segment to deliver INR3.25-3.5bn in revenue in FY21. Will target INR4bn next year.
VAHO In Q3FY21, Value Added Hair Oils registered a strong volume growth of 21% after a soft H1, backed by a double digit volume growth in most of the brands in the franchise. General Trade led the growth with rural outperforming urban. Modern Trade also returned to pre-COVID levels. The Company estimates a healthy market share gain in the portfolio.
Nihar Naturals Shanti Amla Badam continued its growth momentum and grew strongly across markets. The Company will continue to invest in TV and print media to further strengthen the brand image and drive penetration of larger packs.
Nihar Naturals Coconut Hair Oil registered a strong growth in the quarter and the “magic of coconut” campaign led to penetration gains in East. Parachute Jasmine recovered sharply with recent pricing interventions and the new thematic communication triggering demand in the key markets. Hair & Care franchise too bounced back with a double digit volume growth.
Over the medium term, the Company aims to build on to the growth in this franchise by adopting a three-pronged strategy: a) Continue to aggressively participate at the bottom of the pyramid on the back of its leadership position as consumers are increasingly value conscious in their purchasing behavior and are exhibiting a heightened preference for trusted brands; b) Accelerate growth in the mid segment through pricing & brand renovation; and c) Aim to gain market share in the premium segments, where the Company is relatively under- represented, through brand building and innovations offering higher order sensorial and functional benefits.
30-35% of the saffola honey coming from e-commerce and MT.
For Masala Oats 2/3rd of sales coming from GT
Won’t be investing further into the hygiene brands. Were more of tactical play for covid. Believe companies with strong legacy brands will have the right to win.
8% sales coming from e-commerce for Marico now
Believe significant opportunity for the foods to scale up
Positioning Oats as not only breakfast but also as in-between meals consumption
Non-sticky hair oil seeing good recovery
Breakeven for rural portfolio in terms of distribution is around 2 years
Oats continuing to see growth as penetration increases, for Masala Oats. Grew 20% plus in Oats last year. Have increased the distribution for Oats and also introduced some regional flavours to drive sampling.
Soya Chunks and Masala Oats margin is almost similar. As of now the market for Soya Chunks is fragmented with some branded players present.
80-85% sales from Beardo coming from DTC and e-commerce.
Have cut consumer promos in VAHO. Also taken price dip for two VAHO brands. No impact on VAHO GM despite price drop and input inflation. Looking to bridge
176 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
the volume and value gap in VAHO over the coming years. Might look to launch premium/serum in this range to bridge the gap.
Lead pricing in Parachute (hair oil) but follow pricing in Saffola (edible oil).
Despite price hike, no impact seen in Saffola demand.
Honey doing well as good product, good marketing and distribution. The branded honey category overall is also seeing strong growth. Believe honey will be a long- term play for Marico.
Endeavour is to deliver 8-10% volume growth in the long run.
Input costs and pricing Copra market prices were higher by 26% YoY and 16% sequentially in Q3FY21 mainly due to leaner supplies and lower coconut to copra conversions. The Company is witnessing early signs of prices cooling off and expects progressive correction as the peak season sets in. In FY22, the Company expects copra prices to be flat on an annualized basis owing to a healthy crop outlook.
COVID-19 led disruptions and major weather anomalies in key growing regions played a pivotal role in the way vegetable oil prices moved during Q3FY21, with most of the vegetable oils witnessing inflation YoY. While rice bran oil was also sequentially up 7% in Q3FY21, the Company expects this rise to be transient and come down over the next few months.
Liquid Paraffin (LLP) and HDPE were up 12% and 18% YoY, respectively. The Company derives comfort and confidence from the pricing power that its brands enjoy.
The Company would continue to exercise a bias for franchise expansion as long as margins remain within a band and do not fall below a threshold at the overall business level.
Sales & distribution As day-to-day operations gradually returned to normalcy, Q3FY21 carried forward the momentum of the previous quarter with the Company’s distribution back to pre-COVID levels in both urban and rural areas.
Continuous focus on expanding direct reach, has enabled developing a network of 6,200 stockists in the rural market, a growth of 30% since FY19 and to further strengthen and tap deeper, the Company aims to grow the network by ~20% in the next couple of years.
Markets/distribution channels General Trade performed consistently with sales in urban and rural markets up by 10% and 24% in volume terms respectively.
Modern Trade returned to pre-COVID levels with rising footfalls.
E-Commerce delivered an exponential growth of 88% YoY, now contributing 8% to the overall turnover.
CSD recovered sequentially, however posting a decline of 10% YoY.
Marico India With faster than expected recovery in the demand sentiment and a declining COVID graph, the sector appears to be gradually regaining its sheen.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Remain optimistic that this trend will sustain owing to growth witnessed in rural and expectations of a growth-oriented Union Budget. In light of the above, the Company is confident of growing well ahead of medium term aspirations in the next few quarters.
Parachute Rigids clocked a steady 8% volume growth. Given the market construct and strengthening brand equity, the Company expects to sustain the elevated growth trend in the short term and stay in the range of 5-7% over the medium term.
Value Added Hair Oils posted a healthy 21% volume growth with most of the leading brands recovering smartly. The Company aims to capitalize on its leadership position in the market and sustain a double digit growth trajectory over the medium term.
Saffola Edible Oils has exceeded medium term aspirations on the back of improved penetration through a variety of channel/pricing/promotion measures taken over the last 18-24 months. As consumption patterns eventually normalize, the Company expects to sustain high single digit volume growth over the medium term in this franchise.
The company will continue to innovate and broaden its play in the Foods category and is poised to reach the INR 4.5-5bn mark by FY22.
Saffola Honey has started on an exciting note and will continue to build consumer trust on the back of its superior quality and nutritional value. The brand is expected to touch INR1bn in revenues in FY22.
The Company aims to build the Premium Personal Care portfolios into growth engines of the future and expects to deliver double digit value growth over the medium term in these portfolios. In the near term, expectations remain muted given the slowdown in discretionary spending. \
With Beardo integrated into Marico’s fold and tracking healthily, the business should touch a run rate of close to INR1bn in the next year.
A state of lockdown and work from home primarily in the earlier part of the year created opportunities for a structural reset in certain costs. The Company is well on course to achieve its targeted cost savings of more than INR 1.5bn in the current year.
The Company’s medium term Go-to-Market (GTM) strategy focuses on improving the width and depth of its distribution. The Company is investing behind upgrading its distribution infrastructure in urban General Trade to ensure profitability of channel partners and expanding direct reach in rural markets. The Company aims to ensure sustainable, harmonious and incremental growth in General Trade, Modern Trade and E-Commerce through specific price and SKU management measures.
The Company is focusing on Digital initiatives in a big way to improve consumer engagement, drive sales through E-Commerce for internet-savvy consumers and build Data Analytics capabilities.
Marico International Over the last few years, the Company has systematically invested in the core international markets to strengthen both the brands and the organizational
178 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
capability to handle growth. The Company is confident that the key markets are well poised to capitalize on the market opportunities.
Akin to the domestic operations, the international business is implementing rigorous cost saving initiatives, thereby unlocking ~INR 500mn in value in the current year.
Q3 saw Bangladesh sustaining its growth momentum and recovery in few other markets. The overall sentiment is improving sequentially, and the Company aims to deliver high single digit constant currency growth for the rest of the year.
The business in Bangladesh is likely to maintain its growth trajectory as the medium term macro prospects look promising. Therefore, the Company will leverage its distribution and brand strength to further consolidate market shares in the core portfolios, scale up new launches and enter new categories.
As a market leader, the Vietnam business will continue to invest in the male grooming category and drive excellence in sales and distribution systems. The geography is poised to deliver double digit growth in Q4.
The Company has initiated an aggressive cost management program, which will enable resource generation for brand building. Myanmar and the rest of South East Asia are growth engines of the future. Overall, the consumer sentiments in South East Asia are reviving and expect to exit the year with meaningful growth.
In the MENA region, the Company will focus on getting the basics right by judiciously investing behind brands and Go-to-Market initiatives. In the Middle East, the Company will work towards strengthening the Coconut Oils and Hair Oils play. In Egypt, cost management initiatives will enable the business to weather the persistent macro headwinds.
The South Africa business continued to display signs of revival after the business was subdued by macroeconomic headwinds and resultant sluggishness in demand. The Company is cautious on the near term outlook of the business but expects to protect the core franchise of ethnic hair care and health care over the medium term.
The Company will continue to invest in developing new countries and scale the business profitably. In the short term, ably restoring the supply chain will be key.
The Company aims at clocking an organic broad-based double digit constant currency growth over the medium term.
Overall (India + International) The Company holds its medium term aspiration of delivering 8-10% domestic volume growth and 13-15% revenue growth. The near term outlook appears more promising, expect domestic volume growth to be in double digits, provided there is no second surge of COVID-19 cases and economic recovery continues.
Marico shall continue to invest behind brand building to support market growth initiatives in core categories and expansion into adjacent categories as advertising spends are expected to reach pre-COVID levels. Spends on the digital platforms will continue to rise.
The Company would be comfortable maintaining its threshold operating margin of 19% plus over the medium term.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Pidilite
Margins likely to be under pressure in the coming quarter. VAM price movement: USD750 in earlier quarters to USD950 to USD1200 during Q3FY21, now around USD1300 per metric tonne.
Not taking any price hike as of now. Might take some price escalation for B2B segment products.
Will be looking to alter the product mix favourably rather than taking price hike and letting volume growth continue
Net sales grew by 19.5% (*Excluding PAPL 16.4%).
Consumer and Bazaar (C&B) segment registered volume and value growth in excess of twenty percent during this quarter – around 25%.
Robust growth was registered across all verticals driven by continued demand momentum in rural areas and strong recovery in urban including metros.
Due to resurgence in industrial activity healthy volume growth (double digit) has been registered in the Business to Business (B2B) segment too.
Standalone Net sales of Consumer and Bazaar segment grew by 20.6%. PBIT of C&B segment grew by 33.5%.
Standalone Net sales of B2B segment grew by 10.4%. PBIT of B2B segment grew by 1.2%.
The Company has 20 overseas subsidiaries (6 direct and 14 step-down) and one joint venture.
Overseas subsidiaries have also performed strongly, reporting double-digit constant currency revenue growth as well as strong earnings growth.
The Company has 15 domestic subsidiaries and 2 partnership firms.
While Domestic Subsidiaries in the C&B segment have shown healthy growth, subsidiaries in the B2B segment have shown signs of recovery in the latter part of the quarter.
Material cost as a % to net sales is lower by 105 Bps vs same quarter last year and higher by 80 Bps vs previous quarter.
EBITDA before non-operating income grew by 38.1% (*Excluding PAPL 32.5%) on account of lower input cost and A&SP spends.
EBITDA margin at 26.7%; up 380 bps YoY
PAPL showed monthly sequential improvement in revenue and EBITDA
Focusing will be on driving volume growth through distribution. Demand conditions remain robust.
Festive season not a big driver. So demand is more structural and broad-based than seasonal and hence likely to continue
Ad spends in line with the annual average – 3.5-4% towards the end of the quarter. Could not do much in Oct and Nov.
180 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
On an ongoing basis, continue to add new distributors in rural areas and towns.
Spend around 4-5pc of revenue in capex. Will continue to spend in that range.
Volume growth higher than value growth as had withdrawn certain promotions/schemes due to price increase in a few raw materials. These were pulled off gradually as these RM prices were low at the start of the quarter
Have good connect with relevant stakeholders in the waterproofing business as well.
Have complete portfolio of products for the retail segment.
21-24% - target operating range for EBITDA margins
Q4 to see full impact of RM inflation. Also some investment behind ad spends and distribution will happen in Q4.
Crude prices have gone up in the last 6 months – leading to inflation in RM prices.
Also some RMs’ consumption in India and China has increased over the past months
Unplanned shutdown in certain manufacturing facilities also led to higher RM prices
Current margins are high. Going ahead it is likely to moderate.
Capacity utilisation around 85-90% currently.
Competition with paint companies would only be in waterproofing business and some construction chemicals maybe.
Urban has taken longer to recover.
Unlike paints, demand is not led by festive season.
Acquisition of Hutsman (now PAPL) was done from internal accruals. 90% of the amount was paid up front. 10% contingent on certain milestones
Strong presence in joineries as well as on-site furniture.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Consumer Products
Overall
For the quarter, revenue from operations increased by 23% (21% in constant currency) as compared to the corresponding quarter of the previous year, led by broad based growth in both the India and International branded businesses.
Sequential recovery continues for out-of-home India businesses i.e. NourishCo & Tata Starbucks.
EBITDA at INR3650mn and Profit before Exceptional Items and Tax at INR2980mn is higher by 12% and 13% respectively, as compared to the corresponding quarter of last year, despite a period of unprecedented inflation in tea commodity costs in India and increased investments behind brands in the India business.
Group Consolidated Net Profit is higher by 29%.
India business topline accelerated sequentially while International markets also delivered strong performance.
Overall, India business# grew 36% led by
India Packaged Beverages business grew 43%, with 10% volume growth
India Foods business grew 19%, with 12% volume growth
Salt revenue grew 19% in Q3 with double digit volume growth
Sequential improvement in NourishCo’s performance, with a 9% revenue growth
Continued with market share gains with the highest ever sales volume in December
Branded International business (ex Foodservice) grew 13%, with an underlying (constant currency) growth of 7%.
Continued to invest behind the brands to drive long term growth.
Inked an agreement to acquire 100% equity stake in Kottaram Agro Foods Pvt Limited (Soulfull).
Acquisition of 100% shares in Kottaram Agro Foods Pvt. for a consideration of ~INR1.56bn and future consideration linked to achievement of certain milestones.
Product portfolio straddles multiple consumption occasions - breakfast, snacking, mini-meals
Soulfull is a strong brand built in select urban markets with a reach of c.15,000 outlets, offering significant potential for geographic expansion.
In-house manufacturing and R&D capabilities.
Strategy for portfolio expansion with a strong NPD pipeline.
Convenient, healthy offerings targeted for millennial families, kids and discerning health-conscious adults
Transaction expected to close in Q4FY21
182 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Soulfull to be integrated with TCPL, including its Sales & Distribution system
The Founders and the key management team to continue with the Company
Margins accretive to TCPl business; had INR390mn in sales in FY20
Tea price inflation remains a challenge in the near term
With distribution expansion in progress and acceleration in new product launches, growth momentum in India Foods, Beverages & RTD business to continue.
The addition of Soulfull would give an opportunity to expand product portfolio & participate across multiple consumption occasions.
International business is expected to normalise once the vaccination programme is completed
Have seen share gain in the salt category. Focused on the higher end as well. Growth driven by ATL, distribution and broadening of range
Synergies
Integration expected to be substantially completed by Q4 FY21; to enable better execution of strategic roadmap
Synergy identification completed and realization started from Q3 FY21
Distribution channel partner consolidation done
Channel partner digitization completed for urban distributors
Integration of India ERP on track and will go-live in Q4FY21.
CFA locations consolidated for North & East. Pan India consolidation to be complete by Q4.
Integrated Business Planning Phase I (Demand planning) is live and Phase II will go live in Q4FY21.
India
For the quarter, the India Packaged Beverages business recorded a 43% value growth and 10% volume growth, driven by robust growth across most of the brands and market share gains.
The health & wellness portfolio in beverages was strengthened with new product launches- Tata Tea Tulsi Green, Tata Tea Gold Care and Tetley Green Tea Immune.
Continuing with the hyperlocal theme, Tata Tea Premium launched a special festive edition packaging for Diwali, commemorating indigenous art forms and Tata Tea Gold launched festive edition packs in West Bengal for Durga Puja.
For the quarter, the India Foods business registered a 19% value growth and 12% volume growth. This was the third consecutive quarter of double-digit revenue growth across the Tata Salt and Tata Sampann portfolio.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Salt saw double-digit volume growth with the value-added salts portfolio growing disproportionately. The salt portfolio also continued to gain market share during the quarter.
Tata Salt launched an integrated marketing campaign #SawaalDeshKiSehatKa to build awareness about iodine and its importance as a micronutrient.
NourishCo recorded a 9% revenue growth, in sharp acceleration from a decline of 18% in the preceding quarter. The growth was primarily driven by Tata Water Plus and Tata Gluco Plus.
As part of the integration of the foods and beverages businesses in India, a redesigned Sales & Distribution structure has been put in place. End to end digitization across supply chain and distribution partners is underway with channel partner digitization having been completed for urban distributors. The integration is progressing ahead of plan and is expected to be substantially complete by Q4 FY ’21.
International
During the quarter, the International Beverages business saw steady growth across key markets- UK, USA and Canada.
Tetley continues to grow share in the rapidly growing segments of Decaf, Fruit & Herbal and Green tea in the UK.
Teapigs, the super premium tea brand saw robust constant currency revenue growth of 32% during the quarter.
Eight O’Clock Coffee recorded good growth driven by recent innovations and distribution gains.
US coffee business – revenue growth 6%; volume growth 7%; E-commerce growing rapidly, able to maintain market share
Tetley in Canada recorded excellent growth – 24%. It continues to be the #1 brand in the market, with both regular and specialty tea growing strongly during the quarter. 41% growth in specialty tea. Canada performing well as a business unit. Market share around 30%
Exited the coffee business in Australia in line with portfolio rebalancing strategy
Tata Starbucks
Tata Starbucks has seen a strong sequential recovery with 92% of the stores now having re-opened for business.
Non metro cities recovering faster
Opened 13 new stores & entered 3 new cities during the quarter, bringing the YTD new store count to 24.
Dine-in capacity still at 50%, however the channel salience is returning to pre- COVID levels.
Delivery channel performing well - customized activations on key platforms
It launched a Diwali blend pan India, a first of its kind initiative inspired by an Indian festival.
184 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The #StaysafewithStarbucks campaign reinforced commitment to customer and employee safety, further strengthening consumers’ trust in the brand.
It opened 13 new stores and entered 3 new cities during the quarter. Tata Starbucks celebrated the completion of 8 years in India with a total store count of 209 at the end of Dec’20.
Have put in efforts towards cost optimisation. Expect to open similar number of stores as had done in the previous year.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
United Spirits
Reported net sales declined 3.6%, a sequential improvement from Q2 driven by continued off-trade resilience, gradual on-trade recovery offset by the contraction of owned and franchise business in Andhra Pradesh (AP).
Prestige & Above segment net sales declined 0.8% partially as a result of lapping a high festive season comparative.
Popular segment net sales declined 6.7%, led by a decline of 5.7% in priority states. Increased consumer prices impacted demand in this price conscious segment and unfavourable State mix further contributed to the decline.
Gross margin was 44.6%, up 24bps versus last year, driven by benign commodities and continued focus on productivity during the quarter.
Reported EBITDA was INR3.84bn, down 9.5%. Reported EBITDA margin was 15.4%, down 100bps, primarily driven by lower fixed cost absorption and increase in administrative expenses.
Interest costs were INR380mn, down 17% driven by reduced debts and lower interest rates.
Profit after tax was INR2.3bn and PAT margin was 9.2%.
Despite a quicker rebound than originally expected, in the near term there are still reasons to remain cautious and consequently, the company is not providing quantitative guidance for fiscal 2021.
The Prestige & Above segment accounted for 70% of net sales during the first nine months of the year, up 3.7ppts compared to same period last year. The underlying movement net of previous period bulk scotch sale was 2.1ppts. Prestige & Above segment net sales declined 16.3% during the first nine months of the year, led by a laggard first quarter, which was impacted by nationwide lockdown, continued closure of on-premise outlets throughout the majority of period in 2QFY21 and gradual recovery of on-premise consumption in 3QFY21 as easing of restrictions lifted sentiments.
186 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The Popular segment accounted for 28.5% of net sales during the first nine months of the year, down 0.8ppt compared to same period last year. Adjusting the one-time sale of bulk Scotch affecting the relative salience of the segments; Popular segment was down 1.5ppts. The Popular segment net sales declined 22.4% primarily due to lower franchise income and State mix. Net sales of Popular segment in Priority states declined 19.7% during the first nine months.
Overall, performance for the nine months remains impacted by first quarter disruption in sales and supply chain on account of the pandemic and lower fixed cost absorption as a consequence. Contraction of owned and franchise business in AP due to the route to market change further impacted performance adversely.
Have mostly done BTL advertising and marketing
Ad spends were down in Q3 as previous year base was high. Though feel 9.4% as % sales was adequate
Scotch has done well. But limited functions and gatherings impacted sales, which were present in Q3 last year
Overall volume declined 17.1% with shrinkage of 16.3% in Prestige & Above marginally outpacing Popular segment volume shrinkage of 17.9%. Underlying price/mix for the first nine months was (1.1)%, mainly due to reduced franchise royalty and adverse State mix
GM improved sequentially as – Q3 saw better premium offtake, better volumes providing operating leverage and benign commodity prices.
Commodity prices were stable during Q3.
Home delivery will be an advantage and fuel category growth. Will take time as there has to be some gestation period for the adoption.
Commercial travel will take time to come back. Substation effect is difficult to estimate.
No hardening of commodity prices seen during the quarter. Won’t be concerned on the E&A prices in the near term. Have been flattish since the last two quarters.
A&P will continue to happen, the annual numbers however will be in line with the strategy
Strategic priority include mid prestige as well. Will continue to invest behind those brands.
WB market doing very well. New changes in the excise rates have raised prices by 70% for No. 1 rum and prestige whiskey. Due to this, some customers have shifted to country liquor. Has had a significant short-term impact for all the spirit player. Beer showing recovery as prices for beer have dropped there.
Delhi opening up will be a strong positive. AP shut now but will open sometime later, working towards it.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Healthcare
188 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Apollo Hospitals
Financials and guidance Like-to-like basis standalone revenue growth was 6% YoY.
Achieved INR400mn cost savings in the quarter (INR300 which is consolidated). Expects INR1.0-1.25bn of cost savings to continue in FY22.
Employee cost down QoQ on account of full quarter impact of pharmacy transaction. Also, of the INR300mn savings consolidated this quarter, INR150- 200mn is from manpower.
The impact of Ind-AS 116 was less this quarter on account of pharmacy retail rental moving out.
Debt/equity ratio stood at 0.71x from 0.80x in Q2FY21.
AHLL- trying to grow at 30-35% levels, in diagnostics specifically. In three years, wants to reach INR18-20bn and have a steady state 12-14% EBITDA margin.
Raised INR11.7bn through QIP. End use of funds (QIP)- INR4.1bn for Gleneagles, INR1.5bn for 24/7, INR1.5bn for diagnostics. The balance will be used to strengthen balance sheet for bolt on acquisitions and debt reduction.
o The company is looking to have asset in Delhi.
o Raised INR11.7bn through QIP. End use of funds (QIP)- INR4.1bn for Gleneagles, INR1.5bn for 24/7, INR1.5bn for diagnostics. The balance will be used to strengthen balance sheet for bolt on acquisitions and debt reduction. Healthcare services Targeting to achieve 23-24% EBITDA margin in mature hospitals next year. This will depend on how fast the business comes back in the next two quarters. New hospitals likely to achieve 13-15% EBITDA margin next year. The current quarter margin of 13.8% was enabled by high-end surgeries.
OP- 65-70% of normal level. International accounts for 10% of OP volumes.
ARPOBs were higher on account of case mix which included higher ARPOBs cardiac, neuro and onco. New hospital ARPOBs have risen from INR32,000 to INR36,000. This is sustainable.
Q3FY21 covid occupancy- 73% (of the 1,600 beds allocated). However, in Dec, it was 48%. Non-covid occupancy in Q3FY21 was 60%. In Dec, it was 67%. Likely to achieve 69% in Q1/Q2FY22 as reclassification of beds to non-covid may dip the occupancy.
o Reduced allocation to covid beds from 2,300 to 1,500 as on 31 Dec 2020. This has fallen further to 800 beds and occupied beds are even lower.
o Covid accounted for 17% of net revenue (26% in Q2FY21) and accounted for 25% share of occupied beds.
o Covid ARPOBs are INR28,000 on which company makes 14% margin.
60% of pre-covid levels of patients outside Chennai have started coming back.
Consolidation of Kolkata hospital from March or April. FY22 revenue opportunity – INR4-4.5bn and EBITDA of INR750-800mn. Pushing it for a
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
INR40,000 ARPOB in FY22. Recruited few more surgeons and doctors and its being positioned as a very high-end clinical care center.
Apollo Medics to do over INR2.5bn revenue in FY22 and INR400mn+ EBITDA. Covid is most negligible in Lucknow.
Proton- seeing good opportunity in domestic. Also, with international patients coming back it is expected to ramp up well in next 2 years. EBITDA margin of this business is north of 40-50%.
ALOS- hope to see below 4 in next quarter and improvement from the beginning of next year.
Expect vaccine roll-out in private market in March. 24x7, diagnostics, Pro Health Diagnostics- trending to INR1.7-1.8bn revenues in FY21. Aiming to hit INR5bn mark in next 2-3 years. FY22 direction should be upwards of INR2.7bn.
o Currently has 650 diagnostic centers. Plans to be the strongest diagnostic player in the South in next 24 months moving on to the East as well as North.
o It is not the new capacity creation but organising the unorganised.
o Expects to do 15-20% margin on diagnostics and tele consulting.
24x7 platform- 50% revenues will be coming from e-pharmacy.
Pro- Health is a preventive care check tool with in-built AI. The company is targeting to achieve INR10bn in 36 months. 24x7 will be used to funnel patients to Pro Health.
o Currently doing INR2.62bn in preventive care. Believe there is a large opportunity with corporates.
o Capex- INR500mn over the next 3 years. The plan is to significantly sweat current assets where the utilisation is only 50%.
o Looked at ITAG case study (Chinese company) doing run-of-the-mill checkups with TAT of 2 hours and doing their own version of blood checkup. ProHealth, is a package that looks after well-being, it looks at markers that include stress, anxiety, besides the other things which are normal such as cardiac but looks very closely at neuro issues.
o This will help in bringing back the OPs.
Revenue recognition- The back-end pharmacy business still continue to be at Apollo 24/7 which will be shown as the business scales up.
o Other parts like diagnostics, Pro Health will be booked under Apollo Diagnostics and revenue share as a margin or commission will be booked under 24x7.
Teleconsults- 2,000 per day. Slowdown is due to doctors moving into their offices. 6,000 doctors on the platform last month and planning to double it.
To spend INR1.5bn on 24/7. Two areas- tele-consults and condition management.
190 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Pharmacy • There are some 24x7 costs, which have been absorbed by the pharmacy. Excluding that, EBITDA margin should have been 6.7-6.8%.
Transaction costs in books of back end pharmacy is resulting in lower EBITDA being recorded in AHEL books.
Pharmacy margin at 6.4% now and will be closing the year with 6.5-6.6% and move to 7% in next year.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Dr Lal PathLabs
Performance and guidance Delhi NCR: 36%; Rest of India 64%. Ramp up in Rest of India is primarily volume- led.
Delhi NCR revenue is now equal to last-year revenues.
Realisation per test increased to INR824 mainly due to covid-19 contribution.
Go more organically in South and West while continuing inorganic strategy. Planning to set up Regional Reference Labs - 1 in Bengaluru and 1 in Mumbai, which will take 5-6 months, followed by the whole model of satellite labs.
Swasthfit contribution is 17% of total business. There is a marginal increase in revenue per patient implying high-end business growing up well compared with routine.
Revised wage code may have some impact on employee costs.
Covid-19 commentary October and November (of 2020) saw a sharp increase in covid-19 testing, followed by a heavy decline in December. The current trend indicates volumes and realisations would decline further and is now at one–third of peak covid-19 business.
As covid-19 RT-PCR volumes decrease, IL-6 and di dimmers are likely to decline.
Antibody testing post vaccination is likely to go up. However, it will be more in a surveillance format driven by agencies than private labs. May not translate to revenues meaningfully as these are more democratized.
Business environment Resurgence of covid-19 in February and March is possible.
While patients are still hesitant to visit medical facilities, number of walk-in patients has increased gradually. Walk-ins at franchise centers have gone up.
Home collections in non-covid-19 business has shot up 40% from pre- to post- covid-19 era. Non-covid-19 business is largely home collections.
Home collection as a % of business will keep increasing advantageous to regular well-known brand.
Servicing a walk-in-patient is costlier than home collection. Walk-in entails about INR250 spend; however on home collection, about INR100–150 has to be spent on the home collection person. The challenge remains on providing the same brand experience.
192 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Healthcare Global
Quarter highlights
Aims to become cash positive next year. Looking to maintain debt at current level or reduce it going forward.
Net debt/EBITDA FY23 target: 1.5-1.75x.
No new HCG centers expected for next FY and no centers planned for Milann. For Gurugram, capex to come in FY22 end or FY23. In consolidation mode in India and Africa for the next three years.
Medical tourism is happening at a very slow pace and is now at 35% of pre-covid level. Expects flow to improve to 50% by end-Q4FY21 and normalise in Q2FY22.
Domestic market is about 95% of pre-covid and expected to completely normalise over the next few months. However, this has to be monitored for the next two quarters.
All expenses are almost at pre-covid level. Savings to come from shared services, HR costs and real estate use where HCG has given up some corporate places.
Not looking to go for multi-specialty hospitals. Ahmedabad is doing good. Bhavnagar is more oncology focussed. Rajkot also has opportunity to become more onco focussed.
Strands (38.7% stake): It is posting positive monthly EBITDA. Disengaged with Quest. Research (30-35% growth) and diagnostic division growth very good. Genomic will drive future of oncology.
Expects pent-up demand. Video conferencing has increased and patients across India and abroad are appreciating it. Centers at Tier-2 cities have gained attraction during covid-19.
Medical oncology was at 70-75% of pre-covid in Q3. While existing patients continued to come for chemo and day care procedures, coming of new patients delayed. Surgery (which is the starting point) at 80-85% of pre-covid and radiation (laggard as not an ongoing treatment) at 80% of pre-covid levels .
Centre highlights
Maharashtra achieved operating EBITDA margin of 15.6, vs 9.9% in Q3FY20. South Bombay on the verge of achieving EBITDA breakeven.
Borivali center launched Bone Marrow Transplant (BMT); achieved break-even at unit-level and continues to be so.
Nagpur brokeven in last quarter. Jaipur is expected to breakeven in Q2FY22 and Kolkata in Q4FY22.
Kolkata radiation load has increased substantially. At Borivali, it is operating at full load.
The company has made efforts to make Vijaywada Center of Excellence by adding BMT and other services.
Andhra Pradesh revenue was down QoQ on account of government scheme patients which got implemented. This is a normalised number.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Fortis Healthcare
Performance and guidance
Excluding losses from start-up hospital Arcot Road, EBITDA margin is 16%.
Margin improvement is largely from cost-cutting measures. The temporary salary cuts were rolled back in Oct and other things like judicial expenditure on sales and marketing and selective hiring have helped in cost savings.
Cost optimisation and productivity improvement to remain the focus areas.
SC-IHH hearing is on 10th February.
Hospitals
January occupancy is down given farmers’ protests and a severe winter. Covid- 19 occupancy is on a downward trend.
On target to implement 1300 beds in next four FY.
Arcot Road: Breakeven likely in FY23.
Currently 600 beds allocated for covid-19 patients.
ARPOB of non-covid-19 was INR17.5mn—exceeded last year’s due to the change in patient mix.
SRL
Seeing growth in Realisation per test non-covid on account of higher home collections, change in test mix towards specialised tests and improvement in preventive package. The trend is likely to sustain.
Acquisition of balance stake in JV will make SRL the number 1 player in South India and increase its contribution to revenue from South India.
Can create a hub-and-spoke model from 200 labs by setting up collection centers and cover untapped opportunities.
Funding – INR1bn debt, rest internal accruals/cash
DDRC – The business is almost back to normal levels. 9mFY21 JV revenue covid- 19 revenues account for 45–50%. This will be consolidated in FY22.
North East and Central grew 38% YOY, 10–12% non-covid-19. Revenues from hospitals, international and corporates have not recovered that well. 95% of pre-covid revenues in January.
B2C penetration strategy: Digital transformation looking to increase booking through mobile apps. Focussing on home collection services. Adding centres MoM to existing 1,800 centres.
Expect more traction in antibody testing in Q2FY22 and Q3FY22. Expanding test menu to include tests related to prenatal, onco genomics and reproductive health.
194 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Hotels/Hospitality/Aviation
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Indian Hotels
Industry
From November first week, there was a visible pick-up in business.
Middle of November to December saw good business driven by weddings.
Q3FY21
Q3FY21 recovery was driven by the leisure portfolio.
More than 85% of the company’s inventory was EBITDA-positive in December 2020.
Cash burn was INR1bn in April-20 and it was positive INR120mn in December- 20
Costs
The company has currently brought down the staff: room ratio. This will increase as business comes back to normal. However, there is a some component of permanent reduction.
Fixed costs will be about INR1.2bn/month. The target is to maintain it at the same level even in FY22.
Inventory and demand
The company has signed up 14 hotels YTD FY21.
Most corporates are asking to renew contracts on the same rates. Discussion has still not started in full mode.
Travel from junior corporate executives has commenced. However, big MICE events are still not happening.
Ginger
The company has aggressive plans for Ginger. Pipeline is more than 20 hotels.
International properties
Contribution of major international properties is close to zero.
The company expects the lockdown in London to be reversed by March.
Cost rationalization in New York has following parts:
o Rental renegotiated
o Manpower- Under New York regulations temporary furlough of 6 months has been allowed, which the company has used.
Guidance
Based on business on books and the trajectory, Q4FY21 should be stronger than Q3FY21.
196 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
InterGlobe Aviation
Capacity update: During the quarter, Indigo operated at 70% utilization (59.2% of the YoY capacity). It is currently operating at 80%/28% of YoY capacity at domestic/international levels. Company is likely to operate at 100% capacity at domestic levels from April onwards and 50% capacity at international level in H2FY22. It will slowly ramp up to 100% capacity in international operations by end of CY21.
Seasonally weak Q4FY21: Management mentioned that demand remained relatively strong during November and 1st half of December but turned weaker during 2nd half of December and 1st half of January. However, since 15th January Company is seeing strong momentum in demand.
Operating Cash flow: Operating cash flow has been improving steadily. Company’s cash burn rate has reduced from INR400mn/day during Q4FY20 to INR150mn/day during Q3FY21. Company expect its employee cost to be 30% lower than pre-covid levels (previous guidance maintained).
Fleet update: During the quarter, company operated fleet of 287 aircraft including 111/120/30/26 of A320 CEOs/A320 NEOs/A321 NEOs/ATRs (net increase of 5 aircraft). The company operated at a peak of 1,166 daily flights, providing services to 60/6 domestic/international destinations during the quarter. Additionally, the company operated 51 cargo charter flights in Q3FY21.
Non-metro cities perform better: Management highlighted that non-metro cities are doing better in comparison with metro cities. Cities such as Chandigarh and Patna are operating above their pre-covid-19 levels.
Liquidity: The company reported free cash flow of INR74bn in Q3FY21 (vs. INR94bn YoY). Cash burn rate has reduced to INR150mn /day during the quarter (vs. INR400mn/day in Q4FY20). The company is likely to incur additional INR120mn/day Q4FY21, given weak seasonal nature of the fourth quarter.
Corporate traffic update: Corporate traffic revenue during the quarter was 8% of overall revenue (22% pre-covid-19 levels). Management guided that corporate traffic revenue in overall mix is likely to stabilise at 15–16% of revenue. Aircraft utilization is likely to increase to 10–11% going forward (7–8% current levels & 13% pre-covid-19 levels). Momentum was visible in sectors such as pharma and construction.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Lemon Tree Hotels
Industry
As per the company, Q4 will be 45% of last year’s performance. Q1/Q2 next year should see a further improvement over Q4FY21. H1FY22 should be 60-80% of pre-covid. H2FY22 onwards occupancies should return to pre-covid level.
As per the company, industry demand will contract by 9-10%, whereas supply should contract by 15%.
Distress in the sector could start emerging from Q4FY21. This will be more visible in the non-luxury segment.
Industry rate recovery
As per management, the reset in ADR should be immediate, once occupancies revive.
Retail, which will be around 1.1x of pre-covid in terms of room nights, generally sees an immediate repricing, similar to aviation.
Only for corporates and travel trade, pricing will remain same.
In total, more than 60% of room nights will reprice immediately once demand revives.
Business segment
December revenue run rate was INR9mn/day i.e. 45% of last December.
October was slow as auspicious marriage dates were bunched up in December. There are many such dates in February. Approximately 42-45 auspicious dates scheduled in Q1FY22.
Normal mix ADR is >INR4,000. Covid business was more than 50% of total business in Q1/Q2FY21.
Due to lack of demand from normal sources, there is a lot of discounting to generate demand.
Corporate pricing changes in October and January. Rates are same as last year and LT plans this pricing to continue till October.
LT expects a pick-up in MICE from April.
In case of corporate demand, LT expects partial recovery in H1FY22 and entirely by FY23.
Business continued to be driven by the retail segment. Occupancy North of 2,700 room nights.
Debt & liquidity
LT will not require any further fund raise .
The company has INR1bn plus cash and INR1.4bn of emergency credit line
Debt repayment schedule:
FY22: INR1.2bn
198 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
FY23: INR1.4bn
Cost savings
Permanent reduction of costs of INR1.1mn/day i.e. INR0.4bn/annum.
Manpower: LT can operate at 0.75x. So 2,000 staff will not be required. 4% saving.
Power & Fuel: Renewable’s share will go up from 5% to 31%. Power & Fuel will come down by 2-3%
RM Cost: Menu will be dynamic. Food revenues are INR1bn, Food cost was 36%, now will be 29%.
Capex
FY22 capex is optional
In case of MIAL, 80% of capex is scheduled for CY22. INR3.5bn has already been invested.
Guidance
Very comfortable from cash flow position
The company is not looking at further investment. Lease has been very profitable
Longer term it is looking at 11,000 rooms: 6,000 owned 5,000 MC
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mahindra Holidays & Resorts
Industry
Domestic air passenger and railway growth is still muted
As per MHRL, leisure travel at domestic destinations is recovering faster. International inbound and outbound will take time to recover though
Q3FY21
Major saving in other expenses is driven by resort expenses.
Operating inventory is 90% of total inventory. 63 resorts are operational.
Forex loss is due to depreciation of EUR:INR
Deferred income has come-off from FY20 as majority of the members added are in the Go Zest category where the addition is less than the amortization of deferred income.
Interest income: Company has focused on higher down payment
Costs
Energy costs has been controlled very carefully. Solar initiatives are being increased.
Cost of acquisition
Committed to bring down cost of acquisition via referrals
Digital is not a cheap channel. It helps achieve focused targeting.
Membership
CMH25 and Bliss have generated momentum in Q3FY21
Focus on acquiring members with higher down payment continues
AUR has seen a smart recovery in Q3. Earlier proportion of total sales it is still some time away, but December has seen a big movement towards Bliss and CMH 25.
Focus on down payment is ensuring is helping get good quality members
AUR for Q3FY21: 0.26-0.27mn
Holiday Club
Time share sales had improved in Q2FY21 and cost initiatives helped achieve profitability
Targeting to reach 17-18% EBITDA margin in HCR
Jan-March is a season time in Finland
Company has put in place a new team and there are certain internal milestones which the company is close to achieving
Company is expecting a massive turn around in the next 2-3 years
200 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Capex
The company has not curtailed capex at all. YTD company has spent INR750mn.
Added 82 rooms in Alleppey.
Goa construction resumed in May and will be operational in Q4FY21.
33 rooms in Ashtamudi will happen be added this year.
The company is also planning the following properties:
o Ganpatipule – 160 units (INR1.5-2bn spend)
o Shimla (Kandaghat) - 160 units (INR1.5-2bn spend)
o Puducherry (60 rooms, INR0.5-0.6bn)
o Theog: The company has a land bank there (INR0.5-0.6bn)
Longer term, the company is targeting to spend INR12bn on room expansion.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Home Decor
202 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Century Plyboards
Demand All metros have recovered; last to see recovery was Mumbai and even that has now started growing.
Two months were completely shut and thus there is pent-up demand which has started from Nov; however, it will take at least June/July to cater to the pent-up demand. Plywood demand also depends on handover of property and not on construction. MDF There is no update on ADD on MDF.
Given the sustained strong growth in MDF, management has finalised brownfield capex at its Hoshiarpur (Punjab) plant to increase capacity from 600cbm per day to 1,000cbm at the cost of INR2bn. This capacity is likely to be commercialised by Q4FY22.
Management is also actively working on greenfield capacity expansion in South, which will be finalised soon. This is likely to be a dedicated MDF plant of 700cbm.
Brownfield expansion can see turnover of INR4bn - 2x asset turnover while greenfield asset turnover is generally 1.0-1.2x.
Margins for brownfield and greenfield capacity is going to be less by 3% compared to existing plant margins as raw material cost will be higher. However, ROCE and RoE will be similar for existing and new plants.
Margins should improve further in MDF in the coming time led by recent price hike (10%) and favourable demand-supply dynamics.
Any player will not be able to come up with a MDF plant in the next two years and thus margins should stay healthy. Particle board The company is increasing capacity from 180KT to 250KT by adding one line in existing plant.
The company has also taken 8-10% price hike in this segment.
Particle board is not being imported in India and thus no major import replacement demand exists like in case of MDF.
Particle board is a cheap product and many new small players are coming in and it’s very difficult to compete with them. Thus the company is planning to go ahead with only MDF greenfield capacity expansion. Plywood The segment has shown considerable improvement with 17% growth YoY. Part of it was led by some pent-up demand, while the company is also gaining some market share also led by introduction of Viro Kill.
In regular markets too, seeing higher growth.
Plywood realisations is impacted by product mix change (higher growth in economy Sainik segment) that will keep on happening.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Premium segment has also grown in double digits; however, Sainik has clocked faster growth. Laminates Margins slightly on higher side also led by cost cutting. Sustainable margin will be 17-18%.
The company has also taken price hike in laminates segment to offset the impact of raw material price increase. Working capital days Going forward, will be looking at 50-55 days working capital cycle. Outlook Management believes this is just start of growth and January has also posted good growth.
Volumes are likely to rise and thus increased margins are likely to sustain.
The company is consistently working towards improving throughput from all existing units, improving efficiency, reducing cost and boosting sales. And has thus appointed Boston Consulting Group (BCG) for advising and helping CPBI. Shift from unorganised to organised Demand destruction in unorganised has not been that substantial.
A few players have seen pressure and shut shop, benefits of which are visible from the fact that many small players are offering their plants for sale. Face veneer Mynmar facility is operational.
Gabon new plant has also started operations. This Gabon plant will take care of the shortage and for the quantity company is buying from outside.
Main purpose of Gabon plant is security of raw material while there will be some cost savings that will be difficult to quantify MDF price MDF price increase has been absorbed in the market as shipping has become extremely expensive making imports unviable.
Freight increased from USD20 to USD50-60.
There will not be any capacity expansion in the next 1.0-1.5 years. Capex CPBI is looking at INR6.0-6.25bn capex on expansion of Hoshiarpur and greenfield plant at South.
INR500-1,000mn max will be spent on plywood for some brownfield expansion and machinery replacement over the next two years. Furniture exports Ready-made furniture is gaining ground led by import replacement as well growing exports.
204 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Branding Viro-kill goes into laminates, plywood and MDF but does not go into Sainik.
The company is likely to invest in branding substantially, but will not take this expense to beyond 4%; the company is likely to come up with a strong campaign.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Kajaria Ceramics
Q3FY21 Tier 2/3/4 continues to drive growth
In Q2, the company had posted flat revenue, whereas in Q3 volume growth jumped 11%.
Capacity utilisation is at 100% except Cosa where the company is converting 1 line from PVT to GVT for exports
Sanitaryware grew at 36% YoY; plywood also posted strong double digit growth
EBITDA margin touched new high
Working capital increased by 5 days because of higher advance payments and increase in creditors days Margins Average price of gas for its North plant was INR25.5-26.0 (mix of long and spot prices) compared to INR31-32 last year
On an average 50% are long term contracts
Sikarandbad – 35% spot; rest long term
Gailpur and Sikarandabad – Gas price was INR4.5/5.0SCM cheaper compared to last quarter
Slight price increase of 3-5% for Sikarandabad and Gailpur
For Morbi, GSPC has increased prices by INR4
Q4FY21 margins will be lower compared to Q3FY21 (1.% impact) due to pressure on raw material prices, paper prices, boxes prices, etc
Realisations too are hardening and the company is cutting discounts to dealers
KJC is looking at 20% margins going forward
200 bps margin improvement only because of gas prices (now versus pre-covid). Further, there has been improvement in efficiency, ad spends are also down 50% this year, improvement in profitability of JVs especially bathware (INR110mn profit against loss of INR10mn last year)
Reinstated salary for Q3FY21; there will be no increase in manpower for 20-25% increase in topline as current employee strength is sufficient Demand Demand is positive and increasing MoM
Metros have reached 70-75% of pre-covid level. Tier 2/3/4 cities are doing very good Supply 50-60 new plants are coming in of which 40 are for GVT and mainly exports
In India, there are 50 large slab tile plants (1200/2400) and which will increase further and lead to robust exports continuing
206 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Exports India exported INR90-95bn worth of tiles in FY20 and in FY21 exports are likely to touch INR110-115bn. As on Dec 2020, Morbi has done INR7.3bn worth of exports
Strong growth in exports is led by ADD by US on China and by other countries, Anti-China sentiment across the world and low cost structure of India versus other countries
Expects exports to grow by another 20-25% in FY22
KJC will continue to focus on domestic market while it is also looking to serve exports market by converting its existing COSA line from PVT to GVT
Getting lot of enquires from across the world (US, Gulf market and European countries)
The current PVT capacity at Cosa was idle and thus capacity will not lead to any dilution in margins for the company Sanitaryware Started making money since last quarter and will close the year on a positive note
Will be positive from here on as the company has launched new products which have been well accepted in the market and the company has broadly seen acceptance for its product across dealer base as well
The company has introduced lot of value added products which are fetching better realisations
In Q3FY21, margins for bathware division were in double digit (13-14% range) compared to single digit last year
In FY20, the division achieved turnover of INR1.86bn despite covid-19. In FY21, the company is looking at INR2.1bn turnover; FY22 the company is looking at INR2.8-2.9bn turnover
Cost in this division too has gone up with brass prices moving up, transportation cost going up. The company has taken price hike from Jan 1 by 6-9%; competition (Cera and Jaguar) has also taken price increase Plywood Started this division from July 19 and the company is likely to achieve INR400mn in FY21 and INR700mn in FY22
For the next two years, the company is still likely to lose money
Management is optimistic about opportunity in this sector with INR160bn industry size and only two large players Century and Green with turnover of INR10bn each Outlook In FY22, KJC is looking at 20-25% volume growth and 10-15% volume growth for FY23 and FY24
Value added products continue to be at 60-62%
Lot of pressure from Morbi players earlier, which has now eased
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The company is further targeting to cover 102-105 constituencies in terms of distribution in FY22 which will drive revenue growth going ahead Revenue mix 20% institutional sales (of which 8-10% govt projects where payments are not an issue)
Number 1 dealer Coimbatore/ Number 2 dealer from Faridabad Capex This year capex will be INR500mn and next year INR1.5-2.0bn on expanding existing plants.
This capex will be for capacity expansion that will be available in FY23 while next year growth will be taken care by outsourcing and existing capacity JV profitability In JVs made lot of correction in FY20 and FY21
In JVs, Vennar Ceramics and Jaxx Vitrified are making profits
Cosa Ceramics is still making some losses as one line is not yet operational
In its bathware division, the company is positive and is making profits too (13- 14% margins currently)
In plywood business the company is making some losses which will continue for the next two years and after that it should be positive Dividend INR10 interim dividend declared this year
The company has formed the dividend policy and has revised percentage of profit distribution upwards to 40-45% from 20-25% currently Cash flow The company is already having cash surplus of INR4.5bn
The capex each year will be lower; thus increased dividend pay out to 40-45% Competitive intensity Once Morbi players are out for long time, it’s not easy for them to come back
Exports markets have opened in a big way; biggest exports opportunity will be in the US (250-250%)
Anti- China sentiment across the world is driving exports
Varmora/Simpolo Ceramics will continue in domestic market also
Plants are running at 100% utilisation
Going forward, 20-25% volume growth going ahead with improvement in realisations too
208 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Greenlam Industries
Laminates volumes and realisations Net sales declined 6.5% YoY to INR3.35bn as sharp fall in decorative veneer division revenue’s by 36% YoY was partially offset by flat YoY revenues of laminates and allied business.
Laminates’ revenue remained largely flat YoY as 10% YoY volume growth was offset by sharp drop in realisations (on account of a change in the product mix as it recently launched a commodity line: 0.7mm category in Q1FY21, which has seen good traction and which was not there in Q3FY20)
The 1mm category has started coming back with re-opening of metros (still n0ot at pre-covid levels) and thus realisations should improve QoQ. However on stead state business, the realisations now should be ~INR750 per sheet versus ~INR800 per sheet earlier
Laminates volume increased both in domestic as well as exports market by 12% and 9% YoY.
The healthy growth in domestic market (reached 96% pre-covid) was despite various challenges like slowdown in metros. While, commercial real estate market is still slow in India, residential market is seeing good pick-up across the markets led by reduction in interest rate, stamp duty reduction, etc. The growth was also supported by opening up of metros and as the company introduced commodity grade where GRLM gained market share.
Exports growth was healthy despite container availability issues in exports, re- introduction of lockdowns in various markets like the UK, Thailand, Indonesia, inward and outward logistics issues with significant delays, farmer agitations affecting operations and transportation from both the plant locations, etc. The exports growth was supported by new product launches.
Container availability is still an issue. Had these challenges not been there, our performance could have been better Laminates exports During the quarter we have set up two wholly owned subsidiaries in Russia and Poland under the name and style of GREENLAM RUS LLC and GREENLAM POLAND LLC respectively. These subsidiaries shall help us to further strengthen our market position in Russian Federation and Republic of Poland
The company continues to take market share from regional producers like European, the US and South Asian players. GRLM’s laminates will be easily 10- 15% competitive compared to European producers. Laminates margins Laminates and allied business EBITDA margins improved significantly (up 140 bps YoY and 360 bps QoQ) benefitting from low cost raw material inventory, several cost cutting measures, high operating efficiency, waste reduction, certain commodity grade moving to value added product, subsidiary business have added to gross margins, several initiatives at plant and at product level to improve profiatbility
Of the total raw material cost in laminates, 2/3 is on paper and 1/3rd on chemicals. While, chemicals cost have gone up by 20-25%, Craft paper cost have
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
gone up by 6-8% and other papers cost is likely to go up by 3-5% (intimation received)
Some cost have gone up because of inward and outward logistics issue
Q3FY21, the company has taken 2-3% price increase and in Q4FY21, the company is likely to take another 2-3% price increase in Q4FY21 spread across February and March. Price increase for other players is equal or higher
By both Q3FY21 and Q4FY21 price increase, the company will be able to off-set the impact of cost increase
In future, margins can go down because of raw material cost , inward and outward freight increase. However, management is confident of 17-18% margins
Margin will also get support from high operating efficiency (GRLM can reach 115- 120% capacity utilisation) Capex In 9MFY21, the company has done capex of INR250mn and is likely to end the year with INR350-400mn capex
In FY22, apart from routine capex of INR250-300mn , the company is likely to go ahead with greenfield south India capex
The company is working on getting various approvals for South India plant and expects to commence the plant by Q3FY22. Decorative Veneer and allied segment The veneer and allied segment’s revenue plunged 36% YoY due to a fall in revenue across segments---veneer (down 23% YoY), doors (down 59% YoY) and flooring (down 46% YoY).
In Q3FY21, the performance of this segment was impacted due to supply chain disruptions. In the entire wood veneer business, most raw material is imported and exports shipment has also been impacted
The company has seen good traction with respect to queries but that is still pending to get materialise
Furthermore, the segment reported an EBITDA loss of INR60mn versus EBITDA break-even in Q3FY20 and INR13mn loss in Q2FY21.
This segment has seen greater impact due to logistics related challenges on the back of container availability issues as moment of raw material and certain export order was impacted.
Further, the recovery in this segment is slow due to its discretionary nature.
Pre-covid, European players were better cost competitive in high-end products. However, post covid because of high logistics challenges imports have reduced significantly.
The company has also launched staircase solutions under Mikasa brand which is unlikely to attract any major capex Outlook Management remains confident of continued healthy laminates volume growth both in domestic as well as exports market with margins at 17-18%
210 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
For decorative veneer and allied business, the management remains confident of normalisation by Q4FY21. Market share gain possible due to consolidation During this time too, GRLM has gained market share in both the domestic and exports markets as some smaller plants are facing challenges with respect to availability of raw material.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Somany Ceramics
Demand SOMC is hopeful of demand revival and growth over last year’s number in Q4FY21 while keeping the margins steady or improving it a bit more.
Tiles segment revenues – GVT mix improved by 2% (in Q3 as well as 9MFY21)
Bath ware contributed 11% to top line with an 8% increase during the quarter.
Capacity utilisation for the tiles business was nearly 100% while that of sanitaryware increased to 100% post-Diwali.
Growth continues to come from Tier 3/4/5 towns while main metros are have yet to show comeback. Further, in last 2 months, Delhi has been impacted by farmer protests. Thus, the company continues to focus on Tier 2/3 towns
The company has also reduced exposure to projects to less than 5% Outlook The company is looking at mid to high double digit growth in tiles for FY22 and 40–50% YoY growth in bathware in FY22.
If this growth comes, margins will also improve from 12.8% currently.
Tier 3/4/5 will keep improving as most distributor addition will also be here. Good infra/healthcare budget should help in good growth. AD spend Brand spend at 2.5-3% is back to normal and company was present in major airports including Calcutta, Delhi, Mumbai and Bangalore. Working capital Net working capital stood at 61 days, debtors at 56 days, inventory at 35 days and trade payable at 45 days.
Debtors level improved further; target to improve further in Q1FY22
Inventory days at 35 and 63 days on standalone and consolidated level. Around 60 should be a stable number look at
Trade payable have also seen improvement
The company has nil net debt while its debt to equity stands at 0.3x. Margins The salary cuts made during the first six months were reversed during the quarter.
Gas prices have also increased in Morbi and other parts; while it should start coming off in April. INR5-6 per SCM price increase will be surely passed on atleast to the extent of 80-90%
There are three types of gas contracts with SOMC:
o North for its Kassar plant which is linked to 3 months average of crude prices and there the increase has been slightly less by INR2 to INR29-30 per SCM
212 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
o GSPL price increase in Morbi which has gone up by INR6 per SCM to INR34- 35 per SCM. Gas cost for its Kadi plant is similar to Morbi.
o South plant uses spot gas which is exposed to market rate where prices have increased to INR30-33 per SCM in Jan and INR33-38 per SCM in Feb. March onwards prices are likely to come down to INR33-34 per SCM as March futures are already down at 10$.
The south plant will be able to able to pass on prices only by INR4-6 per SCM similar to that of Morbi. Rest will be able to absorb.
SOMC does not see any impact on margins because of price increase and will be able to absorb the prices led by higher operating leverage and better product mix.
In the month of Jan 2021, the company took price hike for bath fittings as brass prices have gone up and tiles price increase will be effective from 1st Feb 2021. Distribution SOMC has added 400 dealers in 9MFY21 of which 200 added in Q3FY21 only. The revenues from new dealers stood at INR750mn. Exports Exports from Morbi continue to grow at healthy pace led by ADD on China by various countries.
Exports for Somany are 6-7% of sales while from next year exports can see 20% growth YoY.
Exports from Morbi are working at 40-50 days on LC basis while rest is on 90- 120 days credit. Wall tiles Wall tiles is ailing as it does not have much traction in exports like GVT. While some plant have shutdown, some more can shut down in the next two months because of sharp increase in gas cost. Capacity additions Capacity additions will start in June/July 2021. PVT and ceramics no new capacity is being added; 8-10% capacity are coming in GVT. The company does not see price pressure as they are already at bottom
If 75% of new capacity is absorbed then there cannot be price pressure. If 75% of capacity is not absorbed in exports, the scenario can be similar to earlier times like in case of wall tiles
In Q3FY22, 1-2% price fall can come that too depending on demand scenario and exports growth at that time Capex FY21 is likely to end with capex of INR350mn as envisaged. SOMC is looking at some aggressive capex for FY22 - announcement likely before next quarter Employees and broker default Unfortunate that the issues happened together – employees and broker.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Extremely close to getting order from court with respect to recover from employee. Half of it will be able to realise. Pressure on other party for half of the amount continues.
The company is also confident of not maintaining any treasury in future. The money will be used for working capital, capacity or debt reduction. Currently, more than INR1.35bn cash is in FDs.
Further, the company is confident of getting out of ICDs completely by March 2022, which will strengthen the cash position.
214 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Supreme Industries
Q3FY21: Volumes and margins surpass our expectations In Q3FY21, volumes increased across segments: pipes (up 9%), packaging (up 2.4%), industrials (up 32.4%) and consumers (up 11%).
On the other hand, EBIT margin increased across segments except packaging— pipes (up ~900 bps YoY at 22%), industrials (up ~400 bps YoY to 9.3%) and consumers (up ~500 bps YoY to 19.6%). The packaging segment margins was down 160 bps YoY to 12.5%
Better-than-expected margins were led by better-than-expected volumes leading to operating efficiency, savings in other expenses by strict monitoring of fixed and variable cost, inventory gains (INR800mn) and increase in share of value-added products (launch of several new products led to 33% YoY growth). The company’s strong margins are likely to sustain led by aggressive monitoring of expenses and the increasing share of value-added products
Excluding inventory gain, margins should be ~17%.
The share of value-added in each of the segments stood at: pipes – 42.8%, performance packaging – 62%, consumers 51%, cross laminated segment -100%)
The company refrained from citing the number for inventory gains, and expects inventory losses in the quarter ending March/June 2021. Prices overall have gone up by INR42 per kg since March and should come down hereon. Growth drivers The crop situation in the country is normal, which has boosted rural income. The Rabi crop sowing has also been done in a larger area than the previous year. The company enjoyed good demand for its products from the rural market and Tier III and Tier IV cities.
In the current quarter, the demand also got a fillip from the housing market. Several policy initiatives have facilitated a brisk sale of ready to occupy housing units. Demand for the company’s housing products has revived in metro cities. Capex The company’s capex plan is going smoothly. Along with carried forward investment commitment of INR1.82 bn, the Company has made a plan to invest around INR4bn in this year.
The said investment is made mostly in its existing plants where additional construction activities are going on at Seven sites. Company is also now putting up new plants at three locations. Land for these plants have been already acquired in Orissa and Tamil Nadu.
In Assam, the plant is being constructed on a lease agreement basis. The company aims to put all these new plants in production in the year 2021-22. Plastic pipes PVC resin consumptions has gone down by 20.5% YoY in 9MFY21. About 70% of PVC resins in India is used for plastic pipes and the remaining for wires and cables, PVC profiles, etc.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Thus, with 3.7% decline in plastic pipes volumes in 9MFY21, SIL has definitely increased market share in plastic pipes segment
Furthermore, in the CPVC pipes segment too, with industry level CPVC resin consumption declining by 13.5%, the company’s CPVC resin consumption has declined only 3.70%, indicating market share gains
Due to sharp increase in PVC resin prices, demand for agri pipes is weak, whereas plumbing pipes are not only getting good demand from Tier2/3/4 cities but now demand has started to pick-up in metros
DWC enquiries are also coming in, since the company provides high quality material with BIS, the company is cautiously working with quality customers. Going ahead, the company is hopeful of reaching optimum capacity utilisation (12,300 tonnes) Packaging films The Company’s Packaging segment working was affected due to increase in its raw material prices which could be passed over with a time lag, which may happen in the current quarter
Protective packaging division in this segment has also fared better as demand has come from Construction, Consumer appliances, yoga mats and other segments.
Volume growth of ~2.5% was due to impact on performance packaging segment
LDPE prices increased sharply and the company could not participate in some business. With LDPE prices now going down, the company will participate in this business
The company has also introduced economy model of Tarpaulin also in Cross Laminated film segment having lower value addition. The product is made from scrap with shorter lifespan of 6 months, and the company can do business of 2,000 tonnes.
However, the overall demand for Cross Laminated film products for the year is expected at a higher level, which may boost business to 21,000 MT in the year compared to 17,000 MT in the previous year. Distribution The company is focusing significantly on expanding its distribution reach by appointing more distributors, expanding reach in various tehsils, and adding more product range
The company is having total distribution of ~40,000 (of which 30,571 are for pipes division, 373 are for packaging, 275 are for material handling, 214 for furniture consumer business and 705 protective packaging)
Further, the company’s manufacturing facilities are present in 12 out of 29 states and thus the company believes there is a long way to penetrate throughout the country Capacity The capacity as on Dec 31, 2020 stood at 694,409 tonnes compared to 635,939 last year same quarter (of which pipes capacity stood at 499,111 tonnes, industrial capacity stood at 74,897 tonnes, Packaging capacity stood at 90,544 and consumer division capacity stood at ~30,000 tonnes)
216 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
As on Mar 31, 2020, the total capacity stood at 636,000 tonnes (of which pipes capacity stood at 440,371 tonnes, industrial capacity stood at ~75,000 tonnes, Packaging capacity stood at 90,500 and consumer division capacity stood at ~30,000 tonnes) Raw material - PVC resins Plastic raw material prices remain at an elevated level.
PVC resin prices have gone up by INR23 per kg in the quarter with an increase of 25% in its prices. The PVC prices remain even now at the elevated level.
At the increased prices, there is a demand resistance from agricultural segment. It is expected that the resin prices may start softening by March
There is some increase in CPVC prices too but it’s not comparable to PVC resin prices Balance sheet strength and capex The company has cash surplus funds of INR4.3bn as on 31st December, 2020 as against net borrowings of INR2.17bn as on 31st March, 2020. New products The company has supplied 212 units of its Biofloc products to 12 states and is awaiting results to launch the product at commercial scale
The new product launched at its Halol unit is very well accepted in the market which is mainly used for Agri and horticulture applications and will provide great savings and reduce wastages of fruits and vegetables
The company remains optimistic, budget is likely to give boost on Infra and healthcare that augers well for the company, rabi sowing is going good, demand for all our products growing
The company thus plans to launch many new products like PEX pipes, introducing several variety in bathware fittings too and focus remains on increasing value added products Supreme Petrochem The company has reported strong performance during the quarter (also led by increasing spreads Polystrine and styrene monomer)
The company has overall capacity of 24,000 per month which is currently running at full capacity
The company has envisaged INR2.5bn investment plant to add capacity of 80,000 tonnes (from ~225000 tonnes p.a. to 280,000-290,000 tonnes by Dec 2021) Plastic tanks By December 2021, the company will be supplying plastic tanks from eight locations versus five at present. The company has locational advantage and is hopeful of growing at a strong pace.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
IT
218 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Eclerx
Earnings Call: Key highlights Revenue stood at USD53.3mn, up 9.9% QoQ and down 4.0% YoY. Constant currency revenue up 9.5% (Organic 8.4%) QoQ, up 1.9% YoY (Organic 0.8%).
Net income margin was at 17.9%. Offshore Voluntary attrition is at 26.1%.
DSO at 78 days, increased by 4 days QoQ. S&D cost higher due to higher year- end bonus provisions and wage hikes. G&A – higher acquisition related legal costs offset by one off client reimbursement for WFH assets.
Core Revenue higher due to higher offshore Revenue and lower roll offs. Onshore Employee Cost higher due to increment, higher headcount and inclusion of Personiv.
Majority of adverse events in the last few years were driven by corporate actions where M&A were happened at client side.
Pipeline is as strong as 12 months ago. Chunky events can change the situation quickly. The company believes it will have good outcomes in medium term. At this point, environment looks stable. Technology disruptions hit clients first before the companies. Portfolio of clients are well positioned for growth.
Personiv business is quite resilient and suffered a dip in Q1 and Q2 and has now recovered to pre-COVID-19. Combined business will be stronger than individual.
This quarter, about USD550k from Personiv contribution. Expecting USD1mn in next quarter.
There is stability across business segments. New sales were equal to roll offs in the last year. It used to be 40-50% of revenue. In Q3, much lower roll offs than prior year. The company saw increase in short term projects.
Concentration by geographies, North America stood at 66%, Europe at 28%, ROW at 6%.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
HCL Technologies
Earnings call: Highlights The company crossed a significant milestone of USD10bn in revenue in calendar year 2020. For Q3FY21, revenue was USD2,617mn, up 4.4% QoQ, and 2.9% YoY. Constant currency revenue was up 3.5% QoQ and 1.1% YoY.
Operating margin expanded 130bps QoQ to 22.9%. Net Income margin was 20.6%.
The company delivered OCF of USD684mn, which was 127% of net income, and free cash flow of USD621mn, 115% of net income.
Net cash and investments stood at USD2.2bn.
HCLT won 13 transformational deals across industry verticals, including Life Sciences and Healthcare, Technology and Financial Services. TCV is up 13% YoY. Further accelerations in bookings in the coming quarters is expected. Digital and cloud formed a major part of the order book.
Digital transformation is truly differentiated and integrated, and is resonating well with clients.
By vertical, growth was led by Telecommunications, Media, Publishing and Entertainment at 12.1% QoQ in constant currency, followed by Technology and services at 6.8% QoQ (in cc).
Offshore concentration is increasing, leading to higher margins. Margins were also aided by SG&A leverage.
DSO edged down by one sequentially to 78 days.
The company has declared a dividend of INR4/share.
LTM voluntary attrition at 10.2% implies a reduction of 667bps YoY. Management expects this to inch up.
HCLT is strongly participating in large deals. 60% of pipeline is filled with large deals.
220 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Infosys
Earnings call: Highlights
Infosys delivered revenue of INR259.27bn, up 5.5% QoQ and 12.3% YoY. Constant currency revenue was up 5.3% QoQ and 6.6% YoY.
Digital revenue grew at 31.3% YoY in constant currency, and now accounts for 50.1% of total revenue. Operating margin expanded 350 basis points YoY to 25.4%, Net income margin was 20.1%.
Large deal-wins for the quarter came in at USD7.13bn, the highest ever. Voluntary attrition in IT services was 10%.
Free cash flow was USD772mn, up 15.1% YoY. FCF conversion was 109% of net profit.
Infosys won 22 large deals in Q3, out of which eight deals were in Financial Services, one deal in Retail, three in Communication, four in Energy Utilities Resources & Services, one each in Hi-Tech and other, and four deals in Manufacturing. By region, 13 were from Americas, seven from Europe, and two from Rest of world.
Utilization in Q3 improved by 190bps to 86.3%, mainly on account of improvement in offshore utilization.
Revenue guidance for the full year was raised from 2–3% to 4.5–5% growth in constant currency. Management also increased its operating margin guidance for the full year from 23–24% to 24–24.5%.
The company has expanded the promotion cycle across all levels.
Infosys has become carbon-neutral, 30 years ahead of target.
Number of opportunities is fairly good in telecom. Pipeline continues to remain healthy. It is optimistic on telecom sector deal conversion.
There has been a lot of work related to transformations, cloud transformations. Timing is not specific as different deals have different nature.
The wage hike coming in Q4 will have some impact on margins. In coming year, travel might also impact. But the company will work on deals to optimize this impact.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Cyient
Earnings Call: Key highlights Revenue at USD141.4Mn was up 4.7% QoQ and down 8.9% YoY. In cc terms, revenue was up 4.1% QoQ and down 10.4% YoY.
Operating margin expanded 14 bps QoQ to 11.2%, Net income margin at 9.1%. Voluntary attrition (LTM) was 13.2%. Free cash flow was at INR1.5bn, Free cash flow to EBITDA conversion stood at 85.8% for the quarter.
DSO was 88 days, lower by 2 days QoQ and 6 days YoY. At end of Q3, total headcount was 12,187 headcounts, down 80 QoQ. Cash and cash equivalents was at INR14.3bn.
Amongst the geographies, North America grew 3.0% QoQ, EMEA -8.3% and APAC including India 26.8% QoQ.
Aerospace and Defence is still soft in services. Recovery to happen once passenger traffic increases while momentum in DLM segment is visible.
Communication: Cyient continues to see momentum in fibre, 5G rollout and continues to see investments in technology modernisation in coming quarter.
Energy & Utilities: Will continue to see momentum driven by digital automation. Transportation sector showed softening and the company hopes to see some recovery going ahead. MT&H was largely hit by supply chain issues which are now behind them.
Cyient doesn’t see any need for capital investment in next 12-15 months. Continue to see growth in next 3-4 quarters.
There are no further export incentives and no announcement from government for future incentives.
Mindset of customers have changed with respect to offshoring. Currently, offshore stands at 47% and many continue to increase.
New performance linked ESOP scheme was launched for employees in which shares would be purchased by the trust. The company sees an impact of 50bps due to this. 80-100 senior associates to be eligible for this program.
222 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
L&T Infotech
Earnings call: Key highlights Constant currency revenue was up 5.3% QoQ and 7.4% YoY. In USD terms, revenue came in at USD427.8mn, up 5.8% QoQ and 8.5% YoY.
Operating margin expanded 440bp YoY to 20.6%, Net income margin was at 16.5%. Voluntary attrition in IT services stood at 12.4%. Utilization was at 81.1% including trainees.
During Q3, LTI added 1,528 employees on a net basis. At the end of Q3, the headcount was 33,983. DSO stood at 63 days.
Among its verticals, BFS grew 8.4% QoQ; Insurance -0.6% Qoq; Manufacturing grew 9.6% QoQ; Energy & Utilities: 0.1% QoQ; CPG, Retail & Pharma 4.7% QoQ; Hi-tech, Media & Entertainment 5.8% QoQ; and Others 11.4% QoQ.
By geography, North America contributed 67.9%, Europe 16.1%, India 8.6%, and RoW 7.4% to revenue.
The revenue breakdown by service offerings stood as follows: ADM and Testing 33.6%; Enterprise Solutions 31.4%; Infrastructure Management Services 14.3%; Analytics, AI & Cognitive 11.9%; and Enterprise Integration & Mobility 8.8%.
The company is excited about conversions and large deal pipelines. There are tremendous opportunities in growth accounts. It continues to focus on capabilities to fulfil customer needs.
Salary hikes will impact margins. Higher utilisation (which would reduce going forward), increasing investment in marketing, investment in new units and cloud-based investments will also keep margins in check.
Wage hike offshore is 6–7% and onsite around 2%. Its impact on P&L is 160– 170bps.
The situation has changed rapidly over the last two years. Investment and government support have bounced back. There are incredible market opportunities across verticals. Incredible capability building is what has separated LTI from its peers. Highest level of partnerships and incredible conversion with customers has also helped.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
L & T Technology Services
Earnings call: Key highlights LTTS saw the highest-ever deal booking. The company won a total of seven deals of more than USD10mn each. The deal pipeline is healthy and sequential growth was seen across segments.
Constant currency revenue shot up 6.6% QoQ (down 5.2% YoY). In USD terms, revenue was up 6.8% QoQ and down 4.6% YoY. Operating margin expanded 150bps QoQ to 15.2%, Net income margin came in at 13.3%.
Voluntary attrition stood at (LTM) 10.7%. Free cash flow for 9MFY21 was INR9.6bn, 205% of net income. Utilization was 77.5%. At end of Q3, total headcount was 16,069.
Among the verticals, Transportation grew +3.1% QoQ, Industrial products +5.5% QoQ, Telecom & Hi-tech grew +14.3% QoQ, Plant Engineering +9.2% QoQ and Medical Devices 2.4% QoQ.
By geography, North America contributed 61.2%, Europe 16.1%, India 13.9%, and RoW 8.8% to revenue.
The revenue mix contribution from onsite stood at 42.9% and offshore at 57.1%.
In transportation, there was sequential growth in all the three sub-segments. Auto had a soft quarter due to seasonality. It won three deals in this segment while multiple deals are in pipeline in the Auto and EV space.
In Telecom & Hi-tech, there was recovery in growth in Q3. Organic growth was 3.7% for the vertical. Plant engineering, momentum is strengthening. In Industrial Products, momentum has improved. Demand was driven by value engineering, productivity improvement,
Decision making is now happening at a faster pace than the previous quarters. Demand is steadily coming back QoQ. The company remains optimistic about future growth. Ramp-up in deals is happening in a gradual manner.
Revenue will be back to pre-covid-19 levels going ahead. In terms of wage increase, it will happen on April 1 for the junior grade and on July 1 for the senior grade. Q4 might be see a slight uptick in attrition, but will be range-bound and is not a concern at this point.
224 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mindtree
Earnings call: Key highlights Revenue grew 5% QoQ to USD274.1mn and was broad-based across verticals and geographies. Constant currency revenue was up 3.5% QoQ and 1.1% YoY.
Operating margin expanded to 23.1%. Net income margin came at 16.1%. Voluntary attrition in IT services was 12.5% and free cash flow was INR5.8bn. Cash and investments were INR25.2bn for the quarter.
Amongst geographies, North America contributed 77.2%, Continental Europe, U.K. and Ireland together contributed 15.2% and Asia Pacific 7.6% to overall revenue.
Revenue contribution from these service lines are as follows: customer success- 38.1%; data and intelligence- 14.9%; cloud- 19.2%; and enterprise IT- 27.8%.
The order book was USD312mn and crossed USD1bn YTD.
MTCL continues to witness strong demand across verticals and geographies. Pipelines continues to be healthy and strong. It also expects growth momentum to sustain.
With respect to the top client, it is a very strategic relationship and continues to grow further. Little bit of aberration is there. MTCL remains optimistic in terms of delivery and relationship is going to grow further.
Hedging is the company’s continuous strategy and it is well protected for any currency movement.
Utilisation jumped significantly and improved 430bps QoQ to 83.1%.
MTCL had embarked on aggressive rescaling of employees in the past, which has helped tremendously. It is also aggressively hiring and in the past few months hiring has accelerated.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Persistent Systems
Earning Call: Key Highlights The company delivered strong quarter across all segments. Revenue of USD146mn was up 7.4% QoQ and 12.9% YoY. Operating margin expanded 60 basis points QoQ to 12.7%, Net income margin at 11.2%
DSO at 57 days, improved by 6 days QoQ. At end of Q3, total headcount was 12,438. It added 1618 in the quarter.
In banking and financial services, the company won multiple large multi-year deals. Compliance, KYC, modernisation in digital banking was key theme in this sector.
With respect to Alliance business: 12.2% growth in revenues. It is continuing to see good business attraction. Persistent continues to build relationship with IBM. Named partners with IBM. Deeply aligned for cloud pact for data, integration with IBM.
The company is trying to hire in time while deployment takes time. Utilisation is in line. Full impact of wage hike will come in next quarter.
Overall growth beyond top ten is healthy. Mining efforts have been proactively done and are successful. The company is seeing healthy growth in all different accounts.
The trends that company is seeing is for at least 3-5 years whether on the cloud side, app modernisation, hyperscalers. It is prudent to wait for 3-6 months to give clear idea about 3-5 years. Have right skill sets and confident about future with cutting edge technology.
Looking to double down in Europe where there are significant opportunities. Persistent has done some acquisitions in Europe which can give it technological presence. In 3-4 years, it is expected to be 15-20% of revenue share.
From hiring perspective, hiring has been done due to multiyear, big deals and ramping up of deals. 1600 hired and 600 are freshers and will be productive in 6 months.
Order book of USD302mn in TCV led by new business and accounts and renewals
Board has declared INR14 per share as interim dividend.
226 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Consultancy Services
Earnings call: Key highlights
There was strong demand for core transformation services and quick revenue conversion from the deal wins of the previous quarter.
BFSI (+2%), Retail & CPG (+3.1%) and Life Sciences & Healthcare (+5.2%) spearheaded growth. Technology & Services grew 0.8%, Manufacturing 7.1% while Communications & Media grew 5.5%.
All markets posted good sequential growth, with North America growing 3.3%, UK 4.5%, and Continental Europe 2.5%. Emerging Markets also grew well, with India growing 18.1%, MEA 6.7%, Latin America 3.1% and Asia Pacific 2.6%.
Operating margin expanded 40bps QoQ to 26.6%, net income margin stood at 20.7% and effective tax rate was 25.4%.
Client metrics: Remained largely flat in Q3; the company expects these metrics to remain soft for a few quarters.
In Q3, TCS had 48 clients in the USD100mn+ range, 97 clients in USD50mn+ bucket, 229 clients in USD20mn+, 386 clients in USD10mn+, 565 clients in the USD5mn+ bucket, 1,077 clients in the USD1mn+ band.
In cloud computing, management expects significant shift, which it says is difficult to quantify. First is migration of cloud and second is actual roll out of programmes. E.g., ecosystem integration. Second is classify the cloud. Incremental differentiation will happen in this platform and will be big driver in future.
TCS has not seen any budget cuts and has closed many large deals during the quarter.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tech Mahindra
Earnings Call: Key highlights TECHM had a revenue of USD1.3bn, up 3.4% QoQ and down 3.3% YoY. Constant currency grew by 2.8% QoQ and was down 4.6% YoY.
Operating margin expanded 170 basis points QoQ to 15.9%, Net income margin at 13.6%. Voluntary attrition was at 12%.
Free cash flow was at INR226mn, Free cash flow to PAT conversion now stands at 127.2% for the quarter. DSO was at 95 days, lower by 2 days QoQ and 17 days YoY.
Amongst the industry, Communications grew by 4.4% QoQ, Manufacturing 4.2%, Technology, Media & Entertainment -0.6%, Banking, Financial services & Insurance 0.4%, and Retail, transport & Logistics by 8.4% QoQ.
Amongst the geographies, Americas grew 0.1% QoQ, Europe 8.5% and ROW 4.6% QoQ.
Company is focussed on cloud, AI, Cybersecurity. Revenue coming from accelerated digitisation. Much of structural shift will become part of the new normal.
In terms of wage hike, it will normalize in Q4 and give a standard hike to employees. Portfolio company synergies, automation, digital will help in keeping margins stable.
Sub-contractor cost has gone down, and it keeps fluctuating. There is extra focus on cloud, data monetisation and AI. Europe had few bad quarters and is now showing recovery. Automotive and aerospace are not doing well but looking forward in EV market by sub creating verticals for EV. Will continuously keep investing in these verticals.
Communication vertical will revolve around digitisation of telcos, new set of 5G and wireless, transformation of customer experience and cloud (early stage).
Seasonally Q3 used to be strong but looking into Q4 the management believe they have the best pipeline and are optimistic in terms of outlook. Continue to transform business in future. There will be pulls and pressures in cost coming back but the management is confident that company will sustain despites pulls and pressures.
228 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Wipro
Earnings call: Highlights Wipro had a strong performance and healthy growth in order booking, higher margins and strong cash flows.
Operating margin expanded 240bps YoY to 21.7%, Net income margin was at 19%.
Operating cash flow was 149.4% of the net Income and free cash flow was 132.7% of net income. DSO improved by 6 (days).
Closed 12 deals, with TCV of greater than USD30mn; the TCV booked of these deals was over USD1.2bn. It also closed its largest deal in Continental Europe.
There was good order booking in the US, running into double-digit growth. Europe is growing faster and is mostly driven by cloud, thereby driving efficiency and digital transformation. Consumer sector and financial services grew due to demand for Cloud infrastructure.
The company believes it has done a good job on utilizations so far. The ‘people’ supply chain constitutes three aspects: one is robust hiring; second is attrition, which is now flat (and this could be the trend in the coming quarter); and third is ‘Manage growth momentum’.
More people working on deals and exposed to clients. Innovation is already in place and the level of intensity in the last three months is the way we are mobilising growth; leveraging of capabilities is quite high.
Offshoring has increased in the last few quarters and is increasing further. Headwind of investments is to be seen but not like the beginning of year.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Lubricants
230 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Castrol India
Financial highlights Revenue dipped 8% YoY as volumes declined 4% YoY to 52mn litres, while realisations dipped 4% QoQ owing to corrective pricing action undertaken in the CV portfolio. Volumes were impacted owing to inventory reduction for distributors to manage their working capital.
Gross margins expanded 172bps YoY with a decline in base oil prices (vis-à-vis Q4CY19). However, EBITDA margin dipped 618bps YoY in Q4CY20, as operating profit declined 22% YoY to INR49,538/KL.
The company increased A&P spends sharply as it had spent lower amounts in H1CY20 (at INR0.7bn versus INR0.1bn in Q4CY19).
The board declared a final dividend of INR3/share, resulting in cumulative dividend of INR5.5/sh.
Free cash flow accretion for CY20 stood at INR8.7bn, up 12% YoY. Operational highlights The corrective pricing action taken in the CV oils space yielded double-digit volume growth in Q4CY20.
Castrol unveiled its all-new premium range in lubricants for 2Ws under the brand Castrol POWER1 ULTIMATE, developed with full synthetic technology for bikes, sports bikes and scooters offering both protection and performance for riders.
Volume growth was largely led by automotives, which formed 80% of the mix, while the balance was industrials. Within automotives, 45-50% of the volumes were in personal mobility while the balance was in CV and other lubricants.
Management has undertaken a 4% price increase on average across products to combat the impact of higher base oil prices.
Management has outlined volumes and absolute gross margins as key strategic priorities, with personal mobility forming an integral part of growth. Thus, management will continue to drive investment in distribution and brands.
While Castrol and markets are currently in recovery mode, the long-term growth target of 5-7% could be re-looked in light of the pandemic, according to management.
The company paused its pilot with 3M in light of the pandemic and is making certain changes across its portfolio on the basis of the same. It should restart in the next couple of months.
Strategic partnership with Jio-BP: The company entered into a strategic partnership in Q2CY20 with Jio-BP as the sole supplier of lubricants and access to 1,350 retail sites, which it plans to expand to 5,500 retail sites. This should result in additional touch points for customers and fresh visibility for Castrol.
Castrol has a separate portfolio to cater to demand from BS-VI engines. While drain intervals have increased, there is a premiumisation of thinner oils. Further, once warranty periods are over, 70-80% of the products move to aftermarket and management thus has faith in its distribution network to sustain.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Management believes Internal Combustion Engine-based oils will remain in vogue in the country for the next 20–30 years as current car ownership penetration is weak. However, Castrol has also entered into agreements for EV fluids with OEMs in India, including MG Motors and Tata Motors, and remains a pioneer thereof with the aid from its global parent.
232 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Gulf Oil Lubricants
Financials Revenue grew 14% YoY as volume growth rebounded to 16% YoY versus Castrol’s 8% YoY decline.
Volumes grew 16% YoY in Q3FY21 to 33,000KL as end-user markets improved further. This was on account of a pick up across markets with growth in 2W and CV categories along with a pickup in PCMO, which has been most affected due to the longer lockdown. B2B related and industrial businesses saw strong growth and record sales in this quarter.
Realisation grew 5% QoQ (down 1% YoY), as the company increased prices across certain categories to mitigate the base oil price increase. (B2C: 65% versus 61% in Q2FY21).
Gross profit margin dipped 237bps YoY on higher base oil prices. Consequently, gross profit per KL contracted 6% YoY on a base of 22% growth, to INR70,061 in Q3FY20.
EBITDA margin contracted 108bps YoY, and EBITDA rose 8% YoY (8% above estimates), owing to tighter cost control. EBITDA per KL contracted 7% YoY to INR25,258.
With improved collections and reduction in working capital cycle, GOLI has a net cash position of INR3.5bn. Operational performance and markets Management saw strong traction in the quarter with growth in its bazaar segment boosting B2C sales and growth across factory-fill volumes driven by OEM sales.
While PCMO volumes picked up, management anticipates higher volumes as work-from-home for employees reduces and activity picks up across metros.
GOLI’s cost optimisation measures aided in EBITDA growth – especially the prudent advertising spends, travel costs and other savings. However, with spends in Q3FY21, A&P costs are now at 4% of revenues.
Management is focused on improving market share along with higher-than- market growth.
Q3FY21 end user break up was: 37% from diesel engine oils; 24% from personal mobility; 15% from industrial oils; and 24% from others (greases, etc).
With base oil prices have been on the increase, management anticipates a dip in margins until prices are passed on, however, believes the same to be temporary.
GOLI has seen strong growth in exports, with Southeast Asian countries opening up. With capacity available in Chennai, management is open to exploring opportunities in the same. Other highlights GOLI announced an investment of GBP1.5mn in Indra Technologies for a 7.85% stake. Indra Technologies is a start-up focused on EV charging stations with a 5% market share in UK. The company is primarily focused on home charging stations and Vehicle to Grid technology. GOLI plans to leverage this partnership as EV
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
demand picks up as the company believes that home charging will be a primary usage for consumers.
Two-wheeler battery: GOLI has seen strong volume growth from the segment and remain optimistic on the long-term growth trajectory. Management is on the lookout to localize production and expects INR700-800mn in case of a greenfield setup, however, have not finalized the plans as of now.
Since GOLI’s current capacity stands at 1,40,000KL, which is sufficient for 1–2 years, it plans to increase capacity via debottlenecking at first.
234 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Media
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Inox Leisure
With seating guidelines relaxed, expect movies to start hitting screens from March or early-April.
FY22 to be a cinema year as several big budget movies will be released.
Hollywood too did well in the recent past, expect to do well in FY22 as well.
Only one state not allowed to open so far – Jharkhand. Received permissions from all other states.
Average cash burn is INR250-300mn per month.
States will allow to operate at 100% capacity very soon.
Expect a few big movies to come in March.
No discounts there on F&B, but giving limited menu. Will start the full menu again soon.
Expect occupancy to come back to normal by H2FY22.
Gave discounts for library content. For new movies ATP was as per pre-covid.
Programming flexibility is low in single screens, hence not very keen on acquiring single screens. Converting single screens into multiplexes has several regulatory hurdles and also very difficult.
Don’t believe there will be increase in marketing costs going ahead.
Few Hollywood movies in US have already announced dates.
Cost optimisation to continue in the coming quarters as well.
Master had 100% occupancy (50%) for 10 days. Did very well in South India. ATP went to pre-covid levels in states, except TN. SPH too was at pre-covid level. Distributor share was lower as OTT release was done within eight weeks.
Reaching out to customer through various digital mediums.
Loyalty program doing well. Most people willing to register as loyal patrons.
Content for OTT and cinemas is different. Don’t believe cannibalisation will happen.
Capex
There further 14 screens to open in this financial year, wherein, on an average 86% of the work has been completed.
Would require an additional capex of INR80mn to INR100mn to complete these screens.
Have gradually started capex cycle in selected pockets. However, 100% cycle would resume when business attain complete normalcy in operations.
236 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Liquidity
As on 31st Jan 2021, have liquidity of more than INR2.30bn (including undrawn limits of INR930mn).
INOX has successfully raised INR2.50bn through QIP in November 2020, a portion of this has been utilised for paying off Debt and towards operating expenses.
INOX owns six cinema properties and a head office. As per current market valuation, if required, the company can raise INR3.5bn via a ‘sale-lease back’ of these properties.
Rentals
Closed discussion with most landlords to avail nil rental and negligible CAM for the lockdown period
Negotiated revenue sharing/discounted rent and CAM post opening upto 31st Mar 2021.
Discussions with only a few landlords remaining, should be able to close in the coming weeks.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
PVR
Ministry of Home Affairs in Unlock 5.0 guidelines dated September 30th , 2020 allowed cinemas to reopen from October 15th , 2020 onwards with 50% capacity
Various states have issued their respective notifications for cinema reopening in a staggered manner.
As on date, except for Rajasthan and Jharkhand (contribution of 6-7% to revenue), all other states, wherein PVR has a presence, have allowed cinemas to reopen.
Believe these state governments would allow opening of screens in the coming time.
Cinemas in Sri Lanka were shut from March 14, 2020 until July 2, 2020, and from October 11, 2020 until December 31, 2020.
Staggered re-opening and limited content availability post re-opening has significantly impacted the revenue.
The Board of Directors at its meeting held on 18th Dec 2020, subject to approval of the members of the company, approved the resolution to raise equity for an amount not exceeding INR8bn.
Continued focus on keeping all other fixed expenses under check.
Footfall in Q3 stood at ~1mn.
Content line-up was weak during the quarter. Hollywood movies managed to rope in some footfall.
Significant reduction in fixed costs YoY – 63% despite screens opening during the quarter. Rent and CAM to come back once business normalises.
Announcement of additional fund raising via equity: The board of directors, on December 18, 2020, approved a fund-raising plan via equity for an amount of up to INR8bn to further strengthen the liquidity position.
First blockbuster of the year – Master – released in TN has done very well, second biggest opening ever for any Tamil film. South has taken the lead in terms of releasing movies. Should give confidence to Bollywood producers as well.
Expect some relief measures in the coming budget.
Globally, movies in China and Japan have started doing well. Seeing that wherever virus has been contained, footfall has come back even sharply
Seeing single screen operators struggle due to the pandemic
Per screen capex won’t change going ahead as want to preserve the quality
Going live on Zomato from 18th January to sell F&B products.
Cash burn for Q3 – INR1.08bn. Fixed cost at INR1.5bn – non-Ind As.
Serving limited f&B. Have restriction in Maharashtra with respect to consumption inside screens.
238 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Content
Bollywood producers waiting for all states to open up, including Rajasthan and Jharkhand. Also, concern about customer sentiment being weak is delaying release of big Bollywood movies.
Post reopening, the film slate still continues to shift and settle. While stronger Bollywood titles are yet to announce dates, low-mid size Bollywood movies, stronger Hollywood and diverse regional content continues to debut.
In continuous engagement with producer and distributor partners to streamline the content flow.
Don’t expect many movies to go to OTT platforms. No reductions seen in movie- budgets and actor fees, implying theatre release more likely
Monetisation is the best for theatre release.
Private screenings
Have also introduced the concept of private screenings, which is a premium and personalized offering wherein a small group of audience hires the entire auditorium to enjoy the content of their choice and no other guests apart from the group members are allowed during that show, thereby reducing the risk of contamination.
Operations:
In order to welcome back patrons, running several promotions and offers on ticketing and F&B
Ticket pricing will move once fresh content starts hitting the screens. ATP for Q3 stood at INR164, as library content tickets were sold very cheap. Once blockbuster movies start coming in ATP to increase sharply
To enable contactless booking, tickets are available on PVR website and mobile application along with partner websites and mobile applications.
Customers can also purchase tickets by scanning ‘quick response’ codes at entrance gates. Further, we have discontinued paper tickets and instead started issuing booking confirmations only over SMS and e-mails. Have also introduced ‘quick response’ code based food ordering, limited the menu under F&B offerings and included some healthy choices and options which include ingredients that help to optimize immunity.
Have also enhanced cleaning and distancing protocols to ensure safety of guests and employees.
Rent & CAM
Settlements reached with Landlords for 88% of cinemas for complete or partial waiver / discounts for the lockdown period
Negotiated discounts/ rebates in the form of revenue share/ reduction in minimum guarantee post re-opening generally until March 31, 2021
Might re-engage with developers if the covid aftermath on business extends beyond FY21
No escalation in rentals in FY22, maybe one or two properties. But it should be largely be similar to pre-covid-19 levels.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Discussions with other landlords is in progress and expected to close in the near future.
Yet to re-open 56 screens in 13 cinemas, as of 15th January 2021, since certain rental negotiations are currently underway with mall developers, landlords, lessors and partners.
Adjusted rent expense does not include an amount of INR320mn for rental waivers sought by the company for the lockdown period in case of properties where rental negotiations with landlords are not concluded.
CAM Expenses for Q3 FY21 lower on account of credit notes received from developers on final settlement
Personnel expenses
Salary cuts for frontline staffs reversed in line with reopening of states; pay cuts for corporate and other staff being rolled back in a staggered manner.
As cinemas have reopened, personnel expenses have increased from INR407mn in Q2 to INR486mn in Q3.
For 9MFY21, personnel expenses are lower by 50% compared with 9MFY20 and lower by 54% against Q3FY20.
The company had taken significant measures to reduce its personnel cost including: temporary salary cuts across various levels in the organisation during the period of lockdown. Reduction in headcount by way of layoffs / retrenchment decision on increments deferred. Post-lockdown, salary cuts for frontline staffs reversed in line with reopening of states; temporary salary cuts for corporate and other staff being rolled back in a staggered manner.
Electricity charges
Electricity & water charges drastically reduced due to closure of cinemas during lockdown period and this is gradually increasing as Cinemas are restarting operations.
Other overheads
Significant reduction in other overheads. Contracts such as Housekeeping / Security, which were suspended till cinemas were closed, are being renegotiated as per business requirements.
All discretionary spends and non-essential expenses, including marketing & promotional and travel and entertainment are being monitored continuously.
Liquidity enhancement
Additional Borrowings: Raised additional borrowings from existing bankers to shore up liquidity. As of December 31, 2020, the company had ca ash and bank balance of INR3.73bn including investments (current), cash and cash equivalents (current) and other bank balances.
Fund-raising through rights issue: successfully completed a INR3bn rights issue during August 2020, with a robust response from shareholders.
Announcement of additional fund-raising via equity: The board of directors, on December 18, 2020, approved a fund-raising plan via equity for an amount of up to INR8bn to further strengthen the company’s liquidity position.
240 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Fund-raising to happen mainly to strengthen the balance sheet. Going in for equity as leverage is already high.
Not looking at any inorganic growth opportunities.
Cash flow management
Working Capital payments: Have negotiated with the suppliers and vendors for an alternative payment schedule for clearing the outstanding dues.
Capital expenditure: The company significantly reduced its capex during the lockdown with minimal capex spends on projects that have been in advanced stage of construction. The company is evaluating the evolving situation before it recommences its capex program.
Debt Servicing Obligations: PVR has reasonable liquidity to meet all its debt and interest obligations for the next few months and in continuous engagement to augment it further by raising resources to keep sufficient liquidity available.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Sun TV Network
Local advertising remained low during the quarter. From Q2, there has been an improvement, but lower than last year as retail advertising is still low. Jewelry advertising in particular was very low.
Jan-Feb look promising in terms of ad demand
Revenue break up:
o Advertising: INR3090mn
o Broadcast: INR160mn
o International: INR290mn
o Digital cable: INR2000mn
o IPL revenue: INR2090mn
Depreciation: INR230mn; Ammortisation: INR460mn
Believe will achieve FY20 levels easily in FY22
Relative share of viewership has come down; rejigged the prime-time line up
Launched new shows etc to bounce back to 50%-plus viewership share. The efforts will take few months to manifest into ratings
Local advertising around 30% historically. Now around 10%.
Most of the new programming on commission model. Content cost likely to rise
Dividend: Declared INR5/share as interim dividend. Can’t comment on second dividend or buyback.
No plans for tie-ups with any global OTT platforms/media players
Estimate around 30% of total TN market would be analog. However digitisation happening quickly month on month. 3-4mn analog subscribers would be present broadly.
International revenues low as some contracts yet to finalise. No changes in the business dynamics. Revenue to normalise from Q4.
SUN NXT around 18mn subscribers. Not moved significantly since the last quarter.
Have 5 movies in the pipeline – Expect to release 3-4 in the next fiscal. Investment around INR3-3.5bn.
Might also look at releasing a few small budget movies going ahead
INR2.8-2.9bn worth of movie amortisation for this fiscal. Will have to see the theatrical releases for next fiscal; could be around INR3.5bn.
Can expect 20-25% increase in the content cost in FY22 against FY20
Change in the diaspora demography globally might call for a change in international strategy.
242 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Believe broadcasters should have the pricing right, rather than price control from regulators. However, the matter remains subjudice as of now. Will figure out way in case ruling comes unfavourable to the industry
Marathi channel to be launched next year
Will be in a better place by Q4 call to give some guidance for the next year
Capital allocation in terms of content – Tamil and Telugu markets will get the lion’s share. Bengal and Marathi will also some content ramp up as they are new markets
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Zee Entertainment Enterprises
Revenues increased due to a content syndication deal worth INR5,512mn during the quarter. The syndicated content had an inventory value of INR4,730mn which was amortized in Q3FY21 – leading to spike in operating cost. Syndication deal pertains to several global markets. Difficult to say whether such deals will continue ahead also.
Cash from syndication deal has been received.
Want to play a holistic film business – BO, OTT and Satellite. Will be a low margin business compared to TV business. Depends upon the selection of the films taken up for production
Deposits declined by INR3.3bn QoQ
Receivables increased by INR4.7bn QoQ due to sales increase, incentive payouts. WC going up as revenues increasing. FCF was negative in Q3 as WC increased and content investment ramped up
Cash and treasury at 18.2bn as on Q3FY21
o INR3.9bn in bank balance
o INR6.5bn in FDs
o INR7.3bn in MF investments
o INR500mn of NCDs
Money from overseas investment has been received – INR2.2bn
No outstanding from Siti Networks as cash and carry basis continues
Payments from Dish TV are as per plan
Receivables from Dish TV down from INR 5bn in Q2 to INR4.6bn in Q3
Majority of the receivables to come by Sept 2021
Sugarbox investment to commence in Q1FY22.
Capex for FY22 to be similar to normal years – INR2-2.5bn. Might go up as spending towards improving ZEE5 experience and ad tech.
Content consumption witnessed spike during the quarter
Plan to regain share in the Hindi market
Consolidated revenue grew by 33.2% to INR27,293mn and consolidated EBITDA grew 26% YoY
Underlying EBITDA (excluding content syndication revenue and cost) stood at INR6,375mn, EBITDA margin of 29.3%.
Excluding content syndication deal of 5,512mn revenue grew 6.3%.
Domestic advertising grew by 7.5% and domestic subscription revenue grew by 9.3% on a like-to-like basis.
244 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Advertisers seeing strong demand revival; new product launches picking up. Domestic advertising revenue for the quarter grew by 7.5% YoY and 43.6% QoQ; a sharp recovery post H1 reflects the rebound in consumer demand and spending. Seeing ad growth happening across sectors sequentially. FMCG continues to drive the bulk of ad spends. Estimate industry ad growth to be around -3% YoY
A&P and other expenses declined by 8.3% YoY during the quarter
Advertising was strong as Q3 was a festive season quarter.
Expect FY22 to be good, but difficult to say by when normalcy will return
Will be increasing investment in content across all businesses. Not finalised the plan so difficult to say of now. By Q4 will be in a better place to give some guidance on margins and FCF/PAT conversion
Low teens sub growth possible owing to pricing and new sub addition. Need to regulatory environment to stabilise for this.
Won’t be able to deliver on the 30% EBITDA margin in FY22.
Content cost for TV has not changed much
IPL impacted roughly 15% of industry ad revenues
Buoyancy in advertising remains intact.
Expect ad revenue to grow in Q4 as well
ZEE5 ZEE5 released 7 movies on ‘Pay Per View’ model
ZEE5 global MAUs and DAUs stood at 65.9mn and 5.4mn respectively in Dec’20
65.9 mn global MAUs*, 5.4 mn global DAUs* in Dec’20
133 minutes average watch time per viewer per month in Dec’20
Q3 Revenue and EBITDA# stood at INR1,178 mn and INR(1,757) mn
Paid sub growth in line with the revenue growth.
Mix of ad and subscription has not changed materially
The ZEE5 team is more or less stabilised now
Programming 18.2% all India viewership share in Q3, continues to be strong #2 TV entertainment network in India
Network share declined due to FTA channels losing share and decline in overall Hindi movie genre
While TV viewership reverted to earlier level, movie genre share dropped due to lack of new movie releases
Launched 2 new channels – Zee Zest and Zee Vajwa, taking the network channel count to 47.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Zee Zest (Lifestyle) and Zee Vajwa (Marathi Music) launched in Q3’21, making it 6 new channels in the last 14 months
Comparable programming cost (excluding inventory amortisation of syndicated content) grew by 11% during the quarter primarily led by increased content and transmission costs in digital business
Reported growth of 18% includes revenue from music business which has been reclassified as subscription revenue in this fiscal. Comparable growth of 9.3% in domestic business driven by both television and ZEE5
Regional channels performed well – Bangla, Malayalam. Lost some share in Marathi markets
ZEE Studios
Zee Studios released Suraj Pe Mangal Bhari in theatres, first Hindi Movie to be released in theatres after COVID
Released 5 movies during the quarter, including 4 theatrical release
Plans to release 2 Hindi and 2 Regional Movies in Q4
246 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Metals & Mining
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Coal India
In focus Demand expected to recover given low stocks at power plant- down to 18 days compared to mandated level of 19 days
FY22E volume growth expected at 10-12% as Q1FY21 had a very low base.
E-auction premium expected to improve. January-21 e-auction premium was at 25% while YTD FY21 average is at 16%
FSA realization is lower this year due to no performance incentive or penalty charged by the CIL. QoQ decline due to possibly inferior product mix
YTD FY21 e-auction volume at 92mt compared to 60mt prior year. FY21 e-auction volume expected at 120mt
Expect dividend payout of last year to be maintained this year as well.
9MFY21 capex at INR93bn. FY21E capex at INR130bn and FY22E capex at INR 160bn. Capex mainly to boost mine evacuation infrastructure.
Receivable stagnant at INR216bn. Do not expect to see it going down till March- 21. See payments from DISCOMs coming post March-21
Cash and equivalents at INR 120bn as on December-20 mainly due to receivables not coming down
Provisions increased sharply in past two quarters due to recognition of dues pending for three years or more.
UG mines closure: Of 23 mines, 11 have been closed till date. Another 5 will be closed by March. The remaining 7 are likely to be upgraded. Cost savings from mine closure- INR3-4bn p.a.
On track to start work on 35 First Mile Connectivity projects in FY21. As on date, work orders issued for 29. The remaining LOIs will be issued progressively through to March-end.
Capital allocation into Solar projects and Greenfield Aluminium complex will only be done after taking returns into account. Operations and guidance While thermal power production grew 8% YoY, however, the same was not reflected in the company’s offtake from the regulated sector as power plants utilised stocks at power plants. Consequently, stocks at power plants depleted from 30-34 days to 18 days towards the end of the quarter. Management anticipates power plant sales to increase as stock is not likely to go below 18 days (mandated level: 19 days).
CIL has increased its offtake to the non-regulated sector consequently, and grown the same by 60-70% over 9mFY21. The e-auction premium increased to 25% in Jan-21 as a result.
With improvement in prices globally, management anticipates better demand and pricing environment for domestic coal. The company is expecting 10-12% YoY demand growth in FY22.
248 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
While there has been some shift from linkage coal, since the company has not conducted Tranche-V auctions, customers are procuring coal via e-auctions.
Management does not see a threat from commercial coal mining, as total capacity that has been auctioned so far is 50mtpa, and management anticipates new miners will take 1-2 years to obtain clearances post which they will be able to commence mining.
CIL has shut 11 mines as targeted for FY21, and 5 additional mines should be closed by the end of FY21, while 7 mines are undergoing upgradation, and if they contribute substantially then mining will continue or else it will be closed down. This should result in cost savings of INR3-4bn.
The company has seen lower OB production in the past which is being made up for at present. YTDFY21, OB production is up 20% as a result. Normalised rate of OB production is 2.2-2.3x of coal production and should be achieved from FY23, post similar levels of OB production in FY22.
At present, dispatches are at 1.8-1.9t/day and need to increase to 2.2mt/day in order to meet the company’s target of 600mt for FY21. Production is however at 2.2mt/day.
The company is actively working on import substitution, and booked 8mt of coal under the special e-auction conducted for import substitution. With coal prices increasing globally and shipping delays, management has approached coastal and inland power plants. For instance, supplies have commenced to TSPL plant of Vedanta for the first time ever. Diversification projects The company is at the evaluation stage on diversification projects and will undertake a project, if it makes a reasonable level of returns.
CIL will not undertake major capital/technology risk and will scout for partners who will take the technology risk and invest capital. The company’s scope will be limited to land acquisition.
Management is keen on launching solar power projects as they improve carbon neutrality of the company.
The feasibility study for the diversification projects are ongoing. Management may take a call on the same over the next 6-7 months. Capex The company is on track to achieve its capex of INR130bn, which will primarily be used to augment evacuation infrastructure. The company has spent INR93bn upto Jan-21.
FY22 capex is planned at INR160-170bn.
Company is on-track to complete scheduled rail projects for FY21 – East Rail Corridor and Lingaraja SILO by March-21.
The company plans to continue investing in equipment. CIL invested INR30bn in heavy earth moving machinery and also working on mechanisation of the evacuation process starting with Coal Handling Plants.
Evacuation remains an issue for the company and mechanised transportation is critical to the same. The company plans to invest heavily in the same.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Receivables Receivables are broadly static at INR216bn vis-à-vis September. The company is not seeing receivables increase from these levels as pending dues are expected to be cleared.
CIL is working with its customers to clear dues and expects payments to start flowing in from April-20 with improvement in demand.
While receivables have sharply increased, the company does not anticipate a further increase in provisions. Bulk of the receivables are expected to be cleared soon while the provisions are made for the dues more than three years old. Financials Tax rate is likely to be maintained at 25% for the company, despite higher tax rate of 35% in the current quarters.
CIL ended 9MFY21 with a cash balance of INR120bn.
250 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Hindalco Industries
In focus Focus on margin-accretive capex in India operations. Capex intensity to remain low.
Aluminium demand in domestic market reached pre-covid-19 level of Q1/Q2 FY20. Traction in transportation and consumer durables sectors visible.
In copper market (domestic), the share of imports declined to 35% in Q3FY21 from 51% in Q3FY20.
Domestic Al sales at 41% in Q3FY21 compared with 36% in Q2FY21; VAP sales at 25% compared with 21% in Q2FY21.
Commissioning of enhanced capacity at Utkal by June-21. Will lower the operating cost. By Q4FY22, the company will also sell alumina to third parties.
Al CoP/t was flat QoQ. Expected to go up as coal premium has increased 3% QoQ in Q4FY21.
Hedging levels remain unchanged: 58% of volume booked at USD1,715/t in Q4FY21 and 28% at USD1,840/t in FY22
Deleveraging in Q4FY21 aided by proceeds of USD500mn from divestiture of the Duffel and Lewisport plants Macros Al market balance: During CY20, the aluminium market had a surplus of 2.6mt compared with a deficit of 1.2mt in CY19. This was on account of a 2% increase in global production while consumption dipped 4% YoY.
Domestic Al demand: Domestic demand rebounded to pre-covid levels at 30% QoQ (up 13% YoY) growth in Q3FY21 with strong demand from transportation, consumer durables, and stable demand in pharma and food packaging. However, the share of domestic manufacturers fell to ~39% from 42% in Q3FY20.
Global flat-rolled products (FRP) demand is expected to grow 7% in CY21 (vs contraction of 6% in CY20). This will be led by 3-6% growth in beverage cans, 25- 30% growth in automotive and 5-10% growth in aerospace.
Domestic FRP demand is estimated to reach pre-covid level in Q3FY21 with stable demand from pharma & food packaging, along with autos. Durables demand is increasing, however B&C demand is recovering and expected to reach pre-covid levels by Q4FY21.
Refined copper market: Global refined consumption declined 3% YoY in CY20 due to impact of covid-19. Chinese demand grew 2% YoY and rest of world (RoW) dipped 9% YoY.
Copper outlook: Spot Tc/Rc remained tight as mine output declined. CY21 Tc/Rc stands at USc59.5/lb, down 4% YoY.
Domestic refined Cu demand: Declined 15% YoY to 166kt in Q3FY21, with imports declining 42% YoY and sales by domestic producers increasing 16% YoY.
Momentum of stimulus in China is not likely to not slow down and commodity prices are likely to hold.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Duties in copper were reduced to 2.5% in the budget 2020, and the impact on the market remains to be seen. However, there remain counter-measures like import monitoring system and standards with respect to usage of scrap on particular uses. The import monitoring system is also applicable for aluminium.
The announcement of the scrappage policy should result in higher sales of automotive, in CVs, which have a bulk of aluminium, and consequently drive up the demand for aluminium. Expansion and overall strategy Capex in India will be undertaken by accruals of Indian entities, while capex overseas will be undertaken by Novelis.
Net debt reduction will be primarily undertaken by Novelis, as Hindalco’s India business is fairly comfortable.
Capacity expansion on Utkal is expected to be commissioned by Jun-21. This will replace some alumina from Muri and Renukoot; however, one line at Renukoot will continue to operate.
The company announced downstream capacity expansion at a spend of INR7.3bn at Silvassa and should announce FRP expansion at Hirakud soon along with a smaller expansion of specialty chemicals. Aluminium division Alumina production at the India division dipped owing to a maintenance shutdown at the Utkal refinery.
Production dipped 5% YoY (up 3% QoQ), as during higher incidence of the pandemic, pot re-lining could not take place due to unavailability of contract labour, which is picking up now.
Al CoP/t was flat QoQ in Q3FY21. Management expects CoP to increase 3-4% in Q4FY21 on account of a price increase in input commodities.
Hedging book in Al for Q4FY21 stood at 58% of volume hedged at USD1,715/t. For FY22, hedge book stands at 28% of commodity hedge at USD1,840.
Coal costs have bottomed out over Q2FY21-Q3FY21 and management anticipates higher costs hereon, as costs pick up.
Management is awaiting RoDTEP scheme, which has been notified from 1st January; it should benefit the company. The company presently exports 50–55% of its production.
The company is looking at linking up its boilers to gas as well as coal, with the pipeline being laid down in Jharsuguda. The cost of gas will be comparable to coal at USD5/mmbtu (costs during the FY21 have been at USD8-9mmbtu); however the gas will be imported, which makes it difficult. Copper division The copper division posted a sales dip of merely 13% YoY, 3% QoQ at 73kt, despite production dip of 41% YoY, 30% QoQ at 51kt. Management has focused on mitigating the sales seasonality via: i) production of anodes from the refinery; or ii) cathodes procured locally or internationally, to ensure copper rods demands are met.
252 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The smelters are running smoothly in January. There was a smelter shutdown of Smelter-1 across October-November ’20, while Smelter-3’s shutdown is planned from 15th March to 15th April ’21. Financials Gross and net debt stood at INR720bn and INR538bn at the end of Q3FY21 from INR842bn and INR623bn at the end of Q1FY21, respectively, post-acquisition of Aleris. This implies a reduction of INR122bn in gross debt and INR95bn in net debt.
Net debt to EBITDA for the consolidated entity was 3.09x (versus 3.52x at Q2FY21 end).
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Jindal Stainless
In focus Started working with various ministries on revocation of provisional ADD on Indonesian imports and CVD. Hope to get a relief soon. In particular, CVD on Indonesia could be restated
Benefit from duty reduction on scrap imports expected at INR 0.6-0.8bn per annum.
Expect only limited impact from elevated level of imports as these are in the segments wherein the company has limited presence.
Would concentrate more on top-end export market to counter the duty cut. Export volume of 10-15kt per month could go up to 20-25kt per month.
Capex of INR20-30bn for increasing the capacity to 1.9mtpa to be met through internal accruals. It will take 18 months to set up the plant and another 6months for commissioning.
EBITDA/t guidance left unchanged at INR14-16K/tonne.
Expect volume growth in FY22 to be 8–10% YoY. Domestic segments, wherein the company has good presence, are growing at 10–15% per annum.
Deleveraging has been significant in 9MFY21. In FY22, the scheduled repayment liability is expected to be just INR0.4bn, leaving enough room for free cash generation.
Interest cost (excluding ICD) expected at INR2.5bn in FY22.
As far as overseas subsidiaries are concerned, recovery is being seen in Indonesia. The subsidiary in Spain is likely to generate cash by end-FY22. Imports and protectionist measures Management efforts are ongoing to ensure the CVD is not reversed and believes government will ensure imports will not hurt the industry.
However, the industry sees imports in segments like utensils and pipes and tubes which are low margin where JSL does not have material volumes.
Since the company did not revise its realisations upwards post imposition of CVD, no reduction will be undertaken on revocation. Stainless steel prices for the company will reduce only if raw material prices fall.
The company should see some benefit from scrap duty reduction of INR0.6-0.8bn on reduced raw material costs.
Post the budgetary announcement, market participants anticipated price reduction, and there was lack of ordering from the company as a result, however, domestic demand has been strong and the ordering has picked up again. Debt and capex JSL reduced debt by INR4.9bn during Q3FY21.
The company has planned for a little debt reduction in Q4FY21, and envisages net debt to be similar to current levels of INR26.2bn. The scheduled debt repayment for FY22 stands at ~INR400mn.
254 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Management has estimated an annual interest cost of INR2.5bn in FY22, excluding inter-company debt.
The INR8bn loan taken by JSL to retire the OCRPS debt, had lock-in on the interest rate for 2 years and no prepayment option available.
The company plans to increase capacity from 1.1mtpa to 1.9mtpa, at a minimal capex of INR25 to 30bn, which will be incurred via internal accruals. The capacity should take 18-24 months to be commissioned.
The company has an annual maintenance capex of INR1.3-1.5bn, while FY21 capex stands at INR3bn. Operations Owing to strong underlying demand in the domestic market, JSL reduced its imports to 15% versus 21% in Q3FY20. However, if the domestic market dynamics change with increased thrust of imports, the company will look to increase its exports to high-value regions such as USA and Europe.
Market share for the company stands at 55% on average.
With railways being the largest customer, the company will look to increase their exposure to 20% from current levels of 10–15% of revenues. The offtake of railways is in the 400 series, which is high value and aligns with the company policy.
The company maintained EBITDA guidance at INR14,000-16,000/t.
The merger process with Jindal Stainless (Hisar) is ongoing, and the company anticipates balance approvals by H2FY22.
Ferrochrome prices have been strong lately owing to news on imposition of export duty by South Africa and robust stainless steel demand and is likely to remain at these levels.
Stores and spares costs should track current levels, while power cost could see some reduction after changes in laws.
Volume mix for Q3FY21: 200 series: 28%; 300 series: 49%; 400 series: 23% of overall volumes Performance of overseas subsidiaries While Spain has seen the worst of the pandemic with a third lockdown, the subsidiary turned EBITDA-positive and is reverting to normalcy.
The Indonesian subsidiary saw a good quarter on three parameters: i) sourcing of local raw materials; ii) good customer base and niche products; and iii) ongoing investigations by the Indonesian government on dumping by China.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Jindal Steel & Power
Key points On course to achieve 15-15-50 target: 15K crore net debt; 15K crore of EBITDA and 50K crores of revenue.
Expect sales volume of 2mt in Q4FY21; Guidance unchanged at 7.4-7.5mt for FY21E
Export market is good now. Have started exporting at USD 840-850/t to Europe
Q3FY21 exit price up INR 5,000/t compared to average. JSPL has booked orders up to Feb-end
Coking coal booked until May-21 at USD 105/t. Will be largely hedged from coking coal cost as look to ramp up overseas coal mining operations that will contribute about 4-4.5mpta. The remaining 2mt will be sourced from open market.
Don’t see iron ore supply shortage impacting operations: 1) Tensa mine to contribute 3.3mtpa; 2) Sarda fines at 4-5mt; sufficient to last until Q1FY22; 3) Long term agreement with OMC to supply ore; 4) Agreement with NMDC to supply ore for Raigarh plant; and 5) Arrangement with certain beneficiation plants in MP to supply ore
Power demand is a concern. PLF improved to 55% but still long way to go. Provisions of INR 3.2bn relate to disputes pertaining to Change of law and late payment surcharge.
CRPS and NCRPS worth INR 70bn to be seen as returns to the shareholders
Capex projects to be concentrated on reducing cost. No plans yet to increase the crude steel capacity
New pellet plant and slurry pipeline projects are in the endeavour to cut cost of production
Interest cost has been progressively coming down. Is getting reflected in the enhanced credit rating of the company. Recently both CARE and IRCA have increased the ratings by two notches to BB+.
Received permissions to commence mining in Russel Vale mines and the same should be initiated soon. Steel operations The company has been active in the exports market, with prices increasing in Europe and remaining quite robust. According to the management, Indian steel is in high demand under low exports from China, CIS and South East Asia. Management remains quite optimistic on domestic steel demand as various projects restarted and steel prices owing to iron ore cost push.
JSPL saw average steel realisation of ~INR41k/t, while December average was INR46k/t. The company has booked sales for January and February at December averages and March sales are likely to be booked in the next week.
The company is currently sourcing iron ore from its own Tensa mines (3.1- 3.2mtpa); stock in SMPL premises (4-4.5mt remain); long-term contracts with
256 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
OMC, NMDC and SMPL; and supply arrangements with beneficiation plants in Madhya Pradesh.
JSPL has stocked up on coking coal, with inventory till April-May, at prices of USD105/t, much lower than current prices. The company is currently buying its requirement and will look to source ~2/3rd of its requirement via its own mines in Mozambique, Russia and South Africa. The balance requirement will be sourced from the open market.
The company conducted the ground-breaking ceremony of a new pellet plant which will supply pellets to the DRI facility via a slurry pipeline. Consequently, management plans to reduce costs by INR500/t via pellets and INR1,000-1,200/t spent in transportation.
Management will be focusing on cost reduction projects, which will be a part of its agenda. Power operations Management remained circumspect on the power sector with challenges pertaining to exchange prices due to low demand, availability of PPAs, DISCOM dues, infrastructure and logistical challenges.
The company undertook provisioning for various dues, as a result of which EBITDA was lower by INR3.3bn. Dues from TANGEDCO hover at INR18-19bn.
JPL Board has recommended the issue of INR 40.4bn of CRPS and INR 30.1bn of NCRPS as bonus shares redeemable in maximum 20 years, from the date of allotment. The proposed bonus would be allocation from accumulated profits of JPL through capitalization of free reserves. The company views the same as returns to shareholders and will not be taking them on additional debt.
JPL is making sales in the spot market owing to absence of long-term PPAs in the market. Management also feels that they are locked-in with PPAs with 810MW however, on the exchange, the company can be more flexible. Financials JSPL reduced consolidated net debt by INR33bn to INR256bn and the company is targeting net debt of INR150bn by FY22 end.
The company saw ratings upgrades from CARE and ICRA by two notches in the quarter to BB+.
Capex undertaken during FY21 stands at INR3bn, which is mainly sustenance in nature. The company had planned for capex of INR6-8bn for FY21.
On the Oman asset divestment, USD226mn inter-company loan taken from Jindal Shadeed by JSMPL, will be assumed by the buyer as a liability which will be serviced accordingly. The asset has been settled for USD251mn and thus, the buyer will be paying USD25mn for the asset in totality. Guidance JSPL plans to achieve its guidance of 7.4-7.5mt in FY21 with volumes of 2mt expected in Q4FY21.
For FY22, the company is aiming for INR150bn EBITDA, net debt reduced to INR150bn and revenues of INR500bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
JSW Steel
Focus points See firm demand growth potential in India- FY22E consumption expected to grow at 10-12%YoY. See recovery across sectors/markets.
Inventory reduction of 1.3mt in domestic market in Q3FY21. Expect restocking demand in the trade channels to continue
See the recent moderation in secondary steel market related to ramp up by DRI- IF players post improved availability of iron ore in Odisha
As the current automotive contracts don’t adequately reflect the recent hikes, the company has requested auto companies for price adjustment in two tranches- In January and April.
Commissioning of integrated operations at Dolvi delayed by a quarter owing to visa related issues for Chinese vendors.
Revenue from commercial iron ore sales at INR 5.5bn in the current quarter
Downstream capacity post expansion likely to 12mt. All the downstream facilities will be commissioned by March-21.
Steel prices in January are up INR 2,000/t for HRC and INR 2,500/t for rebars.
Don’t see any price action by the government as steel prices are inherently cyclical.
Loss at overseas subsidiaries at INR 0.84bn (excluding one-off costs). Including one-off expenses, it was INR 2.08bn. US operations will continue to be under shutdown until March-21.
Iron ore integration up at 49% in Q3FY21 compared to 26% in Q2FY21
Expect to meet FY21 sales guidance of 15mt, however, will miss production guidance of 16mt by 5%
Revenue and Capital acceptances at USD 947mn and USD 491mn respectively
Coking coal cost down USD 6/t QoQ in Q3FY21
Capex in 9MFY21 at INR 63bn. Retain the guidance of INR 90bn
Debt reduction in Q4FY21 might not be possible if BPSL acquisition goes through Macros As a result of monetary and fiscal stimulus, CY21 global GDP is expected to increase by 4% with recovery influenced by the effective pace of vaccination.
With resuming infrastructure projects and rebounding automotive demand, steel demand has seen a steep recovery from October-December and steel prices have seen a sharp increase as a consequence of reduced inventories, production cuts and high global iron ore prices.
Domestic markets have seen pent-up demand as infrastructure projects restarted, with traction from real estate and higher automotive offtake. Consequently, steel demand grew 19% in Dec-20. Management anticipates growth of steel demand to be at 10-12% in FY22 as demand growth sustains.
258 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Domestic steel operations Iron ore integration in Q3FY21 improved to 49% versus 26% in Q2FY21, due to which capacity utilisations improved to 91% versus 86% in Q2FY21. Utilisation in December stood at 94%.
JSTL also moderated exports to 12% in Q3FY21 versus 28% in Q2FY21 as domestic demand picked up.
Blended realisations rose 26/20% YoY/QoQ as iron ore prices increased 135% from June lows and costs from the same increased by 2/8% YoY/QoQ.
Domestic flat steel prices are following the global trend, and January prices are up INR2,000/t for HRC, however there remain gaps in certain categories of flats.
Longs prices have seen an increase of INR2,500/t in January, and prices are a factor of availability, which was constrained due to shortage of iron ore for secondary players. With iron ore production improving from December, secondary steel utilisations should also increase.
While auto contracts are half-yearly in nature, steel companies had deferred prices hikes during the April to September period, despite higher prices in the preceding months. Given the high price environment, steel companies have requested auto majors to take the hike in two tranches – one from January and the other from April.
The company has booked coking coal for most of Q4FY21, however, current prices may be reflected from second half of March or April.
Post commissioning of all facilities, value-added capacities will form 50% of overall capacity
During Q3FY21, inventory in steel markets reduced by 1.3mt, and over 9mFY21, inventory reduction was at 3.2mt. Consequently, restocking demand should sustain in Q4FY21 as well, post which supply chains are likely to normalise. Captive iron ore mining With easing logistical constraints and ramp-up at mines, JSTL was able to dispatch more material.
Current production rate is at 1.8-2mt per month and management expects the same to sustain across FY22. Excess production is presently being supplied to Vijayanagar and Dolvi plants since there is scarcity in Karnataka till Donimalai resumes.
JSTL booked INR5.5bn from sales of iron ore.
The company continues to evaluate imports of iron ore for its plants on the coasts.
The company continues to face logistics issues owing to infrastructure and availability of rakes. However, government announcement on priority allotment of rakes for domestic usage of iron ore vis-à-vis exports is expected to provide relief. Performance of subsidiaries Overseas subsidiaries reported a loss of INR0.8bn during the quarter, excluding one-offs, and including the same stood at INR2.1bn. The operating losses have
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
reduced and should continue in Q4FY21 as well. However, operations at Baytown and Mingo junction are expected to restart in March-21.
Indian subsidiaries recorded a positive EBITDA contribution of INR7bn.
The financials for the current quarter included 2.5 months of operations of Asian Color Coated Ispat. The operations had accumulated losses of INR12-13bn, which the company has not been permitted to carry forward. Management has appealed on the same, and JSTL had received a favourable judgment in the past on Vallabh Industries on the same.
On JSW Ispat (erstwhile Monnet Ispat), operations have been turned around and the company reported an EBITDA of INR1.5bn and a profit of ~INR290mn during the quarter. Management plans to consolidate the entity over the medium to long-term Expansion projects On doubling of capacity at Dolvi, while the project is nearing commissioning, with majority of units in hot commissioning in the current quarter. However, management is seeing some delays with commissioning of melt shop owing to visa related issues of certain vendors and expects the same to be commissioned by Q1FY22.
In Vijayanagar facility, the of two CGL lines, one has been commissioned and the coke oven plant and pellet plant are on track. The CGL line and color coating line should be commissioned in H1FY22.
In Vasind and Tarapur, the company plans to commission all expansions barring the GI/GL line.
Projects in Kalmeshwar are on track to be commissioned by March-21. Financials The company reduced net debt by INR11bn to INR518bn during the quarter, with benefits of INR26bn from working capital reduction.
Despite robust cash flows anticipated in Q4FY21, management does not anticipate debt reduction, if the BPSL acquisition is allowed by the Supreme Court.
JSTL incurred INR63bn, and is most likely to be in the guidance of INR90bn.
As of Dec-20, revenue and capital acceptances stood at USD947mn and USD491mn respectively.
260 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
NMDC
In focus Expect iron ore prices to have stabilised post the recent sharp cut
Sales volume target of 40mt in FY22 (including Donimalai)
Donimalai resumption to happen soon
Steel plant commissioning by July-21. Expect demerger to happen by H1FY22
Capex of INR25-30bn likely in FY22. Mainly directed towards steel plant
Exports not profitable with the current duty structure Operational update and guidance With the correction in secondary steel market and across the steel value-chain NMDC took a price cut of INR600/t across fines and lumps. However, with domestic prices stabilising, management does not anticipate any further price cuts or increases.
There has been higher demand from mines on the West Coast as scrap prices increased sharply.
Management intends to do production of 35mt in FY21, 40mt in FY22 and 45mt in FY23. While the Karnataka’s mines will contribute 14mt, bulk of the growth will be via the ramp-up of the Bailadila sector. The company has a cumulative EC of 51.8mt.
Kumarawamy mine is expected to receive EC clearance on expansion from 7 to 10mt towards the end of FY21 and should see an uptick in production from H2FY22.
At present, landed cost of international ore is at 30 to 35% premium to NMDC iron ore on the East Coast (Vizag).
The company has planned for capex of INR19bn in FY21 and INR25-30bn in FY22. Of the capex in FY22, INR15bn has been earmarked for investment in the steel plant while the balance is to be spent on mining capacity expansion and slurry pipeline.
Royalties are paid on IBM prices, with a lag of 3 months, which results in a slight mismatch each quarter.
The Supreme Court wants to conduct a physical hearing on the Expected Credit Loss accumulated in Karnataka (~INR23bn). This is expected to be heard once courts resume. Issues Surrounding Donimalai and MMDR Amendment NMDC reached the agreement with relevant authorities on resumption of mining at Donimalai subject to additional royalty payment, however, there were some issues with Forest Department clearances. Production is expected to start soon at the mine, with all clearances received.
The government is formulating the new mining rules, which will applicable across mines and states. The nature of these are likely to determine the fate of Chhattisgarh mines and if the state government can also levy higher royalties.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Steel plant and demerger Management anticipates the steel plant to be commissioned by Jul-Aug ’21.
The ore supplied to the steel plant will be from NMDC at an arm’s length basis.
The total cost of plant is expected to be INR210bn, of which INR170bn has been spent by NMDC, via equity infusion. Balance capex will be done via debt raised on the books of the steel plant.
The steel plant can be leveraged upto 40% and interest under the debt raised will also be on the books of the steel plant and no contributions from NMDC will be made.
Of the ~INR50bn required, management has raised INR5.4bn and plans to raise INR25-30bn in FY21 for requirements of the steel plant over the next year. The steel plant will not be leveraged upto 40%, prior to the demerger.
The demerger is on track and should be completed in H1FY22.
262 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
SAIL
In focus Financial performance in Q4 would be better than Q3.
Iron ore sales revenue was INR4.76bn in Q3 compared with INR1.52bn in Q2.
Iron ore fines volume: Q3: 2.1mt and Q2:0.48mt. Q4 iron ore fines sales at 1mt per month is targetted
Target FY22 sales volume at 17mt; Hot Metal production of 20mt.
Deleveraging: Internal target is less than INR400bn by FY21-end
Seen some weakness in longs. Flat prices have not come down.
Current realization is almost INR7,000/t higher than Q3 average.
Secondary rebar and wire rod prices have declined on the market. The differential between the prices of Primary-Secondary is INR8,000/t. It used to be INR3,000–4,000/t on average in the past. Believe that secondary producers will not be able to reduce it further.
Carry 35 days of inventory plus 10 days in transit. Higher coking coal prices to hit only in March-20. Coking coal cost could be higher by INR2,000/T in Q1. Coking coal mix is 70% HCC and 30% semi-soft etc.
Higher employee cost to kick in from Q4FY21. On a normalized rate, it would be higher by more than 10% YoY. Full impact for this year to come in Q4FY21.
Capex target for FY21 is INR48bn (earlier INR40bn). 9MFY21 capex at INR24.4bn.
Receivable at INR69bn. Not come down from IR. Remains concerning area. Sales to railways account for 6.5% of total.
Till date in Q4FY21, the company has reduced INR14bn of debt further.
Market conditions and realisation
Average prices for January in the flats market stood at INR46,060/t versus INR39,363/t in Q3FY21. The average prices in the flats market in January were at INR50,574/t versus INR43,052/t in Q3FY21.
There has been a slight rollback on the hikes taken in January. However, this has been in the longs market as secondary mills have reduced prices and the current differential between secondary and primary mills stands at INR8,000-9,000/t, versus historical average of INR4,000–5,000/t. Management anticipates some pressure in the longs market.
There has been no reduction in prices in the flats market. While market participants are waiting for price dips in the market, management does not expect there to be a correction in the prices in the market.
With better demand, the company has aligned its production with market demand and requirements, and focusing on higher value-added products, which has resulted in better performance.
Management is quite certain on Q4FY21 being much better than Q3FY21 with better pricing and higher VAP.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Coking coal stocks and prices
Management anticipates some weakness from current levels as there still exists oversupply situation for Australian coal as China and Europe buys from the US and Canada.
The company saw a blended cost of INR10,800/t of coking coal in Q3FY21, and should see an impact of current prices from March-April, subsequent to which prices should increase by INR2,000/t.
The company is carrying a stock of ~35 days of coking coal at present, with 10 days of stock at high seas.
SAIL has a sourcing mix of 70%, 20% and 10%, which is hard coal, soft/semi-soft varieties coal and indigenous coal respectively. At present, average imported coking coal across plants would be at ~88%.
The PCI injection is separate from the coal mix, and stood at 447kg per ton of hot metal in Q3FY21. Iron ore sales
Sales of iron ore have taken place from Odisha and Chhattisgarh, as SAIL has not received necessary clearances from the Jharkhand government, post which management could see iron ore sales of 1mt per month.
Management has auctioned 2.6mt of iron ore so far in FY21, of which ~1.8mt has been dispatched.
In Q3FY21, iron ore fines sales stood at 1.27mt with a turnover of INR4.8bn. The sales for Q2FY21 stood at 0.48mt with a turnover of INR1.5bn. Deleveraging plans
SAIL has reduced debt from a peak level of INR544bn at the end of Q1FY21 to INR466bn in Q3FY21. The company has further reduced debt by an additional INR14bn in January.
The internal target for the company is to reduce net debt to below INR400bn at the end of FY21. This is after taking into account higher employee costs in Q4FY21 and assuming no reduction in receivables from railways.
Management plans to deleverage the company further in FY22 as well, as long as the market supports it. Others
SAIL plans to hike employee costs by 10% in FY21, the impact of which is expected in Q4FY21. The costs are likely to spike in one year and then trend downwards as senior employees leave and newer employees join at comparatively low remuneration.
Receivables from railways stood at INR69bn at the end of Q3FY21. Sales to railways stood at 6.5% of overall offtake in 9mFY21.
Reduction in other expenses has been primarily due to a reduction in administration expenses, while some production-related expenses have increased.
264 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The company has targeted for saleable steel production of 17mt in FY22, and hot metal production of 20mt.
The blast furnace at IISCO is going to have a planned maintenance shutdown for 20 days in March and April.
Any push in infrastructure and construction sectors in the budget should aid in higher demand for the company.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Steel
In focus Debt reduction to remain the key priority—expected reduction of USD 1bn p.a.
Resumption of capital allocation on margin expansionary growth capex.
TSE EBITDA impacted by GBP72mn provisioning on carbon credit purchase GBP38mn pertaining to a partial roll-back of wage support during Q2FY21.
Q4FY21 standalone realisation expected to be up INR6,000–7,000/t owing to better realisation, product mix and export prices.
Net debt reduction in Q4FY21 was partially aided by INR60bn in proceeds from exports advances.
Capex: Q3FY21- INR13.9bn (9MFY21: INR46bn). Expected capex in Q4FY21 at INR18–20bn.
TS-BSL merger process is likely to be completed soon. The company would get a tax benefit to the tune of INR40bn from the accumulated tax losses at TS-BSL. India operations Domestic sales volume grew 4% YoY to 4.16mt. Exports shrank below 11% of overall deliveries. Volume growth was constrained by lower opening inventory.
Automotive & Special Products’ segment sales volume grew 48% QoQ on the back of higher traction by auto OEMs. Branded and Retail segment deliveries also grew by 5% QoQ.
Highest-ever quarterly gross revenue generated through Áashiyana’ of INR2.23bn (up 134% YoY).
Developed 25 and commercialised eight new products with varied applications.
Free cash flow: INR113bn from standalone operations, INR17.5bn from TS-BSL and INR6bn from others.
Going ahead, domestic realisation expected to increase by INR6,000–7,000/t owing to better export realisation, richer product mix and higher domestic price.
Don’t expect higher steel price to hurt end-users much as steel forms 5–10% of the cost for end-users. Moreover, domestic steel prices have risen in line with global prices. TSE operations TSE EBITDA adjusted for carbon credit provisioning (GBP72mn) and partial reversal of wage support (GBP38mn) was ~INR3.5bn.
Ongoing wage support from Netherlands operations was contingent on revenue decline of 20%YoY and entailed onerous conditions. Hence, the company opted to reverse the wage support recognised in last quarter.
Expect some extent of carbon credit provisioning in Q4FY21 as well.
Transformation program at TSE is already half way through with recurring benefits of EUR200mn realised
266 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
FCF: Q3FY21 at –GBP 900mn (9MFY21 at GBP700mn).
Separation of TSE into TSN and TSUK is underway. Likely to result in sharper focus on cost and aid in negotiations with the respective governments
Sales from TSE is generally through annual, semi-annual and quarterly contracts. Hence, expect high spot spreads to get progressively reflected in the performance. That said, Q4FY21 is likely to be better
Following the termination of the discussions with SSAB on TSN, the company is focusing on improving the performance and cashflows in the immediate term.
TSE requires spread of EUR 230-240/t to remain cash neutral. Capex Capex in Q3FY21 was INR13.9bn (9MFY21: INR46bn). Expected capex in Q4FY21 is likely to be INR18-20bn.
Capital expenditure likely to be prioritised. The company has decided to restart work on Pellet plant and CR mill.
Total capex for Pellet plant, CR mill and KPO-II is expected to be INR230bn, of which INR50bn has already been spent.
Total capex for Pellet plant and CR mill is expected at INR60bn. Pellet Plant is almost 40% complete. Deleveraging Management reiterated the guidance of debt reduction by USD 1bn p.a.
Deleveraging likely to remain the key focus area with sustainable net debt/EBITDA target of 2.75x and net debt/equity at 1x
Debt reduction of INR100bn in Q3FY21 includes the benefits from proceeds of INR60bn on account of export advances
Owing to the significant working capital unlocking in H1FY21, the potential of further benefit on this count remains limited.
Gross debt reduction of more than INR120bn in Q4FY21 includes utilising the existing cash balance of INR225bn, but does not include proceeds of INR30bn from the Rights issue
Debt reduction of INR60bn has been already done thus far in Q4FY21. Reorganisation of business TS-BSL merger into Tata Steel is underway. Will yield benefits of ~INR40bn due to accumulated tax losses at TS-BSL.
Merger of TML and ISWP into TSLP is going on. Likely to be a vehicle for increasing the focus on longs.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Vedanta
In focus Q4FY21 looks more robust: Volume likely to be up 10% compared to 9MFY21 average, Free cashflow at INR 0.75-1bn and likely debt repayment of INR 35bn
Q4FY21 exit rates: Oil & Gas at 185koepd (Q3: 160koepd); Al at 2.2mtpa; Zinc- India at 1.2mtpa and Gamsberg at rated capacity
Long-term CoP/t target for Al business reiterated at USD 1,200. Captive coal blocks- Jamkhani and Radhikapur W should aid.
Oil & Gas run-rate likely to be at 220koepd by FY22: Surface facility at AB hill commissioned in Q4FY21 (+7koepd), new gas terminal facility commissioned (+15koepd), MBA Polymer injection being ramped up and liquid handling upgradation project (+5koepd).
Outlook for ferrous businesses look promising in view of current prices
Borrowing cost at 7.8%
Effective tax rate at 27% for full year against 29% guidance earlier
Loan to parent unchanged at USD 956mn. Interest rate reset to low double digits from 7% (guided earlier). Expected credit loss provisioning inline with the established accounting standards
Integrated procurement and marketing likely to result in saving of USD 1bn
Project Pratham towards digitization
Growth capex expected to be lower than USD 600mn guidance without compromise on volumes
VEDL not involved in Videocon acquisition. Videocon controls 25% of Raava field, hence an acquisition could be good strategic fit. Strategic growth plans & financials Management will look at expansion plans which will generate IRRs at a faster pace or flexibility to increase volumes soon. However, capital allocation remains a key focus for the company.
On the inter-company loan given by Vedanta to its parent, the company has reset the interest rate upwards from the earlier 7% to low double digits. The company has undertaken expected credit loss (ECL) provisioning, with established accounting standards. This is expected to get reversed as the parent pares down the loan.
With parent’s rating outlook revised upwards to ‘Positive’ from ‘Stable’, VEDL will look at getting its own credit worthiness revaluated.
With Q4FY21 expected to be even better, management anticipates free cashflows at USD0.75-1bn and likely net debt reduction of INR50bn.
The company has incurred capex of USD350mn in 9mFY21 against a guidance of USD600mn and is going to be well-within limits of the same. Growth capex for FY22 is likey to see optionalities on: i) ASP project in Oil & Gas; and ii) aluminium and alumina expansion in the Al division.
268 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
On the parent’s leverage, the management mentioned that cash flows from VEDL will aid in organic de-levering of the balance sheet.
The company is looking at several strategic initiatives on digitisation under Project Pratham, which will combine several initiatives on logistics, asset optimisation and analytics across the group.
Higher contribution from Zinc India and Al businesses is likely to result in a lower tax rate at the consolidated level. Zinc India The unit envisages to leverage volume and efficiencies to maintain its position in the first decile on CoP. The near-term target remains cost reduction to USD900/t.
Silver remains a key priority for the company and with 9mFY21 volumes at 503t, the guidance of 650t is likely to be surpassed. Zinc International Mining re-commenced at Gamsberg in early January 2021, after full risk assessment and approvals.
VEDL plans to ramp-up Gamsberg to rated capacity by the end of Q4FY21. Oil & Gas With the new gas facility commissioned, production to get a bump up by ~15kboepd.
The surface facility is likely to be commissioned in Q4FY21 and shall increase volumes from ~8kboepd to ~15kboepd.
Drilling commenced in OALP blocks in Rajasthan, with the discovery in the first well and evaluation underway to establish potential.
Management anticipated drilling to commence in Assam & Cambay in Q4FY21 to evaluate block potential. Aluminium The unit achieved a production run-rate of 105ktpa at Jharsuguda line 5 during the quarter.
While costs increased 8% QoQ, most of it is on account of higher LME impacting alumina API index and consequently, imported alumina cost for the unit.
Management is looking at increasing local sourcing of bauxite to ramp-up Lanjigarh.
Operationalisation of the newly acquired coal blocks will also aid in cost reduction at the unit. The company has also improved the power plant to aid in cost reduction.
VEDL will be an active participant in bauxite and coal auctions to increase its self- reliance in the upstream value-chain. Iron & Steel Favorable commodity prices in the business are likely to yield better margins.
The company will continue to focus on cost reduction at the newly acquired FACOR and ESL assets.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Oil & Gas Petrochemicals
270 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Bharat Petroleum Corporation
Favourable macro factors aided demand growth BPCL domestic volumes increased 24% QoQ to 11.1MMT in Q3FY21 versus 8.9MMT in Q2FY21. MS/HSD/LPG sales increased 15%/31%/9% sequentially in Q3FY21. This is largely attributable to several factors such as easing of covid-19 restriction, strong festive season, etc.
Aggressive retail outlet expansion helped boost rural demand While urban centres and major town continue to remain strong, aggressive expansion in rural outlets helped improved demand further. As of Dec-20, BPCL’s overall retail outlets stood at 17,841. Besides, growth trajectory in the agricultural sector after a good monsoon and improvement in power demand (up 14%) also helped boost overall demand.
Petroleum demand further improved on increasing transportation… In Q3FY21, highway market demand remained robust on faster recovery of volumes on transportation movement and acquisition of high volume customer. MS/HSD market share improved 0.62%/1.05% in Q3FY21. While MS increased 6.83%, HSD declined 1.05% in Jan-21.
…offset by subdued ATF demand ATF demand continued to remain subdued given lower demand from international flights which contribute 60% of overall ATF demand.
Reported highest GRMs amongst peers BPCL reported GRM of USD 2.4/barrel in Q3FY21 highest amongst peers. Besides, BORL and NRL reported GRM of USD 2 and USD 37/barrel respectively during Q3FY21.
Mozambique operations to commence in CY24 Management mentioned that Mozambique operations are likely to produce first gas in 2HCY21. The company anticipates 1MT from Mozambique operations CY26 onwards. It has infused INR6.5bn in BPRL essentially linked to Mozambique operations.
Revised capex guidance upwards Management has revised its capex guidance from INR80bn to INR90bn for FY21 (incurred INR56bn so far). The company is likely to incur capex on refinery (INR20bn), marketing (INR36bn), petchem (INR8bn) and remaining on other operations. For FY22, capex is likely to be about INR100bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
GAIL
Dhobi-Durgapur pipeline has been completed The company has completed the Dhobi-Durgapur pipeline and has dedicated this project to the nation, which is also likely to support CNG and PNG supplies in ten adjoining districts.
HURL-Gorakhpur plant has also started
The company mentioned that gas in HURL Gorakhpur plant has been started and pre-commissioning activities are still in progress. It anticipates gas supply to go up to 0.5mmscmd by Mar-21; the supply is likely to double by Sep-21.
Plants are operating at optimum utilization capacity
During the quarter performance improved across segments. All plants have attained normalcy and operated at optimum utilization capacity. Petchem plants and LPG transmission pipeline are currently operating at more than 100% capacity.
Several projects are scheduled to be completed during FY22/23
The Vijaypur pipeline is expected to be commissioned by Mar-21. The pipeline in Dehradun-Rishikesh will likely be completed by May-21. Pipelines namely Dhamra, Bokaro-Angul and Gorakhpur-Barauni are expected to be completed by Dec-21. Besides, the Jagdishpur-Haldia and Bokaro-Dhamra pipelines will likely be completed by Nov-22.
Gas transmission volumes improved sequentially
Overall gas transmission volumes increased 4% QoQ to 110.35mmscmd in Q3FY21 (vs. 106.44mmscmd in Q2FY21). It operated at capacity utilization of 54% during Q3FY21 (vs. 52% in Q2FY21). Besides, gas marketing stood at 95.62mmscmd in Q3FY21 vs. 88.6mmscmd in Q2FY21 (up 8% QoQ).
Volumes are likely to improve with additional pipelines
Additional pipelines that are likely to be commissioned over FY22/23 will further add 10–11mmscmd by Dec-21 and add 30–33mmscmd over the next three–four years.
Announced interim dividend of INR2.5/share
The company has announced an interim dividend of INR2.5/share during Q3FY21. Besides, it announced a share buyback of INR10.5bn (INR150/share) during Q3FY21.
Anticipate 12% IRR on capex over next five years
The company has incurred INR37bn in capex till 9MFY21 and has guided for INR67bn in FY21. It expects a 12% IRR from capex over the next five years.
272 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Gujarat Gas
Registered significant volume growth on robust industrial demand Total volumes were 11.44mmscmd (up 23% YoY) with PNG volumes at 9.90mmscmd (up 27% YoY), CNG at 1.54mmscmd (up 2% YoY). Volumes are likely to grow in the range of 10-12% pa over the next 3 years.
Morbi demand continue to remain strong PNG volumes for industrial and commercial segment continue to remain strong, attributed largely demand improvement in Morbi. Volumes in Morbi improved to 7mmscmd in 3QFY21 (vs. 5.8mmscmd in 2QFY21) with the ramp up in ceramic production. Currently, it is hovering at 7.3mmscmd.
Dynamic pricing decision Company has recently taken a price hike of INR 4.96 in Feb-21 (~15% hike). Currently, prevailing price in Morbi for ceramic users stands at INR 33, and INR 1.8 premium in Non-Morbi areas. Competing product, propane is available at INR 3 premium and is likely to reach INR 40 in the near term, and hence GGL’s gas remains significantly more competitive.
CGD additions on track Over the last 9 months, company has added 84 CGD channels (FY21 guidance: 130- 150) taking the overall network to 484 as on Dec-20. Overall, 104 station has been added in FY21TD and currently overall network is 500.
Margin trend EBITDA margin may be squeezed during 4QFY21 to ~US$5/SCM, as spot LNG accounts for two-thirds of GGL’s gas sourcing, which has risen by 100%+ YoY. Operational leverage from higher volumes and judicious cost cutting measures are keep margins healthy though. GGL believes that in the longer-term margins of US$ 5/SCM are comfortable vs US$ 4.5/SCM in the past.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Hindustan Petroleum Corporation
V-shape recovery visible in demand
HPCL’s petroleum demand grew 2.7% YoY (vs. industry growth of 0.3% YoY) in 3QFY21. Aggregate petroleum demand increased from 74% on YoY levels in 1QFY21 to 100% on YoY levels in 3QFY21. Management anticipates demand is likely to improve further in 4QFY21 (guidance 4-5% growth).
While HSD demand is likely to remain strong…
Management anticipates demand from agriculture, transport, tractors, 2-wheelers, railways and mobile towers etc. to rise further in Q4FY21, thereby increasing demand for HSD and other petroleum products. Growth in HSD segment will further deliver strong Q4 results.
…ATF continue to remain weak
ATF fuel demand continue to remain weak (hovering at 50-55% on YoY levels). Management anticipates revival in demand no sooner than 2nd half of FY22.
While refining margins remained weak on unfavourable mix…
Lower margins on lower cracks especially petrol and HSD resulted in low refining margins in 3QFY21. HSD crack (high margin product) remained relatively low in 3QFY21. However, currently, margins have improved where in HSD/MS margins is hovering at $4-6/2-3 per barrel. Singapore GRM has turned positive as well. Currently HPCL’s refineries are operating at ~100% utilizations (vs.102% utilization of IOCL refineries)
…Marketing margins improved on higher sales
Marketing sales volumes have recovered to 103% on YoY levels in Q3FY21 (vs.90% in Q2), given strong uptick in domestic demand. Demand is currently hovering at ~105% levels. MS/HSD sales improved 6.9%/1% in Q3FY21. LPG demand fared well in this quarter. Additional 10 million connection will boost LPG demand further.
Savings in operating cost helped improved margins further
Management mentioned that company had saved INR 4 billion on operating cost during the quarter, largely attributable to low administrative and secondary transportation costs etc.
Capex outlook remains intact
Company has incurred INR 88 billion in 9MFY21 (guidance of INR 1,200 billion in FY21). Company has guided for additional capex of INR 140 billion during FY22. FY22 capex will be likely incurred on marketing (INR 50 billion), Refining and R&D (INR 55 billion), CGDs (INR 22 billion) and remaining on JVS and subsidiaries
Commissioned several outlets during the quarter
Company has commissioned 1,543 new retail outlets taking the sum to 18,019. It commissioned 77 LPG (total 6,160) and CNG facilities at new 170 outlets (total 650 outlets now). Company has also added EV charging facility at 51 stations all together.
Refinery expansion program is running on time
Company anticipates Mumbai refinery expansion to complete by end of CY21, taking overall volumes to 9.5 MMT from 7.5MMT. Vizag refinery expansion (except bottom
274 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
upgradation) is scheduled to be completed by end of CY21. HMEL petrochemical complex refinery is also likely to be completed in CY21 (adding 1.7 MMT volumes)
Buyback of equity shares proceeding as anticipated
Company has bought back 47 million shares at ~INR 9 billion so far (35% of intended buyback plan of INR 25 billion).
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Indian Oil Corporation
Reviving refinery utilisation: Refinery utilization stood at 102% capacity in Q3FY21 (higher sequentially) given sharp rebound in demand of petroleum products QoQ. Throughput during the quarter was 17.86 MT with distillate yield of 79.5% and fuel & losses at 9.1%. Weak refining margins: Company reported GRM of $2.19/barrel in Q3, and normalized GRM stood at $1.24/barrel (in line with benchmark of Singapore GRM of $1.22/barrel). Margins remained low given weak crack spreads for gasoline & gasoil. However, recently MS/HSD cracks are nearing $3/$4.5 per barrel signifying smart recovery in margins. Average crude oil price during the quarter stood at $44.65/barrel (up 4% QoQ). Enhanced marketing operations: Weak refining margins during the quarter was offset by improved marketing margins. Company reported petroleum product sales of 21.23MT in Q3FY21 (vs. 17.22MT in 2QFY21). Preference for personal mobility has led to higher consumption of gasoline. Gasoline demand in Oct/Dec was 103%/108% YoY volumes (2019). On the other hand, gasoil demand weakened from Oct-20 (103% of YoY) to 91%/95% in Nov/Dec (YoY volumes) respectively. Management expect prices to soften post Mar-21, thereby improve margins further. ATF sales improved marginally from Oct-20 (53% of YoY volumes) to Dec-20 (61% of YoY volumes), however, remained weak overall. Petrochemical margins are on the rise: EBITDA margins improved on high operating leverage and improved margins (high petrochemical spreads) during the quarter. Pipeline business tracks reviving retail and refining volumes: Resumption of economic activity post uplifting of lockdown has led to increased demand during the quarter. As a result, capacity utilization improved from 72.2% in Q2FY21 to 92.2% in Q3FY21. It further added 296 km to its pipeline network during the quarter. (Overall network now stands at 14,864kms). Receivables from Government reduced overall borrowings: As on Dec-20, borrowing stood at INR 725bn (vs. INR 915bn/1,166bn as on Sep-20/Mar-20). Reduction in borrowing was partly driven by outstanding dues from government for LPG and kerosene. Outstanding receivables from Government reduced from INR 91bn (Q2FY21) to INR 43bn in Q3FY21. Management mentioned that balance will likely get liquidated by end of financial year. Difficult to achieve FY21E capex guidance: Capex (including JVs) guidance for FY21 stood at ~INR300bn, of which 64% is already achieved) by end of Dec-20. FY22E guidance is at the same levels. CGDs: Company has provided a significantly capex outlay of INR 160bn for CGD operations. It has acquired licences of 40 CGDs (23 in JVs), which is a very long gestation business. Destocking led to reduction in Working capital: Working capital reduction in Q3FY21 was largely attributable to destocking of inventory despite rise in international crude prices. Launched HT100 & aviation gas: During the quarter, company launched HT 100 fuel which is now being produced in all refineries and is available in 26 states. Company is likely to expand network further. Company also launched aviation gas which was earlier imported. Bio-CNG: Management mentioned that company is the only company in CBG operation and is currently retailing from 15 outlets. Company is likely to set up CBG plant in Gorakhpur. Company has been guaranteed INR 46/kg for sourcing, which seems viable to the company.
276 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mahanagar Gas
Volume recovery across segments...
MGL’s volumes jumped 34% YoY to 2.8mmscmd in Q3FY21 (2.1mmscmd in Q3FY20). CNG/domestic PNG/ I&C PNG volumes increased 43%/10%/13% YoY to 1.9/0.5/0.4 mmscmd. Currently (Jan-21), overall volumes delivered stood at 2.9mmscmd. While CNG volumes fell 9% YoY in Jan-21, domestic & I&C PNG volumes are up 15%/7% YoY.
…thereby improving margin on high operating leverage
MGL’s EBITDA margin improved 390bps YoY to 47.5% in Q3FY21 vs. 43.6% in Q3FY20 largely due to high operating leverage. With successful negotiation with OMCs over the trade discount issue, margins are likely to improve further in the near term. Besides, as volumes normalise going forward (FY22/23), per unit operating cost is likely to dip, thereby improving margins further.
Operational highlights of Q3FY21
During the quarter, MGL’s operational reach increased to 1.5mn households. In Q3FY21, it added six new CNG stations (265 overall) and 47 I&C customers (4,093 overall). It also added 97.19km pipeline, taking the overall sum to ~57,000km in Q3FY21.
Commendable performance in Raigad GA
During the quarter, MGL’s connections increased to 39,500 domestic households and 18 CNG network. The company supplied 41,000kg/day CNG during Q3FY21. It has further received permission for 8,000km steel pipeline which is likely to cater to demand from the I&C segment in adjoining areas.
Anticipates higher realisation in I&C segment
Average realisation during the quarter was INR33.72/3.78 per scm for commercial/ industrial segments. Management anticipates higher realisation going forward, subject to dependency on oil price level.
Completed projects in Belapur, Ulwe (sector-19)
The company has successfully completed directional drilling projects for JNPT in Belapur, Ulwe (sector-19) during the quarter.
Capex on track
MGL has incurred INR1.8bn capex till 9mFY21. Capex guidance for FY21/22 stood at INR4/5bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
ONGC
Production in KG-98 is likely to ramp up in May
Management mentioned that production has already started in cluster 2 with 3,027 scm/day currently. However, it is likely to ramp up to 2.5-3.0mmscmd from May. It expects production to be in the 3.0-3.5mmscmd range in FY23 and peak to 8.5mmscmd in FY24. The company has incurred INR100bn capitalized cost so far on this project.
Losses reduced significantly at OPaL project
OPaL project has been operating at 100% utilization since the past three months. Over 9mFY21, its losses have reduced significantly. Majority of the cost incurred in this project is funded through debt (overall cost is INR 300bn).
Margin declined on low operating leverage
ONGC’s net profit declined 66% YoY to INR14bn in Q3FY21 (INR42bn YoY), primarily due to lower sales revenue given lower crude oil prices and lower gas realizations, offset by lower operating expenses (down 18% YoY).
OVL production declined YoY, but improved QoQ
OVL’s oil/gas production declined 12%/15% YoY to 2.149MMT/1.127BCM in Q3FY21. However, oil/gas production improved 3%/5% sequentially. This resulted in 29% YoY decline in sales value to INR 30bn in Q3FY21 (INR 43bn YoY).
Formation of gas subsidiary
The Board has approved creation of a new wholly owned subsidiary company for focusing on gas & LNG business value chain subject to necessary approvals. The company is being formed with the objective of sourcing, marketing and trading of natural gas, LNG business, hydrogen enriched CNG (HCNG), gas to power business, bioenergy/bio-gas/bio methane/other bio fuels business. Besides, it has also acquired 5% equity in IGX as part of strategic investment.
Declared interim dividend of 35% on Face value
ONGC has declared interim dividend of INR1.75 on face value of INR5 (35%), which results in total pay out of INR22bn.
Capex guidance revised down
ONGC has revised its capex downwards to INR290bn from INR325bn earlier. It has guided for INR320bn capex in FY22.
278 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Petronet LNG
Throughput at Dahej remained flat YoY, but declined QoQ
PLNG’s overall throughput remained flat YoY at 222BBTU, but declined 9% QoQ (243BBTU in Q2FY21). Capacity utilization declined to 98% in Q3FY21 vs. 114% YoY on lower demand given high spot LNG prices. However, management expects volumes to recover in upcoming quarters as LNG spot prices soften.
High profitability on high regasification charges
The company’s overall profitability (profit before tax) increased 21% YoY to INR12bn (INR 10bn YoY). This was largely attributed to high regasification charges, impact of Ind-AS (INR0.3bn), inventory gain (INR0.2bn) and trading margin on sport volume transaction (INR0.5bn). Hence, EBITDA/mmbtu also increased 5% YoY in Q3FY21.
Certain costs deferment kept operating cost under check
Management mentioned that operating cost remained lower in Q3FY21 and Q2FY21 as it has deferred certain costs such as publicity expense, repairs & maintenance costs for future (Q4FY21). Besides, power cost remained low on low Dahej volumes.
Volumes to ramp up with addition of new pipelines
Volumes are likely to recover once LNG spot prices soften in the near term. Besides, addition of the Kochi-Mangalore pipeline will spur additional demand of 1.55mmscmd by Q4FY21. With ~11 CGDs underway, Kochi terminal’s utilization is likely to ramp up to 35% delivering 5mmscmd volumes in CY21. With another pipeline (Kochi-Bangalore) coming in to operation in the medium term, overall utilization will increase to 50-60%.
Dahej expansion to be complete in CY24
Management mentioned that first phase of Dahej expansion (to 20MTPA) will likely take around 36-40 months for commissioning. PLNG has allocated INR 4-5bn for the same.
LNG station underway
The company has tied up with Gujarat Gas to set up 5 LNG stations between Mumbai and Delhi highways. Besides, it has set up 4 LNG stations with IOC and 1 each with IGL and Sabarmati station.
Capex outlook
PLNG has incurred INR0.7bn in 9mFY21 (FY21 guidance was INR3.5bn). FY22 capex stands at INR5.3bn, which is likely to be spent on setting up 2 tanks at Dahej (INR 1.3bn), CBG distribution (INR 1.3bn), maintenance cost at Dahej & Kochi combined (INR 1.1bn) corporate office INR 0.7bn etc.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Pharmaceuticals
280 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Aurobindo
Financial performance
Global injectable sales likely to move to USD650-700mn over the next 3 years from the current USD380mn run-rate. This is likely to be reflected in margins as they go ahead. This will be driven by the US facility, injectable facility in Vizag for Europe and Ems and expansion of Unit-4 and contribution from Eugia.
Capex: USD200-225mn. More capex will be towards API in the short term. Over and above, looking for PLI scheme capex of INR30bn for three products over 30– 32 months.
FY21 R&D should be 5.5–6% of sales. May slightly go up by 1–1.5% next year if clinical trials in biosimilars gets concentrated.
Gross margin improvement over quarters is on account of Europe business, favourable exchange rates and improved product profile in all the markets.
Not looking for large ticket acquisition for next few years.
Capex- 76mn in Q3FY21. Received USD434mn from Natrol divestment. Paid USD105mn for Eugia and INR10mn for dividend. Generated FCF of USD311mn. US
Auromedics was down 11% YoY to USD69mn. However injectable business witnessed a healthy growth of 6% sequentially.
Oral solids performance was steady on account of increase in volumes from existing portfolio.
The company plans to launch 12-15 injectables annually. API
The PLI scheme capex of INR30bn for three products over 30–32 months. 40- 45% of these products will be used for captive consumption.
Expect to achieve historical Asset turnover of 1.5-2x and will ensure the ratio is not deteriorated.
Aiming to double the external API sales in next 4-5 years. The target is significantly back-ended and includes PLI, existing products and some new molecules. The company is expanding existing capacity in Vizag for large volume blocks to cater to external customers. Also planning to manufacture 4 large volume products in another 90 acres unit. This would entail capex of INR8bn. Vaccines
Bacterial facility will be used for Pneumococcal Conjugate Vaccine. Phase 3 to begin in March 2021 which will take 9-12 months. Post this, it will look for launch in India followed by GAVI market. This is a 1-1.5 year journey.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Viral facility reasons- 1) in short term will cater to covid opportunity- both private and institutional; 2) supply clinical material for Auro vaccine; 3) contract manufacturing opportunities.
UB-612- Phase 2 data expected in July and conclusion to come in Sep’21. ARV, Growth markets
The company has orals solids manufacturing plant in China. SO far filed 28 products, and expect 8-10 products approval in CY21. This will help in participating in tenders in China. Injectables will also be there.
RoW injectables will take 15 months. Facilities
Unit I, IX and XI - Completed CAPAs and awaiting direction from USFDA Unit-VII: Completed all the CAPAs and awaiting direction from the agency.
282 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Biocon
Biosimilars The performance and biosimilar uptake have been impacted by covid-19; facing challenges across operational, regulatory and commercial functions.
The company acknowledged that it may not be able to achieve USD1bn revenue target by FY22.
Malaysia has extended offtake agreement with Biocon by one year for insulins.
Insulin glargine- Viatris (partner) is positive about its ramp up. The ramp up will be more gradual as it is formulary driven business. Expected to clock reasonable market share in CY22.
o Favourable formulary coverage will help in covering better market share for which discussions are already ongoing. o The company has enough insulin capacity for developed and Emerging Markets. Biocon is the only company to have approval for vials and cartridges in glargine. o Phase 2 capacity in Malaysia will augment insulin capacity further. No technical issues with respect to bevacizumab biosimilar approval. No data request from USFDA is outstanding. Awaiting USFDA inspection.
Expects USFDA approval for insulin aspart in CY21.
Biocon Biologics IPO – Aiming to do in next 18-24 months. The company is waiting for normalcy to return and acceleration in business post which it will assess the timing of IPO.
Focus remains on cost cutting and cost containment measures and to ensure R&D pipeline delivers in timely manner.
The company has at least three programmes which will be entering clinical stage.
In Q3FY21, split between developed and Most of the World (MOW) market was 40:60.
Innovators are likely to get aggressive; however, such pricing aspects are already baked in.
China remains a medium-term opportunity, say 3-5 years. Chinese market itself may be USD1bn opportunity.
Inter-changeability is important for insulin.
Generics Launched Tacrolimus at the end of December and expects ramp up in coming quarters.
API business was impacted mainly due lower offtake by customers as inventory levels are normalising.
Split is 80% API and 20% formulations.
Copaxone- working on CRL and expect to respond in next few months.
5-10% growth is expected for next one-two years.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Plants Existing projects remain intact; however, capex may be delayed by 3-6 months.
Looking for Phase 2 investments in Malaysia.
Malaysia plant is expected to breakeven in next quarter.
Novel biologics Phase 1b of itolizumab making significant process; top line data expected to be announced by first half of 2021.
Financial highlights
Biocon Biologics has now raised USD330mn and achieved post-money valuations of USD4.17bn.
Recorded INR60mn forex gain versus INR150mn gain in Q3FY20. EBITDA was down 11% YoY on account of additional spends of INR1.08bn additional spends on R&D and employee costs.
284 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Cadila Healthcare
Financials and guidance
Spends for India formulations business is now at 80-85%. Expect some part of savings to stay and do not expect expense to reach pre-covid levels. Costs have normalised, expect good margin improvement in next year.
Covid-portfolio is largely domestic. No significant revenues from exports.
ETR FY21 and FY22: 20-21%
Do not expect additional tax outgo atleast till 2026-27 because of exclusion of goodwill amortisation proposed in the budget.
R&D- 8% of sales, R&D: 50:50 on generics/505b2 : NCE/Vaccines/biosimilars
Capex- INR7-8bn in FY21 and FY22
Net debt as on 31 Dec stood at INR38bn (INR2bn+ reduction QoQ).
US
QoQ decline was largely due to inventory correction at year end and not enough one-time opportunities. There is no change in market share, and has 55%+ market share in lialda which is now stabilised.
Launched 7 new products, includes doxil liposomal injection
In CY20, received 38 new products approvals (second highest).
Cumulative filings includes 71 injectables- cumulative approvals includes 56 injectables
Till date in-licensed 16 products to build the portfolio of 16 complex generics mainly injectables. This includes products with FTF status likely to have 180 day exclusivity.
Pipeline of 11 products for licensing. In FY22- see some important launches through this.
Q4FY21- USD215-220mn; expect significant QoQ improvement going forward on launches.
Planning for 40+ new launches in FY22 of which 8-10 molecules are high value.
India
Specialty portfolio has done well. Cardio-diabetes, pain, and respiratory performed well.
Don’t expect inventory return for remdesivir. Remdesivir sales tapering down MoM
Seeing good opportunity in some smaller export markets for remdesivir.
Dapagliflozin- It is likely to be good product and Cadila was among first to launch. Expect 2 more introductions this year and 1 monoclonal antibodies. These are likely to become INR400-500mn in 1 year time. Also looking to launch few covid products in preventive care (some OTC, some prescription) including saliva based testing kit for home use.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Received marketing authorisation for 1 biosimilar in india and Completed pre- clinical toxicity study for another in India
Specialty/ Vaccines
Covid-19 vaccine: Initiated phase 3 trials in 30000 volunteers across 60 sites. First dosing is expected to complete by the end of February. Readout expected in Q1FY22
Plant for Zycov-D to start operations in Q1FY22 – Capacity to produce 120mn doses. Ready for manufacturing in April. Finding CMOs for producing additional 70mn doses.
Total investments will end up with INR1.5-2.5bn.
Most countries are ready to accept phase2 data and provide approval. The company has more order than they can meet.
Other Vaccines- Completed phase2-3 trials for TD vaccine in India during the quarter. Overall vaccine franchise likely to become INR10bn in 2024-25. CY24 will be key year for getting entry in WHO and other tenders- targeting 10-12% share on 3 molecules
505b2- submitted 1 NDA from own portfolio.
Saroglitazar for NASH in India market- DGCI approval- This is expected to become the largest molecule for Zydus in India in 3-5 years.
Saroglitazar- for PBC- to enter the US market in 2023. Phase 3 trial to begin next month. there is no approved drug and got orphan drug status. May look options for finding suitable partner. Currently, committed launching on own. Opportunity size for PBC in 2026 is USD10bn. NASH study – will further open market 2-3x.
Saroglitazar for NASH – 2025 launch (recent developments may pre- pone the timeline). Hope to file by end of 2024.
286 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Cipla
Financials and guidance
ETR- 27.5% FY21.
R&D cost will increase gradually, depending on clinical trial of key projects. Full year guidance is 6-7% of sales.
Don’t want margin accretion at the expense of growth. EBITDA margin may decrease depending on the opportunities and return to normalcy.
The gRevlimid settlement amount of INR500mn is included in other income line.
Expect to achieve 17-20% RoIC.
Covid-19 sale is much lower than 5% of overall company sales in Q3.
Outlook for Q4FY21: Global access revenues were higher this quarter, likely to moderate. India benefited from seasonality and covid-19 revenues in Q3.
Biosimilars opportunity in EMs is expected to contribute from FY23.
Sequential run rate for EMs should continue. EMs market do not include covid- 19 related products.
Looking to participate in second phase of API PLI scheme.
Sequential run rate for EMs should continue. EMs market do not include covid- 19 related products.
US
Addition of USD300-500mn over next 3-4 years. This included gRevlimid sales as well.
Despite QoQ increase in albuterol revenues, US sales remained flat on product recall. Cost associated with recall is already adjusted in Q3. Base has not eroded significantly.
gAdavir filed in May’20. TAD date late Q4FY21 or early Q1FY22. But looking for 2-year cycle considering the type of product.
Partnered respiratory product already filed in the US. Some queries were raised around clinical trials which the partner is responding and expected to file response shortly.
US business profitability trending close to company level.
gRevlimid- The ability to share innovators REMS program is quite promising as this is one of the toughest REMs program
Working with USFDA to address Goa inspection. Last response was sent end of April 2020.
Albuterol
Cipla market share is above 12% in overall albuterol market. Expect gradual ramp-up from hereon.
Cipla has the lowest cost and will be able to defend share in case of re-entry of Perrigo.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
It may be challenging to increase market share beyond certain point given presence in smaller Proventil market. However, there is still enough room to grow.
India
Non-covid business growth 6-7%.
Market beating growth in prescription business for 6th consecutive quarter.
Consumer Health is in India and South Africa and there is opportunity to clock 12%+ of overall revenue.
Going forward expects Consumer Health to have higher gross margin, demand stickiness, and better pricing.
288 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Divi’s Laboratories
Quarter performance and guidance The company is confident of maintaining margins given technology enhancements, backward integration and continued process improvement.
Constant currency growth for the quarter was 11% YoY and for 9mFY21 22% YoY.
US and Europe together contributed 68% to turnover. Generics contributed 60% to revenue and custom synthesis 40%.
The company is venturing into large-scale contrast media APIs. Market size is USD4–6bn. There are very few players in the world given iodine dependency and viability. The company is seeing good opportunity in this as consumption has increased over the last two years. These are high-value products. Validations have been completed and for some products already filed. This is within the investment plan.
For the quarter, Carotenoids revenue came at ~INR1,450mn. 9mFY21- INR4.39bn. More than 90% comes from Europe and US. Overall market size is USD1bn.
The company has INR2.64bn in cash.
Targeting the next ten molecules. The company’s old molecules such as ibuprofen, naproxen are still growing.
Increase of INR1.67bn in inventory QoQ is in-line with historical Q3 trends wherein year-end inventory correction happens and also because of inventory build-up.
Capex
The company capitalised about INR10.1bn in 9mFY21 and INR1.81bn in Q3FY21.
Custom synthesis project of INR4bn going well—one stream, already operationalised. Additional stream is nearing completion. Production to begin in H1FY22.
Kakinada: State pollution control is in discussion to resolve the concerns. Expects to resolve it soon. The company is not losing any business as Unit 1 and Unit 2 are already up and running, clearances are awaited and the company has built additional blocks to cater to opportunities.
Green chemistry will help in better yields, higher raw material conversion and minimal wastage.
Capex in FY22 and FY23 may involve repairs to old buildings.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Dr. Reddy’s Laboratories
Financials and general
Successfully integrated Wockhardt. There is no one-off expense in P&L. Incremental manpower and plant expenses were there in Q2 as well and will continue.
One-off expense: covid-19-related freight expense. Over the next few quarters, this is expected to reverse. One-off litigation expense.
Expenses were higher on account of investments in sales & marketing in branded markets and digital initiatives, which also involve digitalising front-end. This is likely to continue.
It also includes higher covid-19 related freight expenses, which is likely to reverse over the next few quarters, and a one-off litigation expense.
Expenses are still not back to pre-covid-19 levels in branded markets and are likely to inch up. Aspire to deliver 25% EBITDA margin on a sustainable basis. Biggest lever being revenue growth and productivity improvement. Expect to be in this range over the next few quarters.
gNuvaring total impairment is USD200mn against PPA of USD185mn. The difference is majorly on account of interest cost capitalised in line with accounting standards.
Receivables increased INR3bn, out of which one-third is because of lower discounting in the US as the company was finding it less economical on account of lower interest rates. The remaining was driven by normal sales growth and milestone payment received from Aurigene.
Inventory increase was led by sales growth and planned increase in safety stock levels.
North America While the launch momentum continued, US sales were impacted by price erosion in the base business.
Faced covid-19 related slowdown at the end of the quarter.
Still planning to launch gNuvaring.
Copaxone- received another CRL and preparing the response to submit over the next few months.
The proportion of complex injectables in US sales will move up from the current 25% levels.
Pegfilgrastim- Expect approval in FY22.
Others PSAI : It is now at normal levels and is expected to continue to grow well.
Sputnik-V- In discussion to increase collaboration in other markets. Capacity increased to 125mn from 100mn. Expect to submit to agencies in March
290 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
India Excluding Wockhardt integration, base business grew 8% YoY, business grew in single digits for 9MFY21.
Wockhart portfolio will improve hereon as well. Launch pipeline robust Post-FY17, Dr. Reddy's portfolio was among the worst hit as competition to gDacogen, gVidaza, gValcyte, etc led to a sharp decline in US revenue and margins. Over the last 1.5 years, Dr. Reddy's has launched several differentiated products starting from gSuboxone. In the table below, we highlight some of the niche launches that are expected over the next 3–4 years. In our view, these launches are the best among peers.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Glenmark Pharmaceuticals
Financials and guidance
Ichnos- discussions ongoing for fund raising both at the company and the molecule level. Expect to close at least some deal in the near future (earlier guided for Dec’20).
ISB 1342 valuation will be based on trial data. Xolair- will not invest in phase 3 unless the company finds a partner. Reasonable timeline- 9 months.
Milestones are there even on Ryaltris approval.
EBITDA margin: 19-20% for FY22. Confident of sustaining it going forward as well.
Gross margin guidance: 66%. This quarter was higher on account of launches and a favourable mix.
R&D: Generic R&D will sustain or grow going forward. The company is investing in areas such as nebulisers and injectables. Ichnos spends have come down.
Net debt reduction: INR2–3bn by the end of the year.
9mFY21 cash flow: EBITDA: INR16bn; Outflows: INR2.1 cash interest, cash tax INR3.35bn, WC increase-INR3bn, INR5.3bn asset addition, dividend paid.
FX losses are largely translation losses of debtors on USD appreciation.
MEIS incentives: INR200mn impact in the quarter.
Capex: INR6–6.5bn to sustain around these levels. Intangibles addition is going down.
ETR: 30–31% for the next one–two years.
Segmental
India- Majority growth came from the base business. Respi and derma are recovering now. Remo (including FDC) can be an INR1.5–2bn franchise in India. Currently annualising INR1bn. There is some slowdown in Remo because of Dapa launch. So far there is no combination for Dapa- a clinical trial will be needed. Remo+Teneligliptin launch is coming up.
Other markets- Expect a strong recovery from Q1FY22. In Europe, Germany and the UK continue to be impacted in the quarter. Middle East and Africa expecting good growth in Q4. Asia markets were badly impacted.
API will continue to see strong growth for a couple of years, benefitting from China+1 and backward integration. Seeing a good opportunity both in API and CDMOs.
US- 10% YoY growth expected in FY22. Price erosion is 4–5% and tracking similarly for derma. Expecting 5–6 launches from the Monroe facility next year. 50% cost is already in P&L relating to OSD.
292 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Ipca Laboratories
Financials and guidance
About 13-14% growth expected in India business in FY22. Pain will continue to grow around 20% level.
API 12-13% growth expected (adjusted for exceptional business).
Branded markets - 10% YoY in FY21
INR120mn MEIS impact per quarter. No provision made in Q2 and Q3FY21.
Higher prices on intermediates and freight cost (+40-45%). Paracetamol raw material price, which was INR350 per kg, has gone up to INR550. This is temporary and expect things should be normalised in Q1FY22.
Tax rate: 17.5% is like to go to 25% in next 2-3 years. The company has MAT credit of INR3.6bn of which INR1bn will be released this year. Benefit from Sikkim plant will go away in next FY22 and the company may utilise 1INR1.6bn next year.
Overall cash holding is INR8.5bn.
Material cost ratio 31% in next FY.
25–26% EBITDA margin are sustainable.
India formulations
Some amount of cost savings will continue in FY22 as well such as travelling, doctor conferences, etc. About INR250mn has been saved on such travels this year.
Pain and cardiac which accounts for 70% domestic sales showed good growth. Pain grew 16% YoY from INR2.29bn to INR2.66bn; Cardio grew 8% YoY from INR870mn to INR940mn.
CNS, derma, ophthal have now turned positive.
Anti-malarial, cough and cold, anti-bacterial portfolio, pedia segments saw decline.
Capex
Capex: INR3-3.5bn in FY22.
API Ratlam project (INR1bn) is going well. There were some delays because of covid on civil construction work. The plant is expected to operationalise in March and commence commercial production in Q2FY22. The plant will add 10% capacity.
Dewas- civil work on 2 plants started in full swing. Expect entire installation work to get over by Sep-Oct’21 and start commercial production in Q4FY22. Dewas will add 20-25% of capacity.
Backward integration project at Aurangabad site is now fully commissioned (10 tonnes). Looking to set up another plant there in next FY (50 tonnes).
Level of integration- 62% of formulations are backed up by own APIs.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The company produces KSMs for larger APIs (7-8) on its own such as losartan KSMs.
Nobel Explochem- could not do much on its site because of NCLT order. This site will be used in manufacturing intermediates. Environmental clearance application is in process. No capex in FY21. Major capex to take place in FY23.
Other segments
INR340mn exceptional institutional business received in Q3.
Price of one of the key intermediates of sartans has almost halved and is now stable. This has resulted in overall reduction in sartan prices.
Pick up has been good in generics. EU: 1.13bn vs INR750mn; Australia INR520mn vs INR460mn, 13% YoY; Canada INR350mn vs INR260mn, 37% YoY; South Africa – last year had some tender business, sales lower from INR430mn to INR160mn.
Branded markets- CIS Russia impacted by covid and clocked INR160mn vs INR520mn. On ground sales were low and inventory adjustments were done in Q3. Q4 should be normal. 10% growth for FY21 achievable. Middles east INR125mn, +46% YoY, West Africa – INR240mn, +23%, SEA INR150mn flat YoY, Latin America INR103mn almost flat YoY..
China+1 advantage has not come to Ipca because of non-presence in the US markets. But that’s happening for the industry,
API PLI scheme - Putting application for 2 products only in sartans.
Onyx UK 30% EBITDA margin and clocked INR170mn profit in current year and is doing well.
Pisgah (API side) losses because of FDA issues and continue to add losses for FY21 and FY22 as products are still under registration.
Bayshore – pharma distribution in US – INR90mn profit this quarter, INR60mn for 9mFY21.
Trophic wellness- nutraceuticals in India- 20% shareholding- INR1bn business, INR200mn PAT. Doing well.
Krebs- fermentation and synthetic products- currently in losses and hope to turn around next FY.
294 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Lupin
Financials and guidance
Effective tax rate improved as all key subsidiaries have done well. FY21 ETR: Mid 30s. FY22- lower than 30%.
Gross margin at 65.8%, +190bps YoY and +250bps QoQ driven by favourable business mix across region, lowering of freight cost and one time litigation settlement income.
EBITDA improvement was driven by gross margin improvement and cost optimisation.
Employee benefits have come down YoY and will continue to keep efforts to improve from current levels. QoQ increase was on account of increments and some one-off payment on account of rationalisation.
Cost rationalisation particularly in specialty has already flown in this quarter.
R&D: Expect to keep at 9% level for FY22 (from 10%).
Second version of PLI scheme likely to be more powerful (Formulation PLI). Overall alignment with the business strategy is important and believe may participate in it meaningfully.
EBITDA margin guidance: Over time back to 20-22%.
Fx loss for Q3FY21: INR280mn
M&A areas- Specialty, generic front particularly injectables in the US and those therapy areas in India where Lupin has no meaningful share.
The company will continue to rationalise costs, particularly manpower, selling and promotion, R&D rationalisation (settling in 9% of sales over time).
US
YoY growth was muted on limited contribution from Flu and metformin products. Re-launched Glumetza in Sep’20 and expect to re-launch fortamet this quarter. Flu season is weakest in last 7-8 years.
Spiriva – Litigation ongoing, district case expected to get clear within a year. On track to launch in mid-2022. Plant inspection was done earlier and shouldn’t be a bottleneck unless FDA wants to re-inspect. However, there is still some grounds to be covered.
Albuterol: 9%+ market share of the generics market as per last monthly data. Hoping to get to 20%+ share in next couple of quarters
Lapatinib and Vimovo ramping up well. Expect better contribution of tacrolimus this quarter.
US pricing environment- Likely to be under pressure for high priced products such as biologics, oncology drugs, etc., however, positive for generic side of industry.
Filing status- 30-35 products expected to file every year. Of this, 15-20 products comprise of oral solids, opthal, and other dosage forms. Injectable pipeline
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
expected to pick up. Targeting 6+ filings every year of which couple of them being complex. Expect 3-4 filing each year in inhalation.
Key near term filings are from USFDA cleared plants. Eg. Spiriva, Fostair is from Pithampur Unit-3, nebulisers are outsourced. Fostair also from Coral Springs. Other products are from Nagpur, Aurangabad, Pithampur Unit-1.
Injectables – Depot- Netherlands- first product going in in this quarter and second couple of months, Fordoz- atleast 1 filing in next fiscal. Peptides- expect to file couple of products in next few months.
Pegfilgrastim- hope to file in later FY21 and launch in CY22. Continue to be interesting opportunity.
Ranizumab- phase 3 this year.
Levothyroxine: Gained market share couple of points to little over 14%. Has 17%+ share in generic. Hoping to get to 20%+ share.
Metformin: Re-launched gGlumteza in Sep’20 and has the ability to regain market share.
Suprep: USD200mn+ opportunity with FY23 launch. Lupin has FTF
Solosec:
Branded sales USD2mn in Q3FY21. 43 sales force in branded business.
Access to OBG office has been difficult because of covid-19.
Trichomoniasis indication launch and normalisation of covid-19 disruption remain key accelerators.
Scripts are flat QoQ.
Seeing pricing improvement because of gross to net improvement.
USD20mn annualised is required to break even.
FDA status
Expect meaningful activity from USFDA in later half of the year.
Not happy with 13 observation at Somerset. Deeper transformation happening at Somerset.
India
Both acute and chronic therapies recovered and delivered growth.
Expect to clock double digit growth next year.
Expect ramp up on acute side of business as markets open.
EMEA
Etanercept- ramp up is slow in European market. In next 12-24 months, product will be rolled out in key markets.
Fostair – expect to get approval in next couple of months. The ramp up will be over next 2 years as it operates more like branded markets, key market being UK. It’s a EUR600mn market with 3-4 players.
296 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Natco Pharma
International formulations
Lenalidomide launch in markets other than US
Afinitor in other markets as well as US
Foreign subs ~INR 410mn revenue. Brazil and Canada profitable. Good launches in next year. Can go to INR 1.5-2bn next year
Nothing interesting filed in FY21
API
20-25% business from tender. If tenders don’t repeat then base may become weak
India
Back to 70% levels
Oral oncology products stable
People preferring oral products. Higher margin sales of injectables not happening. Dramatic drop in immunosuppression - Practically 0 sales of bone marrow transplant in first 6 months. See improvement in 6-8 months
Not lost market share in any product
10 launches in FY22 incl. cardio and oncology; some will be first time in market
Guesstimate that oncology market is ~INR 30-35bn in India
Agrochem
Received approval but litigation pending
Own brand in CTPR. Real value is when it will do its own front-end
Have other big products that will speak in due course of time. Will be FTF
100 employees in the division. Hired seasoned hands
Striving to make company margins
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Sun Pharmaceuticals
Financials
Repaid debt of USD490mn in 9mFY21, repaid debt of over USD300mn in 1HFY21. R&D spend was 6.4% of sales, down QoQ, despite ongoing trials for Ilumya as patient enrollment has been slow on account of covid-19 disruptions.
Travelling and promotion expenses have gone up and are likely to inch up further. Despite this, costs ex-R&D have gone down QoQ. Some travel restrictions seen in the US.
Net debt ex-Taro: USD250mn.
India (31% of sales)
Sales of branded formulations grew 9% YoY/9% QoQ led by the chronic portfolio growing both in volume and value terms.
Semi chronic portfolio is recovering and showed a good rebound in Q3 as well Q4.
Acute portfolio is still facing some pressure on account of a lower incidence of infectious diseases and fewer patient footfall.
While medical representatives are fully active in field and operating at 90–95% of doctor engagement levels, patient flow to doctors’ clinic remains 70–75%.
Doctor call rates have improved significantly.
Product launches in India to continue going forward.
US (31% of sales)
Ex-Taro generics grew YoY on account of market share gains, better supply chain management, and shortages of competing products.
The company has 90 ANDAs and eight NDAs pending approval
Halol: Awaiting response from the agency.
Global Specialty Global specialty sales came in at USD148mn in Q3FY21 against USD108mn in Q2FY21. Ilumya sales for 9mFY21 crossed FY20 full-year sales. Specialty R&D accounted for 27% of total R&D. Phase 3 of Ilumya for psoriasis arthritis is going on. No decision taken for trial for gastro indication. Initiated Phase 2 clinical trial of SCD-044 for moderate-to-severe plaque psoriasis. Not going for mild to moderate as high price differentiated product acceptance by formulary remains challenging. While biosimilars are available for moderate to severe, there is clearly different market for oral agents. Levulan sales are yet to recover fully; however, they have improved over H1FY21. Do not have any visibility of generic entry in Absorica. Conversion to Absorica LD is around 20%. Face-to-face interaction is 40–45%. Started DTC campaign for Cequa; however, it would not be as high as the one incurred for Ilumya. Ilumya spends are largely optimised. The early onset of action is one of the aspects for marketing Cequa.
298 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Torrent Pharmaceuticals
Domestic
MR productivity - Achieved 8,10,000 PCPM against 8,00,000 PCPM in Q2FY21.
The company has done MR restructuring. Reduced MR from 400on in Q2 to 3800 in Q3. This is further reduced to 3600 in the beginning of Q4FY21.
Intent of restructuring is to reduce focus on old brands with low growth markets and ensure growth of the portfolio. Do not expect any negative impact on sales.
Pricing growth is expected to be around 6%
200bps growth above market. Do not see any challenge in growing base business.
YTD launched 17 products in the market and 4-5 more expected. Expects to launch 16-17 products annually. The launches may not be as significant and will continue to focus on launches made last year.
No significant investment in digital initiatives. Do not see it replacing the existing marketing structure.
US
Expects to re-launch first product from Levittown in April 2021. Targeting USD10- 15mn revenues in initial years.
The company has 6 approved products for launch.
Submitted closure report for Dahej and Indrad to USFDA. Awaiting response from the agency.
US was impacted on account of temporary discontinuation of sartan products, base business price erosion and new launches. However, Levittown facility and external business launches should help in next fiscal.
Sartan used to contribute USD30mn to the topline. Goal is to take market share within losartan category.
Germany and Brazil
Germany –product issues have been resolved. High-digit growth for next three years seems achievable. Continue to launch 8-10 products in Germany. Focus will be on launching high volume products.
Germany sales were flat after 2 quarters of decline. Market share reached to prior level and stands at 7%. Achieved peak share of 7.2% in Sep19.
As per IQVIA, Brazil branded market grew 7.9% versus 10.1% Torrent. The company will launch 3-5 products a year in branded generics and expand presence in existing therapies of CNS, cardio-diabetes.
Generics accounts for 6% of the topline and is growing higher than the market growth of 16-17%.
Financials and guidance
FCF for Q3- INR12bn.
Repaid debt of INR8.5bn in 9mFY21 and INR4.4bn in H1FY21.
Major part of cash allocation will be towards deleveraging.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Net debt/EBITDA target- prior to Unichem levels
Tax rate- 21-22%; FY23- 23%
EBITDA margin- 29% in FY22. Cost may play out in next year but not significantly.
300 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Power & Ports
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Adani Ports and SEZ
Q3FY21 conference call highlights Opening remarks
Business and economy has recovered quickly, which can be seen in the 90–95% recovery led by EXIM trade.
Port industry to function in normal business cycle and the target of 245-250MMT for FY21 remains intact.
Operational highlights
Market share in cargo volume up by 6% to 28%. All India container market share up 7% to 43%.
Total Operating Revenue grew by 12% from INR33bn in Q3FY20 to INR37bn in Q3FY21 led by growth of 35% in Port revenue and revenue from logistics business increased by 8% sequentially.
Increased cargo volume and balanced cargo mix enabled Port EBITDA to grow by 38% from INR17bn in Q3FY20 to INR23.5bn in Q3FY21. Port EBITDA margin for Q3FY21 increased by 140 bps to 71.7% while the Logistics business has reported an EBITDA of INR6.7mn in Q3FY21 compared to INR5.8mn in Q3FY20 an increase of 16%. Overall margins are projected to reach 76-78% in the next few years.
Ports across all three regions registered strong growth western ports grew by 25% and eastern ports grew by 10%.
Five new container services were added, two at Mundra, two services at Hazira, and one at Kattupalli. The incremental container volume on account of these additional services will be approximately 340,000 TEUs on an annual basis.
Double-digit growth in all types of cargo.
Dry bulk grew by 42%, container by 36% and liquid cargo including crude by 24%.
Double-digit growth: Mundra 25%, Dahej 29%, Hazira 14% and Dhamra 10%.
Mundra for third consecutive quarter surpassed volume handled by JNPT (handled 1.59 mn TEUs compared to 1.29 mn TEUs handled by JNPT).
Market share Mundra in all India container volume increased to 33%.
LPG (2,13,00) and LNG volume registered growth of 50% and 10% respectively over Q2FY21.
Higher cargo volume growth compared to all India due to higher growth in container of 36% and liquid (incl. crude) of 24% also aided by sticky cargo of ~54%, enhanced capacity and acquisition of Krishnapatnam port and improved east coast - west coast parity
Interest cost increase due to addition of debt on account acquisition of Krishnapatnam.
Raised USD500mn bond for refinancing in January which gets the average debt maturity to 6 years leaving the total USD debt unchanged at USD3.4bn.
Curtailed discretionary capex to INR20bn.
302 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Mundra
Mundra port registered a growth of 25% during the quarter led by container and liquid cargo including crude. While container grew by 38%, liquid cargo including crude grew by 22%.
Continues to be the largest container handling port in India for the third consecutive quarter and has handled 1.59mn TEUs during the quarter.
Mundra port handled 213,000 MT of LPG and 567,000 MT of LNG, which is a growth of 50% and 10% respectively over Q2FY21.
New container service added - INGWE and New FALCON (to add 181,000 TEUs p.a.)
Growth in Revenue and EBITDA lower than cargo volume growth due to higher volume handled by JVs, up by 7% of overall cargo and 9% of container.
Krishnapatnam
Acquisition completed in October 2020.
De-bottlenecking of current capacities and better utilization results in improvement in realization through operational process re-engineering and higher revenue generation by redefining customer process
Revenue/EBITDA at INR4.7/3.4 with margins at 73%. Margins are projected to reach 78% by FY25.
Dhamra
Highest ever cargo volume in a quarter.
EBITDA growth of 14% in line with cargo growth.
EBITDA margin increased by 250 bps to 66% due to operational efficiencies.
Five new contracts signed for handling products like IOF, IOP, Slag and Gypsum – amounting to a total volume of ~9 MMT p.a.
Dhamra LNG to be commissioned by end of FY22.
Double digit growth to continue for the next 5 years.
Hazira
Growth in Liquid cargo of 24%, Dry cargo of 18%, and Container of 9%.
New services – Blue Nile and Arabian Star (138,000 TEUs on an annual basis).
Revenue growth not in line with cargo growth as Q3FY20 revenue had a onetime component of INR180mn of MGT and change in realization due to change in cargo mix in Q3FY21.
EBITDA margin improved due to operational efficiencies, strict control over cost and lower maintenance dredging of INR70mn and higher apportionment of fixed cost and lower donation of INR80mn.
Katupalli
Cargo volume was lower by 15% due to continued impact of COVID19 in the Chennai cluster, however, cargo volume recovered by 9% on QoQ basis.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Decline in revenue was lower than decline in cargo due to handling of higher liquid cargo and better realization in containers.
EBITDA margin improved by 540 bps to 60% on account of better cargo mix and higher liquid cargo handling.
Market share consistently increasing since last 2 quarters, expecting the trend to continue in the next quarter.
In the process of getting environment clearances to start other services for other commodities.
Dahej
Growth in revenue is lower due to increase in low realization trading coal volume.
EBITDA growth higher than revenue growth on account of operating efficiency.
EBITDA margin up 380 bps to 60% due to savings in operating costs and operating leverage.
Others terminals
Higher container volume at Ennore and higher dry cargo at Tuna.
Revenue growth aided by higher container volume.
EBITDA grew by 204% due to higher volume, higher realization and lower cost.
EBITDA margin increased from 14% to 30% due to change in cargo mix.
Goa and Tuna running and full capacity. Expect steady state capacity and volume there.
Logistics
Increase in logistics revenue and EBITDA due to high realization, high margin new routes and discontinuation of low realization, low margin routes.
Margin improved by 160 bps to 26% due to higher logistics income with better realization.
Adding 16 rakes and signed 5 long term contracts which will enable them to handle 6.5mmt going forward.
Building 2 more logistics parks in Mundra and Nagpur.
Scaling capacity for warehousing and reaching out to ecommerce companies for warehousing opportunities.
Signed MoU with Gujarat government for development of logistics park with air, rail and water connectivity.
Outlook for full-year FY21
2x growth compared to India
Volumes in the range of 225 MMT - 230 MMT excluding KPCL.
KPCL volume in H2FY21 to be around 20 MMT.
Mundra ~142, Hazira ~22, Dhamra ~32 and Kattupalli ~ 9 to 10 MMT
304 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Consolidated revenue expected to be around INR127bn
Port revenue to be around INR108bn.
Logistics revenue to be around Rs.10bn.
EBITDA expected to be around Rs.82bn.
Port EBITDA margin to continue around 71%.
Capex to be around INR20bn (incl. maintenance capex of around INR5bn).
Free cash from operations (after adjusting for working capital changes, Capex and net interest cost) to be around INR56bn.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Gujarat Pipavav Port
Cargo update Container - 199k TEUS 19% increase vs previous quarter; higher EXIM and Coastal volume
Dry Bulk - 777K MT 15% decrease vs previous quarter; end of peak season for Fertilizer. Fertilizer and other commodities remain very strong.
Liquid - 167K MT 13% increase vs previous quarter; higher volume of Non-LPG cargo. Have some limitations in LPG which the company is trying to address.
RORO - 253 cars 93% decrease vs previous quarter
Big congestion in global hub ports including Colombo which is impacting most shipping lines. Mundra is taking a lot of transshipment volumes due to this. GPPV’s transshipment volumes have dipped as this volume has very low margins.
Expect good growth in LPG volumes going ahead
Expect CY2021 volumes to reach the levels of CY2019
Realisations now: INR550-600/MT for bulk, INR6100/TEU for container, INR475- 500/MT for liquid
Have lost some market share which is short term in nature
General Had taken tariff hike from October 2020
Employee expenses were higher due to special bonus announced by global CEO for uninterrupted service during COVID times. It was USD1000 per employee irrespective of rank or level. Overall cost was INR35mn
Maintenance dredging was carried out this quarter – INR48mn.
Excluding these one-time costs, EBITDA margins would be 60%
Container shortage Lot of containers are being stuck in US and Europe and it will take some time for empty containers to come to Asia
Right now, empty containers are available at a charge
Expect the demand-supply situation of container to start normalizing after Chinese new year
DFC Getting ready for DFC in strong way
Railway track from port to Surendranagar is handled by PRCL. All electrification here is nearly complete. Several connectivity points have also been built should go live by April 1st 2021
306 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Indian Energy Exchange
Opening remarks 58.9% PMI in Oct – highest in last many years. This also largely sustained in Nov and Dec 2020.
375 GW installed capacity. Renewable capacity grew faster at 6% YoY to 91 GW.
Peak demand touched 187 GW today.
There are Daily and weekly contracts now in the green market. Regulations The Ministry of Power introduced a draft proposal on December 04, 2020 enabling the distribution utilities to exit from the Power Purchase Agreement after completion of the term. This will help increase volumes on exchange.
Ministry of Power also notified Electricity (Rights of Consumers) Rules, 2020 – This is a significant step aimed at streamlining and enhancing the quality of electricity supply and services being provided to consumers across the country.
Management expects the reforms to continue in the Power sector which will further drive opportunities for the exchange. Gas exchange PNGRB approval received for India’s first gas exchange. The approval has been granted for a tenure of 25 years, making IGX the first regulated delivery-based gas exchange in the country.
25% of the overall network will be available for exchange.
Adani Total Gas Limited and Torrent Gas have acquired 5% stake each in IGX.
Looking at strategic partners in Gas exchange. Management has identified a few parties and are approaching only them to provide stake.
Gas exchange will need time to witness significant volume increase (around one year). By this time all enablers should fall in place. Enablers like - Gas is still not under GST, rates varying from 4% to 24% across various states. There is no system operator for gas. There is also a need for setting up infrastructure for pickup in gas exchange. Comments on products REC market – 80-90 lakhs transactions happen every year in the market. This year only 10 lakhs have hardly happened. On sell side there should be good quantum available. RPO obligation of current year will have to be fulfilled in the next year. APTEL rehearing remains key for trading to start. No regulator has waived off RPO obligation, only permission granted to fulfil in subsequent years.
Escerts trading – Certain issues with new sectors included in Escerts. There is some delay in deciding the benchmarks for the new sectors. Expect 2-3 sessions to happen in current year from Feb.
Derivatives –Signed contract with MCX for derivatives once permitted. Any physical settlement will happen on IEX platform. IEX price will be used for clearing price. 99% of the contracts are generally finally settled.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
TAM market – is only 4% of the overall short term market. The company has lost market share TAM due to intraday contracts moving to RTM. Also, there are only Key 3-4 players in the market, so even if one shifts then there is an impact.
RTM market: RTM market is very liquid now with 500 participants and IEX is doing 40MU per day . DSM is reducing though not that significantly due to better pricing. IEX is working with Discoms trying to analyze the penalty paid by them in DSM market and they should gradually move to RTM market.
Green market – Sellers are mainly from Telangana and Karnataka. With their requirement increasing, their supply is reducing. Management is in active discussion with GOI for new renewable capacities with merchant option of 10- 20%. Talks are progressing well and are in advance stage.
DAM market: Volumes momentum is due to higher power demand. Also, no coal shortage is leading to better pricing and this adding to DAM volumes
Open access – Out of total volumes in Q3, 24% accounted from open access customers and it witnessed 14% YoY increase. Majority of open access is traded through DAM market. Gujarat, Telangana and Tamil Nadu are the top 3 states for open access. States which have allowed open access are the states where industrial development are taking place. Recently, UP also gave nod to open access and there are 30 customers participating currently .
Exchange share in bilateral trades has seen a sharp rise in the current year, because of Covid most of them resorted to exchange.
Cannibalisation, coupling & MBED – CERC is expected to resume office from February and management indicated that its highly unlikely that implementation of Market coupling and MBED would happen. Financials and business Q3FY21 registered highest ever quarterly volume (20.2bn in Q3FY21 growth of 62% YoY ex-REC). With NIL REC volumes in Q3, growth stood at 49% YoY.
Software – Any development is IEX cost. Monetisation unlikely as IEX is leveraging the same.
If GDP has to grow at 8-9%, then power demand has to grow at 8-9%.
Annual fees in Q3 – INR 42mn. Largely flat QoQ as active clients are largely same.
Largely all discoms are participating – Top 10% discoms contribute ~75-80% of the total buy.
308 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
India Grid Trust
Industry Power sector reflecting normalization which can be seen in the demand pick up (4% YoY) and a record demand of 186GW in January 2021
Policy initiatives like enabling IRDAI & PFRDA to subscribe debt securities issued by InvITs helping to raise awareness about InvITs Operational highlights Revenue up 27% YoY to INR4,322MN and EBITDA grew by 25% YoY to INR3,938MN on the back of acquisitions and stable operations
Net debt to AUM at 52% as on December 31, 2020 (within the 70% SEBI regulation)
Q3FY21 saw highest NDCF generation which led to increase in DPU to INR3.1 per unit
Higher focus on digitalization led to signing a multiyear collaboration with IBM for development of AI platform which would help reduce life cycle cost of managing assets going forward. 10 year spend to be around INR220MN
112% collection efficiency (89% in Q3FY20) with DSO at 70 days (80 days previous quarter) in Q3FY21 which signals a healthy reversal sequentially. Management aims to improve DSO to 65 days by the end of the financial year
Working capital affected largely on account of acquisitions (90% difference due to acquired working capital)
EBITDA at SPV level of INR4,001MN and distributed INR1,810MN
Average availability maintained at >99.5%. ENICL was a 98.1% due to plant shutdown and issues are expected to continue in to the next quarter Corporate actions Acquired PKTCL from Reliance Infra and JKPTL totaling INR12,000MN as well as signed an SPA for acquisition of first solar asset (100 MW FRV) from FRV Solar Holdings XI B.V. amounting to INR6,600MN in Q3. After transactions, AUM is on track to cross 155bn
The board has approved an INR15bn rights issue and should go ahead subject to regulatory approval Balance sheet The management aims to continue to maintain a robust balance sheet, incremental financing to be repayable beyond 2025
INR10bn debt raised in Q3FY21 (incremental cost of borrowing at 7.4%)
8.4% average cost of debt and is expected to trend lower than 8% going forward with focus on improving the share of bank loans in total debt (100% fixed rate borrowing) DPU strategy Increased DPU by 3.3% to INR3.1 per quarter (INR12.4 annualized) backed by successful acquisitions as well as robust collections. The management believes this should be sustainable even on an expandable capital base.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
JSW Energy
Overall market Power demand – In Oct, power demand grew in double digits (up 12% YoY). 6.4% growth in Q3. In January, power demand is growing at 4.5%. In 9M, power demand is down 4% and management expects to end FY21 below 3% decline. 4- 6% power demand growth over the next decade.
Merchant market – Merchant market is too volatile currently and predicting anything is very difficult currently. But this does not imply the company keeping any capacities open to tap this opportunity. Management looking to tie up PPA for as much capacity as possible. Operational performance 810 MW SECI – 540 MW PPA will be signed in the current quarter and 270 MW in the Q1 of next year. Tariff is at INR 3/unit. Wind capex – ~60-65mn per MW and Solar capex INR 37.5/41mn per MW. 225-250 MW will be solar capacity and 800-850 MW will be the wind capacity.
Kutehr – On schedule. PPA will be signed and send for approval. Debt : Equity will be 67:33
Board has approved slump sale of 18 MW thermal power plant at Salboni to JSW Cement. Valuer appointed. Expect to close the transaction by 31st March.
ESG rating - MSCI has upgraded company’s ESG rating to ‘BB’.
10,000 MW of PPA are expected to be singed over the next 10 years, based on the HPO obligation.
Long term PPA – Post PPA sign at Dolvi, Long term PPA tie up will be at 87%. At Ratnagiri, only 55 MW will be the open capacity. All new capacities being set up are with 100% PPA capacity.
New projects - 25-30% will be equity and balance debt. Management looks at mid teen equity IRR.
Discom liquidity scheme – Receivables are continuously going down for JSW and with further easing of liquidity in the system it will further aid reduction in discom debt.
Overall capex of INR 95-110bn. Debt : Equity will be 70:30 Financial performance Debt and Interest - Net Debt reduced by INR 9.5bn in Q3FY21 and by INR 22.26bn in 9mFY21. Current net debt to equity stands at INR 0.48x. It is the end of the deleveraging of the Balance sheet.
Receivables –Down 22% YoY on back of strong recovery. Overdues are down 30% YoY.
Current cash balance – INR 16.0bn. Generating free cash of INR 20bn annually which should help fund capex.
JSPL loan has been settled on totality and there is no outstanding from JSPL currently.
310 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
On acquisitions Ind – Bharat Energy (Utkal) Ltd - The resolution plan submitted by the Company for Ind-Barath Energy (Utkal) Ltd is pending approval by the National Company Law Tribunal.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
NTPC
Commercial highlights Group gross generation – 65.42bn units in Q3 and for the group it was 73.56bn units.
Commercial addition – 865MW including 800MW at Lara. Current capacity at 51,170MW on a standalone basis.
Loss due to grid restriction – 84.12bn units for 9M. 20.24bn units for gas units.
Coal - 5.75mn MT coal has been excavated (7.04mn MT YoY) in 9mFY21. INR75.31bn has been spent on development of coal mines in FY20.
FGD – 64.85GW implementation ongoing at group level. 1,340 MW commissioned. 58.94GW are implementation. 4.57GW balance under various stages of tendering.
Nox – 18GW have been awarded/yet to be awarded. 43GW under process for awards.
Capex – INR123.83bn for NTPC SA and INR88.71bn by other group companies. Group total at INR212.5bn. Capex planned for FY21 – INR210bn for NTPC Ltd.
At most airports, management plans to install rooftop solar.
Capacity addition FY21–5,074 MW (NTPC standalone will be 3,080MW). Completed more than 50% addition of standalone. In FY22 – Group 6,000MW (NTPC will be 4,962MW).
MEJA unit 2 has been declared commercial.
No new thermal power plants planned for FY22. Renewables Renewable projects under tendering – 1,440MW.
Renewable projects won in FY21 - 200MW in Gujarat, 470MW in Rajasthan and 90MW in Kerala, 600MW in Andhra.
Equity IRR similar to that in coal-based plants, due to lower cost of debt and less implementation time for executing this project. Equity IRR should be in 11-12% range.
Renewables target to reach 30GW capacity by 2030. Financial highlights Performance of THDC and NEEPCO
In 9m, THDC – profit of INR6.51bn (versus INR6.92bn profit YoY) and NEEPCO – loss of INR1.16bn (INR1.32bn profit YoY). Loss in NEEPCO is due to one plant loss.
In Q3, THDC – profit of INR2.14 (INR2.68bn YoY) and NEEPCO loss of INR0.83bn (versus INR1.15bn YoY).
Standalone - CWIP is INR740bn. Total asset of INR2750bn.
Other income – Late payment surcharge, dues which are settled from AatmaNirbhar scheme, interest at 1% (as against 1.5% for normal payments).
312 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Term loan signed – INR52bn with Bank of India and INR20bn with ICICI bank.
Fixed cost under recoveries – INR5.69bn for 9mFY21, INR4.99bn for H1FY20.
Adjusted PAT for Q3 – INR33.08bn (versus INR26.77bn YoY). Previous year sales and fuel are the main adjustments.
PAF based incentive – INR 3.55bn (INR1.64bn YoY) and for Q3 – INR0.76bn (versus INR0.09bn YoY).
Outstanding receivables (more than 45 days) –
o INR191.64bn was outstanding as on Sep and INR167.20bn was outstanding as on Dec end. Tranch II of Atmanirbhar should aid INR80bn of flows to NTPC. Collections from July have been more than 100%. There are certain conditions that discoms need to comply with.
Regulated equity – INR647.86bn as on 31st Dec 2020.
Surcharge income – For 9mFY21 - 16.9bn (versus INR12.4bn YOY). For Q3 - INR5.65bn in Q3FY21 (versus INR4.17bn YoY).
Dividend from subsidiary - INR5.73bn
Buyback – All the activities pertaining to buyback have been completed.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Tata Power Company
Industry
Budget provision of multiple discoms helps the company expand further and improve the health of their distribution business.
Overdues from discoms have come down due to the INR1.2trillion payment released to discoms by the government. Operational
The company was awarded 3 additional licenses in Odisha, which are Southco and Westco and will be up and running from January 21 while they have also received an LOI for NESCO. With this, the consumer base increases from existing 2.7mn to 12mn.
Bangalore module manufacturing for 250MW almost complete and is expected to be open over the next few weeks.
On one off items, the company has written off INR290mn expenses in Russian coal mine and paid a tax penalty of INR310mn in Indonesian coal mine. Further, there was certain expenses of INR340mn disallowed in TPDL business.
Reduction in Mundra losses is on the back of reduced under recovery and a significant reduction in interest cost due to the restructuring activity undertaken. This has led Mundra to be cash-positive.
Integrated CGPL and coal mining business reported a profit of INR160mn due to reduced coal prices as well as better coal sourcing.
Sales in terms of units have now reached pre-covid-19 levels at 3,089 MUs.
Prayagraj saw improvement in availability to 92%.
The company is trying to focus on improving customer relations by opening customer care centers and reduce customer complaints with respect to payments.
The coal business clocked lower profits of INR22bn due to reduced realizations.
Installed 2,750 solar pumps in Q3, which led to highest-ever quarterly revenue in the business.
INR40-50bn capex pipeline on renewables and Mumbai transmission business capex would be higher and will be disclosed at a later date. Deleveraging
The company has taken strong efforts to deleverage which has improved the credit rating and led to interest cost coming down to 7.8% vs 8.6% in the previous year.
INR42bn worth of loans have been repaid as the company continues its journey to a targeted debt level of INR250bn.
Due to the low interest scenario, the company has raised money through an NCD providing 6% interest.
314 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Order book
Orders won for setting up of e-bus charging infrastructure in Ahmedabad and 64 e-bus chargers for BEST in Mumbai.
Increased order execution in large-scale solar business has led to higher revenue growth.
Solar EPC order book stands at INR87bn as on 31st December 2020 and the order book improved in January further to INR106bn.
Current order book will be executed over the next 12-18 months.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Real Estate
316 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Brigade Enterprises
Management call: Key highlights 1. Commentary on covid-19: Management’s commentary on the impact of the pandemic on its various business lines follows.
Real estate: The residential business has recovered strongly. Customers are looking for completed/near completed inventory and larger-sized homes. Demand is concentrated towards projects from organised developers.
Leasing business: Enquiries/site visits/RfP releases have now started picking up for office space leasing. Rent collection in the office segment was 99% in Q3FY21.
Retail business: The mall business has witnessed some recovery with consumption reaching ~70%. The rent relaxations given to retailers are only till end-FY21.
Hospitality: Hotels continue to be impacted because of the international travel restrictions and subdued domestic travel. That said, hotel segment business is continually improving with some hotels now clocking ~50% occupancy. The hospitality segment is already GOP positive now.
2. Financial performance: Revenue for the quarter came in at INR6.4bn (up 17% YoY, 107% QoQ) while EBITDA margin declined to 23% (down 520 bps YoY and 510 bps QoQ). The company reported a profit of INR239mn (down 52% YoY).
3. Project launches: The company launched two projects spanning 1.15msf in Q3FY21. In 9mFY21, it launched four projects spanning ~3.1msf.
It launched the Brigade Citadel project in Hyderabad in November 2020; of the 0.6msf space launched, 0.45msf has already been sold.
Launch pipeline stands at 3.4msf comprising 2.6msf residential projects and the balance being commercial projects. BEL’s share stands at 2.4msf comprising 1.9msf residential projects and balance being commercial.
4. Sales: Of the ~1.5msf space sold in Q3FY21, residential projects contributed 96% to sales; the balance coming from commercial (sale) projects.
According to management, the major reasons behind good pre-sales trajectory are: (a) low interest rates; (b) right product in the right market and at the right price; (c) a good sales and marketing strategy; (d) Industry consolidation; and (e) customers preferring tier-1 developers.
5. Leasing segment performance: Lease rentals came in at INR845mn during the quarter (INR833mn in Q2FY21; INR944mn in Q3FY20). BTG contributes rentals of ~INR65mn per month.
6. Rental assets: Total leasable area is ~4.8msf; out of this, ~3.5msf has been already leased. This is further sub-divided into:
Office assets: Total leasable area is ~3.5msf; out of this, ~2.5msf has been already leased.
Retail assets: Total leasable area is ~1.3msf; out of this, ~1.05msf has been already leased.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
7. Leasing: Marginal leasing of 0.01msf space in Brigade Opus during the quarter. A couple of tenants vacated space at the Orion Mall Avenue.
8. Details of key commercial projects are as follows:
Brigade Tech Garden (BTG): Around 1msf space has been already leased out. Management expects to completely lease the project by end-CY21.
WTC Chennai: BEL is yet to lease 0.33msf in the 2msf project; out of this, it has internal requirement of ~0.2msf; hence, the space left to be leased is actually only ~0.14msf. Rents are expected to commence from March 2020/Q1FY22.
The company has ‘in-principle’ closed one transaction each in the BTG and the WTC Chennai projects. Rents for the new deals are higher than the weighted average of deals closed to date.
9. Hospitality business: Losses at the PBT level in the hospitality segment narrowed to INR317mn (INR383mn during Q2FY21, INR436mn in Q1FY21).
Operational performance: All the hotels are operational. The segment reported a GOP of INR41mn during the quarter; GOP margin stood at 16% vis-à-vis (45%) last quarter.
Average occupancy rate for the segment was 27% in Q3FY21 (15% in Q2FY21, 11% in Q1FY21).
New project: Holiday Inn Express, Bengaluru East with 134 keys started operations and achieved 26% occupancy during the quarter.
BEL has availed ~INR1bn from the Emergency Credit Line Guarantee Scheme (ECLGS) facility from banks to fund the cash flow mismatch; consequently, support from the parent company has been reduced accordingly.
10. Collections: Collections for the quarter came in at INR6.8bn, up 27% QoQ, down 7% YoY.
11. Cash flows: Cash flow from operating activity grew to INR2.5bn, up 37% QoQ and 49% YoY. Capex spend declined to ~INR1.3bn (~INR3bn in Q2FY21); consequently, net cash flow (operating less investment cash flow) came in at ~INR1bn (negative INR1.3bn).
12. Debt: As a result of cash flows being positive, net debt (BEL’s share) declined to INR29.5bn (INR29.9bn at end-Q2FY21). The net debt to equity ratio stood at 1.27x (flat QoQ; 1.23x in Q1FY21).
The cost of borrowings for the company declined to 9% (9.23% in Q2FY21); the current cost of debt is at an all-time low, resulting in annualised savings of ~INR250mn.
The increase in leverage is primarily on account of ongoing capex in the leasing segment.
13. Revenue breakdown: Real estate business (residential and commercial sales) contributed 74% to 9mFY21 revenue, the hospitality segment 5% and the balance 21% came from the lease rental business.
318 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
The real estate segment constitutes the bulk of the company’s revenue; however, as far as margin is concerned, this vertical generally has the lowest profitability with the leasing business churning out the highest margin. However, in 9mFY21, the hospitality segment had an EBITDA loss of INR155mn.
The real estate segment generally has the highest contribution to profit before depreciation and tax (after interest), followed by the leasing and hospitality businesses. In 9mFY21, the hospitality segment recorded a PBDT loss of INR549mn.
14. Land bank: BEL’s land bank reflects the company’s focus on diversification, both from a segmental and geographical point of view. While the residential segment occupies a pride of place, the leasing segment has a fair representation in the company’s land bank.
As far as geographical presence is concerned, Bengaluru has the highest share followed by Chennai and Thiruvananthapuram.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
DLF
Management call highlights We summarise management’s thought process regarding various facets of business:
1. Liquidity: The company is well placed on the liquidity front. Its debt repayment (ex-DCCDL) over the next year is ~INR12.7bn while it has a cash balance of INR13.2bn.
2. Office portfolio: 98% rents were collected. Management believes while vacancies have risen for the past few quarters, it is a short-term phenomenon; they expect the leasing momentum to improve over the next couple of quarters as vaccination progresses and business travel starts. Enquiries are already up and so is leasing activity in January 2021.
The usual contractual rent escalation of 4–5% hasn’t happened in the current fiscal and the situation may remain the same over the next couple of quarters. As far as re-leasing is concerned, the company has re-leased 1.1msf in 9mFY21 with 44% MTM gains on rents. Incremental leasing improved during the quarter (1.2msf in 9mFY21 versus 1.5msf in FY20).
The company has engaged advisors for REIT for DCCDL and expects the structuring process to be completed over the next 12 months.
3. Retail portfolio: 99% rents were collected. Footfall at malls by end-Q3FY21 was 60% of pre-lockdown levels with consumption at ~70% levels (as spend per footfall is higher). Overall retail rentals should go back to INR6.5–7bn in FY22.
4. Housing business: Management indicated that demand has revived across price points (mid-income, luxury, super premium) and geographies. Low mortgage rates are a major driver of housing demand and hence the company is targeting short-cycle products (like independent floors) to tap this demand.
5. Higher revenues lead to company reporting a profit: With revenue recognition commencing on the Camellias project, top line rose to INR15.4bn during the quarter (up 15% YoY, down 4% QoQ). The company booked revenue of INR9.7bn on the Camellias project this quarter; it has yet to book ~INR41.6bn of revenues on the project.
6. EBITDA margin, at 32.3%, surged ~1,530bps YoY and 350bps QoQ. Finance charges declined 17% YoY. Adjusted PAT came in at INR4.5bn (up 146% YoY).
7. Cost control: DLF managed to reduce overheads by 47% YoY in 9mFY21. This was achieved through a significant cut in discretionary spends and tight control on cash flows. It has done a zero-based budgeting exercise for the first time.
8. Development business: In its development business, DLF issued possession letters for 462 units (788 units in Q2FY21).
9. Q3FY21 sales: During the quarter, DLF posted net sales of INR10.2bn (INR8.5bn in Q2FY21).
10. Major contributors to sales were:
Camellias contributed INR2.8bn to pre-sales during the quarter (11 units sold).
320 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Independent floors worth INR3.5bn and plots worth INR0.9bn in DLF City, Gurugram
National Devco witnessed sales of INR2.7bn, aided by a good response to DLF Samavana in Kasauli.
11. Pre-sales boosted by launches: During the quarter, the company launched independent floors spanning 0.31msf in DLF City in Gurugram. The launch, which had average ticket size of INR36-45mn, was a great success with the entire inventory (worth INR3.5bn) getting sold off during the quarter.
12. Unsold inventory: Overall unsold inventory declined to ~INR60bn (INR66bn in Q2FY21). Of this, ~INR41.5bn is in Phase V (almost entirely in Camellias) compared with ~INR44bn in Q2FY21, about INR1.4bn in Rest of Gurugram (INR1.5bn) and ~INR17.4bn (~INR20bn) in National Devco. The potential EBITDA from this unsold inventory is about INR34.9bn (INR36.8bn).
13. Projects in DLF: The company is planning to develop ~35msf of projects, which are expected to generate INR360–400bn revenue over the medium to long term. The status of these projects is discussed below.
Midtown project, Delhi (8msf): The company expects to launch the first phase (2msf) of this project in H1FY22.
Hines JV project (3msf-plus): Approvals and credit lines for the project are in place and construction has commenced.
Noida IT Park: The work has already started on Phase I of the 3.5msf project; the company has pre-leased ~0.3msf space to an MNC.
Mid-income housing projects in Gurugram and Chandigarh: These projects spanning 10msf are currently under planning/approval stage. These will include plotted colonies, low/mid-rise houses and independent floors in New Gurugram and Chandigarh. These projects are planned to be launched in phases, commencing H1FY22.
Commercial projects: These projects (in Delhi/new Gurugram/DLF Phase V) are currently under planning/approval stage. These projects are planned to be launched in phases, commencing H2FY21.
Premium housing project: The 8.5msf projects are currently under planning/approval stage; the plan is to launch them in phases over the next 4–6 quarters, commencing Q4FY21. The 3msf projects, slated to be launched in Q4FY21, are mainly independent floors – 1.5msf each in DLF City and New Gurugram.
14. Cash flow: The company generated net cash flow of INR1.2bn during the quarter (INR100mn in Q2FY21). This was due to higher collections and lower overheads, which compensated for higher capex/land charges.
15. Camellias: In Camellias, 1.4msf space is still left to be sold, out of total 3.6msf area. In terms of units, 11 units were sold in Q3FY21 while 164 units are pending. The club house has been substantially completed.
16. DCCDL: DCCDL’s operational portfolio is 33.3msf with occupancy at 91% (93% in Q2FY21). It has 3.9msf assets under construction, of which 1.5msf has been already pre-leased (~1msf pre-commitments received in Q3FY21).
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
17. DCCDL performance: DCCDL posted sales of INR11.2bn (INR10.4bn in Q2FY21); PAT stood at INR2.5bn (INR1.7bn). Gross leasing stood at ~1.7msf (~0.6msf) while net leasing stood at 0.4msf (net cancellations of 0.7msf in Q2FY21).
18. Rental income: Rental income in DCCDL stood at INR8.2bn (INR7.2bn in Q2FY21) while that in DLF (ex-DCCDL) stood at INR480mn (INR400mn).
Office rentals rose to INR7.2bn (INR6.7bn) while retail rentals improved to INR950mn (~INR500mn in Q2FY21).
19. Vacancies in DCCDL inched up by ~200bps QoQ in Q3FY21. Management indicated that some occupiers in the co-working and hospitality space have exited/reduced their space requirements.
20. One Horizon Centre (OHC): During the quarter, DCCDL entered into definitive agreements with Hines to increase its ownership in OHC to 100%, for a purchase consideration of ~INR7.8bn (subject to closing adjustments). DCCDL currently owns ~48% stake in the project. The transaction is expected to be closed by February 2021.
The project was originally owned by DLF and Hines in the ratio 48:52. DLF had transferred its stake to DCCDL for INR8.5bn in FY20 in lieu of loans taken from DCCDL. OHC, which has a gross leasable area of 0.8msf with ~95% occupancy, has an annualized rental income of INR1.5bn.
21. Status of various projects in DCCDL
Cyber Park, Gurugram (2.5msf): The project commenced operations in August 2020. It is expected to contribute ~INR3.7bn of annual rentals. Around 90% of the project is leased. Management expects to lease the balance space by end-FY21 and believes monthly rentals should rise to INR300–310mn by end-Q2FY22.
Chennai IT SEZ: Rentals for Block 11 have commenced w.e.f. August 2020. The ~0.3msf Block 12 is at an advanced stage of construction; the company has already leased 0.2msf space in this block.
DLF Downtown, Gurugram: The work has already started on Phase I near Cyber City. The company has pre-leased 0.5msf space (0.3msf in Q1FY21) in the project.
DLF Downtown, Chennai: The work is underway on Phase I (2msf). The company has pre-leased 0.77msf space to Standard Chartered Bank. News reports indicate that the lease is for a period of ten years with lease rentals of over INR80/sft.
22. Debt: Net debt for the DLF Group (ex-DCCDL) declined to INR51bn (INR52.2bn at end-Q2FY21). Net debt in DCCDL rose to ~INR181bn (~INR183bn).
23. Interest rate reduction: DLF has achieved a 95bps reduction in interest cost since Q4FY20 to 8.9%. It targets to reduce borrowing cost by additional 30- 40bps by the end of the current fiscal. The recent funding cost is at 8–8.25%. The company believes that annual interest costs can go down by ~INR0.8bn.
322 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Godrej Properties
Key highlights 1. Thoughts on the realty cycle: Management believes that the realty cycle seems to be turning with demand picking up; this along with commodity price hikes mean that increase in realisations over the medium term can not be ruled out.
Bulk of the demand is concentrated towards projects from organised developers; this is all the more visible for projects under construction where consumers seem to be trusting only the tier one developers.
2. Investment in project portfolio: Management believes that at present, the realty cycle is at an interesting juncture with (a) land available at attractive valuations (b) industry undergoing a consolidation and (c) housing demand improving, largely for reputed developers. Consequently, it wants to build up its project portfolio faster for the next leg of growth.
3. New sales: New sales during Q3FY21 stood at ~INR14.9bn (up 25% YoY, 38% QoQ); around 44% of this came from sales from existing inventory while the balance came from the three projects/phases launched during the quarter. The commercial segment contributed just INR280mn to sales with the balance coming from residential projects.
In volume terms, bookings during Q3FY21 came in at ~2.4msf, up 51% YoY, 39% QoQ.
9mFY21 sales at ~INR41bn were up 16% YoY; in terms of volumes, sales during 9mFY21 at 6.6msf were up 28% YoY.
4. Diversified operations: By value, MMR and Pune each contributed ~30-31% to sales during the quarter; NCR and Bengaluru contributed 26% and 10% to sales, respectively.
5. Project launches: The company launched three projects spanning ~1.9msf during the quarter – one each in Pune, NCR and Panvel (MMR); their contribution to sales value and volumes is summarized below:
Godrej Green Cove, Pune: Total bookings of 0.52msf worth about INR3.1bn.
Godrej Retreat, NCR: Total bookings of 0.49msf worth about INR2.8bn.
The Highland, Panvel: Total bookings of 0.37msf worth about INR2.4bn.
YTD, four projects spread across ~3msf have been launched.
6. Contribution of project launches to sales: The three projects launched during the quarter contributed ~1.4msf/INR8.4bn to pre-sales during Q3FY21.
7. Launch pipeline: The company’s launch pipeline for FY21 initially included 23 projects/phases spanning ~15.2msf; of these, four projects spanning ~2.9msf have been launched while five projects spread across ~3.6msf have been delayed, largely due to delays in receiving statutory approvals.
Consequently, GPL is now planning to launch 14 projects with an area of ~8.5msf in the near term. We believe some of these projects may get deferred to FY22 due to approval issues or the company taking steps to avoid bunching up of launches. Nevertheless, a substantial pick-up in launches in Q4FY21 (compared to 9mFY21) is very likely; this will boost sales, in our view.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
8. Project addition: The company added two new residential projects in Bengaluru spanning 4.1msf during the quarter. Sarjapur: The project in Sarjapur, Bengaluru, is an outright purchase of land and will be a 100% owned project. Spread across ~15 acres, this project will offer around 1.6msf of saleable area. Whitefield: The project in Whitefield, Bengaluru, is an outright purchase of land and will be a 100% owned project with 5.4% area share to landlord. Spread across ~18 acres, this project will offer around 2.8msf of saleable area. During FY20, the company had added 10 residential projects (seven in MMR, two in NCR and one in Bengaluru) with an aggregate saleable area of ~19msf. The transformative effect of RERA imposition and the changing dynamics of the industry (consolidation) are clearly visible looking at the pace of GPL’s portfolio expansion—project addition has moved in to a different orbit altogether when one looks at the past few years. Another thing that the company has managed well over the past decade is avoiding concentration as far as project addition is concerned. GPL has been able to ensure that various markets it is present in have a fair share in the overall development pipeline. Consequently, the five major regions (Ahmadabad, Mumbai, Pune, Bengaluru and NCR) where the company’s development pipeline is account for a 13—27% share in the overall project portfolio. This is likely to ensure that GPL grows at a steady pace even if it has to face a slowdown in any individual market. Consequently, it is insulated from any geographical concentration risk; this sets it apart from most peers who derive bulk of their sales from individual home markets. 9. Project delivery: The company delivered ~1.3msf across two cities in Q3FY21 (~2.9msf across two cities in Q2FY21). The workforce strength stood at 124% of pre-covid strength as at end-Q3FY21. 10. Operating cash flows improve: Collections, which had been impacted by the pandemic, continued to recover during the quarter; they rose to INR12.6bn (INR6.8bn in Q2FY21, INR4.2bn in Q1FY21). With construction pace gathering traction, construction spends rose QoQ to INR8.1bn (INR6.7bn in Q2FY21). Consequently, the company posted positive operating cash flows of INR4.5bn during the quarter (INR140mn in Q2FY21). Capex outflow during the quarter moderated to INR5.2bn (~INR8.1bn); consequently, net cash outflow stood at INR3.4bn (INR9.8bn). 11. Leverage: Net debt at the end of Q3FY21 stood at INR30.8bn (INR27.3bn at Q2FY21 end). The company’s net debt to equity rose QoQ to 0.64x (0.57x at Q2FY21-end). 12. Borrowing costs: GPL’s average borrowing cost declined to 7.25% (7.55% at end-Q2FY21). 13. Financial performance: Q3FY21 revenue came in at INR1.7bn (down 55% YoY, up 90% QoQ) as construction activity gradually ramped up during the quarter. EBITDA loss stood at INR543mn (versus profit of INR423mn in Q3FY20). Other income grew 5% YoY and interest costs reduced 22% YoY, resulting in PAT of INR146mn (down 68% YoY, up 105% QoQ).
324 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Oberoi Realty
Management call highlights 1. Top line rises sequentially: Q3FY21 revenue at INR8.3bn were up 57% YoY and 162% QoQ. Q3FY21 revenue by project (not exhaustive):
Sky City: INR2.3bn (~INR755mn in Q2FY21 and ~INR2.1bn in Q3FY20).
Mulund projects: INR1.9bn (INR292mn in Q2FY21 and INR638mn in Q3FY20).
Goregaon projects: INR2.7bn (~INR1.1bn in Q2FY21 and ~INR1bn in Q3FY20).
2. New sales improve: Total new sales in Q3FY21 were 234 units (73 units in Q3FY20 and 45 units in Q2FY21), aggregating ~510k sft (up 3.2x YoY, 3.9x QoQ) and worth INR9.7bn (up 3.2x YoY, 3x QoQ). This was the highest ever pre-sales in a quarter which did not witness any launches.
The improvement on a YoY basis was witnessed across all projects - sales rose ~2.8x in Goregaon projects and in Maxima, ~2.2x in Worli, ~9x in Mulund projects and around 3x in Borivali. The Worli project witnessed sale of three units worth ~INR1.2bn during the quarter (one unit sold in Q3FY20 worth INR543mn).
9mFY21 sales bookings for the company at INR13.2bn are up 29% YoY despite Q1FY21 being a virtual wash-out.
3. Realisations: Realisations were up QoQ in Goregaon and Borivali projects but down in Worli and Mulund projects. Management expects sales realisations in the industry to pick-up considering likely supply constraints (due to funding crunch with many developers) and increase in commodity prices.
4. New launches: The company plans to launch Goregaon Phase III and the Thane projects in the current quarter. Out of five towers in Goregaon, it will launch two towers spanning ~1.8msf; similarly, out of the overall ~15msf space in Thane, it will launch 1-1.5msf now. Apart from these, it is yet to launch new phases spanning ~2.5msf in Borivali too. These launches will not compete with existing inventory and hence management believes they will boost sales significantly.
5. Hopes of faster inventory liquidation: The company has substantial unsold inventory in some of its projects such as Worli and Mulund; to this end, the recent uptick in sales has come as a shot in the arm and leads to hopes that OBER will be able to clear this inventory faster now.
Management believes that with Esquire ready for delivery and Worli, Mulund and Borivali projects at an advanced stage of completion, sales momentum should remain robust going ahead.
6. Collections: Collection during Q3FY21 stood at ~INR7.4bn, up 26% YoY and 307% QoQ.
7. Rental assets witness sequential recovery post covid-19 hit: Occupancy continued to decline in Oberoi Mall in Q3FY21 (at 93.4% versus 97% in Q3FY20 and 94% in Q2FY21); despite this, operating revenue rose to ~INR500mn (INR410mn in Q3FY20 and INR350mn in Q2FY21).
The company had not recognises revenue for Oberoi Mall in Q1FY21 due to ongoing uncertainty regarding mall operations. OBER has now started recognising revenue for Q1/Q2/Q3 FY21 basis the quarter in which
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
arrangements are finalised with retailers and hence the figures are not comparable across periods.
Management indicated that on an average, consumption in the mall has revived to pre-covid levels.
Occupancy in Commerz I came in at 41.6% (50.6% in Q3FY20 and 33.6% in Q2FY21). Occupancy at Commerz II was 97% (100% in Q3FY21 and 97% in Q2FY21). Management expects to complete the under construction annuity assets as per the following timelines:
s – September 2023
8. Westin Goregaon: Occupancy during Q3FY21 declined to 37% (79% in Q3FY20 and 40% in Q2FY21); consequently, RevPAR declined ~76% YoY to INR1,957 though it was up 21% sequentially.
9. Stake sale in rental assets: Management is reconsidering its idea of selling partial stake in separate platforms for office and retail assets. Any step will be undertaken keeping in mind valuation benchmarks and cost of capital.
10. Stake purchase in Ritz Carlton: During the quarter, OBER bought out its partner Sahana Group’s entire 50% stake in the Ritz Carlton hotel in Worli for INR5.2bn. OBER already had a 50% stake in the project earlier and post the stake purchase, the asset is now 100% owned by the company.
11. Cash flows: The company’s operating cash flow surged QoQ. However, due to investing cash outflow rising ~5x QoQ (due to payment for Ritz Carlton stake buy and capex on annuity assets in Borivali and Goregaon), net cash flow was negative.
12. Leverage: The company’s gross debt to equity was flat QoQ at 0.19x; however, the net debt to equity inched up to 0.17x (0.15x at end-Q2FY21).
326 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Q3FY21 conference call highlights
Sobha
Management call: Key highlights
1. Segmental performance: 2. Real estate: Q3Y21 revenue came in at INR4.6bn (down 20% YoY, up 39% QoQ). 3. Manufacturing/contracting business: The division’s Q3FY21 revenue stood at INR2.2bn (down 28% YoY, up 18% QoQ). Project launches: Due to muted sentiment and some approval-related hurdles, Sobha had not launched any project in H1FY21. During Q3FY21, it launched ‘Sobha City – Athena’ project in Bengaluru, an extension of the existing Sobha City project, with residential area of ~0.12msf and commercial space of ~0.03msf. Launch outlook: Sobha is targeting 14 residential project launches (aggregating 14.4msf) in Bengaluru, Chennai, Delhi, GIFT City, Gurugram, Hosur, Hyderabad, Thrissur and Trivandrum over the next three–four quarters. In the commercial segment, it plans to launch two projects in Bengaluru and one project in Thrissur with a leasable area of 0.32msf. In addition, it has about 7msf of unsold area in new phases (to be launched) of ongoing projects. Management indicated that it is looking to launch ~10msf of projects by Q2FY22 (in phases), split almost equally over Q4FY21, Q1FY22 and Q2FY22. These launches will span Bengaluru, Chennai, Trichy, Hosur, Gift City and Hyderabad. Entering new markets: Bengaluru will continue to dominate Sobha’s sales; at the same time, the company plans to enter markets such as Delhi, Hyderabad and Trivandrum to diversify its geographical presence. Sales: During Q3FY21, the company reported new sales of 1.13msf (up 6% YoY, 27% QoQ). Sobha’s new sales in value terms (its share) stood at INR6.8bn (up 12% YoY, 28% QoQ). Diversification: Share of Bengaluru came down to 68% of overall sales, from 70– 75% witnessed over the past few years. Cochin contributed 12% to sales, followed by 11% from Gurugram. Mixed trend as far as ticket sizes are concerned: Over the past two quarters, the share of houses with ticket sizes Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Inventory: Unsold completed inventory declined QoQ to 0.33msf (0.4msf in Q2FY21) worth INR1.3bn (~INR2.0bn)—among the lowest in the real estate industry. Unsold area: Overall unsold area stands at 14.7msf (14.4msf at end-Q2FY21). Net cash flows from ongoing projects rose to INR47.1bn during the quarter. The balance receivables from sold ongoing project inventory and completed projects stands at ~INR31.3bn, which covers 79% of the balance project cost to be spent on completing the projects. Commercial space outlook: The company has currently ~0.4msf of completed rental assets (its share of leasable area); it has another ~0.3msf commercial projects in the pipeline. Collections: Collections in Q3FY21 stood at ~INR8.7bn (~INR6.9bn in Q2FY21), down 4% YoY but up 26% QoQ. For 9mFY21, collections were down 17% YoY. Cash flows: At the net OCF level (after meeting interest and tax commitments), net cash inflow stood at INR947mn during the quarter (INR601mn in Q2FY21). Capital outflow (on account of land and capex) at INR170mn is down significantly YoY. The company generated net cash flow of INR752mn during the quarter compared with net cash outflow of INR197mn during Q2FY21. Land payments: Going ahead, the pace of land payment will remain contained as the company is focussing on monetising its existing land bank; for projects to be done through JDA, most payments have been made and, hence, internal accruals should be sufficient to take care of most of the land-related capex. Order book: Contractual order book stood at INR21.3bn at end-Q3FY21 (INR22.6bn in Q2FY21). Net debt declines sequentially: Net gearing (as per Ind AS 115) decreased to 1.23x (1.28x at Q2FY21-end). Management expects debt levels to be contained going ahead. Borrowing cost: The company’s borrowing costs declined to 9.17% (9.32% in Q2FY21). Management believes this can be further reduced to ~9%. Buyer profile (12 months rolling): ~48% demand came from professionals belonging to IT/ITES industry, followed by 21% from other professionals. Demand from businessmen/entrepreneurs constituted only 6% of total sales. NRIs have contributed ~12% of sales. Other highlights Basis past six weeks of Q4FY21, it looks like new sales in Q4FY21 will be better than that in Q3FY21. EBITDA margins going ahead should be 20%-plus despite commodity prices going up. Within two years, there will be good visibility on Hoskote land development. Management indicated that discipline in terms of land capex and corporate overheads will be maintained. 328 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Sunteck Realty Management call: Key highlights 1. Q3FY21 performance: Q3FY21 revenue at INR2bn is up 20% YoY and 43% QoQ. EBITDA margin at 21.9% is down ~670 bps YoY but up ~15bps QoQ. Net profit at INR221mn during the quarter slid 10% YoY. 2. New sales performance: Aided by healthy offtake in the ODC, Naigaon and Gilbird Hill projects, SRL posted Q3FY21 new sales of INR3.5bn (up 7% YoY, 75% QoQ) with a total area of ~331k sft (up 177% YoY, 181% QoQ). 3. Q3FY21 sales breakdown by project BKC projects – Nil sales during the quarter. Sunteck City, Goregaon – ~INR1.9bn (~135k sft); of this, ~INR1.2bn (around 87k sft) came from ODC 4 while the balance came from ODC 1 and 2. Signia High, Borivali – INR230mn (~19k sft). Naigaon – INR620mn (~120k sft) Gilbird Hill – INR500mn (~36k sft) 9mFY21 new sales came in at INR6.5bn (up 6% YoY) and at 0.65msf (up 52% YoY). Apart from the Naigaon project, BKC and ODC projects have historically contributed a lion’s share to the company’s sales. 4. Collections: Collections in Q3FY21 totalled INR2.5bn (up 52% YoY, 79% QoQ). 9mFY21 collections at INR4.6bn plunged 15% YoY. 5. ODC project: ODC 1 has already obtained OC while ODC 2 is at an advanced stage of completion. 6. BKC residential projects: Management indicated that enquiries have picked up, and believes the project should witness good sales traction going ahead. Unsold inventory stands at 39 units worth ~INR18bn. 7. Commercial projects in BKC: Management expects work on Sunteck Icon and Sunteck BKC 51 projects to be completed over the next 12–18 months. 8. Vasind project: Management believes the Vasind project (refer to Sunteck Realty - Vasind project addition boosts portfolio) could get launched in H1FY22. 9. Business development: Management indicated even in the post-covid-19 world, it is evaluating various business development opportunities in line with its asset-light strategy. 10. Cash flow: The company’s operating cash came in at INR535mn in Q3FY21. It repaid loans worth ~INR300mn during the quarter. 11. Debt: SRL ended Q3FY21 with gross debt of ~INR7.6bn (~INR8.3bn at end-FY20). Net debt to equity stands at 0.27x (0.29x). Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Retail 330 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Aditya Birla Fashion and Retail Industry trends Fresher inventory has helped drive better gross margins across the sector. Apparel distribution is primarily concentrated in 70–80 cities. Company Changes seen due to covid-19. i) There has been a change in the entire inventory/merchandizing process. ii) Digital acceleration has been much faster. iii) Frequency or process to go to market has become faster. iv) A big portion of fixed cost has been ‘variablized’. Q3FY21 Improved product offerings, and product and cost management have driven better margins. Total cost saving of INR1.6bn in Q3FY21. There was a reduction of inventory of INR3.2bn. Smaller towns are at 80–85% recovery while big towns are doing 70–75%. Store expansion Launched more than 300 stores in line with the strategic initiative of expanding network into smaller towns Added 230 stores, with plans to add 100 more. New Allen Solly stores are on an average 1,000 Sq.ft in size. Madura/Lifestyle LTL contraction of 17% in Lifestyle brands. Secondary sales in MBO and LFS of 70–80%. However, primarily sales were controlled to limit inventory. E-commerce sales continue to rise significantly across channels. The company has opened more than 300 stores YTD’21. PE Red crossed the 300 store milestone this quarter. Wedding, casual and athleisure have helped drive a strong performance in Lifestyle brands. Innerwear/Other segments Innerwear business reached 20,000-plus outlets. Innerwear has seen faster growth due to the nature of distribution and it being a necessity (rather than being discretionary in nature). Super Premium global brands witnessed 20% YoY growth. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Pantaloons Recorded highest-ever EBITDA margin, even adjusting for Ind AS. Excellent inventory management and lower discounting helped drive record- high margin. Mall stores are taking longer to recover than high street. Pantaloons’ overall margin is driven by three factors: operating leverage via better SSSG, gross margin and cost control. Higher GM, lower markdowns and better inventory management helped drive better performance, specifically in Q3FY21. Private label share was lower due to lower winterwear brand sales. As this is a very seasonal category, the company did not want to take the risk of stocking up. Big shifts in Pantaloons have been a change in merchandizing/Freshness along with strengthening of the brand. Outlook March-end debt will be INR2.5bn, excluding the Sabyasachi investment. 332 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Jubilant FoodWorks Q3FY21 Revenue from Operations at INR10,572 million, an increase of 31.2% sequentially; Domino’s delivered a recovery of 100.3% vs. last year. Delivery and Takeaway channels continued their growth trends: Delivery +18.5% and Takeaway +64.3% year-on-year. Dine-in remained slow through sequentially improved. Less than 60% recovery. The company’s liquidity strengthened further during the quarter. Total cash & cash equivalents, bank deposits and investments increased to INR9,517 million as on 31st December 2020, up from INR8,278 million as on 30th September 2020. Opened 57 new stores, including 50 new Domino’s stores - highest-ever in a quarter. On track to open 110+ new Domino’s stores in FY21. Believe potential to open over 3,000 stores in India. Entered the Biryani segment with launch of new brand - Ekdum! Introduced ‘The Unthinkable Pizza’ - India’s first plant protein-based product which is 100% vegetarian with the sensory properties of chicken o India’s first plant protein-based product o 100% vegetarian with the sensory properties of chicken o Will provide both vegetarians and non-vegetarians interesting and innovative options in the menu Introduced ‘Domino’s Drive-N-Pick’ - allowing customers to pick up their orders without stepping out of their vehicle. Highest ever App downloads at 7.4mn. Average OLO contribution to delivery sales at 98%. INR920mn investment in BBQ Nation for ~10.7% stake. 10 stores till date of Hong’s Kitchen and Ekdum! Launched Hindi version of the Domino’s app. Will be adding more languages for more personalisation. Will be increasing store expansion pace going ahead. Dine in to recover gradually now, once relaxations on seating capacity are announced. Focus now on scaling up the new brands. GM softened vis-à-vis last quarter due to a marginal increase in vegetable and dairy prices in Q3. Employee costs increased sequentially due to o Volume of orders increasing in Q3 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights o Higher incentive for employees o Increase in headcount in strategic areas such as technology Plan to scale up the Hong’s Kitchen brand in the coming year. Believe good opportunity in the Chinese QSR space. Could see significant store expansion in the coming years. Supply chain strengths and learnings from pilots/experimentation should allow for faster scale up of the new brands. Have taken out the product level complexities. Believe will be able to standardize the product quickly. Scale-up of Ekdum! can be faster than Hong’s as standardisation is much easier. ChefBoss received good response – will expand range and scale up the brand. Contribution of own platforms to delivery has increased post pandemic GM for Ekdum/HK should be lower than Domino’s. But at EBITDA level stores should delivery similar margins. Strategy remains to grow the Domino’s brand and enter more cities as well increase penetration in the existing cities, which have potential No plans to charge for takeaway service as of now. Ticket sizes have increased post-covid as family consumption happened. Delivery charge also aided in the ticket size increase. The company’s present assessment, there is a potential to open more than 3,000 stores. There are more than 180 cities, wherein the company has only one store. Bird Flu: There was no drop in no. of orders. However, there was a mix in shift from non-veg to veg. Majority of Domino’s orders are vegetarians based. Ekdum! Ekdum! offers a large variety of Biryanis curated from various parts of India. All stores have open kitchens and maintain the highest standards of hygiene. Available in unique, tamper-proof packs, which are eco-friendly and microwave safe. Launched an easy–to-use App and website to drive convenience and ease of ordering. Food made in open kitchens Delivered in microwavable packaging. Positioned for both delivery and dine-in. Dine in facility will get added in due course. International International business has recovered better than expected. The company believes it has the right model in place. Both countries delivered a positive EBITDA. 334 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights See potential for more than 150 stores each in Bangladesh and Sri Lanka. Sri Lanka – 23 stores o Opened one new store. o Overall system sales recovery y-o-y in Q3: 82.5% o Delivery sales recovery: 128.0% o Takeaway sales recovery: 82.1% o Dine-in sales recovery: 31.5% o Launched 2 new pizzas – Sri Lankan Chicken Curry and Spicy Veg Bangladesh – 4 stores o Overall system sales recovery y-o-y in Q3: 94.9% o Delivery sales recovery: 241.6% o Takeaway sales recovery: 105.9% o Dine-in sales recovery: 58.2% Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Shoppers Stop Q3FY21 Sales recovery: 77% of sales in non-metros and 61% in metro cities. Average ticket size increased by 4% YoY. The company has a net cash surplus of IN0.46bn. Gross margins o Provided INR160mn in inventory provisioning YTD’21. Q4FY21 will also see INR30–40mn provisioning. Q1: INR55mn, Q3: INR30–33mn. o Gross margin was impacted due to higher discounting on private brands. o Also, some stock on AW’19 and SS’20 are being sold at big discounts. o Omni channel is not too big to impact margins. Mall traffic is still muted due to limited multiplex and food court openings. The company has changed the life of the asset (INR100mn/quarter of impact). In addition, depreciation of new stores (INR20–30mn). Inventory stands at INR2.9bn, out of which one–third is private labels. Consumer & Industry trends From a mission-based visit, customers are now spending a lot more time. Seeing recovery in men’s formal wear too. Normally, the spike associated in footfalls with EOSS was not as high in December. Once that spike has gone away, the comparative share improved again. Cost Target The company has renegotiated every cost. Target set was INR4.5Bn, YTD – INR3.9bn, Q3FY21: INR0.75bn. Lease savings will be 40% and non-lease will be 60%. Savings could have been higher, but the company had to invest in omni channel. Next year, INR2bn of these savings would be sustained. Stores Looking at adding 10–12 stores in FY22. Addition of 0.25mn Sq.ft. Store size to be between 20-30K with average store capex of INR2,500/Sq.ft. In terms of store closures, the company expects to have 5–7 closures. New store additions will start from Q1FY22. Most of these stores are in malls, wherein work had ceased and has now resumed. On recovery in malls: o 11 stores are standalone stores while the remaining are in malls. 336 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights o 83% of sales came from First Citizen, and the company wants to achieve profitability on these sales itself. Incremental sales, once multiplexes open, will drive further profitability. o Other big footfall drivers in malls are food courts. Food courts have opened faster than multiplexes. Refurbishment cycle is about five years for a store. Against an average of 30–35K, store sizes are now 25–30K. All new stores opening are around 25K. Targeting same sales per store despite smaller store sizes. Also, higher private label share will drive better store margins. Strategic Pillars While Omni will be a front-end-driven initiative, private labels will be a back-end- driven initiative. First Citizen contributed 83% to sales (81% last year). The company has seen new enrolments with a 6% increase in ATP. Personal Shoppers contributed 16% of revenue with an average ticket size of 2.7x company average. The company has developed an exclusive in-house app for personal shoppers. Beauty is at 16% contribution. The company has launched its private brand Arcilia. Two stores opened during covid-19 have reached KPI. Launched a number of new brands in fragrances etc. Digital and e-commerce initiative Tech-related teething issues in July and August due to implementation of SAP have been addressed and are now running smoothly. Implementation of S4 Hana has also happened; it’s a first in the retail industry. Completed the stabilization process Project Trishul in September. E-commerce share of sales increased to 6%, from ~1.5% last year. Started fulfilling Mac.com. Will be adding other products too. Historically, online business has been loss-making, including 1.5%. The incremental business has been breakeven- and unit economics-positive, gross margins are 5% lower due to the supply chain costs. Of the online business: 80% came from Shoppersstop.com and 20% from Amazon and Mac.com Of the four strategic pillars, Omni is top priority and has become most important post-covid-19, Target is to take it to 15-25% over the next two–three years. Amazon tie-up Delivery turn around days has reduced to less than four days. SKU count live on amazon is 61k. The company is fulfilling 99% of orders to Amazon acceptable norms. First focus was to get some key stores listed on Amazon. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Key focus areas this quarter were: o Increase in SKUs listed on Amazon (SKU went from 15K to 61K). o Second focus was to improve delivery performance; Amazon has a strict of 99% delivery guideline (i.e. in 24 hours), and the company took four–six weeks for that. o Third phase is to add the balance stores. According to the company, it’s not necessary to connect all stores. Amazon is 20% of total online. Beauty Beauty has been 2.5–3K sq.ft. Gross margin/sq.ft is 2x other stores. Beauty brand margins are higher than apparel. Private labels In private label, the three focus areas will: o be led by product with clear segmentation and sharp definition for each of the brands o have monthly launches and freshness o within the store, have very aspirational visual merchandising. Offering great value with a big proportion being the under the price point of INR999. Private label mix is 60:40 between apparel and non-apparel. Biggest opportunity in private labels will be in kids. Men’s causal has done much better than expected, even ethnic wear has done well. Lounge wear and athleisure collection were missing, which has been bridged after Mr. Venu Nair joined. Outlook Covid-19 impact will continue for the coming period. The company expects to reach FY19 revenue run rate by Q2 or Q3 of FY22. o The company expects that by Q2FY22/Q3FY22 footfalls will be closer to FY19 level, but may not come back fully to FY19 levels. Transaction sizes though will be higher and conversions will improve. Head office cost is between 3–4% of revenues. 338 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Titan Company Q3FY21 Didn’t make sense to invest in Favre Leuba further. The pandemic is one of the reasons. Closed a few unprofitable fast track stores due to covid-19. Wedding demand to continue to remain strong – double-digit in Q4. Expect similar trend in Q1FY22 as well. Titan dependent upon more affluent and upper middle class demography; hence, despite economic growth slowdown, revenues are protected. Aspirational values of customers also shifting demand towards organised players. Making charges per gram have gone up. Passed through to customers. Remain very bullish on FY22. Will share guidance during the next call. Gold on loan inventory – 56% of the inventory value. Should be broadly in that range going ahead. Confident that the eyewear business will deliver double-digit EBIT margin. FY22 to start seeing the improvement. Believe the segment will start generating good returns from next year. Witnessed good consumer demand in the festive season and saw strong growth of 16% in Jewelry division. Other two divisions have also moved closer to full recovery. The company has recognized INR60mn in ‘Other income’ on account of rent waivers from negotiations. Other expenses include INR510mn of ineffective hedge loss due to mismatches in hedge designations and actual gold quantity sold. However, the impact on the bottom line due to this is negligible as this loss was compensated by lower gold rates on inventory sold and therefore the impact on EBIT margin was negligible. The studded mix saw a sequential improvement in Q3’21 to 26%, although still lower than 29% in Q3’20. EBIT margin was impacted by the lower studded mix and higher coin sales, which was partially recouped by the reduction in fixed expenses. In line with the company's strategy of focusing on the primary business and proprietary brands, and as mutually agreed with Montblanc Services B.V. the company exercised the full put option on 8th December 2020 as per the joint venture agreement and, therefore, would be divesting its stake in the Montblanc India Retail Private Limited. The requisite formalities will be completed within 60 days from the date of the exercise of full put option as per the terms of the joint venture agreement. Titan Commodity Trading Limited has now received approval of admission of Membership as a Trading Member (Stock Broker) on Multi Commodity Exchange of India Ltd. (MCX) along with SEBI approval for the same. The company is setting up its processes and is expected to commence its activities in the very near future. Should start trading by the end of year. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Benefit to business as the company will not incur brokerage charges for gold purchasing etc. Jewelry The division has been witnessing improving sales trajectory and recorded revenue of INR6,2.49bn (excluding bullion sales of INR3.40bn), growth of 16% YoY. This was also aided by another quarter of higher contribution from coin sales, although lower than 14% contribution in Q2’21. Coins contributed to 8% of sales in Q3’21 compared with 5% in Q3’20. The quarter also witnessed a well-rounded recovery with improvement in walk- ins and pick up of sale in metros, sub 1-lakh category and studded segment. The studded mix saw sequential improvement in Q3’21 to 26%, although still lower compared to 29% in Q3’20. EBIT margin was impacted by the lower studded mix and higher coin sales, which was partially recouped by reduction in fixed expenses. The division has recognized a loss of INR510mn crores during the quarter (INR7.40bn for the nine months period) on account of ineffective hedging in ‘other expenses’. However, this was compensated by lower gold rates on inventory sold and therefore impact on EBIT margin was negligible. In the Union budget, the custom duty on gold imports (including surcharge and cess) has been reduced from 12.5% to 10.75% Retail growth stood at 13% in Q3. In January, this stood at 28%. Studded share improving – 39% in Jan-21. In Q3, the wedding segment grew 10% YoY. Wedding contribution now at similar levels to last year: 25%. Seeing good recovery in the GHS scheme. Q4 looks positive. Ticket prices likely to moderate. E-commerce and Omni-channel grew 3.5x compare to last year. Should be 2–3%. Digital (including remote shopping and endless aisle) contributes 7–8% of sales. Worked towards lower cost production, store procurement expenses. Now looking at product reengineering to bring it at lower price point and weight. Watches & Wearables Strong cost focus led to EBIT margin of 10.3% and EBIT of INR 570mn, despite negative operating leverage. The division had a recovery rate of 88% in Q3, compared to the revenue of same quarter in last year and recorded a revenue of INR 5.50bn in the quarter. The E-commerce channel is leading the recovery with very strong absolute growth of over 30%. The recovery rate for all the retail channels had been steadily increasing month-on-month primarily due to higher walk-ins and improved ticket size. Expecting full recovery in Q4. 340 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Eyewear The division had recovery of 93% in Q3, compared with the revenue of the same quarter in last year and recorded revenue of INR1.24bn. Better product mix, lower discounts than last year and cost control led to EBIT improvement to INR220mn. EBIT margin of 18.1%. Consciously driving down the discounts, so that is there to stay. Able to contain the own brand material costs to 21%; compared with 24–25% last year. GM level payouts will increase going ahead, to return to normalcy (over 40%) as other brands’ sales pick up. CaratLane (72.3% owned Subsidiary) CaratLane delivered a growth of 33% YoY for the quarter and there has been almost full revenue recovery for the year to date. This growth was driven by a strong Diwali plan and pick-up in consumer sentiment during the season. While online demand had remained strong from Q2, retail stores also saw a huge pickup from mid-October once the festive season kicked in. Next-day delivery was also initiated, enabling faster delivery to customers in metro cities. The strong revenue growth in the quarter enabled the company to report EBIT of INR210mn for the quarter and INR80mn for year to date. Both online and offline channels contributing to growth. Focus will remain on store expansion Other business — Fragrances, Indian dress wear and accessories Other businesses had a revenue recovery of 77%, compared with the revenue of the same quarter in last year. 'Taneira’ opened another store in Mumbai during the quarter, taking the total store count for the business to 14 covering six cities. The brand launched EIRA collection i.e. a range of stitched kurta sets in the quarter. Taneira increased its online presence through listing of the products on marketplace platforms, viz. Myntra and Nykaa Fashion. The recovery rate for Fragrances and accessories continued to be muted due to the slow recovery of two of the biggest channels, trade and LFS. Wedding demand has been good for Taneira. 95% common customers for Taneira and Tanishq. Will share plans during the Q4 result call. Contribution from Taneira is less than 5% to sales. Will retain position as the no. 2 player in terms of volume. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights V-Mart Retail Q3FY21 Earnings Call: Key Takeaways Good rural incomes, marriages, early winter helped towards recovery. However, footfall was below expectations functions etc now are being done with lesser public Few regional retailers are struggling on inventory, working capital and cash flows. National retailers coming back with full force, however were impacted by the pandemic as well. Q3 has been the biggest and most profitable quarter historically. People came out in lesser crowds than expected. Tier-II/III cities saw better recovery than Tier-I/Metros Stores were closed before time during the festive period in certain areas. Festive sales were low in Oct. November was when momentum built up – festive and marriage led sales. Turnout was good in most geographies in Nov. Post marriage season, footfalls were subdued in December. Did not do any aggressive discounting during the quarter – ASP increased by 2%. Q3FY21 beginning inventory was INR3.6bn vs INR5.5 in Q3FY20. Lowest inventory in the recent past, on per store basis. 106 days inventory days for the quarter. 72 days in Q3FY20. – absolute inventory is much lower. Capex: spent INR170mn YTD. Rental savings of IN210mn : ~20% lower for the full year. Total store count of 274 as Q3FY21. Streamlining operations for the online/omni-channel business. As of now, it is less than 1% in the overall sales mix No comments on the fund raising plan as of now. New stores in Tier-II/Urban cities will be as per the fashion dial-up plan. Old stores in these regions will be migrated gradually. Tier-III/rural as per value dial- up plan. Merchandise, pricing, inventory remains more or less the same. Capex also to the same as in the past. Efficiencies gained during the lockdown period might not be sustainable going ahead. Employee expenses will remain the same. Higher cost pressure likely from input commodity prices. Expenses might go up as the company readies up for the next phase. Cost structure too largely be the same. Investment in store- level inventory also likely to go up. In Q3, the Company’s revenue recovered to 84% of Q3, FY20, while like-to-like (LTL) sales stood at 81% of last year. The strong recovery in revenue’ was despite the slower recovery in customer footfalls, which stood at 72% level YoY, partial curfews and restrictions on public movement in some markets, and the prevailing fear of pandemic among the general public. 342 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights In Q3, the Company reported revenue of INR4.7bn Cr, growing 167% sequentially over Q2. The combined effect of festive season, marriage-related, and winter shopping and the lifting of lockdown bode well for an uptick in discretionary consumption, which is well reflected in the Company’s strong quarter-on-quarter recovery momentum. The two largest markets of the Company, Uttar Pradesh and Bihar, have led the recovery, accounting for 66% of sales in the third quarter. On the profitability front, the Company made a remarkable turnaround in Q3, generating EBITDA of INR1.04bn, and recovering to 89% level YoY. The strong recovery in topline, well supported by an effective cost reduction mechanism and proactive inventory management measures has significantly cushioned the pandemic’s impact on the Company’s profitability, bringing it to a net cash positive status. On the product front, sweatshirts, jackets, cardigans, and pullovers were the highest selling categories for both men and women, with customers starting their winter shopping relatively early in the quarter. Trendy casual wear and street wear made a strong comeback, as the aspirational youth combined need-based shopping with replenishing the fashion collection in their wardrobe. Benefitting from the leanest-ever inventory levels achieved by Q2-end and maintained well into Q3, the Company procured and stocked its stores with fresh merchandize. Further, the Company came up with innovative marketing campaigns and promotional offers that resonated well with its customers, driving footfalls and sales during festive and marriage-related shopping, as well as giving an impetus to winter merchandize sales. Marking an auspicious beginning of festive shopping, the Gold Coin offer of the Company became a talking point among its customers, and connected deeply with their intent to derive maximum value from every penny spent. All these steps aided higher footfalls and conversions, resulting into a higher sell-through rate for both existing and fresh merchandize. Focusing on expansion opportunities with a long-term view, the Company also launched 11 new stores during the quarter, taking the tally of new launches for the year to 13. The majority of these stores were launched in Uttar Pradesh and Bihar, the Company’s two largest markets, while Rajasthan, Assam, Madhya Pradesh, and Jharkhand accounted for the rest. The convergence of festive and marriage-related shopping with change of season and an early onset of winter was visible in customer shopping metrics. In line with the trend seen in Q1 and Q2, the average basket size (ABS), apparel average selling price (ASP), and conversion stood 9%, 2%, and 7% higher YoY, respectively. These trends have remained consistent during the year and establish that post- pandemic, customers are continuing to prefer spending a higher share of their reduced discretionary budget at the Company’s stores, which underscores the high trust they have in the Company’s value-for-money proposition. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Specialty Chemicals 344 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Aarti Industries Focus on value addition and higher margins in pharma drives profitability Operating revenues have grown on the back of strong volume growth in key business segments and better product mix. Top line is also a function of variations in raw material prices linked to crude oil. Sustained revenue growth driven by volume expansion and 76% contribution from value-added products vs 72% in Q2FY21. Gross margins returned to normalized levels. Domestic demand for discretionary products has returned to pre-covid levels, while for exports markets the same are recovering gradually. Pharma segment revenues at record levels, profitability sustained as the product basket remains focused on value addition. Speciality chemicals segment – Benefits from value added Revenue growth backed by 90% utilization across operationalized facilities. Return of demand from established markets driving improved margins. However, H1FY21 had seen higher exploratory sales to discretionary spending markets with the objective of expanding volumes and rationalizing inventories during a tough operating environment. Includes income recognition of about USD 5 million with respect to the first long- term contract. Pharma segment – Margins seeing structural improvement Pharma business revenue grew by 32% YoY during Q3FY21 – top line at highest ever levels. Continued throughput from regulated markets, value-added products and growing pipeline of new introductions. Margins seeing structural improvement based on operating initiatives Revenue growth is expected to sustain as additional capacities for APIs and intermediates are operationalized Demerger of pharma business to unlock value for investors AIL has plans to demerge its pharma business, which is in line with its previous commentary on demerging un related businesses like surfactant and pharma. Pharma business commentary remains strong with revenue growth guidance of 18-20% and PAT growth guidance of 25% over next 3-4 years. Pharma business is seeing strong growth and customer enquiries. At present pharma business contributes approximately 20% in revenues and EBIT and also contributes approximately 20% of capital employed. We believe with demerger of pharma business, AIL will become a speciality chemical focused players having diversified product basket for user industries like agri, textiles, paints, dyes, autos, polymers, etc. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Demerger will give share of pharma company and can see unlocking potential for the investors of AIL Guidance on growth and capex outlook AIL continue to guide for flat PAT growth in current year impacted by covid-19. Pharma margins are likely to sustain at current level and company expects pharma revenues to grow at 18-20% over next 4-5 years. While profitability can grow at higher rate by 25% CAGR over the same period. Capex in Q3FY21 is INR 3.6bn; 9M aggregate capex of INR 8.9. Capex guidance for current year remains at INR10-12bn. AIL will keep on investing similar capex every year over next 3-4 years in expansion. Maintenance capex is INR3bn pa. Management is comfortable with D/E of 0.7-0.9x and likely to continue with that. Commissioning of large ongoing capex in near term drives visibility AIL has seen significant capex over last two years with capex commitment of around INR22-24bn over FY20-21E. AIL is likely to see large part of this capex commissioning in medium term. With almost 50% of its CWIP in FY20 of INR14bn is likely to get commissioned in Q4FY21 while balance is likely to get commissioned by H1FY22. This also include long term contract plant. Commissioning of large capex is likely to drive growth visibility for the company. 346 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Galaxy Surfactants Sharp pickup in India and other markets Post the impact of covid-19, India market has picked up sharply with 14% YoY growth in Q3FY21. AMET region and ROW also picked up with 3–4% growth. Though ROW markets continue to suffer from logistical challenges resulting from container availability and lockdown in a few European regions, management is confident about sustained recovery in these regions. Raw material prices continue to rise; expect end prices to go up With sustained rise in key raw material – Laureal Alcohol prices, which has increased by 34% YoY to US$1,588/mt and continue to rise – end product prices are likely to rise. As the company passes these through, Q4FY21/Q1FY22 is likely to see the impact of increase in revenues. Specialty chemical capex on the ground likely to drive growth With ongoing capex in specialty chemicals and sustained focus on product launches, management is confident of improving the product mix. This is likely to result in better margins and higher asset turnover over near to medium term. Margin expansion to continue We expect GSL’s focus on expanding its product basket in specialty chemicals and raw material-led price growth in FY22/FY23 to help sustain margins at the current level of INR18,000–19,000/mt. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights SRF Chemicals Specialty chemicals –increased demand led to volume improvement. Higher volumes drove capacity utilization levels leading to better margins. Capex remains on track. Investment in speciality chemical segment is at approx. INR22bn now and company will keep on investing in capex in this segment SRF remains as a preferred supplier for global players. SRF Rewarded by Syngenta- (performance award) amongst 300-400 suppliers. Market trend- moderate to low growth in agrochemical segment. Complex products remains key focus area which will drive margins. Push from China+ one, major customers were looking to de-risk from China bit earlier. Possibility of gaining from shift from European CRAMS to India. CGMP plant-50% utilization current. Plan to reach 100% utilization soon. Demand from agrochemicals remains robust. Large capex to happen in Specialty chemicals and company sees enough growth opportunity in agrochemicals to sustain current ongoing capex. Refrigerant gas: both OEM’s , Replacement market(60% levels now) have gotten impacted due to Covid-19. Recovery is faster in OEM’s. Replacement market has also started to kick-in. Result will be seen in Q1FY22. FY21 and FY22: Capex spending to remain at 12bn-13bn. Probably, INR 3bn-4bn additional capex looking at current scenario. Mainly focus would remain it towards agrochemicals. Fluorochemicals Volatility in growth-much larger in FY21. Overall, potential of business to grow 15-25% every year. Passenger vehicles and AC’s showing higher demand and driving overall industry growth. Fluorochemical- impacted by covid-19. Better margins would be seen in fluorochemicals going forward. Seasonal demand for Flourochemicals takes places during Q4 and Q1, Company is building up inventory for same. Packaging Films business Demand improvement from domestic and International clients. Increasing share of value added products remains focus Hungary plant to commission soon. Team to penetrate European markets. Globally, two lines added. Pressure on margins is inevitable as capacities get added. However SRF to continue focus on ramping up utilization and protect margins by increasing share of value added 348 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Revenue drop QoQ-300mn- volume trends remains positive. Impact is due to lower margins on EBIT (INR 300mn) with a drop in realisations. Thailand plant has seen significant ramped up in recent quarters. BOPP Plant at Indore is expected to commission on time June-22. Technical textiles segment Steady performance-faster than expected recovery across tyre industry led to higher utilization and improvement in margins which were at all-time high in current quarter Demand to be healthy in ensuing quarters. Debottlenecking and brownfield expansion including increasing yarn capacity to further boost revenues from this segment in near future Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Textiles 350 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Arvind Q3FY21 Business momentum continued in Q3FY21. This time recovery was driven by domestic segment as demand has re-emerged post Diwali In addition to cotton, there is inflation in other costs too. Dealt via combination of price increase, tight cost control and reduction in working capital. Company Company has been able to negotiate with all buyers for price hikes and company plans to take hikes in Q4FY21 too. Focus on working capital has been paramount. Company has been comfortable foregoing sales but has been focused on reducing working capital. Company has begun a sale of a large parcel of land which should give another INR2-3bn in the next 2-3 years. More than 50% of land has been converted into actual sale. Denim There is a shift of business out of China. In India some weaker players have reduced capacity. Industry capacity is down by ~10% Targeting to reach full capacity by next year In denim, company is 80% integrated. Woven Demand has re-emerged post Diwali All the brand houses have gotten out of old inventory driven by good festive recovery. They have started ordering for fresh stock. In woven, company is 50% integrated Garment Strong traction is visible in domestic and export market There is still incremental capacity of 15mn pieces of capacity. At full capacity, company can do ~IN20bn of revenues. Majority of the business sitting is subsidiaries is related to garmenting AM AM business has matured into focus on certain customers who are giving repeat business Margins could expand by ~100bps/annum for the next couple of years Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Outlook As per the company, Input cost pressures will continue Capex for FY22 will be around INR1bn Target is to reduce debt by INR10bn over FY20-22. ~10-12% of cost base/INR1bn reduction will continue into FY22. 352 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Page Industries Q3FY21/FY21 Business was aided by a strong festive demand. Volume growth was 10% in Q3FY21. Also, EBO like to like growth is positive. More than 95% on MBOs are operational. E-commerce sales remain robust. Growth improvement has various components: Athleisure surge, jump in thermal wear. Margin improvement was driven by better labour cost absorption. Primarily efficiency driven and volume driven. There has been a significant surge in athleisure growth-- in high double digits. Athleisure share is now close to men’s wear. Men’s innerwear has not grown, women’s innerwear and athleisure growth is in high double digits. A&P spends cut by ~50% for 9mFY21. Pricing/raw material There is a tendency of yarn prices to spike at end of the year as it is closing of crop season. It again falls back by February. Generally price used to be hiked in Q4 of every year. For FY22 pricing, the hike will be taken in Q4FY21. Channel Page will have a separate set-up for the rural business. It has been doing pilots for the past 18 months. Channel margins continue to remain the same. Looking to add 10,000 MBO stores in FY21. Page has already added 7,000 stores. Jockey Kids Kids collection is generally being pushed via women EBOs. Athleisure Page has posted high double-digit growth for 9mFY21 and Q3FY21. Athleisure is close to 40% of EBO revenue. Guidance Page is confident of maintaining growth going forward. A lot of discretionary spends have been cut. Going forward, advertisement will come back and margins will normalize. Capex will be around INR3bn for FY22. Should touch 1,000 EBOs in the next 6-8 months. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights TCNS Clothing Industry October and November saw good demand driven by festivities. December was weak, but business has picked up in January. Across competitors, only a few players with a healthy balance sheet put fresh inventory. Most players have been discounting very heavily. Q3FY21 Graded salary reduction are being reversed. However, the company is rationalizing staff by combining stores. Gross margins are lower due to a skewed channel mix and dormancy provision. No impact of increasing yarn prices as most of the RM inventory was bought before the spike in prices. Company Accessories are already contributing to high single digit in various pilot stores. Other segment includes exports and a small part of institutional gifting Current trends Last year, EOSS started early in December. After a long time, the company is seeing lower discounting in Jan and December. Also, TCNS has launched the new SS-21 season very early. In SS-21, customers will look at as much 80–85% of the inventory for the first time. Despite EOSS in December, the share of fresh sales was very healthy. When it comes to stock, which was manufactured last year but will be on fresh display, only intermediaries have an issue with it, not customers. Tier III market recovery is 85%, Tier II about 75% and Tier 1 is 55–60%. Channel and stores Primary billing in online was lower due to stocking up. The company plans to start billing to the MBO channel. To start with, the company will be cautious. By festive (Q2FY22), TCNS expects the MBO channel billing to reach earlier trends of INR1bn-plus. Store Closed 22 stores and opened nine during Q3FY21. The company started the year with 26–28 airport stores; currently, there are less than half of them. The company does not expect more than 10–15 stores pending to be closed. Targeting to open 60–70 new stores in FY22. The company has growth visibility in the LFS channel also. 354 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Will relook at expanding EBOs of Elleven, and will expand to more-large format stores. Of the 60–65 stores to be opened, only 7–8 will be pilot Elleven stores. Supply Chain Targeting to combine various small warehouses into one mega warehouse. This will also help drive the company’s D2C initiatives. New warehouse will cost INR80–100mn (located in Haryana). More than 25% of sourcing is outside the NCR. Working Capital & Cash Inventory is lower by 7–10% from September. Of the inventory, 20–25% is fabric and 75–80% is finished goods. Most of the finished goods inventory (more than 90%) is less than a year old. Guidance Capex will be INR200–250mn in FY22. The company expects online to contribute one-fourth to one-third of sales over the coming 3-4 years. Margin of 64–66% is very much achievable. S&M spends will increase during the festive season. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Welspun India Industry China’s market share loss is evident in the US/Rugs segment RoSCTL has been discontinued from Jan 01 and RoDTEP has been implemented. However, rates for the same are still to be announced. Company expects the rate to be announced by March. Q3FY21 Q3FY21 EBITDA margin is higher by 80bps even after adjustment of MEIS impact Other expense increase has been driven by higher volumes and also a spike in logistics cost (~INR200-250mn impact). There was an increase in dyes and chemical costs. USD/INR realization in Q3FY21: 74.48 vs 73.61 (Q3FY20) Product mix along with a better exchange realization (~5%) has helped improve gross margins. Better realization, quality of demand towards innovative/branded products and operating leverage should help keep margins intact. WLSI is also targeting lower losses in flooring business. Raw material Cotton prices have increased by 8-10% and prices are expected to remain firm Flooring Bagged first orders from EU, South East Asia Soft flooring is seeing enquiries from global customers. EBITDA break even in Q3FY22 and cash break-even in FY23 After the expansion , company will complete the 10mn capacity target it had initially set-out Another INR2.5bn (INR10bn has already been spent). At full throttle this will give revenue of INR20bn over the next 4-5 years with margins in line with current business Advanced material In spun lace seeing better traction and realization New disinfectant wipe lines will commence in Feb 2021. Another in Sep 21 These will help achieve top line of INR6bn by FY23. At peak utilization it could touch INR8bn in FY24/25E Out of INR5.0bn, INR2.0bn has been deferred which relates to the cotton bleaching project. Company will wait for some more time to take a call. In the mean while it will be sourced from outside. Once the business has gained scale, company will bring the capex back. Margins are in line with the current business 356 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Capex Company will be spending INR2.25bn for the capacity augmentation. Capex in FY22 will be ~INR6bn and this includes the new home textile capacity (INR2.25bn). By Q4 of FY22, it will be full operational and full fruits will be FY23 Towels in Q1FY22 and rugs over Q2/Q3FY22 Guidance Targeting USD100mn-plus in revenues in 2-3 years via licensed brands. Company expects debt to remain below INR24bn Targeting to keep margins between 19-20% with Revenues of INR73bn for FY21E. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Miscellaneous 358 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Balkrishna Industries Financials BKT's Q3FY21 revenue rose 28% YoY (4% ahead of estimate) to INR15.1bn. Volume jumped 26% YoY to 59,810MT. Volumes grew across geographies with increase of 20%, 13% and 38% in Europe, Americas and India, respectively. Overall realisation (INR/kg) was up 1% YoY due to the price hike of 2-3% taken by the company. Gross margin expanded 50bps YoY to 60% despite higher raw material prices. Headwinds remain on gross margin as rubber prices have increased sharply in Q4FY21. EBITDA margin increased 65bps YoY led by higher gross margins and operating leverage. As a result, EBITDA grew 30% YoY to INR4.8bn. PAT rose 48% YoY (36% ahead of estimate) owing to higher forex gains for the company during the quarter. BKT has cash and cash equivalents of INR14bn on its balance sheet at end- Q3FY21. The board approved third interim dividend of INR5/share, taking dividend for FY21 to INR12/share. Expansionary capex On the ongoing capex, management announced completion of project for 51”and 57” ultra large all steel giant radial plant and the tyres are under various stages of testing. Replacement tyre plant at a greenfield location in Waluj for 30,000MTPA is likely to commence by Q1FY22 and should see gradual ramp up. The Board has decided to shelve the US greenfield expansion project. Management announced additional capex of INR19bn. This is to be spread across three projects: 1. Brownfield tyre project for INR8bn: Debottlenecking and brownfield expansion at Bhuj, to add 50,000MTPA capacity, likely to be completed by H2FY23. Post completion, the achievable capacity stands at 335,000MTPA. This will be ramped to full utilisation over six months. This should give a payback over four years. 2. Carbon black and captive power plant for INR6.5bn: With current achievable capacity of 115,000MTPA, management plans to increase achievable capacity of 200,000MTPA, including 30,000MTPA of high value advanced carbon material and power plant of 20MW. This will allow for larger control over supply chain while fulfilling internal demand on expected capacity of tires and meeting increased demand from third parties. The company will save 115,000-120,000MT for captive use, while the balance of 170,000MT will be used for external sales and will have margins of 15-16% on external sales. The additional capacity will take 1 quarter to be ramped up. The 30,000MTPA capacity will be used by print ink grade and high quality plastic grade, and will have higher realisations. This is likely to be completed by H1FY23 with a payback of 5-6 years. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights 3. Modernisation, automation and technology upgradation for INR4.5bn: Certain existing equipment at Rajasthan and Bhuj require upgradation which will lead to improvement in quality and efficiency. This will result in savings in manpower costs and higher efficiency across machinery. Focus also remains on radialisation and bigger tyres. This capex is required to maintain margin. This is to be completed by H1FY23 with a payback of five years. This should result in margin expansion and yield savings of INR0.8-0.9bn per year. The company plans to fund the capex via internal accruals and debt, if required. Maintenance capex of INR1-2bn per year will be additional. Post expansionary capex, there will be some land bank available at Bhuj for additional capacity expansion. Further announcements may be made at a later date post completion of expansion. For FY21, the company has budgeted INR6bn and ~INR1.2bn in Q4FY21. Operational and other highlights BKT is working with channel partners in the US to ensure no business is lost as a result of shelving the capacity expansion plan. The company has two months of inventory of raw materials – one month at plant and one month in transit. There remains a market shortage of nylon and rubber chemicals with 4-5% increase; however, BKT remains comfortable on the same. Management upgraded sales volume to 215,000-220,000MT in FY21 and higher volumes in FY22. At BKT’s carbon black plant of 140ktpa, achievable capacity is 115ktpa. Management sold 20% of carbon black volumes externally, contributing 2% to 9mFY21 top line. Sales mix in 9mFY21 was as follows: o By channel – Replacement : OEM : Offtake is 71 : 25 : 4. o By end-use – Agriculture : OTR : Others is 64 : 33 : 3. o By geography – Europe : US : India : RoW is 49 : 15 : 23 : 13. 360 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Bharat Forge Overall environment/segment commentary Strong recovery across sectors in the domestic and export markets. Cyclical recovery in new business. Three new focus areas: o EV (components, subsystems, BMS) – This should become a large business. Not looking at full vehicle. Also supplying – forged and machine components to traditional European customers. o Light weighing business (USD50mn) can reach USD200-250mn. o Solution business of light weighting. CV Automotive business – See good traction in both US and Europe. In India, slightly concerned given fluctuations in retail sales. Currently, the orders being announced are at very high levels and the production levels are not at those levels currently. The demand uptick has been so rapid, BHFC is delivering slightly lower than it could have. PV segment – Highest revenue ever in this quarter. PLI scheme – Negative impact due to withdrawal from the MEIS scheme. Cost reduction – Variable cost reduction done. Cost reduction for employee cost is pending, as covid-19 was not the right time to do so. Now it is coming down through VRS. India Positive traction in defence, E-mobility and aluminium forging. Scrappage policy is a mild positive for the industry. Shift to newer vehicles will be for higher efficiencies. Defence: Many orders in the pipeline other than ATAGS. Expect to get orders in the near term. Expect recurring orders. ATAGS – At the last stage, final testing underway. The aluminium facility in India is ready, but impacted due to covid-19. Revenue FY21 – INR250mn. In FY22, expect INR750–800mn. International Demand is on an upswing ex-oil & gas. Almost nil oil & gas revenue. There will be some positive movement in the O&G segment from the lows, but what will be the quantum will be known over a period of time. O&G - USD4–5mn a quarter from a peak run rate of USD30mn a quarter. It is not going to go back to the previous high and hence the focus on metals & mining and renewables. From H2FY22, should witness benefits of new businesses with focus shifting away from oil & gas. North Carolina first line capacity is already sold out. 2nd plant in Europe for aluminium forging. Commercial production to start from June 2021, expect ramp-up over the next two–three years. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Financial comments LT debt consolidated – INR 300mn. Net cash position is positive ex-borrowings. Cash balance: INR26.4bn. Currency realisation was at INR72.5 per USD. Next quarter will be more or less at the same level. INR220-230mn worth of export incentives lost. In the current quarter, there was an increase in transportation and warehousing cost. This should cool off over subsequent quarters. Capex – Fresh capex in India will be less than INR500mn. 362 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights CCL Products Branded business: Momentum sustains CCL has delivered strong performance over 9mFY21 in branded business. Overall sales clocked INR1.05bn, while contribution of B2C sales remained at INR700mn. With strong demand in place, the company expects to post overall turnover of INR1.4bn during FY21. MEIS benefits CCL has over the past enjoyed MEIS benefits (FY20: INR 330mn). Now, with the Govt. of India replacing the existing system, the company remains uncertain of deriving the benefits going forward. Though backlog of INR280mn is likely to keep margins on similar trend over FY22. Logistical challenges dent growth CCL’s growth momentum was impacted due to logistic disruptions. Issues of non- availability of containers led to an overall revenue impact of INR500mn during Q3FY21. However, the company has reassured of not losing any orders and said the quantity will be dispatched in ensuing quarters. Vietnam operations: Remain strong CCL’s operations across Vietnam remain on a strong footing primarily driven by incremental revenue contribution from new clients. Vietnam operations remained at nearly 90% utilization levels during Q3FY21. The company remains on track to add 3,500t capacity by end-FY21. Agglomeration plant The company will commence agglomeration plant by Q1FY22. The new plant will help in deriving better margins on small packets. Freeze dry plant Impact of INR 300-400mn on sales of freeze dry products during Q3FY21 on account of logistic challenges. The new freeze dry unit has operated at 60-65% utilization level during Q3FY21. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights EPL Q3FY21 revenue grew 8% YoY led by 17%, 19% and 9% growth in EAP, Americas and Europe regions. AMESA witnessed a dip of 6% YoY. While there remained certain cost headwinds, gross margin expanded 144bps YoY and 204bps QoQ to 60.2% mitigated by previous low-cost inventory. Gross margin is expected to see some hardening as higher petroleum related costs will hit 40-50% of non-pass through contracts over the short-term. However, the same should be normalised as contracts are renegotiated. Overall EBITDA margin dipped ~155bps YoY to 20.7%, subsequent to which EBITDA growth as flat YoY. This was on account of an 18% YoY increase in employee costs with higher overtime and covid-related expenses along with ESOP expenses. There was a 16% YoY increase in other expenses owing to covid- related costs and higher R&D expenses. EPL completed the acquisition of Creative, effective on 1st February 2021. Creative is a plastic and lami-tubes manufacturer founded in 2012, with annual production of ~200mm tubes and FY20 revenues and EBITDA of INR1bn and INR305mn respectively. The deal is at an EV of INR2.54bn, with 72.5% stake purchase via cash and the balance via issuance of EPL shares to the founders (~2.34mn shares). The business is revenue growth and margin accretive with FY18-20 revenue CAGR of 8.3% (versus EPL’s 6.2%) and EBITDA margin of 29.6% (versus EPL’s 20.3%) in FY20. The merger should provide operational synergies of INR35mn and boost personal care revenues (~47% from ~45% in FY20). The capacity is in Himachal Pradesh, and adds plastic tube capacity in North India, a strategic location for the company. During Q1FY21, the company launched a new category of hand sanitizers. The company launched hand washes in Q2FY21 and plans to expand to hand creams. This is a strong opportunity for the company to increase wallet share in existing categories. The growth in hand santizers was broadly flat QoQ. Management believes health and hygiene to be a new category for the company, and remain enthused on the growth prospects. All the 20 plants were operational during the quarter with best hygiene practices to ensure employee safety and continued operations. Management is currently running phase 2 of Project Phoenix to drive cost optimization across plants aiding in process optimization and reducing resource utilisation. Net debt by the end of quarter reduced to INR1.6bn from INR3.6bn at the end of FY20. Capex incurred over 9MFY21 stood at INR1.05bn. Four levers of growth 1. Accelerated growth in Personal Care: Personal Care has been a major driver in the last few years, growing at 16% over the last ten years. It accounted for 49% of overall revenue compared with 45% in FY20. The company saw growth across geographies in personal care with the addition of categories, as also customer wins. The only dip was seen in AMESA, which decreased 11% YoY in 9MFY21, owing to sluggish demand in B&C. EPL is seeing recovery in B&C from Q3FY21 in AMESA. 2. Continued leadership in oral Care: EPL strengthened its leadership in oral care. The quarter saw wallet share gains from marquee customers in Europe 364 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights and Americas and market share gains from regional players in China. For 9MFY21, revenues increased 9% YoY. However, travel tubes remained under duress owing to the pandemic. 3. Growth in Europe: With 17% YoY growth in personal care and 10% YoY growth in oral care, revenue increased 17% YoY during 9MFY21. In the wake of key customer wins in Europe, EPL now serves all major oral care players in the region. EBITDA grew 32% YoY while margin expanded 130bps YoY on the back of operating leverage. 4. Industry leadership in eco-friendly solutions: The company is an industry leader in providing eco-friendly solutions. It received approvals from major regulators – APR, Recyclast and BIS. Platina and Green Maple Leaf have been commercialized. With approval from key regulators, EPL is in advanced stages with many customers and is approved by some as well. AMESA For Q3FY21, revenue slid 6% YoY and EBIT margin dipped 134bps YoY to 13.3%. For 9MFY21, revenues dipped 1% YoY, while EBIT improved 3% YoY. While revenues were impacted on account of lack of sample and travel tubes along with a huge hit on personal care, hand sanitizers and pent-up demand aided in revenue growth. Personal Care contribution declined to 47% in 9MFY21 (from 51% in 9MFY20), due to sluggish demand in B&C. B&C is seen recovering from Q3FY21. Timely launch of hygiene products mitigated the dip. EAP Revenue grew 17% YoY driven by strong growth in China while EBIT margin remained flat YoY at 18.8%. For 9MFY21, revenues grew 22% YoY, while EBIT jumped 43% YoY. Personal Care contribution increased to 39.7% in 9MFY21 (versus 34.7% in 9MFY20) with growth driven by B&C and pharma segments. The business pipeline remains robust and focus remains on fast-growing regional players. EAP saw personal care revenues surpass FY20 revenues in 9MFY21. Americas For Q3FY21, revenue grew 19% YoY while EBIT margin contracted 319bps YoY to 11.6%. For 9MFY21, revenues grew 7% YoY, while EBIT dipped 14% YoY. The region was heavily impacted by the second wave of covid-19 with only one plant in the region. Consequently, employee expenses increased as EPL incurred costs on overtime and pandemic-related expenses. Personal Care contribution is maintained at 25.7% in 9MFY21.The company saw customer wins across categories in personal care and traction in bottle-to-tube product conversions. Cross-selling Personal Care products to existing Oral care customers remains a key focus for the company. Europe For Q3FY21, revenue grew 9% YoY while EBIT margin contracted 42bps YoY to 5.6%. For 9MFY21, revenues grew 17% YoY, while EBIT is up 76% YoY. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights This was led by strengthening of front-end organisation and an improved pipeline development process. EPL informed that it has gained wallet share with marquee global consumer companies in Europe in the oral care business and now serves all players in the region. Personal Care contribution rose to 65.7% in 9MFY21 (versus 64.4% in 9MFY20) as revenues expanded 17%. This was driven by strong customer wins across Personal Care categories. Europe region continues to have a robust business development pipeline. 366 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Heritage Foods Operating and financial highlights Revenue declined 10% YoY primarily led by a volume decline of 14% YoY, mitigated by a 9% YoY increase in realisation. Volumes were primarily hit due to the floods in Andhra Pradesh. VADP sales lower: The VADP portfolio momentum declined 13% YoY in Q3FY21, after declining 28%YoY in H1FY21. The slowdown was led by 23% YoY dip in curd volumes. VADP contribution stands at ~22.5% in Q3FY21 (Q3FY20: 23% of sales). EBITDA margin improved 790bps YoY to 12.9%, a moderation (150bps down QoQ) vis-à-vis the last quarter as procurement prices picked up. This was led by growth of 952bps YoY in gross margin, primarily on account of spreads, which expanded 1.9x YoY to INR11.5/l. Furthermore, other expenses were well controlled, down 12% YoY. Heritage Nutrivet, the feeds subsidiary, reported 2.2x and 7.2x growth in EBITDA and PBT, respectively. It reported EBITDA margin of 9.8% versus 11% in Q2FY21 and 5.3% in Q3FY20. The company recorded a fair value loss on its FRL stake at INR0.2bn and should report a loss in Q4FY21 as well, after which there should not be any impact on profitability. Covid-19 had led to increase in supply of milk in Q1FY21, which the company converted to milk powder. The company continues to have a surplus inventory of SMP, which will be utilised for captive consumption over the next 7–8 months to improve protein content along with some conversion to liquid. During the quarter, HTFL matched procurement to sales subsequent to which procurement dipped 3% QoQ, 14% YoY. This should pick up as the flush season sets in. The procurement dipped on a YoY basis as the company procured in bulk in Q3FY20 to fulfil demand in the end-user markets. Procurement prices picked up slightly sequentially (up 7% QoQ); however, prices remained on a downward trajectory on a YoY basis (5% YoY) in Q3FY21. Sales were impacted by the decline in volumes owing to monsoon and lower OOH sales for agents of HTFL. The company is seeing some pickup in the OOH consumption as markets open up. Others Capex: In H1FY21, HTFL incurred capex of INR471mn. However, capex will be planned to cater to demand for next summer season. The company believes capex in FY22 should also be at normal levels (~INR1bn), after which capex would taper off (~INR0.5bn). Debt: Long-term debt has been pared to INR1.15bn from INR1.85bn last quarter, driven by the FRL stake sale. Cash & cash equivalents stand at INR599mn, which may be utilised for rewarding shareholders. The company scaled down its operations in certain geographies in FY20, as logistics cost and packaging costs were unviable. HTFL continues to operate in Haryana and the NCR region. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights The regional mix is dominated by AP and Telangana with 60–62% of sales, and Maharashtra, Karnataka and Tamil Nadu each contributing 10% to revenue. The company discontinued its investments in the Farmers Welfare Trust and Employee Welfare Trust, and conducted the same via the parent entity. Capacity stands currently at 2.5mn litres of chilling capacity, 2.37mn litres of processing capacity and 1.55mn litres of packing capacity, and 600ktpd curd packaging capacity. HFL expects to cross 3–3.5mn litres over the next five years, which will be funded through a mix of debt and internal accruals. HTFL exited its stake in FRL of 17.8mn shares, for a value of INR1.36bn. The same was used to retire debt. 368 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Sheela Foam Industry situation Importance to railways, buses and affordable housing will drive incremental business. Q3FY21 B2B business has done well driven by traction in Auto segment. Reduction in other expenses was largely driven by Sales & Marketing contraction. Raw material RM prices are on a downward trend. TDI is back to INR170 (Peak of INR230/Kg), polyol has fallen below INR200/Kg (Peak of INR230/Kg). Expect prices to stabilize by end of February. RM: 30% of revenue is TDI and 20% is Polyol. Mattress segment In all three geographies demand for mattress has been strong. The growth is mainly coming from the unorganized to organized segment. Company is working hard to give more value to the consumer. Growth was driven by pent up demand along with a change in consumer behaviour. Also, shift from unorganized to organized. Company does not pass on the entire increase in RM to customers. There is also a function of product mix. There is no price war from the ecommerce segment EBO network is in excess of 5,000 Other segments Technical Foam Segments: Helmet, sound absorption, filtration industries, shoes, lingerie are the key business segments. Export opportunity US bed in a box market is at USD600Mn, primarily supplied by China. Post the change in sentiment, clients are looking elsewhere Competing with Chinese players is challenging. Company is getting enquiries and there are some orders being serviced from India and Spain. International subsidiaries Australia is big on travelling. The saving on travel is being invested in spending on home improvement. Also money in hands from Government via grants. In addition, restriction on imports from China, has helped drive business further Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Capex Company is planning to come up with one plant in Central India (Jabalpur). Other than that, it will be maintenance capex Guidance Export opportunity could be INR1bn in the next 2 years 370 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Solar Industries Q3FY21 Significant improvement: Surpassed 9 months’ operating performance of last year. Improvement in demand from housing/infrastructure. Given positive demand outlook, the company expects domestic segment to witness good growth during Q4FY21. Order book: INR16.35bn. 107 days working capital versus 113 days as of March-20. Forex impact: INR115mn during Q3FY21, INR 970mn for 9mFY21. Australia-project hasn’t started, South Africa- business has improved. Domestic Explosive volume flat Realization improved marginally due to commodity prices Housing infra-promising Q4 Volume growth- Demand from housing and infra has picked up after covid-19 impact in initial quarters of FY21. Disruption in availability of raw materials led to a fall in volume growth across domestic markets. The situation has improved though. Ammonium nitrate-resulted into supply chain disruption. Sustainable demand: The company has highlighted demand across housing and infra to sustain going forward. Exports Improvements visible with operations in Ghana getting stabilized. Deferment of orders-Q4FY21 would be good. Pandemic challenges: Optimistic- INR10bn (excluding exports). 15% YoY growth expected going forward with sales expected to cross INR10bn mark by FY22. Defence Supplied to testing agencies: Expect to receive final green signal during Q4FY21 for MMHG. Other products’ production has started. There was some deferment of orders, but it will get reflected over Q4FY21. Confident of delivering INR5bn over the next two years. Pinaka Missile: Expect government to roll out RFP for PINAKA in the coming one/two quarters. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Guidance ROCE: To be back to 25%-odd levels Manufacturing expansion: Three package explosive plant to expand reach. Capex: FY21-INR 2.1bn Expect 15% growth over FY22. 372 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Supreme Industries Q3FY21: Volumes and margins surpass our expectations In Q3FY21, volumes increased across segments: pipes (up 9%), packaging (up 2.4%), industrials (up 32.4%) and consumers (up 11%). On the other hand, EBIT margin increased across segments except packaging— pipes (up ~900 bps YoY at 22%), industrials (up ~400 bps YoY to 9.3%) and consumers (up ~500 bps YoY to 19.6%). The packaging segment margins was down 160 bps YoY to 12.5% Better-than-expected margins were led by better-than-expected volumes leading to operating efficiency, savings in other expenses by strict monitoring of fixed and variable cost, inventory gains (INR800mn) and increase in share of value-added products (launch of several new products led to 33% YoY growth). The company’s strong margins are likely to sustain led by aggressive monitoring of expenses and the increasing share of value-added products Excluding inventory gain, margins should be ~17%. The share of value-added in each of the segments stood at: pipes – 42.8%, performance packaging – 62%, consumers 51%, cross laminated segment -100%) The company refrained from citing the number for inventory gains, and expects inventory losses in the quarter ending March/June 2021. Prices overall have gone up by INR42 per kg since March and should come down hereon. Growth drivers The crop situation in the country is normal, which has boosted rural income. The Rabi crop sowing has also been done in a larger area than the previous year. The company enjoyed good demand for its products from the rural market and Tier III and Tier IV cities. In the current quarter, the demand also got a fillip from the housing market. Several policy initiatives have facilitated a brisk sale of ready to occupy housing units. Demand for the company’s housing products has revived in metro cities. Capex The company’s capex plan is going smoothly. Along with carried forward investment commitment of INR1.82 bn, the Company has made a plan to invest around INR4bn in this year. The said investment is made mostly in its existing plants where additional construction activities are going on at Seven sites. Company is also now putting up new plants at three locations. Land for these plants have been already acquired at Orissa & Tamil Nadu. In Assam, the plant is being constructed on a lease agreement basis. Company aims to put all these new plants in production in the year 2021-22. Plastic pipes PVC resin consumptions has gone down by 20.5% YoY in 9MFY21. About 70% of PVC resins in India is used for plastic pipes and the remaining for wires and cables, PVC profiles, etc. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Thus, with ~3.7% decline in plastic pipes volumes in 9MFY21, SIL has definitely increased market share in plastic pipes segment Furthermore, in the CPVC pipes segment too, with industry level CPVC resin consumption declining by 13.5%, the company’s CPVC resin consumption has declined only 3.70%, indicating market share gains Due to sharp increase in PVC resin prices, demand for agri pipes is weak, whereas plumbing pipes are not only getting good demand from Tier2/3/4 cities but now demand has started to pick-up in metros DWC enquiries are also coming in, since the company provides high quality material with BIS, the company is cautiously working with quality customers. Going ahead, the company is hopeful of reaching optimum capacity utilisation (12,300 tonnes) Packaging films The Company’s Packaging segment working was affected due to increase in its raw material prices which could be passed over with a time lag, which may happen in the current quarter Protective packaging division in this segment has also fared better as demand has come from Construction, Consumer appliances, yoga mats and other segments. Volume growth of ~2.5% was due to impact on performance packaging segment LDPE prices increased sharply and the company could not participate in some business. With LDPE prices now going down, the company will participate in this business The company has also introduced economy model of Tarpaulin also in Cross Laminated film segment having lower value addition. The product is made from scrap with shorter lifespan of 6 months, and the company can do business of 2,000 tonnes. However, the overall demand for Cross Laminated film products for the year is expected at a higher level, which may boost business to 21,000 MT in the year compared to 17,000 MT in the previous year. Distribution The company is focusing significantly on expanding its distribution reach by appointing more distributors, expanding reach in various tehsils, and adding more product range The company is having total distribution of ~40,000 (of which 30,571 are for pipes division, 373 are for packaging, 275 are for material handling, 214 for furniture consumer business and 705 protective packaging) Further, the company’s manufacturing facilities are present in 12 out of 29 states and thus the company believes there is a long way to penetrate throughout the country Capacity The capacity as on Dec 31, 2020 stood at 694,409 tonnes compared to 635,939 last year same quarter (of which pipes capacity stood at 499,111 tonnes, industrial capacity stood at 74,897 tonnes, Packaging capacity stood at 90,544 and consumer division capacity stood at ~30,000 tonnes) 374 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights As on Mar 31, 2020, the total capacity stood at 636,000 tonnes (of which pipes capacity stood at 440,371 tonnes, industrial capacity stood at ~75,000 tonnes, Packaging capacity stood at 90,500 and consumer division capacity stood at ~30,000 tonnes) Raw material - PVC resins Plastic raw material prices remain at an elevated level. PVC resin prices have gone up by INR23 per kg in the quarter with an increase of 25% in its prices. The PVC prices remain even now at the elevated level. At the increased prices, there is a demand resistance from agricultural segment. It is expected that the resin prices may start softening by March There is some increase in CPVC prices too but it’s not comparable to PVC resin prices Balance sheet strength and capex The company has cash surplus funds of INR4.3bn as on 31st December, 2020 as against net borrowings of INR2.17bn as on 31st March, 2020. New products The company has supplied 212 units of its Biofloc products to 12 states and is awaiting results to launch the product at commercial scale The new product launched at its Halol unit is very well accepted in the market which is mainly used for Agri and horticulture applications and will provide great savings and reduce wastages of fruits and vegetables The company remains optimistic, budget is likely to give boost on Infra and healthcare that augers well for the company, rabi sowing is going good, demand for all our products growing The company thus plans to launch many new products like PEX pipes, introducing several variety in bathware fittings too and focus remains on increasing value added products Supreme Petrochem The company has reported strong performance during the quarter (also led by increasing spreads Polystrine and styrene monomer) The company has overall capacity of 24,000 per month which is currently running at full capacity The company has envisaged INR2.5bn investment plant to add capacity of 80,000 tonnes (from ~225000 tonnes p.a. to 280,000-290,000 tonnes by Dec 2021) Plastic tanks By December 2021, the company will be supplying plastic tanks from eight locations versus five at present. The company has locational advantage and is hopeful of growing at a strong pace. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights VIP Industries Financials Revenue growth: Revenue declined ~46% YoY (up 2.3x QoQ) in Q3FY21 (54% of pre covid levels versus 25% of pre-covid levels in Q2FY21) as demand improved with pick up in air travel, weddings and gifting. Gross margin: Gross margin fell 31bps QoQ to 38.4%, mainly due to higher discounts and high mix of India-produced goods sale rather than Bangladesh as it clears high cost inventory. It expects gross margin to improve as sourcing increases from low cost Bangladesh. As sales improved QoQ, fixed cost coverage improved during the quarter, resulting in a profit at the EBITDA level post two quarters of losses. The company has seen reduction in manpower costs and other expenses and continues to identify other inefficiencies to reduce costs. Overall expense was down from INR3.6bn in Q3FY20 to INR2.2bn in Q3FY21. Management ascertains INR1bn of fixed cost reduction to be sustainable as it expects INR0.6bn reduction in other expenses and INR0.4bn cut in employee costs to be sustainable. Other income jumped 5.8x YoY to INR102mn owing to impact of ~INR28.8mn from the new accounting of rental concession of practical expedient in Ind As 116. PAT loss was at INR70mn during the quarter. The company reduced its borrowings from INR2bn as at September end to INR1.5bn at December end. Management plans to repay the remaining debt in FY22. On receivables owed by Central, Brand Factory and Big Bazaar, management has had payments from Central and Brand Factory. Receivables from Big Bazaar have been tallied and management has received a letter that the new owner will clear the receivables. VIP expects clarity on settlement of insurance claim in Q4FY21. Operations and Outlook Q4FY21 – Q1FY22: Management has seen demand improve sequentially and expect recovery to sustain led by re-opening of schools and colleges and improving passenger travel in the domestic market. VIP has significantly increased its presence across e-commerce with the advent of the pandemic. The company has seen sales from e-commerce channel forming ~25% of its aggregate sales, however this may decline as general trade improves. While CSD was the first to re-open post the pandemic, there remain challenges with regards to sourcing products from India. VIP has mitigated the same via its third-party agreements in the India. According to management, lower labour costs and import duties make Bangladesh favourable in cost structure vis-a-vis sourcing from China (15% higher costs) or even India. Management plans to source 60-70% of its products from Bangladesh. 376 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Q3FY21 conference call highlights Currently, certain supply chain challenges pertain to sourcing of raw material from China ahead of the Chinese New Year. Unless demand resurges, management believes current capacity should cater to demand in FY22. However, if demand does pick up, VIP can set up a factory within four–five months in Bangladesh to cater to it, at minimal spends. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance. This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders. ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report. We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report. ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) be engaged in any other transaction involving such Securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with ESL. ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk. Research analyst has served as an officer, director or employee of subject Company: No ESL has financial interest in the subject companies: No ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report. There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer. A graph of daily closing prices of the securities is also available at www.nseindia.com Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Additional Disclaimers Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc. Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst. This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person. ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada. Disclaimer for Singapore Persons In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors. Disclaimer for Hong Kong persons This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved. Aditya Narain Head of research [email protected] Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098 Tel: +91 22 4009 4400. Email: [email protected]