24 November 2015 1

Research & Quant Team (Gautam.Duggad@MotilalOswal.com)

1QFY21 | September 2020

VOICES

VOICES India Inc on Call VOICES, a quarterly product from Motilal Oswal Research, provides a ready reference for all the post results earnings calls attended by our research analysts during the quarter. Besides making available to readers our key takeaways from these interactions, it also provides links to relevant research updates, and transcripts links of the respective conference calls.

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

transcripts Links to our Results Updates on each of the companies included

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Automobiles ................................................................................................................9-21 Amara Raja ...................................................................................................................... 10 Ashok Leyland ................................................................................................................. 10 Bajaj Auto ........................................................................................................................ 11 Bharat Forge.................................................................................................................... 12 BOSCH ............................................................................................................................. 12 CEAT ................................................................................................................................ 13 Eicher Motors .................................................................................................................. 13 Endurance Tech. .............................................................................................................. 14 Escorts ............................................................................................................................. 15 Hero MotoCorp. .............................................................................................................. 16 Mahindra & Mahindra ..................................................................................................... 17 Mahindra CIE ................................................................................................................... 18 Maruti Suzuki .................................................................................................................. 19 Motherson Sumi.............................................................................................................. 20 Tata Motors..................................................................................................................... 20 TVS Motors...................................................................................................................... 21 Capital Goods.............................................................................................................22-30 ABB.................................................................................................................................. 23 Blue Star .......................................................................................................................... 23 Crompton Greaves CG ..................................................................................................... 25 Cummins ......................................................................................................................... 25 Havells ............................................................................................................................. 26 KEC International............................................................................................................. 27 L&T .................................................................................................................................. 27 Voltas .............................................................................................................................. 29 Cement ......................................................................................................................31-40 Birla Corp ........................................................................................................................ 32 Dalmia Bharat.................................................................................................................. 33 Grasim Inds ..................................................................................................................... 34 India Cements ................................................................................................................. 36 JK Cements ...................................................................................................................... 37 JK Lakshmi Cements ........................................................................................................ 38 Ultratech Cement ............................................................................................................ 39 Consumer...................................................................................................................41-56 Asian Paints ..................................................................................................................... 42 Britannia Inds .................................................................................................................. 43 Dabur India...................................................................................................................... 44 Emami ............................................................................................................................. 45 Godrej Consumer ............................................................................................................ 47 Hindustan Unilever.......................................................................................................... 47 Jyothy Labs ...................................................................................................................... 48 Marico ............................................................................................................................. 49 Nestle India ..................................................................................................................... 50 Page Inds ......................................................................................................................... 50 Pidilite Inds ...................................................................................................................... 51 Tata Consumer Products ................................................................................................. 52 United Breweries............................................................................................................. 54 United Spirits................................................................................................................... 55 Financials- Banks .......................................................................................................57-69 AU Small Fin. ................................................................................................................... 58 Axis Bank ......................................................................................................................... 58 Bandhan Bank ................................................................................................................. 60 Bank of Baroda ................................................................................................................ 61 DCB Bank ......................................................................................................................... 62 Federal Bank ................................................................................................................... 63 HDFC Bank ....................................................................................................................... 64 ICICI Bank ........................................................................................................................ 65 IndusInd Bank.................................................................................................................. 67 Kotak Mahindra Bank ...................................................................................................... 68 State Bank of India .......................................................................................................... 69 Financials – NBFC .......................................................................................................70-88 Aditya Birla Capital .......................................................................................................... 71 Bajaj Finance ................................................................................................................... 71 Cholaman.Inv.&Fn ........................................................................................................... 72 Equitas Holdings .............................................................................................................. 73 HDFC Life ......................................................................................................................... 74 ICICI Pru Life .................................................................................................................... 75 ICICI Securities ................................................................................................................. 76 Indostar Capital ............................................................................................................... 77 IIFL Wealth ...................................................................................................................... 78 L&T Finance ..................................................................................................................... 79 LIC Housing Fin. ............................................................................................................... 80 M&M Financial ................................................................................................................ 81 MAS Financial .................................................................................................................. 82 Muthoot Fin .................................................................................................................... 83 PNB Housing .................................................................................................................... 84 Repco Home Fin .............................................................................................................. 85 Shriram City Union Finance ............................................................................................. 86 Shriram Transport Fin...................................................................................................... 87 Healthcare .................................................................................................................89-98 Alembic Pharma .............................................................................................................. 90 Alkem Labs ...................................................................................................................... 90 Aurobindo Pharma .......................................................................................................... 91

Biocon ............................................................................................................................. 91 Cadila Healthcare ............................................................................................................ 92 Cipla ................................................................................................................................ 92 Divis Lab .......................................................................................................................... 93 Dr Reddy’s Labs ............................................................................................................... 93 Glenmark ........................................................................................................................ 94 Granules India ................................................................................................................. 94 IPCA Labs ........................................................................................................................ 95 Jubilant Life ..................................................................................................................... 95 Laurus Labs ..................................................................................................................... 96 Lupin ............................................................................................................................... 96 Strides Pharma ................................................................................................................ 97 Sun Pharmaceuticals ....................................................................................................... 97 Torrent Pharma ............................................................................................................... 98 Media ...................................................................................................................... 99-101 Sun TV Network .............................................................................................................. 99 Zee Entertainment ........................................................................................................ 100 Metals .................................................................................................................. 102-109 Hindustan Zinc .............................................................................................................. 102 Hindalco Inds ................................................................................................................ 103 Jindal Steel .................................................................................................................... 104 JSW Steel....................................................................................................................... 105 NMDC ........................................................................................................................... 107 Tata Steel ...................................................................................................................... 108 Oil & Gas ................................................................................................................ 110-113 BPCL .............................................................................................................................. 111 Reliance Inds ................................................................................................................. 112 Retail ..................................................................................................................... 114-120 Aditya Birla Fashions ..................................................................................................... 114 Jubilant Foodworks ....................................................................................................... 116 Shoppers Stop ............................................................................................................... 117 Titan .............................................................................................................................. 118 V-Mart........................................................................................................................... 119 Technology ............................................................................................................ 121-128 Cyient ............................................................................................................................ 122 HCL Technologies .......................................................................................................... 122 Hexaware Technologies ................................................................................................ 123 Infosys ........................................................................................................................... 123 L&T Infotech ................................................................................................................. 124 Mindtree ....................................................................................................................... 124 Mphasis......................................................................................................................... 125 Coforge (NIIT Tech) ....................................................................................................... 125 Persistent Systems ........................................................................................................ 126 TCS ................................................................................................................................ 126 Tech Mahindra .............................................................................................................. 127 Wipro ............................................................................................................................ 127 Zensar Technologies...................................................................................................... 128 Telecom ................................................................................................................. 129-134 Bharti Airtel ................................................................................................................... 129 Bharti Infratel ................................................................................................................ 131 Tata Comm.................................................................................................................... 132 Vodafone Idea ............................................................................................................... 134 Utilities .................................................................................................................. 135-139 Coal India ...................................................................................................................... 135 JSW Energy.................................................................................................................... 135 NHPC ............................................................................................................................. 136 NTPC ............................................................................................................................. 137 Power Grid Corp............................................................................................................ 137 Tata Power .................................................................................................................... 138 Torrent Power ............................................................................................................... 138 Others .................................................................................................................... 140-159 Brigade Entp.................................................................................................................. 140 BSE Ltd .......................................................................................................................... 140 Container Corp .............................................................................................................. 141 Coromandel Intl ............................................................................................................ 142 Essel Propack ................................................................................................................ 143 Godrej Agrovet.............................................................................................................. 144 Indian Hotels ................................................................................................................. 145 Interglobe Aviation ....................................................................................................... 146 Info Edge (India) ............................................................................................................ 147 Kaveri Seeds .................................................................................................................. 148 KNR Constructions ........................................................................................................ 149 Lemon Tree Hotels ........................................................................................................ 150 MCX .............................................................................................................................. 151 Phoenix Mills ................................................................................................................. 152 PI Inds ........................................................................................................................... 152 Quess Corp .................................................................................................................... 154 SRF Ltd .......................................................................................................................... 154 Tata Chemicals .............................................................................................................. 156 Team Lease ................................................................................................................... 157 UPL ................................................................................................................................ 158

Contents Summary ....................................................................................................................................................................................................................... 3 Sectors ................................................................................................................................................................................................................... 9-159

Note: All stock prices and indices are as on 11th Sept 2020, unless otherwise stated.

September 2020 3

Voices | 1QFY21

Voices

Commentary improves on Demand; COVID caveat remains! In this report, we present detailed takeaways from the 1QFY21 conference calls as we refine the essence of India Inc. ‘Voices’.

The 1QFY21 corporate earnings were better than our muted expectations for both the Nifty and the MOFSL Universe. Nifty sales declined 29% YoY (v/s est. decline of 30%), while EBITDA/PBT/PAT declined 6%/30%/26% YoY (v/s est. decline of 11%/39%/35%). Six sectors posted YoY profit growth - Healthcare (27%), Utilities (16%), PSU Banks (10%), Life Insurance (4%), Private Banks (1%) and Technology (1%). The sectors that posted losses in line with our expectations were Automobiles, Metals, Retail and Telecom. Our FY21/FY22E Nifty EPS estimates have been marginally revised upwards by 2.1%/2.7% to INR477/INR664 (prior: INR467/INR647). We now expect FY21 Nifty EPS to grow 2.4% YoY. Breadth of earnings revision was positive - 84 companies in the MOFSL Universe saw upgrades of >5% while 40 witnessed downgrades of >5% for FY21. Corporate commentaries were cautiously optimistic based on gradual demand recovery Jun'20 onwards due to easing of the lockdown restrictions.

Commentaries of Banks suggest that business trends are gradually picking up MoM. The rural economy is picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue accessing the on-ground situation over the next few months, and accordingly, decide their growth strategy. In terms of asset quality, collection efficiency (CE) trends improved further in Jul-Aug'20 with ~75-85% collections in MFI and above ~80% in Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it is expected in mid-sized corporate/SME segments. Commentaries of NBFCs across suggest that improving macros across most business segments has led to increased optimism on CE as well as on growth across product segments. In terms of restructuring, most financiers are awaiting Sep'20 CE trends given the end of the moratorium period.

For the Consumer sector, the outlook on rural is positive on account of strong monsoons, good harvest and higher government spends. Rural is expected to grow faster than urban in the near term. The commodity environment remains benign, providing some relief in these challenging times. While in 1QFY21 companies had cut down their A&P spends, they are not sustainable going forward.

In Autos, 2W/4W demand recovery post the lockdown surprised OEMs and dealers on the back of (a) preference for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the rural market. While there is still some uncertainty over sustainability of demand, there is high focus on cost cutting, capex and conserving cash, which is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.

In IT, despite the COVID-19 led disruption in 1QFY21, revenue saw limited impact while deal wins were healthy. Supply side challenges are largely behind as ~99% employees are working from home (WFH). Demand side challenges are also expected to subside given that clients are now prioritizing IT spends and deal discussions. These had earlier come to a standstill and have picked up again.

Voices BSE Sensex: 38,855 S&P CNX: 11,464

1QFY21 | India Inc. on Call

September 2020 4

Voices | 1QFY21

Managements of Cement companies have informed that cement prices have softened across India in Aug'20 and are down by INR15/bag over Jun'20 on an average. Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas. However, managements remain cautious on the demand outlook due to the spread of COVID to rural areas.

In Healthcare, COVID-19 led impact on domestic formulation (DF) segment was recorded due to limited MR-doctor connect and lesser footfalls at clinics. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors to improve DF sales gradually. DF sales growth outlook is expected to gradually pick up, but cost calibration should keep margins at elevated levels over the near term.

Autos 2W/4W demand recovery post the lockdown surprised OEMs and dealers alike

on the back of (a) preference for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the rural market. For Aug’20, most OEMs were able to meet current demand in a seasonally weak month and are inching up toward inventory refilling for the upcoming festive season. 2W/4W demand sustaining in Aug’20 is a positive sign. CV demand recovery is expected only toward 2HFY21. While there is still some uncertainty over sustainability of demand, there is high focus on cutting cost, capex and conserving cash, which is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.

Capital Goods Due to disruption caused by the COVID led shutdown, managements across

companies highlighted the need to focus on working capital (execution has been slowed down on purpose). While ABB’s management indicated positive outlook for Automation in F&B and Electronics industry, Cummins’ management was cautious on the Hospitality sector and indicated slower pace of recovery for it. For ACs, Voltas’ management alluded to higher-than-normal inventory in the channel; however, it expects the same to get normalized over the next few months.

Cement Cement industry volumes declined ~38% YoY in 1QFY21 as Apr’20 was a

washout due to shutdown of operations till 19th Apr’20, post which operations have ramped up gradually. Managements informed that cement prices have softened across regions in Aug’20 and are down by INR15/bag over Jun’20 on an average. Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas, but managements remain cautious on the demand outlook due to spread of COVID-19 to rural areas. The quarter witnessed sharp decline in fixed costs due to lower admin, traveling, and maintenance and advertising expenses. While, a part of fixed cost reduction is likely to sustain in FY21, with an increase in volumes, some costs are likely to return. Further, while fuel costs had bottomed out, they are looking up in 2QFY21. As a result, margins are likely to decline.

September 2020 5

Voices | 1QFY21

Consumer The sector saw broad-based recovery toward the latter part of 1QFY21, which

has sustained for most companies in Jul’20 and early-Aug’20 as well. Overall, rural demand held up well during the quarter and the outlook is getting even better with good progress of the monsoons. Even among urban centers there is a big divergence between performance as well as recovery outlook for metros, non-metros and Tier-1/2 cities. Performance and outlook of in-home food consumption categories were exceptionally strong in 1QFY21 and the same was the case for cleansing and herbal products. Down-trading is a fear called out by most companies, which along with slower pace of recovery for discretionary products, means that premiumization is unlikely to be a material factor for the full year. On the other hand, benign material cost outlook and strong focus on cost savings are likely to shore up margin outlook for the rest of the year particularly as sales declines are likely to be lower from 2QFY21. Channel inventory days are also declining sustainably as companies are culling their tail-end products.

Financials Banks Commentaries of banks suggest that business trends are gradually picking up

MoM. The rural economy is picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue accessing the on-ground situation over the next few months, and accordingly, decide their growth strategy. Among business segments, retail growth is picking up faster with some segments like tractors, 2Ws, gold disbursements and affordable housing seeing the fastest improvement. On the other hand, MHCVs (especially linked to large fleet operators/commercial vehicle segment) continue to see challenges. On the asset quality front, CE trends have improved further in Jul-Aug’20 with ~75-85% collections in MFI and above ~80% in Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it should occur in mid-sized corporate/SME segments. Overall, slippages are expected to rise in the coming quarters, and thus, credit cost trends should remain elevated.

NBFC Commentaries of NBFCs suggest that improving macros across most business

segments has led to increased optimism for collection efficiency (CE) as well as for growth across product segments. In terms of restructuring, most financiers are awaiting Sep’20 collection trends given the end of the moratorium period. Improving liquidity and a higher risk appetite on account of better collection performance has given companies the confidence to lift disbursements. Improvement in the rural segment is a consensus view of most NBFC companies.

Healthcare The COVID-19 led impact on domestic formulation (DF) segment was a result of

limited MR-Doctor connects and lesser footfalls at clinics. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors to improve DF sales gradually. The DF sales growth outlook is expected to gradually pick up, but cost calibration should keep margins at elevated levels over the near term.

September 2020 6

Voices | 1QFY21

Capacity utilization has improved 70-90%. The trade generics segment has seen better off-take as compared to branded generics in 1QFY21. On the US generics front, ANDA approvals were higher but volumes for certain products were impacted in 1QFY21 due to stock piling in 4QFY20. Companies, post completion of remediation measures, are pursuing virtual inspections to ensure regulatory compliance at sites. Thus, the outlook remains steady for the US generics segment. The vaccine development for prevention of COVID is on at a rapid pace. Specifically, Bharat Biotech and Cadila Healthcare are expected to complete Phase-II clinical trials and subsequent statistical analysis by end-CY20.

Media Gradual opening up of the economy has led to rise in advertisement spends by

corporates, which has led to healthy recovery in ad revenues of broadcasters. Commencement of production and shooting of daily shows should further drive viewership, aiding ad revenues. Subscription revenue is likely to remain on a steady track and threat from NTO 2.0 regulations is expected to have a short-term impact on major broadcasters like ZEEL and SUNTV. SUNTV has guided that ad revenues could potentially decline 15-20% while ZEEL expects to grow ad revenues from the 2HFY21. Subscription revenues would moderate in FY21, after witnessing strong growth in FY20, led by NTO 2.0 regime.

Metals Companies have highlighted that domestic demand has improved in 2QFY21 as

the economy opened up post the lockdown. Exports are likely to remain elevated YoY; with domestic volumes picking up, share of exports in total volumes should decline sequentially to 30%. Managements of Tata Steel and JSW Steel have guided for higher capacity utilization in 2QFY21. Tata Steel has guided for >95% utilization and improvement in realization in 2QFY21 on the back of repetitive price hikes in the domestic market, better product mix and higher export realizations. It has also guided for sequential improvement in realization in excess of INR3,000/t. For FY21, both Tata Steel and JSW Steel have guided for flattish sales volumes whereas JSPL has guided for volume growth in the range of ~15% on the back of unutilized capacity and its ability to sell excess volumes in the export market. On the other hand, managements of Hindalco and Hindustan Zinc have highlighted that domestic demand for base metals has improved resulting in lower dependence on exports. Hindalco has guided that exports are likely to contribute ~65% of its volumes in 2QFY21.

Oil & Gas OMCs expect some more time before 100% demand is retained, with further

pickup in demand from the industrial and commercial space. Thus, refining margins are also likely to remain subdued due to poor product cracks, which are weighed down by demand destruction. However, the OMCs have reiterated that marketing margins and GRM trends over the longer term would stand at normalized levels. RIL is further planning to streamline its O2C integration business and focus on expanding its fuel marketing business. In the current challenging operating environment, RIL’s ability to optimize between feedstock and sales mix provides an edge in improving its performance. The company’s strong growth path remains in its digital and retail business. MAHGL and IGL stated that CNG volumes have recovered to 70-75% of pre-COVID levels,

September 2020 7

Voices | 1QFY21

although it is likely to range between 80-85% of pre-COVID levels in the near term. However, margins are likely to remain strong owing to lower domestic and spot prices. GUJGA has mentioned that current sales volume stands at 9.5mmscmd (v/s 9.4mmscmd of average sales in FY20), aided by strong recovery post the lockdown. Apart from probable benefits of the NGT’s stringent norms to curb industrial pollution, the company also plans to set up ~60 CNG stations in FY21 (out of 100 planned), which would increase the reach of CNG in Gujarat and encourage conversion. Post completion of the Kochi-Mangalore pipeline, PLNG expects utilization to increase to ~30-35% and reach 40-45% after 2-3 years. Utilization levels at Dahej should remain at current levels even 4-5 years down the line, primarily due to back-to-back tie-ups despite competition coming in. GAIL has stated that Gas trading, Gas transmission and Petchem operations are back to pre-COVID levels. Growth guidance for the company continues on the back of incremental volumes of ~8-12mmscmd from the commencement of fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.

Retail Retail sector witnessed a complete shutdown during the lockdown period and

has seen almost insignificant revenues during Apr-May’20. However, since Jun’20 pace of store reopening has been significant across states. Though footfalls have been lower, the conversion rate and bill size of customers has improved significantly. ABFRL/SHOP/V-Mart have negotiated rents during the lockdown period and reduced rental expense in FY21 as business is expected to remain muted. Retailers are also focusing on increasing their sales via the online channels and invest in marketing, branding and logistics to scale up online sales. ABFRL/V-Mart/SHOP have guided for muted capex/store adds in FY21 until normalcy returns. V-Mart; however, might look at expansion opportunities via attractive deals from 2HFY21.

Technology Despite the COVID-19 led disruption in 1QFY21, revenues saw limited impact

while deal wins were healthy. Supply side challenges are largely behind as ~99% employees were enabled for the WFH model. Demand side challenges are also expected to subside given that clients are now prioritizing IT spends. Deal discussions, which were earlier at a standstill have picked up again. Deal pipeline is healthy and has returned to pre-COVID levels. In terms of verticals, BFSI, Healthcare and Hi-tech remained largely resilient and are expected to be growth drivers in the near term. Retail, Energy and Utilities and Manufacturing were the most impacted verticals and will continue to see further challenges over the next couple of quarters. Deal closures have been slower than usual given that clients have added another layer of decision making. However, deal ramp-ups have been largely on track. The near-term outlook is positive and the worst is now behind. Expect 2QFY21 to see largely stable revenues and margins.

September 2020 8

Voices | 1QFY21

Telecom Telcos have reiterated their stance that ARPUs should reach INR200 in the near

term and INR300 in the long term for the industry to be sustainable. Further, managements have noted that 2G would exist in the market for at least the next 3-4 years and telcos would continue to offer 2G services until revenue share from these services become insignificant. Capex remained muted this quarter due to the nationwide lockdown; however, the companies would start deploying capex with the opening up of the economy. Bharti Infratel’s management mentioned that energy margin should reduce from 3-5% to 0-3%. However, it is continuously engaging with telcos to move back to the long-term fixed energy contract that is expected to bring back margins to previous levels. TCOM’s capex guidance remains intact and the company would keep investing in business opportunities. Further, it does not have any immediate plans to monetize its land parcel and would look for other means to deleverage.

Utilities PWGR has witnessed a pickup in RE related projects in Rajasthan. The Pugalur-

Thrissur project is also progressing well. But, overall execution pickup is uneven. On the supply side, manufacturers are having difficulty in restoring production. Nevertheless, PWGR has maintained its FY21 capex and capitalization target of INR105b and INR200-250b, respectively. For the sector, while receivables did increase in 1QFY21, it has now started to normalize. For PWGR, receivables increased from INR49b in Mar’20 to INR82b in Jun’20, but reduced to INR75b in Jul’20. Collection efficiency has increased and is >100% for Jun-Jul’20. For NTPC, outstanding over-dues have reduced to INR145b from INR164b at end-Jun’20. The company is hopeful of squaring off past dues by end of the quarter. In terms of capitalization, NTPC expects its capitalization run rate at 5-6GW per annum over the next 3-4 years.

September 2020 9

AUTOMOBILE | Voices

Key takeaways from management commentary

2W/4W demand recovery post the lockdown surprised OEMs and dealers alike on the back of (a) preference for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the rural market. For Aug’20, most OEMs were able to meet current demand in a seasonally weak month and are inching up toward inventory refilling for the upcoming festive season. 2W/4W demand sustaining in Aug’20 is a positive sign. CV demand recovery is expected only toward 2HFY21. While there is still some uncertainty over sustainability of demand, there is high focus on cutting cost, capex and conserving cash, which is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY21 Sales Commentary after Unlock

Capacity utilization stood at 30–35%. AL is confident of producing ~10k BS6 units (incl. LCVs) in 2QFY21.

Net debt stood at INR42.47b as of Jun’20 (v/s INR20b as of Mar’20). QoQ increase in debt was attributed to: (a) INR12b payments to vendors and (b) the funding of expenses. Inter-corporate deposits (ICD) declined by INR1b QoQ to INR4b.

Hinduja Leyland Finance: Moratorium rate stood at 40% (v/s 75% in Apr’20). PAT was down 15–20% YoY despite an additional ~INR150m provision (over and above INR700m in 4QFY20) for COVID-19.

It expects LCV to recover first, followed by ICV and M&HCV (tippers would recover first, followed by tractor trailers, and then MAVs).

The supply side is slowly ramping up, with manufacturing at

65–75% capacity utilization levels. 95%/85% of outlets for motorcycles/3W is operational.

It has fully passed on BS6 cost, but is yet to load margins. Since Apr’20, it has increased prices of domestic motorcycles by an average of 0.5%.

KTM rebounded in the Apr–Jun quarter; this would be reflected in BJAUT in 2QFY21 (consolidated with quarter lag).

Domestic: Motorcycle demand is at 80–85% of July levels from last year, with no downtrading across segments. Inventory is less than 30 days of current retail sales. 3W demand is 20% of normal levels, although Cargo 3W is faring relatively better.

Exports: Demand for motorcycles is back at 80–85% of July levels from last year. 3W exports are at 70–75% of normal levels.

Status of operations: Supply chain constraints continue to

affect production. It expects production to return to normal levels by end-Aug or Sep’20 (assuming there is no further impact due to COVID-19).

New product launches are expected over Aug–Sep'20. Future product launches are on track, and timelines for these have not changed.

VECV acquired Volvo Bus India for INR1.05b, completing its product portfolio on Buses.

Bookings are almost back at pre-COVID levels and inquiries are higher than the said levels. Bookings have sustained at pre-COVID levels for the last six to eight weeks, convincing the management that this is not just pent-up demand. Bigger cities are below average and smaller cities above average.

It has an order backlog of 40–45k units and is not seeing any material cancellations. Inventory is just 10k (dealer + co.); ideally, it should be at least three weeks (v/s one week currently).

Purchases for commuting to work and additional vehicles have gone up significantly, while replacement demand is down considerably. Demand for additional vehicles has gone up substantially, and FTB is also higher.

Price hikes: It took a price hike of INR250 in Jul’20 and INR1000 in 1QFY21.

Cost-cutting initiatives: Leap-2 targets cost-cutting by 100bp (2x target), capex phasing, and Project Mileage for overheads.

Strong demand recovery: Demand does constitute only pent-up demand; recovery seems sustainable. Rural is seeing a V-shaped recovery, while urban is lagging behind due to sporadic lockdowns. 10–12% of demand is owing to purchases being brought forward.

Update on capital allocation: The company has decided not to bid for the US Postal Services order through its US subsidiary as this does not fit 18% RoI norms and would have required substantial investments of over USD0.5b.

Status of operations: Capacity utilization was as follows – FES: >90% and Autos: >50%; a number of dealers (~85%) have opened up in both businesses. New launch pipeline: The new Thar would be revealed on 15th Aug’20 via a launch over Sep–Oct'20. The W601 (XUV500) would be launched in 1QFY22 and the Z101 (Scorpio) in 3QFY22.

Tractors: FY21 would be a growth year, but the supply side would influence demand. Market share loss in 1QFY21 was due to supply-side issues.

Auto demand is yet to be tested as supplies itself are at 50–60% of normal levels. Rural is faring much better (contribution at 62% v/s 50% normal). The challenge currently is to ramp-up supplies, with demand not an immediate concern.

AUTOMOBILES

Ashok Leyland

Bajaj Auto

Eicher Motors

Hero MotoCorp

M&M

September 2020 10

AUTOMOBILE | Voices

Status of operations: Current production ramp-up is at a run-rate of over 4,000/day. With the Gujarat plant starting its second shift from mid-Aug’20, it would add 900/day to the current run-rate of 900/day.

Due to fresh lockdowns, the number of operational dealerships has declined from >90% at the start of Jun’20 to 80–92%. ν Discounts were at INR25,000/unit (~INR14,000/unit on retail sales) as Wholesales (67k units) were substantially lower than Retail sales (119k units).

The diesel model share for the industry declined to 20.6% (v/s 29.5% YoY).

Retail demand stands at 85–90% of pre-COVID levels, with the rural markets bouncing back stronger than urban.

Demand for entry-level cars has increased to 65% v/s 55–56% earlier. Share of salaried customers has gone up to 49% (from 45%), the self-employed sector is stable, and the contribution of customers with businesses has come down.

First-time buyers’ contribution has increased by 5.5pp (to 50–51%), whereas replacement is down to 16–17% (v/s 25–26%). Second-car demand is also up.

JLR’s Project Charge delivered total savings of GBP1.2b (cost savings of GBP0.5b) and cash flow improvement in the quarter. It further increased the FY21 target from GBP1.5b to GBP2.5b, with the remaining GBP1.3b being equally targeted between cash and cost savings.

S/A cost and cash savings stood at INR10.2b in 1QFY21. Target savings of INR60b in terms of cost (INR15b target) and cash.

JLR launched the Defender across markets and has a strong order book of over 30k units. The Defender is expected to be a volume driver; annual volumes are estimated at over 100k units.

India’s business utilization stood at 20% for CVs and 60% for PVs.

The company expects premiumization to continue, albeit delayed by one or two quarters due to the COVID-19 impact. This should benefit Apache and Ntorq.

Expect margins to improve in 2H, driven by cost-cutting and focused market strategy. Jun’20 EBITDA and PBT were positive, with July faring even better.

Capex would be INR3b for FY21 and investment in TVS Credit would be ~INR750m.

The company expects demand recovery in 2HFY21, with TVSL performing better than the industry on account of its portfolio.

Amara Raja Batteries Neutral Current Price INR 747 Status of production – Currently, capacity utilization is at 80-85%, though it is

lower than pre-COVID levels. However, the situation is dynamic due to the sporadic lockdown and its possible impact on supply chain.

Demand – Aftermarket demand is good; however, its sustenance after normalization of the current situation is a key monitorable.

Other expenses – One-off expense of INR125m for provision in delay for BSNL’s receivables.

Exports faced major challenges as many countries were either impacted by the lockdowns or disruption in logistics.

Spot lead prices have seen inflation of ~14.5% from 1QFY21 average of ~INR127/kg.

It has launched its e-rickshaw battery in 1QFY21 and expects small sales to happen in 2QFY21.

Capex was largely maintained at ~INR4b for FY21. The company is planning to expand its 4W (2m units) and 2W (2-3m units) capacity.

Ashok Leyland Buy Current Price INR 68 Status of Operations: Capacity utilization stood at 30-35%. AL is confident of

producing ~10k BS6 units (incl. LCVs) in 2QFY21. Demand Outlook: It expects LCVs to recover first, followed by ICVs and M&HCVs

(first Tippers, followed by tractor trailers and then MAVs).

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Maruti

Tata Motors

TVS Motors

September 2020 11

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AVTR Platform- It has received excellent feedback for BS6 modular platform AVTR. The company is seeing interest from both fleet operators (due to better ad-blue efficiency) and drivers (due to cabin quality).

LCVs: Phoenix platform should be launched over the next 60-90 days. It will be a differentiated vehicle product and is expected to be a game changer. Production of LCVs at Hosur is ramping up quickly.

Cost cutting initiatives: The company saved INR5-5.5b under K54 project during FY20. It has launched ‘Project Reset’ focusing on improving efficiencies (variable cost) and reducing overheads.

Spare parts business: It has seen good recovery and is clocking a run-rate of INR1-1.1b/month (v/s FY20 average of ~INR1.3b).

Net debt: It stood at INR42.47b as of Jun’20 (v/s INR20b as of Mar’20). QoQ increase in debt was on account of (a) INR12b payments to vendors, and (b) funding of expenses. ICD has declined by INR1b QoQ to INR4b.

Hinduja Leyland Finance: Moratorium rate stood at 40% (v/s 75% in Apr’20). PAT was down 15-20% YoY despite providing an additional ~INR150m (over and above the INR700m in 4QFY20) for the COVID impact. HLFL plans to raise capital from a private equity player; however, if it does not materialize then AL would have to invest in HLFL.

BS6 Models: The company took a price hike of 15-20% for M&HCVs and 15% for LCVs. However, price discovery for BS6 hasn't happened yet.

Capex: FY21 capex is expected at INR5-6b. If demand recovers, the company may make some investments in paint shops, line balancing, etc. Thus, total capex could increase. Investment in subsidiaries of INR1.5-1.7b was made (Optare and Albonair).

Bajaj Auto Neutral Current Price INR 2,914 Domestic motorcycle: Demand is at around 80–85% of July levels from last year.

There is no evidence of any down-trading across segments. The share of Pulsar (incl. 125cc) increased to 50% from 40% in 4QFY20. Inventory is less than 30 days of current retails.

Domestic 3W: This is most impacted, with demand at 20% of normal levels, although Cargo 3W is doing relatively better. Till the time that normalcy is not restored, 3W demand is not expected to normalize as 3W operator income would not support financing. There is a need to have innovative financing products for this segment, and if need be, BJAUT may share the cost of such offerings.

Exports: Demand for motorcycles is back to 80–85% of July levels from last year. While some markets are doing relatively better (S. Asia, Middle East, LATAM) and some are lagging behind (Africa, ASEAN), most of the markets are at 75–100% of last year’s July levels. 3W exports are at 70–75% of normal levels. Nigeria is at 75% of normal levels from the 1st half of July (v/s 50% in June).

The supply side is slowly ramping up, with manufacturing levels at 65–75% capacity utilization. 95%/85% outlets for Motorcycle/3W are operational.

Gross margin sequential improvement was driven by favorable Fx (~INR0.77b benefit) and higher exports, offset by lower 3W sales and some commodity cost inflation on the precious metals side.

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Results Update

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Considering the continuous cost inflation in precious metals used in BS6, the company has fully passed on BS6 cost, but is yet to load margins. Since Apr’20, it increased the prices of domestic motorcycles by an average 0.5%.

In 1QFY21, other expenses amounted to ~INR1b (excluding marketing cost, which was very low).

KTM bounced back in the Apr-Jun quarter; this would be reflected in BJAUT in 2QFY21.

Bharat Forge Buy Current Price INR463 Outlook: Revenue is expected to decline in 2Q on a YoY basis, but domestic

revenue would be flat, with growth in Industrial, PV, Mining, and Tractor to cover for expected 67% decline in CV. It has added new customers in all three areas and gained market share, including in the CV segment.

International business: Revenue (excl. Oil & Gas) would be flat in 2Q on a YoY basis. The Oil & Gas business would be lower; however, Brent sustaining above USD42/barrel could drive recovery in demand.

US Class 8 Trucks: The net ordering trend has been positive in the last two months, and the segment has seen slow traction toward increased demand.

Defense business: BHFC’s focused products are part of the government’s localization drive and it is also looking at their potential export. Two of the key product offerings on the priority localization list are the Towed Artillery Gun and Ultra-Light Howitzer Gun. Even without this opportunity, the company is confident of doubling Defense revenues by FY23, supported by small projects and consumable supplies. As per Mr Kalyani, the sale of all defense products in India would be accounted for in the standalone entity, whereas global sales for certain defense products would be accounted for in the associate company (Kalyani Strategic Systems Ltd).

Aerospace business: The Commercial Aerospace business has substantially declined due to the COVID-19 impact. However, demand for engine parts for business jets has increased. Also, new products in replacement parts would add to revenues. Hence, it is confident of achieving its USD100m target over the next three years, although there could be a small downside.

Cost-cutting: The VRS scheme (offered from Jul’20 at two plants) and digitalization in manufacturing have reduced manpower cost. Also, it is targeting other fixed cost in identified areas; 70% of cost reduction was done in 1Q.

Overseas subs: The impact of COVID-19 would be extended to 2Q as well.

Bosch Neutral Current Price INR 12,874 Status of operations: Plants resumed operations during May’20 and are

currently operating at different levels. Jul’20 production reached 66% of the normal level. Multiple lockdowns in several states are adversely affecting the supply chain.

The company expects good demand in tractors, compact PVs and 2Ws. BOS is in the process of rightsizing its manpower, driven by changing business

dynamics. It reduced manpower by few hundred people in FY20 and has further reduced it by ~1,000 people in 1QFY21. It would continue this exercise, which is driven by increasing business mix that is shifting toward gasoline and

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September 2020 13

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EV/hybrids, which are less man-power intensive businesses (manpower intensity for diesel: petrol: EVs is 10: 3: 1).

BS6: Project acquired for FY20-25 was estimated at cumulative revenues of INR245b (pre-COVID level), which is now estimated at INR185b in post- COVID levels. Further acquisition of BS6 business is expected in FY21. Pricing in BS6 is decent and not as low as in BS4.

Production constraints for tractor fuel pump was resolved in 2HJul’20. Capex is expected at INR2.5-3b (~50% of FY20 capex of INR5.5b).

CEAT Buy Current Price INR 895 Demand Recovery: Farm/truck radial replacement sales picked up just after

opening up of the market. 2W/PV replacement demand picked up toward end-1QFY21 as urban markets opened with a lag.

Finished goods inventory decreased by INR2.12b (v/s increase of INR0.45b in 4QFY20). It also had non-material cost of goods like direct manufacturing and labor costs, etc., which resulted in gross margin contraction. Otherwise, gross margin per kg improved on like-to-like basis due to better mix and lower RM costs. The subsequent decrease in gross margin was captured by decline in other expenses. Thus, it did not have an impact on EBIDTA margin.

Other expenses decline was also supported by cost-cutting measures like zero advertisement expenses – discretionary costs were minimum, however, it should stabilize with sales and production normalizing.

Margins: Near-term mix would be favorable in 1HFY21 in the form of replacement and farm demand. With OEMs and exports picking up from 2QFY21, some change in mix is expected. Plus, RM costs should be supportive.

The company reported exceptional loss of INR218m (including INR25.8m loss) toward unusable semi-finished inventory due to the abrupt stoppage of production. Another INR175m was toward borrowing cost not capitalized due to temporary suspension of on-going projects and payment for unutilized contract labor during the lockdown.

Realization improved 3-4% QoQ and 1.5% YoY. 1QFY21 capex stood at ~INR1.05b. Target for FY21 is ~INR6.5b, which includes

~INR5.5b for standalone and ~INR1b for the Specialty tyres business. For FY22E, capex is expected at ~INR6-7b

Net debt declined by ~INR700m and gross debt to equity ratio stood at 0.69x. Natural rubber prices declined from INR135/kg to 115/kg during 1QFY21, but

again increased to INR132/kg. Benefit due to the crude price decline during Apr’20 would come in 2QFY21, but should be partially offset by INR weakness.

Eicher Motors Buy Current Price INR 2,159 Royal Enfield (RE) Demand outlook: Bookings are almost back at pre-COVID-19 levels, and inquiries

are higher than pre-COVID-19 levels. This is not just pent-up demand as per day bookings have been at pre-crisis levels for the last six to eight weeks. Current demand is mostly from tier 2 and tier 3 cities; therefore, there is headroom for demand from the urban areas.

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Results Update

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September 2020 14

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Bookings and inventory: It has an order backlog of 40–45k units, and it is seeing no material cancellations. Inventory is just 10k across channels; ideally, it should be at least three weeks (v/s one week currently).

Status of operations: The supply chain has been the biggest bottleneck due to lockdown seen in its key supplier cities (Pune, Aurangabad, and Chennai). Operations could have been at 20–25% higher levels in Jul’20, but for supply-side issues. While the situation is improving, there are still issues in pockets; it expects production to return to normal levels by end-Aug or Sep’20 (assuming there is no further impact due to COVID-19).

Dealerships operational: Up to Jun’20-end, over 90% of its dealerships were open. However, post that, the count reduced to 75–80% due to local lockdowns, but is now back at 90%.

It added 38 studio stores in 1Q (to 638 studio stores and 1,559 total outlets) and plans to add 600 more studio stores over the remainder of FY21. Over half of the studio stores have been opened up in UP, MP, Rajasthan, Odisha, Bihar, Andhra Pradesh, and West Bengal, where RE's market share is lower than its India average.

Globally, it added five exclusive stores (to reach 82) and 32 multi-brand dealerships (to reach 617) in 1QFY21. It plans to increase its exclusive store count to ~100 by end-FY21 from 82 currently.

New product launches are expected over Aug–Sep'20. Future product launches are on track and timelines for these have not changed.

VECV It acquired Volvo Bus India for ~INR1.05b, completing its Buses product

portfolio. This is a no-debt acquisition as it is a slump sale and acquisition of all assets. The acquired Bus business’ revenues for FY18/FY19/FY20 stood at INR4.6b/INR4.2b/INR2.8b. FY18 EBITDA/PAT for VGIPL was at ~INR494m/INR225m.

All nine production units have resumed operations, and capacities are operating at 25% utilization.

Endurance Technologies Buy Current Price INR 1,080 India Status of operations: Production was up 75% in Jul¡¦20 and reached near pre-

COVID levels during Aug-20. Cost cutting: Focus is on cost (both variable and fixed cost). The company is

targeting fixed cost reduction of at least 10%. New orders: ENDU has INR828m brake assembly orders from TVS/Yamaha with

supplies starting from FY22E. It has RFQs worth INR15.4b from various OEMs. With TVSL, it has orders 2W/3W brakes (INR1.2b p.a.) and suspensions

(INR320m p. a., starting from 3QFY21). Further discussions are ongoing for business worth ~INR810m.

The company is de-risking its CBS business, as it is only made at Aurangabad. It is now setting up 600k per annum CBS capacity at the Pantnagar plant, which should start from April-21.

Focus on value added products: (1) brakes & clutch assemblies for 200cc+ segment, (2) paper clutch assemblies for m/cycle, (3) CVT for scooters, (4) ABS,

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Results Update

September 2020 15

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Inverted Front Fork and Adjusted rear mono shock absorbers for local and global requirement (for KTM), and (5) fully-finished machined castings.

The Vallam plant for machined aluminum casting for Hyundai and Kia would start from Oct-20 and supply to Venue and Sonet. Additionally, it has got RFQs worth INR1.1b for machined aluminum castings for Hyundai's plant in India, Korea and Russia.

ABS business is on track for supplies starting 4QFY21. EU New Orders: EUR110m orders for EVs/Hybrids were won in the last two years

and should start in FY21 and peak in FY23. EUR45m business for EV components is under discussion with VW; ENDU hopes to win 50% of this.

Cost Cutting: Focused cost cutting efforts are on through labor cost reduction (reduced 116 contract workers), tight control on G&A and foundry plant consolidation from 2 to 1 plant (to be completed by Sep’20, driving EUR0.6m p.a).

ENDU did not get any support from the local governments as there were restrictions.

Other highlights: Consol. net debt to equity stands at 0.3x (India net cash at INR275m). Capex: India FY21 at INR1.5b, but could increase to INR2b for growth

opportunities. Incentive: INR100m incentive from Maharashtra state. Escorts Neutral Current Price INR 1,198 Tractors Supply Chain constraints - Biggest challenge to ramp up production is supply

chain for the entire industry. For FY21, supply side would determine market size/share. It has reached peak capacity in Jun’20. However, by end-Jun’20, the industry has started facing supply constraints on fuel injection system from Bosch. This is getting resolved and full capacity is expected by mid-Aug’20 (from 50-60% currently), though there would be some near-term uncertainties.

Growth Outlook: For FY21, low single-digit growth for the tractor industry is implied (~10% growth for rest of the year).

Geographically, it has positive growth, except in West Bengal and Chhattisgarh. Growth is skewed toward the South with 50% growth (v/s pan-India growth of 22%) and is expected to remain skewed for the next 3-4 months.

This Kharif season crop sowing has been preponed; therefore, early harvest might start the season early.

Current Inventory is ~3-3.5 weeks (incl. depots) v/s normal 6-7 weeks (2 weeks at depot and 4-5 weeks at dealer).

Operating performance - Margin has improved due to lower commodity cost along with: Improved product mix (>40hp tractors), as share of 40HP+ tractors has

increased to 62% in 1QFY21 (v/s 45-46% YoY) v/s 57-58% in 4QFY20, Subdued discounts during the quarter, which is expected to remain subdued

till the supply chain normalizes, and

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September 2020 16

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Other expenses being lower by INR300-350m due to (a) no SG&A expenses in 45 days shutdown (had resulted in no cost on SG&A of INR300-350m, and (b) no marketing spends, both of which will normalize in the coming quarters.

Cost: It has aggressive plans to cut fixed cost by 10-15% in FY21. Kubota JV production to start in 3QFY21 (end-Sep’20) for domestic

requirement. Exports: Some delays are seen in aspiration of exports of 8-10k tractors by

FY22E (v/s 3k in FY20), however, it should be achieved in the next 3 years. Railway business was impacted due to (a) logistics issues impacting deliveries,

and (b) railway units being shut. Order book at INR4.8b would be executed over the next 12-15 months. For FY21, it expects Rail business to grow in higher single digits and maintain margins.

Construction equipment volumes should recover in 2HFY21. Its break-even volumes are 230-250 machines/month and the target is to reduce it further.

Capex: INR2.25-2.5b in FY21 for new product development and capacity expansion (machining capacity of 50k).

Hero MotoCorp Neutral Current Price INR 2,991 Around 95% of the customer touch points of Hero MotoCorp are fully

operational. Demand outlook: Demand does not comprise just pent-up demand; recovery

seems sustainable, with some push from the movement toward personal mobility. Rural is seeing V-shaped recovery, while urban is lagging behind due to sporadic lockdowns. 10–12% of demand is owing to personal vehicle purchases being brought forward.

Customer profile: Contribution from people buying 2Ws to commute to work has gone up significantly. Replacement demand has also reduced considerably; additional vehicle demand has surged, and FTB is also higher.

Market share and product performance: Management is quite confident of market share gains sustaining, driven by rural buoyancy, BS6 product response, a refreshed portfolio (Passion, Glamour), and plugging the product gaps. Passion is very well-received by the market. Also, post-BS6, Glamour is seeing multifold growth in markets where it had minimal sales. Initial reviews of Xtreme 160 seem very encouraging.

Supply chain and inventory: The supply chain has recovered to 80–90% of pre- COVID-19 levels, but it is still in catch-up mode, and inventory levels are still below normal. However, the supply chain is normalizing, and in the coming months, the company would be ahead of demand to enable inventory build-up for the festive season.

Premium segment strategy: The first priority would be to complete the portfolio of premium products and create confidence in the market. It would then increase focus on gaining market share. This would be different from earlier strategies, which were focused on acquiring market share as soon as the product was launched, with the product being discontinued if targets were not achieved.

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Results Update

September 2020 17

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Regional flavor: Demand is good in Rajasthan, MP, UP, Bihar (before lockdown from mid-July and has picked up in Aug) and the eastern region. South is moderate, whereas Maharashtra and Gujarat are lagging behind.

Price hikes: The company took an average price hike of INR250 in Jul’20 and INR1000 in 1QFY21. The BS6 pricing pass-through is only for the cost and not for contribution margins.

Cost-cutting initiatives: Leap-2 targets cost-cutting by 100bp (2x target), capex phasing, and Project Mileage for overheads.

Capex target for FY21 was kept at ~INR6b. BS4 inventory: This included 25–30k unregistered vehicles of BS4 as of the

lockdown date. Mahindra & Mahindra Buy Current Price INR 614 Status of operations: Capacity utilization stood at FES: >90% and autos >50%;

Number of dealers opened – ~85% for both businesses and 100% suppliers are operational.

Inventory: Total system stock for both businesses (company + dealer) is at the lowest level in the last three years. In tractors, there was nothing much left to bill by end-Jun’20.

Tractors: FY21 would be a growth year with supply side uncertainties. Tractors’ market share declined 39.1% in 1QFY21 (v/s 41.2% in FY20) due to supply side issues.

Auto: Current demand is 50-60% of normal; however, a clearer picture would emerge over the next 3-4 months. Rural is doing much better (contribution at 62% v/s 50% normal). Current challenge is to ramp up supplies with demand not being an immediate concern.

Key management concerns currently are: Any supply chain disruption due to local lockdowns and COVID spreading to rural areas, which could impact demand in rural markets.

Update on Capital allocation: It decided to not bid for the US Postal Services order through its North American subsidiary, as it does not fit the 18% RoI norms and would have required substantial investments of over USD0.5b. It has written-off preparatory cost in this quarter. Further, it reiterated its decision of not funding losses of SYMC as well as Mar’21 timeline for deciding on all the loss making subs. The management team would be accountable for 3 variables i.e. EPS growth, RoE and FCF.

It added Bristlecone as the 10th Gem to its businesses: Bristlecone is a profitable company providing specialized technology for supply chain and serves Fortune 500 companies.

1QFY21 EBITDA margins got a boost from reduction in several expenses, which should normalize. Also, net variable margin has improved in both businesses and a large part of it is sustainable.

Diesel model share in UVs declined to 44% in 1QFY21 (v/s 50% in 4QFY20). US Tractor: It saw positive retail momentum with 1QFY21 growth at 15% and

22% growth in FY21YTD. It is taking this opportunity to correct its stocks as well as reduce cost. It is targeting to reduce losses at least by half in FY21.

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September 2020 18

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Jawa: Demand is very strong; however, it took longer for BS6 transition. It faced supply side issues from suppliers from Pune. The situation is normal now.

New Launches pipeline: Thar will be revealed on 15th Aug and launched during Sep-Oct'20. W601 (XUV500) would be launched during 1QFY22 and the Z101 (Scorpio) in 3QFY22. K2 Tractor platform launch would be in two years.

EV partnership: MM is looking for external partners for investment of USD100m for business needs (including product development), which would be funded through stake sale.

Capex: FY22-24 capex target stands at INR90b (v/s INR120b earlier).

Mahindra CIE Buy Current Price INR 123 Sales decline across businesses is below the breakeven point due to the COVID-

19 impact. India business BF Mexico changed its functional currency to USD with effect from 1st January

2020. The business has generated a restatement of its 1Q figures, with gains of INR418m in exchange rate fluctuations.

April and May were heavily affected by the lockdown, so negative EBITDA was generated mainly during this period. However, June was already reporting positive EBIT.

AEL received INR122m as grant income in 2QCY20, with 90–95% from the prior period. The total grant would be INR36m for CY20, of which INR18–20m came in 1H. The total accrual to date is ~INR1b.

Although employee headcount has reduced, the benefit would reflect in the coming quarters.

BF Mexico has seen fresh business from new customers; exports are doing well in Bill Forge and Gears.

Capacity utilization increased to 65–70% in 3QCY20 from 50% in June. Europe business The Europe business is nearing normalcy, with June already coming in EBITDA

positive (excluding restructuring costs). Restructuring actions have already been undertaken, and EBITDA includes about

~INR344m of restructuring cost (in MFE and Metal castello). This is for lay-offs, although the execution of the layoffs would happen in the next few months. This would result in a EUR4m reduction in staff cost on an annualized basis.

Capacity utilization increased to 65–70% in 3QCY20 v/s 55–60% in June. Incentives in EU – It received an EUR4m benefit under the schemes during

2QCY20. The benefit was largely for April and May as it was ramping up production in June.

Outlook: For PVs, 75–80% of CY19 volumes in the next two to three quarters; CY21 expected to be 10% below 2019 levels

Others Net financial debt increased to ~INR14.5b in Jun’20 from ~INR11.5b in Mar’20

due to forex fluctuation impact of INR840m and IndAS16 impact of ~INR2.5b. The company reduced its breakeven level by 10% to INR9b revenue from

INR10b revenue/quarter. Fixed cost reduced by INR 100m/month on fixed cost of INR1000m/month earlier.

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September 2020 19

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The next quarter should see improvement in margins, and expect pre-COVID-19 margins by the end of the year.

Tactics to improve profitability: Short term (3–6 months) – Cost reductions, profitability, improvements, and

restructuring at Metal castello and MFE Medium term (6–12 Months) – OEE improvement, labor productivity

improvement, VAVE, and Bought Out Parts (BOP) insourcing Long term (12 months and beyond) – OEE improvement, value stream mapping,

TPM/5S It is seeing the emergence of import substitution opportunity in India and has

already acquired similar business in the Gears and Magnets division. Also, it expects consolidation in the vendor base in both India and the EU, a benefit for MACA.

Capex for CY20 at consolidated level would be ~INR2.4b (INR1.4 b invested in 1H).

CIE open to increase its stake through a creeping acquisition if market price is conducive.

Maruti Suzuki Buy Current Price INR 7,190 Demand post lockdown: Retail demand stood at 85-90% of pre-COVID levels. In

some states, retail was higher than last year. Kerala, Maharashtra and TN were the worst hit. Rural markets are bouncing back stronger than urban.

Entry-level car demand has increased to 65% share v/s 55-56% earlier. Salaried customer share has gone up to 49% (from 45%), self-employed is stable

and business has come down. First-time buyers’ contribution has increased by 5.5pp (to 50-51%), whereas

replacement is down to 16-17% (v/s 25-26%). Second car demand is also up. Status of operations: Current production ramp-up is at run-rate of over

4,000/day as Gujarat is still operating at single shift. Gujarat plant is expected to start second shift from mid-Aug’20. It will add 900/day to current run-rate of 900/day. Currently, it is restricted by supply as vendors are located in 46 districts across 9 states.

Dealerships: Earlier91-92% of outlets were open, but due to the new lockdowns in sporadic manner, 80-92% outlets are open at any given point in time. Additionally, 10 states have levied lockdowns on the weekend.

RM cost was exceptionally high due to sharp decline in inventory levels (impact of INR1.1b or 3.5pp).

Discounts were at INR25,000/unit (~Rs14,000/unit on retail sales) as Wholesales (67k units) were substantially lower than Retails (119k units). Model level discounts have come down in 1QFY21. Given production constraints, discounts in Jul’20 should be lower than 1QFY21.

Diesel models’ share for the industry declined to 20.6% (v/s 29.5% YoY). Ex- MSIL, diesel model share stood at 26%. Given very low pricing disparity, running cost of petrol and diesel is similar at ~INR4/km.

Inventory for MSIL stood at 80k units or 25 days.

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Results Update

September 2020 20

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Motherson Sumi Buy Current Price INR 112 Status of operations: Gradual ramp-up was witnessed in plants globally, with

84% plants operating at more than 50% capacity. Demand: Strong demand has been sighted for 2QFY21, supported by consistent

improvement at SMP’s green-field plants. Its US plant reduced manpower from 2600 to 1800. This is a structural reduction as it had created a strong bench due to high absenteeism, and it is planning a further reduction.

Greenfield plants benefited from the shutdown as they could carry out structural improvements that would have otherwise happened when the plants were seeing ramp-up. The US plant saw improved efficiency and a reduction in scrap by 3%; costs for consultants and expatriates were also reduced.

Operations: The Hungary plant has ramped-up to its peak revenue potential, whereas the US plant would have achieved peak revenues this year if not for the COVID-19 impact.

Greenfield plants posted FY20 revenue/EBITDA loss of EUR461m/EUR175m and 1QFY21 revenue/EBITDA loss of EUR66m/EUR19m.

PKC: The CV segment in China showed very good recovery in 1QFY21. However, most of the OEMs in other regions were heavily impacted.

MSS expects to reach pre-COVID-19 revenues by Sep’20. Currently, it is at 80% of last years’ revenues.

Net debt stood at INR90.83b v/s INR68.17b in 4QFY20. This includes an INR1.2b impact of Fx.

Capex target for FY21E is INR20b (v/s ~INR22b in FY20). Tata Motors Buy Current Price INR 144 On 1QFY21 performance JLR’s realizations and Gross Margin improved by better market conditions

(China), product mix (SUV5), lower VME and favorable forex. Further, reduction in warranty cost (by 210bp YoY to 3.8%) along with other cost cutting initiatives supported EBITDA margins.

Chery JV achieved break-even during the quarter, driven by lower VME (from 23% to 13%), following the trend of improvement in dealer transaction price.

Elimination of prior UK tax losses led to deferred tax. This will reverse as it recovers losses, may be by end-FY21 or early-FY22E.

Status of operations JLR’s 98% retail network is operational. All plants are operational (barring Castle

Bromwich), which will gradually restart from 10th Aug-20. JLR launched the Defender across markets and has strong order book of over

30k units. The Defender is expected to be a volume driver with annual volumes expected at over 100k units.

JLR’s near-term performance will be impacted as it is focusing on bringing down dealer inventory to ~55 days (from 90 days in Jun’20 and 140 days in Mar’20). However, overall performance should be better than 1QFY21. The company expects to turn FCF positive from 2QFY21.

Warranty cost should sustain at current levels due to quality improvement model year (MY20).

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Results Update

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September 2020 21

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In 2QFY21, volumes may not pick up sufficiently to generate profits; however, cash flow is expected to be positive, supported by improved working capital and continued cost savings.

Utilization is relatively low. The company does not expect two shifts in other plants (except in Solihul and Slovakia) in 2QFY21 as it is working to reduce dealer inventories.

Investment spending is expected to be GBP2.5b in FY21. JLR Project Charge delivered GBP1.2b of total savings (cost savings of GBP0.5b)

and cash flow improvement during the quarter. It has increased its FY21 target further from GBP1.5b to GBP2.5b, with remaining GBP1.3b equally targeted between cash and cost savings. This brings the total charge plus savings so far to GBP4.7b, with a target of GBP6b by end-Mar’21.

JLR’s FY21 capex is maintained at GBP2.5b. The company spent GBP548m in 1QFY21.

JLR’s net debt stands at GBP2.75b (v/s GBP2.2b in Mar’20).

TVS Motors Neutral Current Price INR 445 Demand outlook: It expects demand recovery in 2H. Rural is faring better than

urban. TVSL expects to outperform the market owing to its strong portfolio. The Scooter and Moped categories are seeing a good response post the

BS6launch. Apache saw major production constraints. This has improved substantially in 2Q.

The company expects premiumization to continue, albeit delayed by one or two quarters due to the COVID-19 impact. This should benefit Apache and Ntorq.

For the dealerships that are open, demand is back at pre-COVID-19 levels. At the start of Jul’20, 85% of dealerships were operational. However, this has dropped to75% due to fresh lockdowns in select markets.

Production bottlenecks prevailed in Jun’20, but are easing in Jul’20. Apache faced severe production-related challenges, which impacted the mix in 1QFY21.

Inventory is much lower v/s the normal 30–35 days. It took price hikes of 0.7% in 1QFY21, and has taken a 0.4% price hike

in2QFY21.The gross margin declined by 90bps QoQ in 1QFY21, led by: (1) the reversal of finished goods inventory and (2) a weaker product mix (lower export mix), partly offset by price hikes taken in 1QFY21 and cost-reduction initiatives.

Expect margins to improve in 2H, driven by cost cutting and focused market strategy. Jun’20 EBITDA and PBT were positive, with July thus far faring even better.

It took a price increase of 0.7% in 1QFY21 and 0.4% in Jul’20 in the domestic market.

Interest cost increased due to additional borrowings in 1QFY21 to ensure timely payment to suppliers. The company repaid additional borrowings; hence, net debt is similar to Mar’20 levels.

Finance: Finance penetration increased to 52% v/s 46% YoY. TVS Credit holds 54%share of TVSL Financing. TVS Credit’s moratorium is currently at 14% (incl. Morat2.0) v/s 37% earlier, backed by strong collection efforts. Collections are now atpre-COVID-19 levels.

Capex would be INR3b for FY21 and investment in TVS Credit would be~INR750m.

Click below for Detailed Concall Transcript &

Results Update

September 2020 22

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CAPITAL GOODS

Due to disruption caused by the COVID led shutdown, managements across companies highlighted the need to focus on working capital (execution has been slowed down on purpose). While ABB’s management indicated positive outlook for Automation in F&B and Electronics industry, Cummins’ management was cautious on the Hospitality sector and indicated slower pace of recovery for it. For ACs, Voltas’ management alluded to higher-than-normal inventory in the channel; however, it expects the same to get normalized over the next few months.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY21 Domestic Capex Cycle

The velocity of orders and revenues has been encouraging currently, with ABB witnessing double-digit YoY growth on a like-to-like basis.

Building automation is one of the focus areas for ABB India. The entire Delhi airport is on ABB’s automation system. Numerous hotel chains are also using ABB’s automation.

Electronics manufacturing is set to increase in India, and the industry depends heavily on robotics. Hence, this would prove a strong growth opportunity.

It is witnessing increasing spends in the Food and Beverage industry.

Management has refrained from guiding for FY21

as it is still assessing the impact of COVID-19. The Distribution segment is expected to rebound

faster as the refurbishment of existing equipment would be the top priority for most customers.

Demand in Rental, Healthcare, and Data Center is recovering. Commercial Realty, Hospitality, Residential Realty, and Manufacturing are also reviving gradually (lower than other segments). Hospitality is in bad shape and would take longer to recover. The current capacity utilization stands at 65–70% (v/s pre-COVID levels).

Channel inventory is now lower than before as the channels have turned cautious and are working with optimum inventory.

The intensity of recovery was slower in the second half of July due to intermittent lockdowns.

~70% of Havells’ sales come from the B2C channel, which has shown better traction. Overall, demand for B2C products grew by 12% YoY in Jun’20.

As a percentage of sales, the working capital cycle appears optically high at 26.8% v/s 23.7% at FY20-end. L&T is expected to prioritize working capital management over execution.

L&T has been adding 1.5k laborers/day, with the total availability of the labor force now at 190k. While this is lower than the peak of 220,000, it is sufficient for the current monsoon quarter.

On expected lines, order inflows fell 39% YoY to INR236b, with core E&C order inflows declining 55% to INR137b.

The order book stood at >INR3.0t, providing comfort against weak order inflows in the near term.

Company-level inventory stood at 140 days, while that in the channel stood at 40–45 days.

Margin surprise in the UCP segment was owing to a better mix, the curtailment of ad spend, and low commodity prices. These levels of margins are unsustainable.

Due to weakness in the overall market, order inflows declined by 46% YoY to INR3.7b.

Domestic projects have ~70% labor availability currently.

ABB

Cummins

Havells

Larsen and Toubro

Voltas

September 2020 23

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ABB Buy Current Price INR 897 Business update Velocity of orders and revenues has been good. On like-to-like basis, the

company is witnessing double-digit YoY growth currently. Cash balance was higher at INR15b in 2QCY20. Non-trade items like tax refunds,

capex rationalization as well as focus on collections helped drive cash balance. Building automation is one of the focus areas for ABB India. Whole of Delhi

airport is on ABB’s automation system. Many hotel chains are also using ABB’s automation.

15% EBITDA level is the target set by the Global CEO for the ABB group. Raw material cost target is maintained at around ~65% of sales. Power Grid contracts are global and across group companies. Costs billed to ABB

Power are the ones, which are not incurring immediately. IT service support to ABB’s Power Grid by ABB India is expected to be extended for 2 years at least.

~10% of orders are via the government (Railways, Utilities, etc.). Electrification Orders will decline 7-8% if solar business orders are removed. Industrial Automation Lower margins are on account of lower exports and services revenue in the

quarter. ABB allowed certain digital services to be offered free to customers, in order to

make the customer get used to its advantages. Other key takeaways ABB is witnessing increasing spends in the Food and Beverages electronics

industry. Service revenue stood at INR2.53b in 2QCY20 v/s INR3.32b YoY. Exports stood at INR1.28b in 2QCY20 v/s INR1.59b YoY. Employee cost is lower as bonuses and other related expenses have been fine

tuned. Other expenses include forex gain of INR340m. Some part of other expenses cut

will come back as volumes grow, but few items like travel, promotions, etc. may remain subdued in the near term until strong growth resumes.

Net working capital increase pertains to the Power Grid business as few contracts are still routed through ABB’s books. It is yet to de-leverage as it should have been done post demerger.

Electronics manufacturing is set to increase in India and the industry largely depends on robotics. Hence it will be strong growth opportunity for ABB India.

Believe the portfolio is well placed to see structural string growth from energy efficiency and automation.

Blue Star Neutral Current Price INR 604 EMP segment Order inflow stood at INR2.7b in 1QFY21 (v/s INR9.7b in 1QFY20). BLSTR saw

healthy order inflows from segments such as BFSI, Healthcare, Pharma, and Government.

Click below for Results Update

Click below for Detailed Concall Transcript &

Results Update

September 2020 24

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BLSTR had ~150 active project sites with ~ 10,500 laborers. Currently, it has reduced this to ~50 active sites with 1,500 laborers (v/s the requirement of 3,000 laborers).

The order book stands at INR29.2b (+3% YoY). ~30% of order book exposure is toward the Construction segment

(electromechanical and AC systems). Provisions taken stood at ~INR150m in 1QFY21. UCP segment The RAC industry is expected to have declined 65% YoY in 1QFY21. Even after

the lockdown was lifted, footfall was lower and the focus was on inventory liquidation.

BLSTR’s revenue decline was in line with market decline. Secondary sales in July’20 are likely to have recovered to 77% v/s the previous

year. Price levels have dropped by 10–12% for the industry post the lockdown as the peak summer season has ended and the focus has been on inventory liquidation.

In June’20, sales recovered by 71% for the industry, with recovery in northern India sales at 85%.

The e-commerce channel gained traction, with BLSTR’s sales improving to 12% during the quarter. Industry e-com sales stood at 17% of the total sales during the quarter.

Inventory in the channel is likely to be higher by 30 days. In 2Q, revenue is expected to recover by 80% and by 90% in 3Q; 4Q is expected

to be at 100% of last year and may witness 5–10% growth if there is no fresh wave of COVID-19 infection.

Cost savings Warehousing, logistic, and ad costs are variable in nature. 50% of the total cost savings are expected to be sustainable; the other 50%

depends on incremental sales. Cash flow from operations Gradual liquidation in inventory would help release cash. Free cash would be used to pay off creditors. The company would focus on the latter part of the year to lower its borrowings.

It targets INR3.5–4.0b net borrowings by the end of FY21. Other takeaways Import substitution: There is no final policy as of now. However, certain sectors

are being prioritized, such as ACs and Furniture. Custom duty is likely to be enhanced.

BLSTR believes R&D is required to innovate and be price-competitive. The government should provide incentives on R&D to aid industry.

BLSTR would not manufacture components such as motors or compressors. The company would, however, indigenize inner door units (IDUs) and drives.

Another way to make the RAC industry competitive would be to reduce GST to 18% from 28% currently so it gives impetus to volume and leads to economies of scale.

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Crompton Greaves Consumer Electronics Buy Current Price INR 255 Demand outlook and business ramp-up CROMPTON achieved 70% of last year’s sales in May’20 and 90% in June’20. Secondary sales trend in July’20 indicate similar pickup in demand to that of

June’20. CROMPTON continued to gain market share in Fans and LED B2C portfolio

(Bulbs and Battens) E-commerce channel witnessed 400% YoY growth in May’20 and June’20. While local lockdowns will continue to disrupt business, management expects

sales to normalize by the end of 2QFY21. Management hasn’t seen a decline in demand post the pent up demand

witnessed post lockdown. Thus, the growth has been steady and improving. Electrical consumer durables Fans: In June, Fans activity scaled back to ~85% level. Latest market share

available for April period shows market share gains for CROMPTON. Appliance: In June’20, appliance business witnessed 6% volume growth YoY.

Water heater saw 42% YoY volume growth in June’20, while Mixer grinders grew by 125% YoY (volume) in June’20.

Pump: In June’20, Agro pumps achieved 25% value growth, with domestic Pumps scaling back to 100% activity level.

Lighting In June’20, B2C LED volumes grew 9% YoY. B2B business came under pressure due to deferment of orders by institutions

and muted Government orders. Margins came in better than expected on account of cost cutting initiatives and

favourable mix (1QFY21 saw supplies of EESL street lighting which has a higher margin than EESL bulbs)

Margins Ad-spends were curtailed to a negligible INR20m (0.3% of sales) from INR450m

(3.3% of sales) last year. Ad-spends will be restored as markets recover. Other expenses declined by 51% YoY versus 47% decline in revenue, with the

reduction done across variable costs and discretionary costs. Some of these costs could have been recurring cost but was cut down owing to COVID led shutdown.

Other key takeaways Strong focus on cash flow management led to improvement in balance sheet

with net cash position of INR4.6b (v/s INR2.4b at end-FY20). Introduction of New BEE rating has been shifted by 18 months. CROMPTON’s objective is not to improve margins from hereon, but to invest for

growth from near to medium term perspective. Cummins India Sell Current Price INR 456 Sales break-up Power gen sales plunged 76% YoY to INR 960 M, Industrial sales declined 68%

YoY to INR800m and Distribution sales dropped 47% YoY to INR1.8b. Note that the company operated for just one month during 1QFY21.

Click below for Detailed Concall Transcript &

Results Update

Click below for Detailed Concall Transcript &

Results Update

September 2020 26

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Demand revival: Demand in rental, healthcare and data center is recovering. Commercial realty, hospitality, residential realty and manufacturing are also reviving gradually (lower than other segments). Hospitality is in pretty bad shape and would take more time to recover. Current capacity utilization stands at 65-70% (v/s pre-COVID level).

Margins: Higher gross margin was on account of the favorable sales mix – higher proportion of distribution, better mix between HHP and LHP. Should revert to normal as revenue normalizes. The company remains focused on reducing material cost and keeping other costs under control to inch back to its historical margin range.

Emission norms update: As of now, there has been no notification on CPCB4+, but expect the implementation to get postponed (likely by three quarters). The new emission norms do open up export opportunity for KKC in developed markets. Globally, KKC has manufacturing bases in the US, China and India. If KKC India betters its cost and delivery, opportunities could come up for the company.

Rental income from captive continues at earlier rate. There has been no re- negotiation as of now.

There was some element of backlog, which could not have been shipped during the Mar’20 quarter (~INR1.9b).

The government is focused on infra development. Spending has been good in the first quarter. Also, the construction end market has not slowed down.

Havells India Neutral Current Price INR 654 Demand outlook In Havells’ core portfolio, May reported 60% sales against last year (LY), whereas

June surpassed LY sales by 4%. Lloyd achieved ~80% revenues against LY in May’20, whereas growth in June as

8% over LY. Switchgears saw 70% of sales from the consumer/residential channel and the

remaining 30% from the industrial channel. 70% of Havells’ product portfolio is B2C and the rest is B2B + B2G. B2C has

shown better traction. The B2C portfolio grew by 12% YoY in Jun’20. The stock level in trade currently is lower than pre-COVID-19 levels. Pent-up

demand could have been a factor in June. Market share gains are likely to have accrued from the unorganized sector on

the back of pent-up demand in June’20. Management is unsure of whether June’20 demand levels are sustainable, with

the possibility of extended lockdown in local areas. Havells would monitor sales on a monthly basis before settling down on a particular trend.

The western region is taking more time to bounce back, with cities such as Mumbai, Pune, and Nagpur lagging behind in terms of demand recovery. In the eastern region, recovery in Kolkata is slower than in other states. In the northern region, recovery in Delhi is slow v/s other states.

Lloyd Incremental capex would be limited to INR400–600m. Post localization, Lloyd has witnessed market share gains in the CY.

Click below for Detailed Concall Transcript

& Results Update

September 2020 27

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Other takeaways If all supplies from China are stopped as of date, the risk to revenues for the

current year would be limited to 5% of sales. The reason for raising Commercial Papers (CPs) worth INR5b: Havells had taken

loans in 1QFY21 to maintain liquidity due to the fear of COVID-19-led disruption. The company is raising its short-term CPs to replace this high-cost debt. This is a very short duration loan and would be repaid in due course of time.

Cost levers: a) many cost items would come back once revenue stabilizes. However, a part of cost reductions could sustain, such as travel expenses and marketing expenses based on new media avenues. b) Employee costs stood lower in 1QFY21 due to certain voluntary actions. These costs are expected to increase from hereon, but would still be lower on a YoY basis on account of employee rationalization in FY20.

The online channel is likely to see strong growth. The company expects to maintain the offline channel’s similar market share for the online market.

Havells would invest more in channel expansion in the rural areas. The management has not witnessed any trend of down-trading thus far.

KEC International Buy Current Price INR 325 EBITDA margins were lower, mainly due to cost overruns in the EPC business in

Brazil. All international sites are working at pre-COVID level utilizations, except for sites in Brazil, which have been hit harder by COVID.

The company is L1 in ~INR50b worth of orders, with majority from the International T&D segment. KEC is also L1 in a defense package under the Smart Infrastructure segment.

The company is using Automation to mitigate lower labor availability. Management has targeted ~20% improvement in overall productivity.

Railways’ business has ~INR100b of new orders, which are expected for bidding in the next few quarters.

Larsen & Toubro Buy Current Price INR 918 Outlook on order inflows: Ordering activity has continued despite pandemic

concerns, albeit with time delays. Sectors such as Water, Heavy Civil, and Power T&D are leading in terms of order inflows. Overall, the prospective order pipeline stood at INR6.3t for FY21; the share of Domestic orders stood at INR5.07t and International orders at INR1.2t. Within the Domestic order pipeline, opportunities in segments such as Water, Heavy Civil, and Power T&D would be worth INR1t each, with the rest equally divided between Buildings and Transport Infrastructure. L&T’s dependence on public capex and PSU investments has helped the company mitigate cyclicality. Order inflows would be driven more by the government sector than the private sector.

Order book highlights: International orders stood at 24% of the total order book. Only 18% of the Domestic order book is from the private sector, while 82% is from the public sector. Within the public sector, 50% of the order book is from the center and states, while 32% is from PSUs. Around half of the orders from the center and states have multilateral funding. Around 55% of the order book is variable pricing contracts with pass-through on material costs.

Click below for Results Update

Click below for Results Update

September 2020 28

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On labor situation: Labor availability has started to normalize. L&T has been adding around 1,500 laborers per day. The current strength of labor stands at 190,000, which is lower than the peak strength of 220,000, but sufficient for the current monsoon season.

E&A sales update – Deal closure is getting delayed as some of the paperwork needs to be signed in the presence of personnel from L&T and Schneider. This process is expected to be expedited as soon as international travel has resumed.

Key segmental comments Infrastructure: Order inflow pipeline has remained healthy. Client collections

have continued during the quarter. Margins have remained stable due to expense control and favorable input costs.

Power: High-value orders won last year are yet to cross the margin recognition threshold. Margins look optically low as profits of MHPS and other JV companies are consolidated at the PAT level under the equity method.

Heavy Engineering: Relatively healthy order inflows were witnessed despite the pandemic situation.

Defense: This segment continued to witness order deferment. Lately, there have been some hopes of revival given government announcements and ongoing border tensions.

Hydrocarbon: A record share of the order book provides adequate visibility for 2–2.5 years of revenue.

Development projects: Operations for the Hyderabad Metro were affected due to lockdown. Under-recovery of fixed costs was possible in this period.

Others: Revenues were significantly impacted, largely due to lower handover in the Realty business.

IT & TS: This reflects the contribution from the Mindtree acquisition. Even ex-Mindtree, this segment grew YoY.

L&T Finance Holdings: The business continues its focus on realization of the loan book, prudent ALM, improving asset quality, and increasing the diversity of funding sources. The Wealth Management business’ sale led to exceptional income of INR2.2b.

E&A business: Fixed overheads of manufacturing units charged to profits amid low capacity utilization impacted margins.

Working capital as a percentage of sales stood at 26.8%. Although higher in percentage terms, the absolute increase in working capital was only marginal.

Other highlights On execution challenges: The company has to follow social distancing norms

until the virus is controlled. Hence, despite labor availability, execution remains a challenge.

Hyderabad Metro – L&T opted for moratorium. Excluding interest expense, fixed cost (cash outgo) was INR0.5b per quarter. The company does not intend to increase additional debt on its SPV books. It will have to wait until E&A proceeds come in to finalize on the level of support to the Hyderabad Metro.

L&T is not incurring additional INR5b contract labor cost that was incurred in 4QFY20.

Some orders are not under execution as of now, but L&T does not plan to classify these as slow moving. The orders would be to the tune of INR70b.

The Realty business has taken a hit during this crisis.

September 2020 29

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Development projects – Nabha Power had positive EBITDA and the Hyderabad Metro reported EBITDA loss.

Design content was higher in the quarter as the company was able to shift to the work-from-home model.

Voltas Buy Current Price INR 657 Demand outlook VOLT sold over 3.4 lakh units in UCP in 45 days. The Projects business witnessed slower execution and collection challenges due

to certification delays, shortage of labor, and liquidity constraints. Unitary Cooling Products Industry volumes of RAC (secondary sales) declined by 49%, while decline for

Voltas stood lower at 45%. Inverter AC now forms 44% of overall AC sales and 66% of total Split AC sales. North India witnessed a fair amount of demand owing to the heat wave in

May’20. High inventory led to price deflation in RAC. Reasons for higher margins comprise: (a) improved product mix (higher Inverter

AC sales), (b) drastic reduction in ad spend (in an otherwise heavily advertised quarter), and (c) synergy from material costs (certain low inventory was already available in-house).

In spite of higher margins, the management maintained margin guidance of 11–12%.

Normally, ad spends in 1Q are approximately INR500m, which were cut down heavily in the quarter due to loss of sales. Usually, VOLT spends around ~INR750m toward ad spends in a year.

Air coolers saw 70% de-growth, in line with the industry. Voltas ACs is now available across 19,000 distribution touch points. Inventory position: INR11b of inventory is with VOLT. The company has around

~140 days of inventory and an additional 40–45 days with the trade. Jun’20 posted 1% YoY growth. However, June is generally not very strong for the

AC season. Electromechanical Projects and Services VOLT incurred idle costs over 45 days at different project sites. In the Middle East, construction activity was classified as ‘essential’. However,

productivity declined due to the strict implementation of social distancing rules. ECL and other time-based provisions incurred impacted profitability. Management expects to incur further provisions over the next 1–2 quarters. Order inflows stood at INR3.66b. The order book was at INR76.6b (domestic:

INR47.6b; international: INR29.0b). Middle East: The level of transparency over client financials is lower. Hence, the

company has to deploy risk mitigation strategies to choose its clients. The Oman project may require more provisions in the future.

Domestic projects have ~70% labor availability currently. Management believes there are sufficient margins built in the orders. However, the impact of COVID-19 on margins is yet to be ascertained, and any future guidance on this is difficult to quantify.

Click below for Results Update

September 2020 30

CAPITAL GOODS | Voices

VOLT has focused on government projects since payments may be delayed, but are sure to come through. The company does not want to depend only on private clients.

Volt-Bek The company witnessed high demand for washing machines, dishwashers, and

microwaves, in line with the changing trends in consumption. Demand for DC refrigerators was also strong.

Volt-Bek was able to leverage on Voltas’ existing distribution network. Currently, the brand is present across 6,000 touch point’s v/s 19,000 of Voltas.

~130 EBOs (Exclusive brand outlets) are selling Voltas and Volt-Bek products. Voltas has invested INR3.73b in the JV. The company targets 10% market share

by 2025 and expects to achieve breakeven by then (or maybe a year or so earlier as well).

Other takeaways Major imports comprise compressors, DC motors, and PCBs. Highly and GMCC

have commenced compressor manufacturing in India. Hence, backward integration in these components would not make sense. VOLT is looking to set up its southern factory, with delay due to COVID-19 extending the timeline to 1Q of next year (1QFY22).

Import duty on compressors is set to be increased to 20% from 12.5% currently. Similarly, a fully imported AC is likely to see higher duties at 30% from 20% currently.

~40% of AC cost is due to imports. This would reduce, especially once compressor imports are replaced. However, VOLT would not compromise on product quality and would watch out for strong suppliers for localization.

.

September 2020 31

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CEMENT

Cement industry volumes declined ~38% YoY in 1QFY21 as Apr’20 was a washout due to shutdown of operations till 19th Apr’20, post which operations have ramped up gradually. Managements informed that cement prices have softened across regions in Aug’20 and are down by INR15/bag over Jun’20 on an average. Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas, but managements remain cautious on the demand outlook due to spread of COVID-19 to rural areas. The quarter witnessed sharp decline in fixed costs due to lower admin, traveling, and maintenance and advertising expenses. While, a part of fixed cost reduction is likely to sustain in FY21, with an increase in volumes, some costs are likely to return. Further, while fuel costs had bottomed out, they are looking up in 2QFY21. As a result, margins are likely to decline.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook FY21 Commentary on Capex Cycle

Variable cost declined, led by lower power consumed and higher blended cement sales. Reduced marketing activity, traveling, office admin expenses, and other overheads led to a further reduction in cost. As volumes pick up, these costs are expected to normalize.

In 1QFY21, it repaid debt of INR5.1b, which brought down net debt / EBITDA to 1.02 from 1.34 in 4QFY20.

A 3.0mt clinker line at Rajgangpur is undergoing trial runs and is expected to be commissioned in 3QFY21; the Bengal and Cuttack grinding units would be commissioned in Dec’20 and Mar’21, respectively.

Capex guidance is at INR8.0b for FY21, and including Murli Industries, it could go up to INR11.5–12.0b.

While the industry saw volume decline of 10% over July–Aug’20, JKCE’s volumes grew by ~20% YoY, driven by capacity expansion.

1QFY21 witnessed sharp decline in fixed costs on account of a reduction in consultancy charges and admin, travel, and branding expenses. Variable costs, though, are expected to go up due to an increase in petcoke and diesel prices.

The Nimbahera Line 3 upgrade is expected to be completed by 2QFY22, and the 0.7mt Balasinor plant is expected to be commissioned in 3QFY21.

FY21 capex guidance stands at ~INR7b on account of Mangrol capex at INR3.5b, other growth capex at INR2.5b, and maintenance capex.

The Nimbahera Line 3 upgrade is expected to be completed by 2QFY22. The total outlay stood at INR1.96b as of 30th June’20.

The 0.7mt Balasinor GU is expected to be commissioned in 3QFY21. The total outlay stood at INR15.1b as of 30th June’20.

FCF generation stood at INR22.0b, achieved through a working capital release of INR7.9b. However, management does not foresee further reduction in working capital in FY21.

It aims to reduce fixed costs (including employee costs) by 10% or INR5.0b in FY21 (implying ~INR70/t) on a sustainable basis.

UTCEM has divested the non-core China cement business (part of the Binani acquisition) for EV of USD120m (INR9.0b). Post the payment of its liabilities and withholding tax, it would receive INR7.0b, which would further reduce net debt.

The company has increased its capex guidance to INR15b for FY21 from earlier guidance of INR10.0b (INR17b in FY20). Of INR15b, ~INR7b is toward maintenance capex, INR1.2b for the Bara grinding unit, and another 1.2b for the Bicharpur coal block.

Dalmia Bharat

JK Cement

Ultratech Cement

September 2020 32

CEMENT | Voices

Birla Corp Buy Current Price INR 598 Utilization The company’s production in April was at negligible levels. Operations

commenced effectively in the first week of May at most plants, leading to loss of nearly five weeks of operations. Operations remained impacted by local lockdowns and restrictions.

Capacity utilization stood at 58% during the quarter (v/s 96% in 1QFY20) on non-operation for nearly five weeks, implying capacity utilization of >90% for the rest of the quarter.

Market mix Trade sales stood at 2.06mt, with volume share growing by 2pp YoY to 86%. Premium cement sales (by volume) declined 44% YoY to 0.74mt, and the share

within the Trade segment declined 8pp YoY to 36% in 1QFY21. Blended cement share remained unchanged at 94% of volumes in 1QFY21. Demand and pricing Trade demand picked up in May on the back of pent-up demand and strong

demand from rural housing. While urban demand remained weak throughout, some green shoots have been visible since Jun-end, driven by a pickup in infrastructure projects and the government’s funding of welfare schemes.

During the quarter, the company’s realizations were affected by lower sales in lucrative markets such as North Bihar and higher sales in Madhya Pradesh, where pricing was lower.

With the onset of the monsoons, cement prices have begun to weaken. Management remains cautiously optimistic on gradual recovery in demand.

Cost reduction measures During the quarter, the company undertook measures to rationalize fixed costs

and improve efficiencies. To reduce transportation cost, the company started transporting fly ash through rail. Other cost reduction measures included higher generation of solar power to reduce power cost and a change in the product mix.

The board approved the buyback of secured Non-Convertible Debentures to lower borrowing cost, if such an opportunity prevails in the market.

Upcoming capacity Work at the Mukutban integrated project of 3.9mt was impacted due to

lockdown. As a result, the company expects the completion of the Mukutban project to be

delayed by a quarter to early 2QFY22. Others Borrowing cost declined 52bps YoY to 8.08%. The Jute division’s operations were impacted by lockdown and the Amphan

cyclone, and sustained for just 16 days in the quarter. It reported EBITDA loss of INR34.2m v/s EBITDA of INR48.3m in 1QFY20. Production was at 1,1715t during the quarter v/s 8,583t in 4QFY20.

Click below for Results Update

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CEMENT | Voices

Dalmia Bharat Buy Current Price INR 710 1QFY21 highlights Volume de-grew by 20% YoY, but was better than industry de-growth of 35%. The trade sales mix was up to 75% from an average level of 60%, led by a pickup

in IHB demand, and is likely to drop as infra demand revives. Blended sales mix stood at 85%, while premium products accounted for 18% of

trade sales. Continuing with the trend, pricing remained favorable over May–June and was

supported by higher volumes on account of pent-up demand. DSP (special product) is gaining popularity in the eastern region, which has led

to a 3–4% increase in market share in eastern and 1% increase in southern. Lead distance remained below 300km during the quarter. Variable cost for DDSPL (Kalyanpur) is down to INR2,100/t from INR2,900/t, and

capacity is expected to increase to 1.1mt by Dec’20. Demand and pricing outlook The demand outlook remains uncertain as the COVID-19 spread in eastern

states could lead to continued lockdown; monsoon floods would further dampen demand in Assam and Bihar.

Demand has deteriorated in eastern and southern post mid-July and is expected to drop by 5–10% and 25–30%, respectively, in 2QFY21.

Industry cement volume is expected to decline by 15–20% in FY21, but growth would be significant in FY22 on account of a lower base.

Road projects in southern are now operational at 95% of normal levels, while the Polavaram project is progressing slowly due to labor issues. The AP govt. has established low-cost housing projects, but no other govt. projects have picked up pace in southern.

Current prices in eastern and southern have been down by INR10–12/bag and INR5–8/bag, respectively, since June.

Cost insights Variable cost was down, led by reduced power consumption, reduced power

rate, and an increase in blended cement sales. The WHRS plant is expected to be commissioned by Dec’20, which would bring down power cost.

DBL expects to further reduce variable cost going forward, but uncertainty in pet coke prices and decline in the blended cement mix (as non-trade demand picks up) could have an impact.

Logistics cost was down despite an increase in diesel prices due to the use of the reverse auction mechanism and emphasis on digitization.

Reduced marketing activity, traveling expenses, office admin expenses, and other overheads have led to a further reduction in cost, but as volume picks up, these costs are expected to go up.

DBEL is not purchasing any clinkers from outside. Depreciation cost: Depreciation would be lower at INR12.5–13.0b in FY21 owing

to the WDV method and retirement of certain assets, while the goodwill amortization amount would vary.

Debt and capex INR5.1b of gross debt was repaid in 1QFY21, which has brought down net debt /

EBITDA to 1.02 from 1.34 in 4QFY20.

Click below for Results Update

September 2020 34

CEMENT | Voices

A 3.0mt clinker line at Rajgangpur is undergoing trial runs and is expected to be commissioned in 3QFY21; the Bengal and Cuttack grinding units would be commissioned in Dec’20 and Mar’20, respectively.

70–80% of land has been acquired for the Bihar grinding unit; construction would commence within two to three months and would be completed in 15–18 months (from the start of construction).

Other highlights Incentive booked in revenue was INR170m, while INR90m of incentives were

received in 1QFY21. Outstanding incentive receivables stand at INR7.16b as of Jun’20.

The Murli Industries acquisition would be completed by Sep’20, and it would take 10–12 months for ramp-up post the acquisition.

The mutual fund issue is under resolution, and the timeline for the same is uncertain; the strategy on IEX would be finalized in CY20.

Grasim Industries Neutral Current Price INR 722 Update on operations Capacity utilization in the VSF and Chemical segments was impacted due to

lockdown in the country. VSF capacity utilization stood at 26% in 1QFY21, and Caustic Soda utilization stood at 49%.

However, capacity utilization ramped up in Jul’20. Capacity utilization in VSF stood at 79% in Jul’20 (73% in Mar’20); utilization in Caustic Soda improved to 78% in Jul’20 (v/s 72% in Mar’20).

The fertilizer plant continued to operate normally even during lockdown. VSF The VSF business’ performance was impacted by weak domestic and overseas

demand due to local lockdowns and low operating rates in the Textile industry. Reported EBITDA loss stood at INR1.1b (v/s profit of INR4.4b in 1QFY20) due to

~78% decline in revenues. VSF sales declined 69% YoY to 43kt in 1QFY21, and VFY sales declined 90% to

1.0kt. Share of VAP sales in total sales stood at 30% (v/s 24% in 4QFY20). Grey VSF prices declined ~26% YoY during the quarter v/s ~20% decline in

cotton and ~29% in PSF. Management highlighted that VSF prices remain under pressure. Textile

demand recovery in China has not been up to the mark, and China’s textile industry is still operating at low utilization (64%).

However, with the Europe and US markets opening up, it expects demand to recover in 2QFY21. It expects prices to bottom out from current levels, already at historical lows.

It expects Viscose demand to reach 90–95% of normal levels by 4QFY21. Chemical Revenue from the Chemical segment declined ~53% YoY to INR7.04b due to a

sharp dip in sales volumes and weakness in ECU realization (INR25,649/t; down 31% YoY).

As a result, EBITDA declined ~90% YoY to INR410m. Caustic Soda sales declined 42% YoY to 138kt. Caustic Soda prices (CFR) in Asia eased below USD300 levels due to an

oversupply situation, which created pressure on domestic prices.

Click below for Detailed Concall Transcript &

Results Update

September 2020 35

CEMENT | Voices

Chlorine realizations turned positive in 1QFY21, driven by demand from disinfectants and hygiene products.

Chlorine value-added product demand remained strong, reaching pre-COVID-19 levels in Jun’20.

Caustic Soda sales for 1QFY21 were 32% lower YoY at 138kt on account of lower demand for user-based industry.

Chlorine consumption in VAPs stood at 27% in 1QFY21 from 26% in 1QFY20. Fertilizer Revenue declined 13% YoY to INR6.05b. However, EBITDA improved 38% YoY to INR720m due to fixed cost reduction,

one-time gains pertaining to freight arrears (INR120m) and better PURAK sales (16% of total, up 10% QoQ). PURAK sales contributed ~24% to segmental EBITDA.

Demand for urea continued to be strong on account of normal monsoons leading to advance crop sowing.

Other Business – Textile and Insulators The Textile business’ revenue declined 83% YoY to INR750m. Reported EBITDA

loss was INR550m v/s profit of INR310m in 1QFY20. The Insulators business’ revenue declined ~59% YoY to INR1,100m. Reported

EBITDA loss was INR150m v/s profit of INR60m in 1QFY20. Cement Volumes were lower by 21% YoY due to the impact of COVID-19. India operations reported EBITDA of INR20.3b and EBITDA/t of INR1,453 in

1QFY21. Variable costs declined 9% on a YoY basis in 1QFY21: Logistics was down 3%,

Energy 11%, and RM 2%. Consolidated net debt reduced by INR22b QoQ to INR146.5b in 1QFY21. Net

debt / EBITDA stood at 1.44x as of Jun’20. Aditya Birla Capital Revenue and net profit after minority interest for 1QFY21 stood at INR40.3b and

INR2.0b, respectively. Overall, closing AUM (Domestic) increased 8% QoQ to INR2,176b and closing

Equity AUM grew 19% to INR780.2b in Jun’20. In Life Insurance, Individual First-Year Premiums (FYPs) grew 5% YoY to INR3.1b;

13th-month persistency improved to 81% from 79%. In the Health Insurance business, gross written premiums were up 72% YoY to

INR2.5b in 1QFY21, with the retail mix at 73%. Others Standalone net debt increased by INR1.6b QoQ to INR31.4b. The company has taken the board’s approval for capex spend of INR16.1b for

FY21. This includes spend on the VSF business of INR8.64b (largely for capacity expansion) and the Chemicals business of INR3.17b. However, Chemical capacity expansion remains on hold. Capex was INR1.31b in 1QFY21.

September 2020 36

CEMENT | Voices

India Cement Neutral Current Price INR 116 Operational highlights 1QFY21 sales volumes declined 53% YoY to 1.43mt on 48% decline in volumes in

the main markets. Capacity utilization was at 35% for 1QFY21. Breakeven utilization stands at 32%, down from 62% in FY20. Net plant realization stands at INR4,235/t and EBITDA stands at INR1,090/t. India cement trade sales mix stood at 67%. Revenue for Windmill/Shipping/RMC stood at INR42m/INR60m/INR80m. EBITDA for Windmill/Shipping stood at INR42m/INR38m. EBITDA loss for RMC

stood at INR20m. Cost-reduction measures Focus on cost reduction led to the company achieving lower fixed cost. Fixed

cost for the quarter stood at INR1.3b, down from an average level of INR1.9b. This was achieved by cutting down travel and admin expenses, and curtailing

contractual labor to 970, down from pre-COVID-19 levels of 1,500. Variable cost of production was at INR2,150/t for 1QFY21 and is expected to

drop to INR2,100/t, supported by lower fuel prices. The rationalization of geographical distribution and distribution channels

through a reduction in the no. of warehouses and direct sales from plants led to a reduction in freight cost to INR954/t (from INR1,058 YoY).

Gifts and discounts to dealers were capped as a part of cost-reduction measures.

The fuel mix stood at 50%/50% for pet coke / coal. Guidance on cost and margin India Cements could not benefit from lower fuel prices due to the high-cost fuel

inventory carried forward from the previous quarter. Hence, the benefit of lower prices is expected to be realized in 2QFY21.

Fixed cost is expected to increase to INR1.5b per quarter with an increase in production.

Lead distance is expected to increase as supply is directed to the western and eastern regions with the normalization of the COVID-19 situation.

Demand and pricing insights The company is focused on improving the trade mix (67% in 1QFY21) to boost

realizations as the NPR differential between trade and non-trade stands at INR800/ton.

The company expects govt. spending on infrastructure, low-cost housing, etc., to support demand and pricing in AP and Telangana.

Average monthly demand for AP and Telangana is 1.0mt and 1.6mt, respectively (subdued in FY20 due to elections), and is expected to revive by 3QFY21.

India Cements expects capacity expansion by Chettinad, Penna, and Ramco to have no impact on the southern market, which has a monthly capacity of 12– 13mt.

Road and irrigation projects are supporting demand and offsetting muted demand from metros.

Debt Debt reduced by INR1.3b in 1QFY21. Standalone gross debt stood at INR34.4b as of 30th June 2020.

Click below for Results Update

September 2020 37

CEMENT | Voices

Term debt stood at INR25b and should decline to INR20b by Mar’21. Working capital debt stands at INR5.5b. The company has INR5.3b of debt repayments planned in FY21.

Management highlighted that industry in southern India has witnessed a shift from credit-based sales to cash-and-carry, leading to improved liquidity for India Cements.

JK Cement Buy Current Price INR 1,434 Operational highlights Current capacity utilization for plants in south India is at 60%. The Aligarh grinding unit is operating at 50% utilization levels. Cement production volume was at 1.59mt for 1QFY21. Cost insights 1QFY21 witnessed sharp decline in fixed costs on account of reduction in

consultancy charges and admin, travel, and branding expenses. Variable costs, though, are expected to rise on an increase in petcoke and diesel prices.

Petcoke prices have increased by INR600/t MoM in Sep’20. As a result, fuel costs are expected to increase further.

Freight cost would go up on account of an increase in diesel prices. In 1QFY21, power cost was higher on account of a change in the power mix,

triggered by a fire breakout at the Mangrol captive power plant. The Nimbahera Line 3 upgrade would enhance clinker capacity by 1000t/day as

well as reduce power and fuel cost. The average grid power mix stands at 20%, while the cost differential between

grid power and captive power is at INR1.5–2.5/unit. Demand and pricing outlook Cement prices have softened by INR10–15/bag in 2QFY21 due to seasonal

demand weakness. Non-trade prices have declined by INR30–40/bag. JKCE expects demand to pick up from mid-Sep’20 and non-trade prices to

improve by end-Sep’20. JKCE remained cautious about demand, but expects an increase in volumes on

account of commissioning and ramp-up of new capacities. While the industry saw volume decline of ~10% over July–Aug’20, JKCE’s

volumes grew by ~20% YoY, driven by capacity expansion. Demand for white cement has started to pick up, while prices have remained

flat YoY in 2QFY21. Sales mix Blended cement mix was at 69%. Trade mix was at 75% v/s 69% in 4QFY20. Trade mix is at 65–70% on account of the monsoon-led softening of retail

demand. Debt and cash position Standalone gross/net debt stood at INR26.0b/INR13.37b, while debt for UAE

operations was at INR4.0b. Net debt/EBITDA improved to 1.22x in 1QFY21 from 1.35x in FY20. Net D/E is at 0.42x v/s 0.51x in 1QFY21. Cash balance was up to INR12.6b in 1QFY21 from INR10.0b in 4QFY20.

Click below for Results Update

September 2020 38

CEMENT | Voices

JK Lakshmi Cement Buy Current Price INR 256 Utilization and volume Sales volume at 1.9mt included 0.3mt clinker sales while consolidated sales

volume stood at 2.07mt. Clinker production stood at 925kt while cement production was at 1.43mt. Utilization in Jul’20 stood at 67%, flat YoY. Demand and pricing insights The South witnessed higher price hikes in 1QFY21 (on QoQ basis) as compared

to other regions, but price has started softening in Jul’20 (on MoM basis) across India.

In Jul’20, demand softened in the East due to the monsoons while it has picked up in the North and West.

Jun-Jul’20 sales volume stood flat YoY. Rural demand remains strong due to better liquidity on account of several Govt.

initiatives including MGNREGA but it could suffer in the East due to stricter lockdowns in Chattisgarh and Odisha on account of increasing spread of COVID-19.

In urban areas, demand from independent house building (IHB) segment has started picking up in Jul’20 while infra projects continue to suffer due to labor issues, which are expected to normalize in 3QFY21.

Trade and non-trade average price differential is at INR40-50/bag across regions while the East has the highest differential of INR70-80/bag.

Sales mix Trade mix stood at 61%, up from 59% in 4QFY20. Trade mix in the East is higher

than in the North. Higher clinker sales led to lower realization as compared to the industry. Lower profitability in the East resulted in lower EBITDA/t as compared to the

industry. EBITDA/t for East is at INR700/t while for the North it stands at INR1,000/t.

Blended cement sales mix stood at 78% in 1QFY21. RMC revenue – INR120m while aggregate non-cement revenue stood at

INR290m. Debt and cash Standalone gross debt stands at INR15b while net debt is down to INR8.0b from

INR10.0b in 4QFY20. Cash balance increased to INR7.0b from INR4.5b in Mar’20. Cost of debt stood at 8.3% p.a. JKLC plans to repay debts amounting to INR2.0b each in FY21 and FY22. JKLC availed first moratorium on INR650m debt repayment; however, the

company did not avail the second moratorium. JKLC expects to receive INR400m of ICDs from a group company and will further

deploy INR400-500m as ICD. Pre-tax treasury yield stands at 9.5% p.a. Capex Capex plan is on hold and will be announced in 2QFY21, depending on the

prevailing COVID-19 situation. New capex in the North has been put on hold. It would have amounted to

INR14.0-15.0b if not for COVID-19. 10MW WHRS at Sirohi has been delayed by 2-3 months due to labor availability

issues and is expected to be commissioned in 2QFY22E.

Click below for Results Update

September 2020 39

CEMENT | Voices

Cuttack grinding unit ramp-up has been adversely impacted by COVID-19 and has reached 60% utilization level.

No additional land is required for Durg, Sirohi and Udaipur brownfield expansion.

Other highlights Incentive for Udaipur plant is available till FY22E. Engagement with BCG has reached completion and JKLC will take a call on

further engagement once the situation normalizes.

Ultratech Cement Buy Current Price INR 3,897 Capacity utilization at 65% in July; Retail and rural drive demand The company resumed operations w.e.f. 20th April 2020 and operated at 46%

capacity utilization during the quarter. It is operating at ~65% capacity utilization in July.

The Cement market is witnessing strong demand from the Retail market and rural regions on account of good monsoons and govt. support, which have improved rural cash flow.

Real estate demand is expected to normalize post Diwali as migrant labor is expected to return post the agri season.

The company is not facing any labor shortages or logistic issues, and could rampup utilization in line with demand.

Plants in the eastern and central regions are running at optimum utilization levels. Utilization is picking up in the northern region, while it remains low in the western region. Demand in AP and Telangana has been muted.

Expect strong demand from rural and ongoing govt. infra projects, such as highways and metros, in the post-COVID-19 era.

However, management remains skeptical about demand due to the recent lockdowns and rising cases of COVID-19.

1QFY21: Operational highlights In 1QFY21, volumes declined by 32% YoY to 14.65mt and industry volumes by

33%. The retail volume share increased by 13% YoY. Blended sales were up 11% YoY to

78%. It also increased penetration in rural markets by 13% YoY. UBS (UltraTech

Building Solutions) contributed 8% to total sales. Cost of production declined 9% YoY on account of lower logistic, raw material, and energy costs. During the quarter, the company booked a one-time expense of INR1.57b as per

the Supreme Court order directing the partial refund of VAT incentives (incl. interest) received toward the investment in the Aditya Cement plant during 2006–12.

Revenue from White Cement / RMC declined 39%/75% YoY to INR2.5b/INR1.5b. Fixed cost reduction to continue, but variable cost reduction to pause The company achieved cost reduction of 5% YoY / 3% QoQ in logistic cost per ton

to INR1,116/t. This was due to the absence of busy-season surcharge (2.5%) and synergy with acquired plants (2.5%). Sequentially, it benefitted from lower lead distance. However, it expects a rise in diesel cost to impact logistic cost in 2QFY21.

It achieved 11% YoY (flat QoQ) cost reduction in power and fuel costs per ton on lower pet coke cost and higher pet coke usage. Average pet coke price was down

Click below for Detailed Concall Transcript

& Results Update

September 2020 40

CEMENT | Voices

26% YoY to USD70/t, whereas pet coke usage stood at 77% (1QFY20: 59%). Spot prices of pet coke were at USD75/t (nearly flat YoY).

Century assets: EBITDA/t of >INR900; cost reduction of INR105/t QoQ The Century plant’s capacity utilization was at 70% over May–Jun’20 (80% in

4QFY20). Pet coke usage increased to 73% (69% in 4QFY20), while power consumption

reduced by 3% (v/s 4QFY20). In 1QFY21, cost declined by INR105/t QoQ. As a result, EBITDA/t stood at

>INR900/t. Capex guidance increased; deleveraging to continue The company has increased its capex guidance to INR15b for FY21 from an earlier

guidance of INR10.0b (INR17b in FY20). Of INR15b, ~INR7b is toward maintenance capex, INR1.2b for the Bara grinding unit, and another 1.2b for the Bicharpur coal block.

Consol. net debt declined further by INR22b to INR146.5b in the quarter (from the peak of INR221b in Mar’19). This was achieved through FCF of INR22b during the quarter.

Net debt/EBITDA reduced to 1.7x in Jun’20 from 3.0x in FY19. Working capital release stood at INR7.9b during the quarter. Management does

not expect further release of working capital.

September 2020 41

CONSUMER | Voices

CONSUMER

The sector saw broad-based recovery toward the latter part of 1QFY21, which has sustained for most companies in Jul’20 and early-Aug’20 as well. Overall, rural demand held up well during the quarter and the outlook is getting even better with good progress of the monsoons. Even among urban centers there is a big divergence between performance as well as recovery outlook for metros, non-metros and Tier-1/2 cities. Performance and outlook of in-home food consumption categories were exceptionally strong in 1QFY21 and the same was the case for cleansing and herbal products. Down-trading is a fear called out by most companies, which along with slower pace of recovery for discretionary products, means that premiumization is unlikely to be a material factor for the full year. On the other hand, benign material cost outlook and strong focus on cost savings are likely to shore up margin outlook for the rest of the year particularly as sales declines are likely to be lower from 2QFY21. Channel inventory days are also declining sustainably as companies are culling their tail-end products.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook FY21 Demand Environment

The demand outlook for rural and lower tier cities is good. The management is looking at demand on a QoQ basis. The

predictability of festive season demand is weak currently. No change was seen in pricing in 1QFY21, and change is not

likely in 2QFY21 either. APNT is looking at sourcing and formulation efficiencies on

material costs for gains from a longer term perspective.

Demand is still weak in metros and tier 1 cities such as Ahmedabad and Surat (~45% of total sales), but has recovered in tier 2, tier 3, and tier 4 markets. Western India demand is weaker than in the rest of the country.

Both automotive and industrial coating demand remains very weak, although the former seemed to have recovered a bit in June.

Britannia reckons it is ahead of the market owing to execution efficiencies.

BRIT rationalized A&SP spend for the quarter. ~200bp of the 460bp reduction in other expenses to sales was on account of the A&SP reduction. The A&SP reduction is not sustainable going forward.

Capex of INR7b over the next two years (with Dairy capex to be determined and added later) would be significantly higher than the INR2–2.5b annual rate expected earlier.

Industry growth is healthy owing to the higher in-home consumption of biscuits amid lockdown.

The Healthcare segment’s contribution was up 10 percentage points in the quarter. Dabur expects this business (31% of sales last year), which is already more profitable than the rest of the portfolio, to increase sharply for the full year as well.

The channel pipeline has been corrected to 16 days from 20–21 days over the last year despite NPD additions. Management believes a further pipeline reduction by another 4–5 days may be possible.

Some inflation is seen in Ayurvedic product costs. Expect 3% inflation in the Agri product basket as well.

Project Samriddhi – The INR1–1.2b cost optimization program is likely to be implemented this year.

Expect rural growth to be higher going forward. The spread of COVID-19 in these geographies has not had any impact on sales.

The Healthcare segment (despite it being off-season) grew 29.2% YoY, with over 50% growth seen in health supplements such as Chyawanprash and Honey (with sharp improvement in market shares as well). OTCs also reported 30% growth, with Honitus and NPDs doing very well.

While rural forms 30% of India sales, GCPL believes it has the SKUs to take advantage of better-than-expected rural demand going forward.

Expect sequential gross margin improvement as the mix improves and due to some price action by the company on Soaps.

A sequential uptick in ad spends is expected in the Sep’20 quarter.

Rural is reporting better sales than urban. HI grew 27% YoY in the quarter, aided by health

awareness and a good season.

Rural demand outlook – A good harvest, government spend, and a good monsoon are leading to higher growth.

With more lockdowns, the company advised caution on extrapolating the growth reported in June. At the same time, a heightened sense of hygiene is likely to persist.

HUVR’s adverse portfolio mix for the quarter impacted gross margins. The mix would not be as bad going forward.

COVID-19-related sanitization costs would be lower going forward, and some of the GSKCH integration would also be lower.

80% of the portfolio (non-discretionary) has grown at 6%. On the other hand, discretionary businesses such as Skin Care, Cosmetics, and Deodorants (15% of the portfolio) declined 45% YoY in the June quarter.

The Out-of-Home business (5% of the portfolio, mainly Ice-creams and Water Purifiers) declined 69% YoY and is likely to remain weak going forward.

Hindustan Unilever

Asian Paints

Britannia

Dabur

Godrej Cons.

September 2020 42

CONSUMER | Voices

MRCO is confident of growth for the remainder of the year, unless the COVID-19 situation worsens significantly.

MRCO targets flattish sales for the full year. Expect copra prices to see mild deflation from a full-year

perspective. Operating margins are likely to be over 20% for the rest of the

year. The New Hygiene portfolio would be INR800m–1b for MRCO

in FY21 (Veggie-Clean, Sanitizer, Home and Travel Protect, etc., launched recently).

Foods – INR3–3.5b sales are targeted in FY21 and INR5b in FY22. They were at INR2b in FY20. Margins in Foods would also increase despite remaining lower than the overall portfolio.

The business saw smart recovery in May and June (~3% sales growth combined), which continued in July.

Rural grew 120% of the FY20 run-rate, while urban growth was on par with FY20 levels.

Near-term demand appears uncertain. Consumers remain reluctant about allowing labor into their

house. The company is providing certifications for contractors, stating that they are following all the prudent measures. Recovery in confidence, however, is being seen gradually.

VAM price is currently at USD650–700 due to low demand. Management does not believe these low price levels are sustainable in a post-pandemic environment. However, the near-term material cost outlook remains soft. Going forward, gross margins may be similar to 1QFY21 levels.

Recovery was seen in June and July. However, management was unable to quantify how much of this was pent-up demand.

The C&B business is seeing a swifter recovery, particularly in the rural areas.

Retail construction chemicals are also recovering well.

UBBL expects demand recovery to take time. Karnataka, a large state in terms of demand, has seen multiple lockdowns.

Restrictions are being imposed and repealed in various states even in 2QFY21, which is creating further volatility.

Price increases have been taken in free pricing markets such as Karnataka (INR5 per bottle) and Maharashtra (INR10 per bottle).

Capex would be close to INR2b in FY21, depending on how things pan out.

Demand for beer was impacted more than demand for spirits on account of: (1) beer being bulkier to carry than spirits, (2) limited refrigeration capacity in households, and (3) summer being the peak season for beer, but not for spirits.

Asian Paints Neutral Current Price INR 2,035 Performance and outlook comments May and June witnessed improving demand. Demand is still weak in metros and tier 1 cities such as Ahmedabad and Surat

(~45% of total sales), but has recovered in tier 2, tier 3, and tier 4 markets. Western India demand is weaker than the rest of the country.

After a near-washout in April, May demand was down only 20% YoY, while June demand rose to the double digits YoY in terms of volumes.

Demand recovery was driven by: (a) the ‘safe painting’ campaign, which gave customers confidence, and (b) a campaign to paint ahead of the monsoons.

The demand outlook for rural and lower tier cities is good. Channel normalization has also played some part in driving sales growth, but

was not the most significant part. Unless the mortality rate increases due to COVID-19, APNT does not expect the

improved sentiment to reverse. However, the re-imposition of sporadic lockdowns would lead to demand impact in the affected pockets.

The management is looking at demand on a quarter-to-quarter basis. The predictability of festive season demand is weak currently.

Other businesses Both automotive and industrial coating demand remains very weak, although

the former seemed to have recovered a bit in June. Demand recovery for Sleek (kitchen equipment retail) and Ess Ess (bathroom

fittings) has not been as good as for the Decorative Paints business.

Click below for Results Update

Marico

Pidilite

UBL

September 2020 43

CONSUMER | Voices

Margins and pricing Decline in gross margins happened sequentially despite input prices also falling

sequentially. Margin decline could be on account of deterioration in the mix. No change was seen in pricing in 1QFY21, and change is not likely in 2QFY21

either. Other expenses declined sharply due to control discretionary spend. Other points Waterproofing margins in the retail business are comparable with those of

Decorative Paints. However, institutional business margins are lower in Waterproofing.

APNT is looking at sourcing and formulation efficiencies on material costs for gains from a longer term perspective.

The per capita consumption of paints in India is half of that in developed countries. Infrastructure development would be a big boost to improve this metric.

Britannia Inds Neutral Current Price INR 3,771 Factors that aided sales growth BRIT successfully pursued rural sales as urban sales slowed to some extent.

Rural contributed 37% to sales. The company also managed to resume manufacturing earlier than peers. While direct reach fell by over 100k outlets due to the lockdown, the company

has managed to bring its reach back to pre-COVID-19 levels. Industry growth is also very healthy. The management reckons BRIT is growing

ahead of the market owing to the execution efficiencies. Volume growth was 21%, with the remaining growth attributed to the mix and

price increase. BRIT was selling more premium products, especially in the first two months of 1QFY21.

Costs BRIT rationalized A&SP spend for the quarter. ~200bp of the 460bp reduction in

other expenses to sales was on account of the A&SP reduction. The A&SP reduction is not sustainable going forward. BRIT has renegotiated contracts wherever possible. Overall, material cost inflation of 3% YoY was witnessed in 1QFY21. Deflation of

flour and milk and very low inflation in sugar costs were also seen during the quarter.

BRIT would continue its efforts for cost savings going forward. New launches, adjacencies, and international business BRIT launched ‘Lassi’ in some states under the ‘Winkin’ Cow’ brand in 1QFY21. It also launched Layer Cake in eastern India, the largest market for cakes. Cheese did very well during the quarter. On the other hand, demand for Milk

Shakes was affected as this is more discretionary in nature. Most markets for its international business expanded well. In the FY20 Annual Report, BRIT indicated that 2% of sales were from new

categories such as Milk Shakes and Cream Wafers, with the latter category seeing growth recently.

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ICDs outstanding and balance sheet Group ICDs – GoAir has repaid its ICDs to some extent, but group ICDs remained

at INR6b, broadly in line with Mar’20 quarter levels. BRIT would incur capex for augmentation in Orissa and the setup of new plants

in Orissa, Tamil Nadu (TN), and Uttar Pradesh (UP). Capex over the next two years is expected to be INR7b; additional capex is forecast for Dairy as well.

UP is now the second largest market for BRIT. Dabur Buy Current Price INR 508 COVID-19 acting as catalyst for further change COVID-19 is acting as a vehicle for rapid change within the organization. Cost optimization and new category additions, and lower price points to plug

erstwhile gaps are being implemented. NPD contributed 5–6% to sales in 1QFY21, a very good performance. The

fearless attitude on innovation in the past year is turning fruitful. 3–4% steady-state NPD contribution is the medium term-target (NPD was 1% of sales a year ago).

Newly launched Dabur Sanitize posted INR900m sales in 1QFY21. Dabur continued to gain share even in categories such as Shampoo, Home Care,

and Hair Oils, which declined for the quarter. 7–8% secondary sales growth was reported in June, and similar growth in July as

well. Recovery has been witnessed in all the categories that were impacted in 1QFY21, while Healthcare segment sales remain extremely healthy.

Rural sales grew 1%, while urban declined 8–9% for the quarter. Expect rural growth to be higher going forward. The spread of COVID-19 in these geographies has not had any impact on sales.

Nielsen expects 12.5% growth in rural going forward v/s 1% negative in urban. Additional data points on improvement underway – Distribution technology, analytics, costs, launches The channel pipeline has been corrected to 16 days from 20–21 days over the

last year despite various NPD additions. Management believes further pipeline reduction by another 4–5 days may be possible, thus improving distributor ROIs even more.

Sales and operation planning meetings are happening every week instead of every month, enabling better flexibility.

Project Samriddhi – The cost optimization program of INR1–1.2b is likely to be implemented this year.

The Healthcare segment’s contribution was up 10 percentage points in the quarter. Dabur expects this business (31% of sales last year), which is already more profitable than the rest of the portfolio, to increase sharply for the full year as well.

E-Commerce contribution stood at 5.6% of sales for the quarter. This is likely to be 5% for the full year as well, especially with exclusive e-commerce products.

Segmental performance The Healthcare segment (despite being in the offseason) grew 29.2% YoY, with

over 50% growth in health supplements such as Chyawanprash and Honey (with sharp improvement in market shares as well). OTCs also reported 30% growth, with Honitus and NPDs doing very well.

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& Results Update

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HPC declined 14.9% YoY. Foods (mainly juices) declined 34.4% YoY. International business declined 21.6% for the quarter, particularly led by MENA.

Recovery has subsequently been seen in Turkey, sub-Saharan Africa, and the US. Dabur continued to gain market share across key categories, such as

Chyawanprash, Toothpaste, and Packaged Juices & Nectars, during the quarter. Costs and margins Some inflation is being witnessed in Ayurvedic product costs. Expect 3% inflation

in the Agri product basket as well. International business – MENA, the largest and most profitable geography,

declined more sharply, negating improvements in the standalone margins. Dabur does not see gross margins being at risk for the rest of the year despite

improving contribution from the low-margin Foods business. Dabur would use the gains from the Samriddhi cost-savings program to boost ad

spend. Emami Buy Current Price INR 383 Demand environment Performance in Apr-May’20 was impacted due to the lockdown. Domestic secondary sales decline was lower at 15% in 1QFY21. Domestic business sales declined 26% YoY in 1QFY21, International business

sales declined 18% and Institutional business sales declined 38%. Green-shoots visible in Jun’20 (high-single digit growth). Double-digit growth

expected in Jul’20. Health and Hygiene portfolio (43% contribution) grew 29% YoY, while Other

Brands (57%) declined 44%. New launches contributed 5% to domestic revenues in 1QFY21 (3% contribution

from Sanitizers and 2% from other products). Overall, volumes declined 28% YoY in 1QFY21. Buyback of shares The board has approved share buyback from the open market at a maximum

price of INR300/ share up to INR1.92b as permitted by the Companies Act and SEBI on 19th Mar’20. Buyback was completed on 7th Jul’20 with 9.42m shares purchased at an average price of INR203.78.

Share capital post buyback reduced from INR453.9m to INR444.5m. Consequently promoter stake increased from 52.74% to 53.86%. Material costs and EBITDA margin Margins increased despite lower sales due to stringent cost control measures

and benign raw material prices. Material cost is likely to remain soft going forward. Expect INR500-600m worth of reduction in costs in FY21. Confident of achieving at least 26% margins but it could improve further if

momentum of Jun-Jul’20 continues. Guidance Expect NPD contribution to be at 5.5% of sales. Plans to introduce new products in the Home and Hygiene segment. Expect 20-30 new launches. Going ahead amortization should reduce to INR250m/quarter.

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& Results Update

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Completed Cement stake sale – expect promoter pledge to decline to 50% by FY21 from 56% currently.

Expect positive growth in FY21 (in-line with last year), provided the COVID crisis does not heighten.

Effective tax rate to be at ~20% on consolidated basis. Ad-spends as % sales expected to be maintained at 17.5-18%. Capex plans of INR800m in FY21. Does not expect price increase of more than 1.5% in FY21. Domestic business In Jul’20, growth was led mostly by Zandu and the Pain Management portfolio. Chyawanprash sales have increased 7x YoY. Honey sales have risen 5x. Expected focus to increase in the Healthcare segment. Home and Hygiene segment – Expect market to triple over the next three years,

and hence, there exists a huge opportunity to grow. Pancharishta is growing in double digits. Boroplus growth is led by new launches i.e. sanitizer in particular (inorganic

growth). Zandu - Seeing 30% growth and plans to increase ad-spends here. Pain management – Good growth was driven by increase in consumption and

consumers switching to Ayurveda products from painkillers. Healthcare Range – contribution to increase to 10% from 8% currently. International Business performed well in Jul’20 with Crème 21 showing significant growth. Hygiene products introduced in key geographies. Planned 3P manufacturing in the Middle East and Sri Lanka. Other points E-commerce grew 108% but GT and MT got impacted. Stocks at distributor level reduced to 19-20 days in Jul’20 from 26 days in Jun’20

and 27-28 days in Mar’20. Secondary sales were higher in Jul’20. Credit in domestic business has declined to 4-5 days from 13-14 days in Mar’20. The company has taken price reduction in Honey. Fair & Handsome is still under stress. Rural has grown in double digits in 1QFY21. Wholesale channel was not in stress

and is growing, but on the other hand, retail and MT are declining. Contribution of sachets is in the range of 32-33%. Margins in Healthcare are slightly better. New Launches BoroPlus Advanced Anti Germ Hand Sanitizer, BoroPlus Antiseptic Moisturizing

Soap, BoroPlus Aloe Vera Gel, Zandu Ayurvedic Hand Sanitizer, Zandu Ayush Kwath Powder, Zandu Single Herb Range.

E-comm specific launches: Zandu Pachan Vati (Digestive Stimulant), Zandu Sandhigata Pida har Vati (Joint pain reliever), Zandu Amla pitta harvati (Acidity Regulator), Zandu Draksha Pachan Churna, Zandu Papaya Leaf Extract.

International business: Launched hygiene products under Creme 21 Gold Turmeric and BoroPlus brands.

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Godrej Consumer Neutral Current Price INR 686 Update on segments/ geographies Household Insecticides (HI), Hygiene and Value for Money (VFM) products (85%

of sales) grew 9% in 1QFY21. Indonesia and India grew 5% YoY each for the quarter. GAUM has started reporting better growth in recent months. Rural is reporting better sales than urban. While rural forms 30% of India sales,

GCPL believes that they have the SKUs to take advantage of better expected rural demand going forward.

Primary and secondary sales for the quarter were roughly the same. Inventory at distributor level (end-Jun’20) was at a lower level than the past 18-24 months’ average.

HI sales were strong, Soap sales surprisingly weak HI grew 27% YoY in the quarter aided by health awareness and good season. There has been an impact on illegal incense sticks because of supply chain issue.

Duty on Bamboo sticks imported from China and Vietnam has increased from 10% to 25% affecting the illegal trade.

Soap sales surprisingly declined 2% YoY (in a period where we expected sales to improve due to the favorable environment).

Costs and margins Hair color is the highest gross margin category for GCPL. Sharp decline in Hair

color sales affected gross margin. Input costs for soaps were also higher. Expect sequential gross margin improvement as mix improves and due to some

price actions by the company on soaps. A sequential pickup in ad-spends is expected in the Sep’20 quarter. Other points Africa – Dry hair competitors have significant supply chain issues owing to

absence of imports. Thus, performance should get a tad better going ahead. HI is also being introduced in Africa now. Hindustan Unilever Buy Current Price INR 2,159 Key highlights HUVR believes it has made good progress over the last few months, with

satisfying results. Its dynamic response to a changing environment has supported its performance.

The merger with GSKCH could not have come at a better time from the perspective of introducing an in-home consumption and immunity building product. It witnessed sound growth of 5% v/s the corresponding quarter last year.

8% volume decline was reported on a like-to-like basis on 7% sales decline. 80% of the portfolio (non-discretionary) has grown at 6%. HUVR was at a 70% operational level in April, which was better in May. June sales growth was in the mid-single digits, partly due to the normalization of

pipelines; if not for this, growth would likely have been flattish. With more lockdowns the company advised caution on extrapolating the growth

being reported in the month of June. At the same time, a heightened sense of hygiene is likely to persist.

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Results Update

Click below for Detailed Concall Transcript &

Results Update

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CONSUMER | Voices

Rural demand outlook – A good harvest, government spend, and a good monsoon are leading to higher growth.

Urban growth has also been affected by the lockdown. HUVR maintains that rural is witnessing green shoots and is not yet a fullfledged

revival even as performance vs. urban is likely to be better. Impact on discretionary businesses Skin Care, Color Cosmetics, and Deodorants (15% of portfolio) declined 45% YoY

in the June quarter. Skin Care showed signs of improvement in June and is likely to do better going forward.

The Out-of-Home business (5% of the portfolio, mainly Ice-creams and Water Purifiers) declined 69% YoY and is likely to remain weak going forward.

Glow & Lovely (formerly Fair & Lovely) HUVR is highly confident of not only retaining existing customers but also

attracting new ones. Despite the repositioning more than a year ago, growth has been healthy. Other points Production capacity was rapidly increased by 100x in Sanitizers and by 5x in

Hand Washes to meet demand. The base business reported a 170bp EBITDA margin decline, while GSK added

60bp to margins, implying 110bp margin decline on a merged basis. HUVR’s adverse portfolio mix for the quarter impacted gross margins. The mix

would not be as bad going forward. GSKCH – Since there are no royalty costs now they were able to offset the

transition costs in the GSKCH business. COVID-19-related sanitization costs would be lower going forward, and some of

the GSKCH integration also be lower. HUVR is taking price increases in Tea due to higher commodity costs. In

Detergents, the company is looking to pass on the benefits of lower crude costs to boost growth.

The number of SKUs is still at 50% of pre-COVID-19 levels, but the company is looking to prune 20% of the tail anyway.

Special Dividend The Scheme of Arrangement for the transfer of balance in General Reserves of

INR21.9b to the P&L A/c was approved by its Shareholders in 2016. Subsequently, the scheme was sanctioned by the Hon’ble National Company Law Tribunal, Mumbai Bench – vide its order dated 30th August 2018. The Board approved the distribution of the Reserves to its Shareholders by means of a Special Dividend of INR9.50/share.

Jyothy Labs Neutral Current Price INR 143 Positive sales growth in 1QFY21 Positive growth due to (a) agility – focus on hygiene products, (b) flawless

execution, and (c) financial prudence. Jul’20 is also in the positive category in terms of growth. Rural demand is positive due to good monsoons and government support. Manufacturing is near pre-COVID levels. Higher sales of lower price low unit pack (LUP) products aided volume growth,

being higher than sales growth.

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Larger pack sales were more an urban phenomenon. The company has refrained from giving sales growth outlook for the year given

the uncertain demand environment. Key categories Good household incense sticks and Hygiene products demand helped. For JYL, it

is not a key season for HI. As customers are at home, dish-washing product usage is also healthy. Fabric care sales were down 23%. Some recovery was seen in Jul’20 relative to

1QFY21. Costs and margins Low fabric wash (post-wash) sales led to flattish gross margins despite lower

material costs YoY. Soft input prices would support gross margins, going forward. Ad-spend decline of 40% YoY was higher than peers. Trade offers were also low

during the quarter. Maintained 15-16% margin guidance despite higher margins in 1QFY21. Other points 40% sales come in from rural markets. Marico Buy Current Price INR 367 Recovery is happening well The business has seen smart recovery in May and June (~3% sales growth

combined), which continues in July. MRCO is confident of growth for the remainder of the year, unless the COVID-19 situation worsens significantly. This is despite a higher base in 1QFY20.

Market share gains were posted in 90% of the portfolio on a MAT basis. The quarterly YoY trend is even higher.

Rural grew 120% of the FY20 run-rate, while urban growth was on par with FY20 levels.

MRCO targets flattish sales for the full year. Operating margins are likely to be over 20% for the rest of the year. Key products and channels Parachute and Saffola are doing well. The ‘untouched by hand’ campaign for

Parachute has received a good response. MRCO has taken a 5–6% promotional pricing cut in Parachute and believes market share gains (62% currently) from both organized and unorganized players may be highly significant and, more importantly, permanent. The company launched Saffola Honey, with high purity.

Even VAHO sales were at 94% of prior-year levels for the recent month. The Hair Oils category is recovering. Only the small Discretionary portfolio is seeing slow offtake.

The CSD channel declined by 48% YoY in 1QFY21. Modern trade sales are recovering, but expected to be sub-optimal in the near future. The kirana channel is expected to continue to do well.

Owing to an increase in direct distribution (currently 0.9–1m), MRCO now has a critical mass of portfolio, particularly in VAHO with Sarson (mustard), in addition to Shanti Amla.

E-Commerce was 7% of sales in 1QFY21.

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& Results Update

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Other points Ad spends were at 90% of normal levels for the core portfolio. Cuts were

implemented on non-core products. The remainder of the year would also witness a 100–150bps decline YoY.

The New Hygiene portfolio would be INR800m–1b for MRCO in FY21 (Veggie Clean, Sanitizer, Home and Travel Protect, etc., launched recently).

Foods – INR3–3.5b sales are targeted in FY21 and INR5b in FY22. They were at INR2b in FY20. Margins in Foods would also increase despite remaining lower than the overall portfolio.

Expect copra prices to see mild deflation from a full-year perspective. Cost savings are targeted in all areas, barring innovation, safety, and employee

costs (jobs and salaries). Among the newer categories, virgin coconut oil, green coffee, and Coco Soul

offer promise. Nestle India Neutral Current Price INR 16,324 In the past three months, the company has witnessed volatility, uncertainty, and

stresses never imagined nor experienced before. This has led to disruptions across the value chain, in turn impacting results. However, NEST built back the momentum strongly as the quarter ended.

On average, factories were operating at 75% capacity during the quarter. The company’s eight factories have restored their manufacturing capabilities

almost to pre-COVID-19 levels. The e-commerce channel grew by 122% in the quarter and now contributes

3.6% to domestic sales. Demand in all out-of-home consumption channels declined sharply due to the

lockdown. EVERYDAY Dairy Whitener, Nestlé a+ Milk, the portfolio of other milk-based

roducts, NESCAFÉ Classic, and NESCAFÉ Sunrise performed well in 2QCY20. MAGGI also witnessed solid growth toward the end of the quarter following initial supply constraints.

Page Inds Neutral Current Price INR 18,443 Key highlights Volumes declined by 69% in 1QFY21. Operations resumed in the last week of May. There were only 33 working days

with the changing lockdown rules in 1QFY21. Things are now reviving, and a positive pull is seen from the market. Aug’20

sales were at par (or a little higher) v/s Aug’19 sales. Supply-side issues are now mostly resolved. PAG introduced face masks and has received good traction. Customer

acceptance and feedback have been good. The Jockey Junior business did well in 1QFY21. The Athleisure brand is on a growth trajectory, driven by a higher number of

consumers being homebound during the lockdown. Average Selling Price grew by 12% owing to higher athleisure sales. Innerwear and outerwear both have similar gross margins.

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Results Update

Click below for Results Update

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Competition has done well as they are stronger in smaller cities, whereas PAG’s business comes primarily from the Top 6 metro cities (including Ahmedabad), which saw 12.6% decline in contribution.

Management does not expect competition taking away market share. Opex has come down significantly due to the deferment of A&P and royalty

(well below FY20 levels) and the cutting of discretionary spends. The festival season is expected to see good demand. Channels and inventory Channel inventory has reduced. Secondary sales were higher by 18% in 1Q. Both exclusive brand outlets (EBO) and multi-brand outlets (MBO) were doing

well. But, EBO fared better due to better opportunity for social distancing in these stores and repeat customers knowing what to buy.

LFS sales are still weak as footfall at malls is low. This has been offset by e-commerce sales, which are now in the high single / double digits from 2–3% earlier and could sustain at these levels.

Around 60% of distributors are on ARS (automated replenishment system), based on which the stock gets refilled every Tuesday. All of the distributors dealing in outerwear are now on ARS, and dealer

inventory is declining due to this. Each SKU is stocked within 30 days as per the store’s demand pattern; hence,

this would not bring down inventory days, but would optimize stocking. It started with good inventory over May–June; July and August saw much better

demand than 1Q. Everyone in the value chain is acting prudently about stocking up due to ongoing

uncertainty. Other points PAG paid all its laborers and employees fully during the lockdown, resulting in

lower labor absorption. Cash and equivalents have increased due to better cash management. Net

working capital has reduced due to good collections from debtors. It has not borrowed any funds during this crisis period. PAG has put capex on hold up to Jan’21. Contract manufacturing, at 30% of last year, faced manufacturing issues in the

initial weeks post the start of operations in June (due to labor-related issues), but is now nearing 30% levels.

An INR107m provision was taken due to slow-moving goods, which may be reversed later.

A price hike was taken only in products below the EBITDA-level threshold.

Pidilite Industries Neutral Current Price INR 1,488 Outlook Recovery was witnessed in June and July. However, the management was

unable to quantify how much of this was pent-up demand. Pipeline inventory remains similar to end-Mar’20 levels. Near-term demand appears uncertain. International business, particularly in SAARC, was also affected.

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CONSUMER | Voices

Normalcy would resume once the pandemic situation comes under control and the consumer has oney in his pockets once again. Consumers remain reluctant about allowing labor into their house. The company is providing certifications for contractors stating that they are following all the prudent measures. Recovery in confidence, however, is being seen gradually.

Manufacturing and store openings are at 80% of pre-COVID-19 levels, but the management refrained from commenting on whether sales have also recovered at anywhere near the same level.

Recovery has been strong wherever the lockdown is being repealed. There has been a significant increase in the use of digital technology to connect

with channel partners and end users. Segmental outlook The C&B business is seeing a swifter recovery, particularly in the rural areas.

Rural and small towns in India constitute 30% of domestic sales. Retail construction chemicals are also recovering well. The B2B business in Construction Chemicals continues to be negative. Domestic subsidiaries Nina and Cipy struggled in 1QFY21, and their outlook

remains unclear. Material and other costs VAM price is currently at USD650–700 due to low demand. Management does

not believe these low price levels are sustainable in a post-pandemic environment. However, the near-term material cost outlook remains soft.

Consumption cost for RM was ~USD800 for 1QFY21, against USD925 in 1QFY20. Going forward, gross margins may be similar to 1QFY21 levels. Other points Capex in a normal year is at 4–5% of revenue, and this would continue in the

long term. However, management deemed it difficult to guide for the current year due to the rapidly changing business environment. JVs also impact capex at the consolidated level.

Tata Consumer Products Buy Current Price INR 548 India Beverages (Tea and Coffee) India Beverages business (tea and coffee) recorded revenue growth of 8% and

volume growth of 4% YoY. Apr’20 sales were significantly impacted, followed by high double-digit growth

in May-Jun’20. Increase in profits was due to better price realization, efficient management of

commodity costs and lower discretionary expenditure. Premium offerings – Tata Tea Gold delivered double-digit growth. Tata Tea Agni

and Spice Mix continued its robust growth momentum. Gained market share in India tea business from most competitors on the back of

better procurement and better distribution (compared to peers). Sharp increase in North India Tea prices during 1QFY21 was a result production

being impacted by the lockdown and excessive rains (flooding) in Assam. Tea prices surged 50% in the last few months. It is believed to have peaked and

is expected to decline (as crop harvest would come to market). Focus would be to achieve profitability rather than volume growth.

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India Food business India Food business recorded revenue growth of 19% and volume growth of 8%

YoY. High double-digit growth was achieved in each month of the quarter, despite

operational challenges. Salt revenues grew 11%. Record sales volumes were achieved for Tata Salt in

May-Jun’20. Profits increased due to better gross margin, lower trade spend and lower discretionary expenditure.

TCP faced supply-chain issues during the early days of the lockdown. However, supply-chain is now robust.

In a bid to reduce multiple layers in the distribution network, TCP decided to remove consignee agents/distributors and directly deal with stockiest.

NourishCo Revenue decreased by 34% YoY to INR460m in 1QFY21. TCP completed acquisition of the entire stake of PepsiCo in NourishCo and rights

over the ‘Gluco Plus/Gluco+’ brand at a total consideration of INR290m. Volumes declined due to drop in on-the-go consumption due to COVID-19. Total revenues in May-Jun’20 bounced back to ~85% of last year levels. New organization structure is in place with Mr. Vikram Grover as MD and CEO of

NourishCo. Tata Coffee (incl. Vietnam) Top line grew 12% (10% in constant currency terms) led by Vietnam and the

Plantations business. Plantations business grew 17% (+18% volume growth). Highest-ever sales of

coffee in a quarter. Overall extraction business grew 14% (+6% volume growth) led by Vietnam

business. India extraction business declined 30% in value terms being adversely impacted

by the reduced exports on account of COVID-19. Vietnam plant is now operating at ~87% of its production capacity and has

turned EBIT positive. Steep decline in supplies to domestic out-of-home business. Demand for instant

coffee continues to face headwinds due to the COVID-19 impact. JV: Starbucks Despite challenges ~60% stores have now re-opened. Revenue is growing every month, with Jun’20 revenue at ~27% (v/s last year). Take-away contribution to revenue currently stands at 82%, whereas delivery

stands at 18%. Opened India’s first Starbucks Drive-through store at Zirakpur near Chandigarh. UK Business Strong revenue growth of 12% with volume growth of 7%. Discounter channel remains the biggest growth driver, with growth across all

key accounts. The OOH (out-of-home) channel is growing despite the lockdown on the back of

DEFRA supply (government food packs). Good Earth Teas and Kombucha launched in the UK should create new tea

occasions and beverages for a new generation of consumers.

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USA Business Revenue grew 37% with underlying growth (constant currency) of 26%. Volumes

grew 27%. Growth is seen across both branded/private-label coffee business. Tea (excluding Empirical): Strong revenue growth of 25% in value and 26% in

volume terms. Canada business Strong revenue growth of 32% and volume growth of 28%, largely driven by

pantry loading and retailer re-stocking. Growth continues to outpace the category –both Regular and Specialty. Improved profits driven by sales and reduced overheads. Synergy TCP completed organization structure and operating model to enable profitable

growth across multiple categories. On track to realize initial synergy estimates of 2-3% of combined India branded

revenues over the next 18-24 months. In the near term, focus is to expand into adjacent categories F&B. Post this, the

company can focus on new product developments within the existing product portfolio and new launches.

COVID-19 All factories and plantations are now operational. 60% of Starbucks stores are

operational across India. As part of the ongoing risk management, TCP secured its raw materials and

packaging supply chains. Others Currently TCP is the second largest branded tea player in the world. TCP is already listed with Jiomart and supply chain of the company is robust to

meet Reliance Jiomart’s requirements. Debt: Currently net cash of TCP stands at ~INR20b with gross cash at INR30b.

The company’s long-term borrowings are due to loans in Vietnam and for Eight O’clock, which are at very low interest rate.

Overall spending on advertisement and sales promotion would be robust. TCP does not plan to cut down on ads and promotional spends.

TCP aims to become a complete FMCG entity from an F&B company now. TCP plans to expand to adjacent product portfolio in the near term. Over the long term, it plans to branch out to newer categories. The company’s focus will be to maintain strong RoCE rather than improving sales alone.

United Breweries Sell Current Price INR 1,060 Operating environment Volumes were down 77% YoY in 1QFY21, with Jun’20 volumes down 57% YoY. Among the states that announced sharp increases in excise duty, excise has

been reduced only in Delhi and Orissa. Net debt increased by INR1.2b over Mar’20 levels (~14% increase in percentage

terms). UBBL expects demand recovery to take time. Karnataka, a large state in terms of

demand, witnessed lockdown. Restrictions are being imposed and repealed in various states even in 2QFY21,

which is creating further volatility.

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Market share has been flattish in 1QFY21. Reactions worldwide to the opening up of bars and restaurants have been

mixed given the volatile COVID-19 environment. Beer affected more than spirits Demand for beer was impacted more than demand for spirits on account of: Beer being bulkier to carry than spirits Limited refrigeration capacity in households Summer being the peak season for beer, but not for spirits Margins and costs A weak state mix led to sharp gross margin decline despite soft raw material

costs. Barley costs are down 10% YoY. On-trade has more premium sales. Hence, the sales mix was affected to some

extent due to the lack of on-trade sales. Price increases have been taken in free pricing markets such as Karnataka (INR5

per bottle) and Maharashtra (INR10 per bottle). There is a higher proportion of new bottles currently as on-trade is closed. There was no inventory write-off due to expiry. This was unlike 4QFY20. Depreciation was lower due to single-shift manufacturing in 1QFY21. Balance sheet and capex Capex would be close to INR2b in FY21 depending on how things pan out. Working capital is under control on a sequential basis. United Spirits Neutral Current Price INR 547 Performance and outlook During 24th Mar’20 to 3rd May’20, there was a complete ban on manufacturing

and sales of alcohol. 80-85% of off-trade outlets are now operational, although some are only open

for home delivery in cities like Mumbai. On-trade is important for P&A and since they were closed, P&A was affected

more than the ‘Popular’ segment. Factories were fully operational by end-Jun’20, but the second wave of localized

lockdowns in Jul’20 has affected both manufacturing and retail. Across the board tax increases are also a deterrent to performance. Only Delhi

and Odisha have rolled back the hikes. Impact of tax increases will be felt even more in the subsequent quarters. Online delivery is still at a very nascent stage. Sentiment is improving but cannot be extrapolated given the volatile situation,

particularly for the alcohol business in India. Margins impact and outlook, state government delays Impact of INR210m obsolescence of inventory in the quarter affected gross

margin by ~150bp. Other operating income was also affected by the sharp dip in franchise income,

which additionally impacted gross margin by 160bp. Franchise income stood at INR100m in 1QFY21 (v/s INR500m in pre-COVID period). Expect ~40% decline in franchise income in the coming days.

ENA costs have been flattish. Glass industry was also under lockdown and prices are expected to increase gradually.

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70% of sales are to the state governments. Some states are delaying payments. Ageing of inventory at corporation level due to the lockdown has led to some provisions. There is no credit risk with these corporations.

UNSP has been able to reduce receivables over Mar’20 levels. Other points UNSP is wooing consumers that would buy from duty-free shops. However, the

prices are much higher and there is little evidence of a material shift from dutyfree to duty-paid consumption. Nevertheless, management believes that there will be some shift in the coming days.

Spirits’ companies are likely to benefit over beer companies. This is due to the fact that it is easier to carry spirits home (v/s beers). Bars and pubs, which are shut, also have higher beer salience. The company is surprised by the extent of shift from beer to spirits in recent months.

Home delivery has helped but contribution is still relatively small, especially in areas where over-the-counter sales are allowed. On the other hand, the contribution is decent where only home delivery is allowed.

UNSP received price increases from the government in 7-8 states in recent months; however, the quantum was modest.

Consumer behavior trends: Larger SKUs are being sold because of improving and higher in-home consumption. No material down-trading has been witnessed yet.

No material restrictions are affecting scotch imports.

September 2020 57

FINANCIALS/BANKS| Voices

FINANCIALS/BANKS

Commentaries of banks suggest that business trends are gradually picking up MoM. The rural economy is picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue accessing the on-ground situation over the next few months, and accordingly, decide their growth strategy. Among business segments, retail growth is picking up faster with some segments like tractors, 2Ws, gold disbursements and affordable housing seeing the fastest improvement. On the other hand, MHCVs (especially linked to large fleet operators/commercial vehicle segment) continue to see challenges. On the asset quality front, CE trends have improved further in Jul-Aug’20 with ~75-85% collections in MFI and above ~80% in Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it should occur in mid-sized corporate/SME segments. Overall, slippages are expected to rise in the coming quarters, and thus, credit cost trends should remain elevated.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY21 Asset Quality & Moratorium Retail disbursements have improved to 80–

85% of pre-COVID levels, with better trends seen in Home Loans, but weaker trends in the LAP portfolio.

NRI deposit traction remains healthy for the bank.

Gold loans are showing strong momentum, although the bank is not chasing any growth targets.

The moratorium pool declined steadily, while customers who have not paid any dues have declined to the mid-single digits (v/s 12% reported earlier).

It does not have any large-ticket corporate accounts under stress, while some mid-sized corporate accounts have availed moratorium and could see restructuring.

Overall, the bank believes that restructuring should not be more than 20–25% of the moratorium pool.

Growth trends are gradually improving across retail lending segments, and activity in the Rural segment is picking up faster. Corporate trends remain muted.

ICICIBC does not have any loan growth targets, and the focus would be on growing profits in a risk-calibrated manner.

In the near term, margins would remain under pressure, dragged down by excess liquidity and muted business trends.

The CV and Builder portfolios have witnessed higher moratorium and may see relatively higher restructuring.

Furthermore, expect some rating downgrades on the corporate side.

The asset quality of the other retail portfolio, including unsecured loans, remains steady; however, the bank remains watchful of job loss in the economy.

IIB is witnessing healthy traction in retail deposits.

Margins should remain in a tight band as an improving asset mix offsets cost of higher liquidity / retail TD cost.

Expect normalcy in MFI business from Oct’20.

The focus is on reducing fixed cost; expect branch expansion to moderate.

IIB did a stress test to analyze the impact on asset quality and expects an increase of 90–95bp in GNPA on account of COVID-19.

Restructuring could be in the range of 1.5–2.5%, closer to the top banks.

Among the sectors, it expects higher restructuring in the Passenger Bus portfolio, two Real Estate accounts, and two Hospital accounts.

The focus remains on garnering deposits, particularly CASA and retail deposits.

Growth momentum has slowed in unsecured retail segments, such as Credit Cards and Personal Loans over the past two quarters.

The bank expects normalcy to return by the latter part of FY21 or early FY22.

Moratorium under the corporate book was low, while that under the SME book was higher; thus, some amount of restructuring may be seen.

The CV/CE portfolio saw higher moratorium. The overall impact on asset quality is likely to be visible over

the next six months.

Lending activity has gradually been improving since June’20.

The bank stated that its guidance to achieve ROA of 1% is expected to be deferred by a year.

SBIN expects slippages and restructured book combined to remain within 2.5% of total loans. Also, not much stress in corporate loans above >INR15b.

Overall, expect recoveries of INR160b over FY21E.

ICICI Bank

Kotak Mahindra

SBI

IndusInd Bank

Federal Bank

September 2020 58

FINANCIALS/BANKS | Voices

AU Small Finance Bank Buy Current Price INR 674 Moratorium and Collections related Improvement in collection efficiency to ~90% in Jun’20 indicates that some

borrowers have paid more than one EMI. Overall, 67% of customers (in value terms) have paid 90% of the total billed amount in Jun’20

Overall, ~11% of the portfolio have not paid any installments (moratorium book), 67% of the portfolio paid full EMI in Jun’20 while the rest have paid at least some installments.

Total collections during the quarter stood at INR22b. On the commercial taxi segment, collection trends are a bit low at the moment. Deposit franchise The bank’s emphasis is on high quality retail deposits led by (a) a separate team

being set up recently to focus on NRE/NRI and government accounts ,and (b) the entire bank staff coming together to focus on building the deposits franchise.

Retail term deposits of INR7b were garnered during the quarter. Non-branch banking employees have garnered close to INR4b deposits during

1QFY21. As at 31st Mar’20, 26 branches (excluding unbanked areas) had above 5%

market share of the total banking system’s deposits in the respective centers. The bank remains focused on maintaining high liquidity buffers. Asset side At the moment, it is difficult to give guidance on asset growth. However,

customer confidence is reviving and new opportunities are expected to emerge once the situation stabilizes.

The bank is facing some challenges in geographies like Mumbai, Pune and Surat. The bank has adopted a cautious stance in lending to the NBFC segment. The

decline in portfolio is also due to borrowers making full repayments. The bank disbursed ~INR3b in retail while similar disbursements were made in

the MSME portfolio. Operating metrics Focus was high on collections during 1QFY21 while disbursement trends were

muted, resulting in a sharp drop in fee income. Core focus remains on lending and building deposits franchise rather than creating new fee lines.

Axis Bank Buy Current Price INR 447 Business related The agriculture and rural sector is performing fairly better. The bank remains cautious, and thus, is creating provision buffer, conserving

capital and is carrying excess liquidity. The bank made some conservative changes in their accounting policy, which

impacted earnings to the tune of INR5.1b. Balance sheet related Demand in rural and small towns is recovering. Rural disbursement in Jun’20 stood at 90% of Jun’19.

Click below for Results Update

Click below for Detailed Concall Transcript &

Results Update

September 2020 59

FINANCIALS/BANKS | Voices MSME credit guarantee scheme – Total eligible borrowers with a loan value of

INR120b with sanctions of INR30b and disbursement of INR10b. Retail business saw decline of ~80% in disbursements across products. There has

been an increase in secured business such as mortgages and rural lending. The bank remains cautious on the unsecured side.

~80% of the retail book is secured. Of the unsecured retail, ~84% is salaried while 80% have banking relationships with the bank. ~67% of these salaried customers are from premium corporates, MNCs and government entities.

P&L related ~60% of the decline in fee income was due to reduced retail disbursement and

moderation in credit card spends. The bank is carrying surplus liquidity, which has impacted NIMs by ~9bp. Asset quality related Moratorium 2.0 for AXBS stands at 9.7% of total loans. The reduction has been

across segments. Retail MFI customers were granted moratorium with conditions and constitutes

~0.5%. Of these, ~67% paid their installments for Jun’20. 90% of Moratorium 2.0 customers are from moratorium 1.0. Reduction has

been due to focus on collections and closer scrutiny of the business’ cash flows. Of the total moratorium book, ~78% is secured. Collection from the moratorium book – ~80% in corporate and ~70% in retail

during Jun’20. Of the non-moratorium book, 95% of retail customers paid in Jun’20. None of the NBFCs have been granted moratorium. Wholesale book: 82% is rated A- and above. 95% of the incremental are in A-

while 75% are AA- and above. Exposure of top-20 borrowers as % of Tier-1 capital stands at 102% v/s 110% in

FY19. SME: 87% of SME book is rated SME 3 or better with ~88% of book secured in

nature. ATS stands at 35m across 35 sectors and diversified across 120 locations. For Axis Finance, both Moratorium 1.0 and Moratorium 2.0 stood at 7%. Asset quality under retail segment for AXSB is 10-20% better than the industry

for unsecured retail and 50-80% for secured retail. Collections: 8,000 member team collections; 1,500 agents are working from

home for collections. Collections have improved to ~65% in Jun’20. Slippages: ~21% of slippages were due to the bank’s risk assessment criteria and

not due to the 90-day DPD on which the bank made 100% provisions. Further, ~42% of slippage is toward a single corporate group for which the bank made provisions of 100%.

There were downgrades of ~INR13b in the BB & below book. 95% of credit card customers are in 0-DPD. As on Jun’20, SMA-2 book stands at ~0.4% of the total book. Others Axis-Max deal: Query and discussions are ongoing with the

regulators/authorities. The transaction remains on track.

September 2020 60

FINANCIALS/BANKS | Voices

Bandhan Bank Buy Current Price INR 312 Collection trends Challenges remain widespread for the industry, which is dealing with the COVID-

19 crisis, floods/cyclones in Assam and West Bengal, etc. Despite these concerns, collection trends have been improving steadily and recovered to ~73% v/s 70% as of 3rd Jul’20.

If no further lockdown is announced, collection trends would continue to improve.

In terms of state-wise collection trends, Bihar and Telangana have the highest collection efficiency, while Maharashtra and Tamil Nadu the lowest collection trends. Collection efficiency in Maharashtra is at ~54%.

Disbursements made in June were largely toward ~5% of existing borrowers with avg. ticket sizes of top-up loans at ~INR35k. Furthermore, the bank disbursed loans for new business activity in sectors such as Retail, Food Processing, and Agri-related.

Collection efficiency in terms of proportion of borrowers is at 68%; it stands at ~70% in terms of billing collection (for the month).

~30% of customers have not paid even a single installment. Balance sheet and P&L related In terms of incremental opportunities, 30–35% of existing borrowers have loans

with one or more lenders. Thus, the bank expects to tap these customers by proving top-up loans and become the sole lender.

In the Small Enterprise Loans portfolio, unsecured loans stand at INR20b. The opex-to-asset ratio has already hit the bottom level, and not much

improvement is expected from current levels. PSLC income during the quarter was INR1.19b (INR4.7b for the full year). Guidance: The new customer acquisition rate would slow to 10% YoY for FY21E;

the bank would focus on providing loans to existing customers only. Bandhan has reduced the center meetings’ size to lower the probability of

infection. The bank is providing top-up loans at 100bp higher than the usual interest rate. 50% of borrowers in MFI have ticket sizes of ~INR150k, while 14% have ticket

sizes of INR100–150k. The remaining 35% of borrowers have ticket sizes of INR50–100k.

More than 50% of incremental disbursements in the Mortgage portfolio are toward new customers, while the bank has also purchased loans under IBPC.

Asset quality BANDHAN has made additional provisions of INR7.5b during the quarter; thus,

the total contingent provision buffer (including COVID-19-related and additional standard asset provisions) stood at INR17.7b.

Overall, expect credit cost of 2.0–2.2% for FY21E. However, a large proportion has already been incurred by making contingent provisions.

~75% of COVID-19-related provisions are toward the MFI portfolio. In the Mortgage portfolio, a marginal increase is witnessed in GNPAs, primarily

from the LAP portfolio. Furthermore, although moratorium availed has

Click below for Detailed Concall Transcript &

Results Update

September 2020 61

FINANCIALS/BANKS | Voices increased in value terms, it has reduced by 20% in terms of the number of

borrowers v/s Apr’20.

Bank of Baroda Neutral Current Price INR 46 Moratorium update The moratorium book declined significantly and stood at 21% of term loans as of

July’20 (including all the accounts that did not pay last month’s EMI). If we consider the payment of two installments, the moratorium book declines to 17%.

A large proportion of moratorium is availed in the Corporate portfolio. Therefore, higher restructuring could be availed in this portfolio.

P&L & balance sheet related The bank is seeing strong traction in both CASA and retail term deposits. Unrecognized treasury gains on the Investment portfolio stand at ~INR89b. NIMs would continue to remain under pressure in the near term due to surplus

liquidity on the balance sheet. Expect domestic CASA to improve to 42% by FY21E. Plans for capital raise: It plans to raise INR90b through equity and another

INR45b through bonds. Business growth guidance: The focus is on aligning deposit growth with loan

growth. Expect loan growth to be 7–8% for FY21E. Fee income would continue to remain under pressure. Overall, expect the C/I

ratio to remain at ~50%. CET-I decline during the quarter was on account of reported net loss, DTA

impact, and revaluation reserves. Under the credit guarantee scheme, total loans sanctioned stand at INR80b

(~90% of eligible customers are sanctioned) and disbursed at ~INR55b (~60% disbursed).

90%+ of the customers would have a liability relationship with the bank. Wage revision: It made provisions of INR2.78b during the quarter. On the revised current account circular, PSBs would benefit from RBI guidelines. 74% of retail loans are to borrowers with a CIBIL score above 725. Asset quality ~90% of slippages came from the watch list. However, additions to the watch list

were primarily from one NBFC account. There is some possibility of restructuring in retail loans, while a higher

proportion of restructuring could be availed in the Corporate portfolio. NBFC portfolio: Some accounts have been downgraded and included in the

watch list. However, the larger proportion of the portfolio is highly rated. Total standard asset provisions stand at INR90b on global advances, while they

stand at INR79b on domestic advances. Exposure to the Infrastructure sector was down to 10% from 14% earlier. Higher standard asset provisions during the quarter were on account of one

large single account and are expected to reverse over the next few quarters. Slippages in the international portfolio comprised: (1) INR11b from one group in

the Middle East and (2) the balance was from two accounts (a large diversified group of INR6b and an INR2.5b one based in Australia).

Click below for Results Update

September 2020 62

FINANCIALS/BANKS | Voices DCB Bank Neutral

Current Price INR 86 New RBI resolution framework In the corporate book, large proportion of loans, which were SMA as on 1st

Mar’20 have already been recovered. Moratorium/collection update MFI loans: The bank was able to collect at least one installment from 79% of

customers. Highest moratorium availed is in the CV portfolio. ~26% of the portfolio has not paid any installments during Apr-Jul’20. While the

rest 74% of the portfolio have paid at least one or more installments. Balance sheet and P&L related Under the CGS, the bank expects ~40k customers to be eligible with peak

disbursal likely at ~INR14b. However, currently the bank has sanctioned ~INR6.68b and disbursed ~INR0.75b (628 customers).

The focus over the next 6-9 months would be on disbursing loans under the CGS, Gold, Tractor, KCC and Home loans. Also, the focus would be on improving fee income.

Focus remains on replacing bulk deposits with retail term deposits. The bank has ‘Nil’ certificate of deposits.

The bank has slowed down hiring at the moment. Home loans have risk-weighted assets of 35% while LAP has 75%. The approval

rate in home loans is ~65-68%. Overall, the focus continues to remain on reduction in risk-weighted assets. The bank operates in small ticket sized home loans. The average LGD should be in the range of 20-30%. The bank is witnessing strong traction in retail deposits. Many customers are

also giving CASA balances. The focus is on giving top loans and disbursing under the CGS to viable projects. Asset quality related The bank has built provisions of INR150m during the quarter on restructured

MSME loans affected by COVID-19. SMA/overdue accounts have reduced from ~INR19.1b as at Mar’20 to INR4.75b

as at Jul’20. The bank expects this to reduce further in Aug’20. The bank will continue to face higher delinquencies in the CV portfolio. This

portfolio is expected to take time to revive. The bank holds standard asset provisions of INR1.17b. COVID-19 related

provisions stand at INR0.95b, floating provisions at INR1b and the rest are NPA provisions.

Total net restructured standard advances stood at INR 4.69b – INR2.39b in CV, INR1.47b in mortgages, INR0.65b in SME/MSME, INR0.11b in corporate and INR0.07b in others.

Click below for Results Update

September 2020 63

FINANCIALS/BANKS | Voices Federal Bank Buy

Current Price INR 52 Balance sheet related Gold loan remains one of the key focus areas for the bank. 1QFY21 was good for NRE deposits and early trends of 2QFY21 are also on

similar lines. Generally, the first five months of a fiscal are always good for traction in NRE deposits

The bank expects 2HFY21 to be better in terms of advances growth and expects overall growth to range between 10-12% in FY21.

~INR10b was disbursed under the MSME Credit Guarantee scheme – of the total customers eligible under the scheme, ~70-75% have opted for it. Majority of these have chosen to pay an existing line of credit and create liquidity buffer.

P&L related Focus remains on keeping operating expenses tight. Number of employees in FedServ currently stands at ~320. The bank is planning

to take this number to 900 in the near term. 50% of its employees are currently working for 2 processes. The bank is targeting to make ~80% employees work for 3 processes, which will help in cost efficiency and enable an overall improvement in the C/I ratio

INR350m was provided toward pension provision due to change in the interest rate. If the interest rate remains the same, similar amount is expected to be provided for in the remaining quarters. This amount, however, could change based on movement in interest rates.

Balance sheet related Focus was on increasing the PCR with the bank looking to create an adequate

cushion. A large corporate account (in the Middle East) slipped during the quarter, on

which, the bank has made 100% provision (INR1.74b). FB has also created an additional provision of ~INR370m toward an IL&FS entity. Moratorium has declined from 35% to 24% as at end-Jun’20. Credit cost stood at 83bp for 1QFY21. The bank does not have much exposure in the stressed segments like aviation,

hospitality and tourism. Of the total INR130b reduction, ~INR20b is on account of Gold/other liquid

instruments while the remaining INR110b is pure repayments. Recovery for the quarter stood at INR670m and is expected at ~INR1b in

2QFY21. Overall recoveries are expected to be dull for FY21. Moratorium book’s partial payments stand at ~12%. Hence, of the total 24%,

~12% have paid nil installments. Others As of now, the bank is considering taking shareholder approval for capital raise.

However, there are no plans to raise capital in CY20 and early-CY21.

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Results Update

September 2020 64

FINANCIALS/BANKS | Voices HDFC Bank Buy

Current Price INR 1,079 Opening remarks by Mr. Aditya Puri (MD & CEO) Mr. Munish Mittal (Chief Information Officer) moved from the bank to pursue

higher studies in a foreign university. Mr. Abhay Aima (Group Head – Private Banking) has taken an early retirement

to pursue his personal interests. Based on Internal Audit (vehicle dealer financing), some personal misconduct

was observed by a few employees. The bank has taken appropriate action against these employees

Payment business – The bank has witnessed strong bounce-back and reached ~70% of Jan’20 levels with higher spends on online education

Corporate banking – Focus is on AAA rated corporates. The SME business has witnessed some sequential decline. On the retail side, origination volumes have declined ~70%. Credit card spends have also declined sharply over 1QFY21.

Loan origination volumes in vehicle financing have seen a steep decline, while tractor/2W loans are showing better trends.

The bank has already put in place a strategy to overcome the current harsh environment in every aspect. These include delinquency levels, technology, business growth, distribution, etc.

HDFCB has 51% of its branches in semi-urban and rural India. Succession planning – Mr. Puri has hinted at an internal successor. P&L and balance sheet related Of the total fees, retail forms 89%, while wholesale constitutes 11%. However,

retail loan originations have d Recoveries witnessed an impact of ~INR3b due to the lockdown. C/I ratio has declined due to lower discretionary spends, advertisement costs,

etc. However, once the situation normalizes, these expenses are likely to pick up.

9% of the total portfolio is currently under moratorium as at Jun’20. 97% customers availing moratorium are in 0+DPD while 98% customers have

received full salary credits. Moratorium was availed to preserve liquidity. Further, 70% customers that have availed moratorium 1.0 have cleared their

dues while ~90% customers that have availed moratorium 2.0 are from moratorium 1.0.

The bank believes contingent provisions are sufficient to manage the stress. The bank has sufficient cushion and believe a capital raise is not required in the

near term. Business growth trends across segments Corporate/wholesale banking portfolio Corporate banking portfolio is benefiting from strong disbursement to public

sector companies, MNC, corporates, etc. It also participated in TLTRO 1.0. Strong growth is coming from Power, Material, Consumer, etc. In terms of collection trends, corporate collections stood at 45%/50% in

Apr/May’20 (v/s Apr/May’19); however, it has improved to 94% in Jun’20. Sector wise, all industries showed positive collection trend in Jun’20 – NBFCs reflected 66% increase while Auto ancillaries exhibited 100% increase over May’20 levels.

Click below for Detailed Concall Transcript &

Results Update

September 2020 65

FINANCIALS/BANKS | Voices Top disbursements: 48% toward capex, 33% toward working capital, 9% toward

other market participants while 6% toward lending for PSL, etc. Corporate CASA grew 25% while corporate fixed deposits grew 14% YoY. SME & Business Banking Portfolio The bank is doing business on the basis of granular portfolio and geographical

spread while the risk is mitigated through self-funding and high collateral value. ~68% of the incremental disbursement has ticket size less than INR10m. 89% of new-to-credit customers have collateral cover in excess of 100%. Credit Guarantee Scheme: Total eligible customers (pre-approved) stood at 30k

with loan value of INR200b, of which disbursements were in excess of INR100b. Retail portfolio Overall, retail loan originations fell ~70% with personal loan origination volumes

declining 86%. Credit card sourcing declined 87% while spends dropped 44%. In the vehicle segment, originations plunged 66% (v/s pre-COVID levels) while tractors/2Ws portfolios showed some resilience.

Tractor segment grew 26% QoQ. Gold loans’ portfolio also grew during the quarter. Asset Quality Core Credit Cost ratio stood at 1.08% (v/s 0.77% in 4QFY20) while total credit

cost during 1QFY21 stood at 1.54%. ICICI Bank Buy Current Price INR 370 Moratorium update The proportion of loans that have availed moratorium has declined to ~17.5% as

at Jun’20 (v/s 30% as at Apr’20). Further, another ~2% of loans (not explicitly opted for the moratorium), have not paid Jun’20 EMIs. Thus, the proportion of moratorium could increase to ~20%.

~90% of the moratorium as at end-Jun’20 comprise loans that were under moratorium as at end-Apr’20.

Builder loans, commercial vehicle and dealer funding have relatively higher proportion of moratorium.

Builder loans and CV portfolio was already witnessing some challenges from pre-COVID times, and thus, the proportion of moratorium has been higher.

Balance sheet related Customer footfall has started improving from Jun’20. Some high frequency

indicators such as toll collections, GST collection, tractor sales, sale of fertilizers, etc. have also improved in Jun’20.

Retail portfolio is largely secured and is well priced. The bank has crossed ~1m users on Whatsapp banking platform. The bank has extended loans under the Credit Guarantee scheme with sanctions

of INR50b (~19k customers), of which, INR38b has been disbursed. The bank has further reduced its international book, which includes 40% decline

in non-India linked businesses. The bank does not have any loan growth targets and expects some incremental

opportunity on the corporate side (preferably short-term lending). The bank expects some pick-up in the retail segment, while rural growth has picked up well.

Click below for Detailed Concall Transcript &

Results Update

September 2020 66

FINANCIALS/BANKS | Voices Deposit growth has been strong despite pruning of TD & SA rates.

Business segments Retail loans: Focus remains on existing customer base to cross-sell products.

Incremental sourcing during the quarter was largely toward existing customers. Home loans: 70% of mortgage loans are to customers having existing liability

relationship with the bank; Avg. LTV of 65%; LAP has an avg. LTV of 55%. Commercial CV: Utilization rate has started improving in Jun’20; Top-20

customers contribute 3% to the portfolio. Auto loans: Passenger vehicle is showing faster recovery; disbursement has

reached 65% of pre-COVID levels. Credit Cards and Personal Loans: 85% is toward salaried customers. Of this, 75%

is with well-rated entities (MNC and government entities). 70% is toward existing customer. 97% customers that have availed the moratorium are receiving salary credits.

Rural Portfolio: Gold loans/Kisan Credit Card comprises 3% each of the total portfolio. Gold loans grew 32% YoY.

Business Banking: Avg. ticket size stands at INR15m. ~85% of the portfolio has a collateral cover of more than 100%.

SME portfolio: Focus remains on granularity and higher collateral cover. Disbursements were made through program-based lending.

Operating metrics Significant decline in fee income was due to lower business volumes and

slowdown in customer activity affected by the lockdown. On the cost front, the bank will continue to spend on technology at a reasonable

level. Increased employee expenses were largely due to retrial provisions. Overall, the bank expects cost to pick up as loan volumes bounce back.

Margins declined during the quarter, largely due to surplus liquidity. However, it expects margins to remain stable in the coming quarters as excess liquidity is deployed toward loan growth.

Asset Quality The bank carried additional provisions of ~INR144b (2.3% of loans), which is not

part of the PCR (includes COVID provisions of INR82.75b). Thus, this cushioned the balance sheet from impact of the COVID-19 pandemic.

The bank has not sold any NPA during the quarter. Increase in the BB & below book includes downgrades of INR14.7b. Capital Raise Proposed capital raise of INR150b would be utilized to further strengthen capital

ratios and improve competitive positioning.

September 2020 67

FINANCIALS/BANKS | Voices IndusInd Bank Buy

Current Price INR 610 Business related Certain indicators suggest economic activity has picked up, but remains

challenged as pent-up demand settles and lockdowns are re-imposed in certain areas.

The rural economy continues to pan out better than urban. Balance sheet and P&L related Retail deposit growth was at 5% QoQ. The bank carries excess liquidity of INR300b. The portfolio eligible under MSME stands at a disbursement value of INR32b;

just 2% of the portfolio has availed the facility, with the bank having disbursed INR1.7b.

Short-term borrowings form ~12% of the total borrowings, while the proportion of Certificate of Deposits fell below 10%.

Growth is likely to revive from 2HFY21. Asset quality related Moratorium 2.0 follows an opt-in facility for all customers, except MFI, which

continues to have the opt-out facility. 90% of Moratorium 2.0 is secured. The moratorium book ex-MFI stands at 14% in value terms (8% in volume) and

16% including MFI (11% in volume). Retail moratorium stands at 19%, while Corporate stands at 9%. The moratorium book stood at ~50% in Moratorium 1.0: Retail at 75% and

Corporate at 23%. 92% of Moratorium 2.0 customers are from Moratorium 1.0. Corporate moratorium decline to 9% from 23%: Of the 14% decline witnessed,

all are currently making payments. Retail moratorium decline to 19% from 75%: Of the total decline of ~56%, ~46%

are currently making payments, while the balance 10% is not paying. Vehicle finance: Collection efficiency has improved to 75% (current) from 30– 35%. Moratorium is at 20% in value and 10% in volume. LAP/BB: Business is now at 80–85% of normal levels. Credit Cards: This comprises 3% of the total book. 15% of the book opted for

moratorium. Spends have reached 80% of pre-COVID-19 levels. Gems: One customer of INR50m opted for moratorium.

COVID-19 impact: The bank expects incremental slippages of 92bp and incremental credit cost of 65b due to COVID-19.

The SMA 1 and 2 books declined to 35bp in 1QFY21 from 70bp in 4QFY20. Accounts for which the asset classification benefit was availed stood at INR33b,

comprising 1.6% of total loans. The BB & Below book forms 5.5% of total loans. Others The bank has decided to raise INR32.88b thorough preferential allotment. This

increases the CAR by ~125bp to 16.5%.

Click below for Detailed Concall Transcript &

Results Update

September 2020 68

FINANCIALS/BANKS | Voices Kotak Mahindra Bank Neutral

Current Price INR 1,330 Moratorium update Focus remains on assessing the viability of the borrower (ability to repay).

Customers who seem unviable have not been provided the moratorium 2.0 and the bank prudently recognized the stress earlier. Thus, this resulted in some of the accounts slipping during the quarter.

The collection trends have improved in the portfolio, which have come outside Moratorium 1.0 over Jun-Jul’20 (v/s Apr-May’20).

P&L and balance sheet related KMB has disbursed INR5.5b under the MSME credit guarantee scheme during

1QFY20. It has disbursed another INR35b in Jul’20. KMB is sitting on significant bond gains (~INR30b) and will monetize it at an

appropriate time. The bank has an LCR of 150% on a daily average basis. The bank witnessed strong growth in retail SA deposits. Total consolidated advances stood at INR2.31t while customer assets stand at

INR2.45t. Business strategy Mortgage business will be a key segment for growth in the near term. Also,

focus is on disbursing loans to the MSME segment (still some opportunity available to lend under credit guarantee scheme).

Expect better fee income trends in the MSME segment. Overall working capital utilization limit has come down due to muted economic

activity trends. Collection front: Expect improvement in resolutions trends; strengthened the

collection team; enabled multiple digital repayment tools. CV segment: Disbursements are quite low in this segment; however, it has

improved post May¡¦20. Traffic movement suggests operations at 75% of pre- COVID levels. Collection trends were better in Jun-Jul¡¦20 (v/s Apr-May¡¦20). Construction equipment segment is reflecting better trends and is improving

MoM. Agri business: Collection efficiency is quite good in this portfolio. Cash flows of

borrowers have not been impacted severely. Tractor loans: Higher disbursements in this segment, customer cash flows are

good and collection efficiency is close to pre-COVID levels. Corporate portfolio: Conservative in lending to this segment; cautious in

lending, especially to companies with high fixed cost, high leverage, etc. SME portfolio: Cleaned this portfolio last year; significant under-utilization of

limits due to low economic activity; optimistic in growing this segment. Market share in the SME segment is around 2%.

HFC exposure: Increase in exposure to top-rated HFCs only. Unsecured business: Remains cautious in this portfolio as it does not see risk-

reward in the current environment. Overall, the bank sees huge opportunity in the non-credit risk business (such as

wealth management business). Some opportunity exists in a special situation fund (significantly higher return);

some pockets of SME business, Home loans and on the LAP side. Cost of funds provides competitive advantage. Expect cost of funds to further

trend downwards. Future of branches: In the post COVID era, lower branch expansion is expected

while higher digital adoption would be seen.

Click below for Detailed Concall Transcript &

Results Update

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FINANCIALS/BANKS | Voices Asset quality

Total provisions (including COVID, contingent, NPA provisioning) stood at 107% of the total GNPAs.

Single large accounts (3 digits) slipped during the quarter. This account is still standard in other banks.

Total overdue accounts stood at INR130b (as on 29th Feb’20), of which, INR5b slipped during this quarter.

State Bank of India Buy Current Price INR 203 Moratorium update Term loan portfolio: Only ~9.5% of term loans (only accounts that have paid less

than two EMIs) are under moratorium. For working capital, the interest deferment stands at ~INR48.8b on the overall

working capital book of INR7t. Segmental moratorium: Home loans at INR320b and personal loans at INR110b. P&L & balance sheet related Loans sanctioned during Jun’20 has picked up well. Further, loan pipeline on

corporate loans is strong (mainly project financing). Therefore, expect corporate disbursements to pick up.

On the wage revisions – The bank has built provisions of INR10b during the quarter. Also, an additional impact of ~INR10b is expected in the coming quarter.

The bank is witnessing strong traction in gold loans. Further improvement in margins is not expected. Expect it to remain stable at

the present levels. Under credit guarantee scheme, loans sanctioned stands at INR210b, of which,

~INR150b was disbursed. Home loans – Average LTV stands at ~60%. 90% of the portfolio comprises first-

time buyers. Large proportion of the book is toward government employees. Risk weights have reduced due to disbursement toward high-rated entities. Asset Quality Base line slippages guidance of 1.5-1.6% i.e. INR320-360b. This could increase

due to the impact of COVID-19. Of the total SMA of INR420b (as at end-Feb’20), the portfolio where less than

two EMIs were paid stands at INR130b, on which, the bank has made provisions of INR30b.

Interest reversal was negligible during the quarter. Large HFC exposure (DHFL) was declared as a fraud account in the previous

quarter, and thus, provisions of INR35b were made in this quarter. Overall, expect resolution to get completed by Dec’20.

On the large steel account, expect resolution by 3QFY21. Also, few power accounts are expected to get resolved soon. Overall, expect total recoveries of INR100-120b over the next two quarters.

No accelerated provision requirements are expected on the legacy portfolio. Thus, expect ageing provisions of INR50b (each quarter) over the next 7 quarters.

Standard COVID provisions stood at INR30b while provisions for other standard assets were INR2.82b during the quarter.

CRE Exposure is ~INR418.8, of which, 90% is LRD, exposure to Aviation (0.3% of loans), and Tourism and Hotels (0.47% of loans).

Click below for Results Update

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FINANCIALS/NBFC| Voices

FINANCIALS/NBFC

Commentaries of NBFCs suggest that improving macros across most business segments has led to increased optimism for collection efficiency (CE) as well as for growth across product segments. In terms of restructuring, most financiers are awaiting Sep’20 collection trends given the end of the moratorium period. Improving liquidity and a higher risk appetite on account of better collection performance has given companies the confidence to lift disbursements. Improvement in the rural segment is a consensus view of most NBFC companies.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook for FY21 Asset Quality & Moratorium

It aims to be among the top 3–4 credit card issuers in India. New card origination was at 20% of normal levels in June and is at 30% in July thus far.

Gold loans are growing at INR500–700m per month. Flexi loans have now been extended to PL,

Professional Loans, LAS, etc. The loans are priced 25–50bp higher than normal term loans. And, the company charges an AMC fee of 25–100bp.

Bounce rates across segments have been dropping 300–400bp per month for the past few months.

Without the flexi loan conversion, the moratorium rate would have been 18.3% (v/s 15.7% reported in June).

Collection efficiency improved 800–1000bp MoM in June and is expected to improve by the same magnitude in July as well.

30–40% taxi aggregators are resuming activity, but recovery is likely to be prolonged.

50% of opex reduction in 1Q is sustainable going forward. Expect a 15–20% drop in overall opex in FY21. The expense ratio would rise to 2% (from 2.85%) over the medium term.

50–52% of the Tractors portfolio has opted for Morat. 1.0.

Moratorium rate by value and volume is 48% currently (30% in Tractors). Expect decline.

60% moratorium customers of the 75% have not paid a single full installment since April.

The company has undertaken fixed cost reduction measures, which should pay off in the near future.

Tractor demand is likely to continue to improve MoM. In 2W, while the need is prevalent, customers’ capacities may not exist. It may see a drop in demand for 2W in the coming months.

Demand for MFI would be high as customers need money to tide over the crisis.

In June, of the total demand of INR7.5b (incl. moratorium customers), LTFH collected 87–88%. Net Stage 3 loans in the Tractor segment are now at an all-time low of 0.26%.

The number of moratorium customers in retail lending fell to 44% QoQ from 79%. However, on a value basis, this number stood at just 34% in June.

Most under-construction RE projects are under moratorium, but they have enough money in debt service reserve accounts (DSRA) to last up to March.

It is likely to see YoY growth in disbursements in

2QFY21. It would look at capital infusion at the appropriate

time; there is no proposal as yet.

Moratorium as of June 2020 in the PPT is by value. In volume terms, less than 12% of customers are under moratorium.

For the non-moratorium book, collection efficiency is at 90%.

Construction finance and non-housing individual moratorium stand at 77% and 36%, respectively.

Guidance is 15% AUM growth for FY21, irrespective of gold prices.

Expect yields to remain stable at 22%. Plans are afoot to open 250 branches over the next 12 months.

Opex reduction in 1QFY21 is not sustainable over the long term.

It is going slow on auctions of NPLs as the collateral buffer is adequate. Rather, the company is giving its customers time to repay.

Collection efficiency in July is as follows: MFI – 76%; HL – 87%, VF – 75%.

Bajaj Fin

Mahindra Finance

L&T Fin.

LIC Housing

Muthoot Fin.

September 2020 71

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Aditya Birla Capital Buy Current Price INR 70 Business updates NBFC segment – In the Personal Loan segment, 85–90% of customers are

paying; in Business Loan, 80% of customers are paying. ABCL works with 40k IFAs in the AMC segment. The IFAs typically have high

persistency ratios. Improvement in the claims ratio in the Health Insurance segment this quarter

(owing to lower elective procedures) is sustainable. Do not expect COVID-19 related claims to impact the profitability of the Health Insurance segment.

No capital raise is required in FY21. Persistency in the Life Insurance segment is better v/s peers, largely led by

digital initiatives regarding renewal collection. Also, due to the grace period granted by the regulator, some renewals for 1QFY21 were done in July (18–19% customers opted for it).

It plans to increase the share of retail and SME loans to 50% by year-end from 46% currently. It would add 50–70 new locations to aid growth in the retail book.

Management is cautious on the Group Life business. Asset quality / Moratorium It took INR500m COVID-19 provisions this quarter (in addition to INR900m in

4QFY20). 85% of the moratorium book in ABFL was never more than 30dpd+ in the three

months prior to the lockdown. In the SME segment, the moratorium rate is higher than average. In wholesale

lending, it is less than 20%, and in unsecured lending, it is less than 15%. Provisions on the balance sheet are adequate in the current situation.

Bajaj Finance Neutral Current Price INR 3,543 Business updates BAF earned an INR1.47b fee in 1QFY21 from switching from term loans to flexi

loans. The option to switch to flexi loans is offered to customers who have never been

overdue. Of the INR86b worth of customers who switched to the flexi option, INR50b were not in moratorium. The remaining INR36b worth of customers had never been overdue, but had opted for moratorium as a conservative stance. In fact, the company offered the flexi-switch option to INR150b worth of loans.

The C/I ratio could decline to 28–29% by 2HFY22 with zero-based budgeting. Flexi loans Flexi loans were launched in 2013 for LAP customers as an alternative to OD/CC

by banks. These have now been extended to PL, Professional Loans, LAS, etc. The loans are priced 25–50bp higher than normal term loans. And, the company charges an AMC fee of 25–100bp.

Flexi loans are the main product offered to doctors and affluent salaried personnel.

60% of LAP/LRD is flexi loans. The bulk of LAS are flexi loans. Typical utilization rates are 65–80%.

Click below for Detailed Concall Transcript &

Results Update

Click below for Results Update

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This product is a higher RoE product structurally. Asset quality / Moratorium Bounce rates across segments have been dropping 300–400bp per month for

the past few months. Without the flexi loan conversion, the moratorium rate would have been 18.3%

(v/s 15.7% reported in June). Collection efficiency improved 800–1000bp M-o-M in June and is expected to

improve by the same magnitude in July as well. Moratorium customers as of June included those who did not pay EMIs in June.

They need not have cleared past EMIs. Others The company intends to increase the share of wallets. It aims to be among the top 3–4 credit card issuers in India. New card

origination was at 20% of normal levels in June and is at 30% in July thus far. Gold loans constitute INR15–17b of the loan book. This category is growing at

INR500–700m per month. The company added 2800 collection officers to the existing 4500 officers (as of

4Q). This is a fresh addition; just 150 sales officers were moved to collections. The number of collection agents increased to 45k currently from 28–30k in 4Q. Provisions on 2W loans under moratorium are low due to variables such as

collateral value. INR17b interest was earned on moratorium customers. The INR2.2b interest

reversal is a sort of ‘provision’ against interest accrual. Cholamandalam Inv. & Finance Buy Current Price INR 225 Business updates June 2020 disbursements were 75% of June 2019 disbursements. The improving

trend is likely to continue. Company’s market share performance YoY – Overall Auto: 1.7% to 3.99%; CV:

13% to 23%; PV: 3% to 6%; 3W: 3% to 19%; 2W: 1% to 2%; Tractors: 6% to 11%; Construction Equipment: 8% to 21%

Activity in rural areas is higher than in urban areas. Hence, truck owners are finding more work opportunities in these regions.

It renegotiated some rental agreements, leading to a one-time reduction in rent. In addition, lower business activity led to lower opex in the quarter.

Truck capacity utilization increased significantly in June, but declined in July due to lockdown in Tier 2/3 towns as well as seasonality.

It has recently tied up with one of the Top 3 tractor OEMs and also expanded market share in the Top 3 OEMs. This is one of the reasons for strong tractor disbursements this quarter.

Asset quality / Moratorium Moratorium rate is high at 76% as customers face uncertainty in their

businesses. Some customers moved from non-morat to moratorium and vice-versa from

phase 1 to phase 2. COVID-19 provisions are believed to be adequate. It would continue to evaluate

and make further provisions if required.

Click below for Detailed Concall Transcript &

Results Update

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Collection efficiency in July is stable MoM. GNPL ratio – VF: 2.41%, LAP: 6.9%, HL: 3.5% It wrote-off some old over dues in vehicle finance in the quarter. NRRB for the 1-2 bucket improved to 33.98% in June from 26.79% in May.

Similarly, that for HCVs improved to 30% in June from 17% in May. Moratorium was given to customers even in the 180dpd bucket, as per the

board’s resolution. No moratorium is being offered to new contracts. Liquidity/Funding Liquidity on the balance sheet would hover around INR60b through the

remainder of the year. Behavioral ALM in the PPT reflects some conservatism in collections

immediately post the lifting of the moratorium. Incremental cost of funds: 3–month money - 7%; Banks - 7.5% Others Business was muted in April due to underlying pain in the Auto segment,

coupled with supply shortage at the dealer level and nationwide shortage. Do not expect LGDs to increase. Margins are down due to the liquidity drag. When truck capacity utilization is at 65%+, the customer is able to service the

EMI. Equitas Holdings Buy Current Price INR 53 Moratorium update Expect moratorium trends to further improve in Aug’20. Moratorium availed was higher in the Heavy Commercial Vehicles (HCVs) v/s

Light Commercial vehicles (LCVs) portfolio. In the CC/OD accounts, Moratorium 1.0 stood at 65%. In Moratorium 2.0, it has

reduced sharply. Balance sheet related Average ticket size per loan is INR4lacs (excluding MFI loans). Disbursement during Jul’20 reached ~75% of pre-COVID levels with higher

traction in the small business loans category. Overall, normalization of disbursements is expected by end-3QFY21. The bank has indicated that whenever the equity market looks stable, it would

launch listing of the SFB. Under the Credit Guarantee Scheme, no disbursements were made so far. Increased focus on Gold loans: It has been launched in 100 branches currently

and was started from mid-Jun’20. The product is showing great traction. Disbursement TAT in Gold loans is 40 minutes.

Average LGD in used vehicle portfolio is ~40%. In small business loans, it is less than 30%.

In the MFI portfolio, disbursements made during the quarter was 15% toward new customers while 85% were to existing customers. Further, disbursements made during Jul’20 were to 91% of existing customers. The rest were to new customers.

On the used-vehicle portfolio: The entire CV industry is going through a tough phase. Among segments, LCVs have higher demand v/s HCVs.

Click below for Results Update

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FINANCIALS/NBFC | Voices

Liability franchise Nearly 10k new accounts were opened through digital channels recently. Mass affluent customer base is rising. Retail TD interest rates reduced in the range 30-75bp across various tenor

buckets while bulk deposits rates have declined sharply. Overall, high focus remains on retail term deposits.

Operating metrics Yields during the quarter declined as investments were made in SLR bonds.

Overall, NIMs should remain at ~9% levels. On the cost front, the company expects levels to be similar around FY20. Asset Quality Some concerns exist on HCV v/s LCV portfolio, especially in the high risk

category. However, concerns are low in the small business loan segment. Under the new restructuring scheme, high restructuring is not expected. 29th Feb overdue account was ~INR9.9b, which has reduced to INR3.4b as at

31st Jul’20. Continued strong traction in collections was seen with an 86% resolution in vehicles while 88% was witnessed in small business loans.

Credit cost under normal scenario ranges between 1.0-1.2% while under COVID, credit cost rises sharply. Thus, the bank has built 100bp COVID related provision buffer.

HDFC Life Neutral Current Price INR 605 Business mix HDFCLIFE has started witnessing better business trends MoM with strong

traction in the Individual Protection segment. Further, HDFCLIFE is also experiencing better renewal growth trends.

Around 1.94lac policies were sold during the quarter. It expects ULIP demand to remain soft over FY21E. However, trends in the

Protection business should remain strong with share of retail Protection improving to 11% in 1QFY21.

Further, the credit life should witness tepid trends (down 74% YoY in 1QFY21). As far as term plans are concerned, customers are sticking to 2-3 large players

only. HDFCLIFE has strong positioning, which is helping drive higher business volumes.

It is witnessing some decline in persistency in the ULIP segment while it remains strong in the Protection segment.

In non-PAR savings, it has cautiously slowed down in the current environment. Solvency has been stable and remains comfortable. Over the last quarter, due to

volatile capital markets and higher demand for the Protection business, it has decided to raise INR6b of Tier-II bonds.

The timing of Sanchay PAR advantage has helped in reflecting strong trends in the PAR segment.

It has launched Group term insurance plan ‘Group Poorna Suraksha’ – a comprehensive protection plan – offering multiple benefits under the group platform. The margins in this product remain as high as in Individual Protection.

Only 39 COVID claims have been raised so far – 37 in the Savings business and 2 in the Protection segment.

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Results Update

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FINANCIALS/NBFC | Voices

Operating metrics On the cost front, volume related variable cost has declined. But as business

volumes pick up, variable cost should increase. Thus, overall cost ratios are expected to remain at similar levels to last year

Solvency position remains healthy at 190% v/s 184% in FY20. The positive economic variance of INR11.5b in the EV calculation has largely

come from the equity market (INR4b), interest rate (INR2b), RBI operation twist (INR4b) and credit spread (INR1.6b).

In terms of Protection plan pricing, it has increased pricing in certain age groups to cover mortality risk.

Distribution channel In terms of distribution mix, there was higher share of volumes in the banca

channel during Jun’20. The share of direct channel has improved. Agency channels are doing very well in selling participating products. ICICI Prudential Life Buy Current Price INR 439 Operating metrics IPRULIFE witnessed some deferral in renewal premium due to grace period

offered to customers, which led to slight drop in persistency. However, the company expects persistency trends to revert to normalcy in the coming quarters.

The increase in VNB margins is primarily on account of increase in the Protection mix in the total APE. However, VNB margins in the Protection segment have contracted as entire re-insurance hike has not been passed. Nevertheless, it has launched new product Jul’20 onwards, which has relative higher pricing and will neutralize the impact of re-insurance hike and further support VNB margins.

Levers for cost reduction – to lower rental cost and manage discretionary expenses, etc.

It continues to reiterate its guidance of doubling VNB over 3-4 years. Business mix IPRULIFE is witnessing better trends in the Non-Linked Savings business (14%

YoY) while it is continuing to witness pressure in the Linked business (declined 66% YoY).

Further, it is witnessing strong traction in the Protection/Annuity segment, which will remain a key focus in the near term. The share of Protection in total APE improved to 26% during 1QFY21

In terms of individual sum assured, IPRULIFE’s performance remains better compared to peers.

On the other hand, persistency in the ULIP segment has dropped while it has improved in the Protection segment.

IPRULIFE has launched a new term plan from Jul’20, and thus, expects margins to improve further. The new product prices are 10-25% higher v/s old premiums. Overall, increase in pricing is to neutralize impact of the re-insurance hike.

The percentage of risk retained in the Protection business is 50% and the rest is passed to the re-insurer.

Only received 69 claims so far due to COVID-19.

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Some sectors have seen increased risk due to the COVID-19 pandemic. However, it has only 0.9% of fixed income exposure below AA rated.

Non-par guaranteed return book is very minimal i.e. 0.4% of liabilities, and thus, has minimum ALM mismatch.

Credit life business was affected significantly during the quarter. It is ~70% lower due to pre-COVID trends.

Protection and non-linked business contributes 74% of total VNB. Others Entered into partnership with IDFC First Bank to sell Life Insurance policies. ICICI Securities Buy Current Price INR 473 Retail brokerage segment Rising retail participation in equity trading witnessed across the globe. This has

been driven by activation of inactive clients as well as entry of new customers. WFH has also contributed to this phenomenon. Some of this participation may moderate in the coming quarters.

For the first 15 days of the quarter, the company did not open any accounts due to the lockdown as i t did not have a fully-digital process. In addition, ICICI Bank itself was acquiring fewer new customers due to the lockdown – this, in turn, impacted ISEC.

Launched ‘ICICI Direct Insta’ account which is the open-architecture platform. Customer acquisition happens digitally end-to-end. ISEC opened 20k such customer accounts in the quarter. This channel is now used for customers sourced by other means too.

Monthly average account opening increased YoY in June despite the lockdown. ICICI Bank now contributes 65% of new account openings vs 80% earlier.

In the equities business, the company witnessed 90% YoY increase in the number of customers trading on a daily basis.

Seeing share of delivery volumes going up. However, this may not be sustainable.

Employee expenses shot up this quarter due to high variable employee cost (due to strong company performance). Typically, 70% of an employee’s total compensation is fixed.

Decline in other operating expenses this quarter was due to the one-time INR90m COVID provisions taken in 4QFY20 as well as due to renegotiation of some transaction and franking charges.

50% of retail brokerage business comes from ‘Prime’ customers. Regulatory guidelines There is a SEBI regulation on collection of upfront margin in cash and derivative

segments. There are also some changes in the margin requirement for these segments. There should not be any impact of the same on the cash market.

There are also new guidelines in margin finance with respect to pledging and re-pledging of securities.

SEBI regulation on intra-day margin collection – this will have some impact on the industry but it’s too early to comment.

While SEBI’s guidelines are positive in the long term, there could be short-term challenges.

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Results Update

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Distribution MF client base has bottomed out, though the SIP client base is still declining.

ISEC’s equity MF market share improved QoQ. Immediately post the closure of some schemes by an AMC, there were outflows

from debt MFs. However, after some time, the company witnessed inflows back into fixed-income funds, but mostly in sovereign/AAA assets.

Capital markets Strong investment banking revenues were due to some large block trades as

well as QIP mandates. This is likely to continue in 2Q too. Others There is a clear trend towards preference towards online trading rather than

trading through the physical format. This is true across all client segments. SEBI released simplified guidelines for digital on-boarding and KYC of customers

which helped customers open accounts in the lockdown without any physical intervention.

Focusing on digitizing all possible non-digital processes Focus is on growing the active client base from the current level of 1.5m For the MTF book, ISEC borrows via CPs at ~5.5%. Average NIM is 4-5%.

However, this book is likely to grow cyclically rather than structurally. Outbound remittances from India amount to ~$15b. But only $500m is going

into financial assets, while the rest is into physical & other assets/expenses. Activation rate is down QoQ due to the change in channel mix towards non-ICICI

Bank channel customers. Indostar Capital Finance Neutral Current Price INR 260 Business updates The focus is on opex reduction (salary and rent, among others). Expect to disburse loans worth INR4–5b under ECLGS. It has undertaken certain projects on the digitization front. The quantum of

these expenses was INR100m in 1QFY21. Some part of the AUM growth was attributable to interest capitalization. Asset quality / Moratorium Morat 2.0 was an opt-in rather than an opt-out. Corporate NPL comprises just one account that turned NPL in 1QFY20. It holds

10% provisions against this asset and is confident of recovery in the asset. ECL provisions – These were as follows: Stage 1: more than 0.4%; Stage 2: 6–

8%; and Stage 3: 27% in CV, 20% in HFC, and 20–22% in SME. INDOSTAR has INR2.8b COVID-19 provisions over and above this.

More stress in new CV financing v/s used CV financing, primarily in central and northern India.

It plans to consider moratorium for wholesale lending on a case-by-case basis. In retail lending, it would reach 20–25% moratorium in August. It would reach 90% collection efficiency in retail in September or October.

Liquidity/Funding Incremental funding is at 8.5–9.5% (one loan came in at sub-6%). It has raised INR9.76b since April 1. Others Do not expect branch expansion in the near term.

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Results Update

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Collection efficiency numbers include arrear collections. Excluding these, numbers would be 4–5% lower.

A typical SME customer is a business with turnover up to INR100m. ATS is at INR10m. Some loans have been assigned in this segment.

Non-morat customers are those who have paid at least one EMI. Low tax rate this quarter is due to a change in the policy of calculation of

deferred tax rate. Most of the real estate lending is seen in the Affordable segment. It is confident

of cash flow covers in this book. INR2.07b write-offs were reported in the corporate portfolio and INR600m in

the Vehicle Finance portfolio in 4QFY20. IIFL Wealth Buy Current Price INR 980 Business Updates All account opening processes, etc. is back to normal now. Expect to make up

for lost new business in 2QFY21. Some money moved out of liquid funds to savings accounts. Saw 7-8 new divestment transactions by clients over the past 30-45 days. May see regulations of upfront commissions in AIF over the next 6-9 months. There is scope to release equity capital from the (a) NBFC segment, and (b) sale

of the office building. This could potentially free up INR3.5-6b capital over 12- 8 months.

Typical revenue mix: 50-60% from ARR excl. NII, 10-15% from NII on loan and 25- 5% from TBR assets.

Tech spend has increased from 1.5% of revenue to 2.5% of revenue over the past year. It could further increase to 4-5% over the next few years.

Client profile: 20% of AUM: Entrepreneur/Industrialist, whose portfolio is created out of

dividends receiveed, 40% of AUM: Industrialists, who have monetized businesses, 20-25% of AUM: Professional entrepreneurs (salaried but higher share of

ESOPs), 5-10% of AUM: PE/celebrities/consulting professionals, 5-10% of AUM: Treasury clients. Given the sharp rise in the Sensex over the past three months, clients have

tactically shifted from equity to fixed income investments. Also, only 65% of the equity allocation is currently invested, while the rest is yet to be invested. In addition, there have not been any meaningful withdrawals.

Bulk of the new inflows in 1QFY21 came from existing clients. ARR Assets Lower ARR revenue is on account of (a) lower AMC fees (of which, 60-70% will

come back in 2QFY21), (b) NII on loans (due to INR2.3b lower capital translating to INR60m impact), and (c) lower average AUM in distribution and IIFL assets.

Retention in ARR is stable at 80bp. IIFL One yields: Non-discretionary – 30-35bp, Discretionary – 60bp, Blended –

40-50bp. Target INR900b ARR AUM by end-FY21.

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FINANCIALS/NBFC | Voices

TBR Assets TBR income – INR180-200m comes from brokerage (Equity, FICC). The rest is

from syndication income, which could vary on QoQ basis. Operating expenses Expect level of non-employee opex to sustain over the coming quarters. 30-35% of revenue goes in platform payouts (i.e. employee salaries, sourcing

opex, etc.). This figure is better for India v/s rest of the world. Target 50% C/I ratio over the next 18 months. Others Entire onboarding of 900+ clients and employees of L&T Wealth was completed

during the quarter itself. Large clients (INR1b AUM) prefer to pay fixed fees rather than % of AUM fees. Retired some of liabilities early. Reduced liquidity from INR17-18b to INR11-12b

QoQ and expect to further reduce it to INR5-6b in 2QFY21. At the same time, expect an increase in the loan book in the coming quarter.

No large scale changes were required for the new regulations on segregation of advisory and distribution services.

More than 80-85% of sales team is productive. BNP Paribas shut down its wealth management business in India, which had a

small pool of clients. IIFLWAM hopes to capture a large market share of that company.

Joining bonus of INR200m was paid to L&T Wealth employees, which will be amortized over the next 8 quarters.

Have a good CRM system but much more improvement is needed. Clients still don’t want to execute large orders by themselves. They prefer doing

it through physical format or order instruction over the phone. 2.3m ESOPs are unexercised. Management is clear that if the AMC were to go the retail way, it would not be a

me-too player. Besides strong management bandwidth, it would be increasingly digital.

Expect to receive more mandates from institutional clients in the AMC segment. Dividend pay-out should remain high. L&T Finance Holdings Buy Current Price INR 63 Business updates The rabi crop has seen good prices this season. Cash flows have reached the

farmers. 95% of all farm and MFI branches are now operational. 2W and home loan

branches are resuming a bit slower as they are largely located in the urban areas. Dealer openings in the 2W and tractor categories are improving MoM.

The company has undertaken fixed cost reduction measures, which should pay off in the near future. An around 25% reduction in opex this quarter comes from fixed costs.

Tractor demand is likely to continue to improve MoM. In 2W, while the need prevalent; customers’ capacities may not exist. It may see a drop in demand for 2Ws in the coming months.

Click below for Results Update

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MFI meeting centers have been decreased, particularly in eastern India. It would exit a meeting center only after all collections are made (or loans written off).

Demand for MFI would be high as customers need money to tide over the crisis. Asset quality / Moratorium In June, of the total demand of INR7.5b (incl. moratorium customers), LTFH

collected 87–88%. Net Stage 3 loans in the Tractor segment are now at an all-time low of 0.26%.

The number of moratorium customers in retail lending reduced to 44% QoQ from 79%. However, on a value basis, this number stood at only 34% in June.

Most under-construction RE projects are under moratorium, but they have enough money in the debt service reserve accounts (DSRA) to last up to March.

Collection numbers across products are better in July v/s June. The INR2.25b provisioning against a defocused account this quarter was for a

large conglomerate. The account is now 100% provided for. This may reverse partially over the next two to three quarters. LTFH has provided for 70% of its defocused book GNPLs.

Farm bounce rates are down to sub-50% currently (typically 40%) from 69% in April. 2W is down to ~50% (typically 25–30%) from ~60%. The entire reduction in moratorium is attributable to the payment of installments.

Liquidity/Funding The share of CPs would remain stable at current levels. The company would keep liquidity at current levels (would not go beyond this). Others Kharif sowing is going well. Reservoir levels and monsoons are healthy. Tractor disbursement volumes in June were just a few notches below all-time

high monthly levels. Collections in Jun’20 were at 70% of Jun’19 levels in retail lending. This has also

improved in July. Typically, 92–95% of first bounces in 2W are collected later in the month. The interest capitalization impact on loans is around INR6–6.5b. IBC has been suspended for a year. The company was able to service redemptions in credit funds (AMC segment)

without borrowing incrementally. Infra disbursements – it would weigh in risk and reward, most likely to curtail

disbursements. ~1k personnel has been laid off in the MFI segment. LIC Housing Fin. Buy Current Price INR 297 Business growth and moratorium details Business activity recommenced from June 2020. The first two months of the

quarter were completely washed out. It is likely to see YoY growth in disbursements in 2QFY21. INR10b disbursement was under the PMAY (>30% of retail disbursement for the

quarter). Moratorium as of June 2020 in the PPT is by value. In volume terms, less than

12% of customers are under moratorium. For the non-moratorium book, collection efficiency is at 90%.

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INR26.69b provisions for Stage 3: COVID-19 weakness is already factored in the coverage ratio.

Construction finance and non-housing individual moratorium stand at 77% and 36%, respectively.

No specific trend or regional concentration is seen in individual moratorium. Do not expect any material increase in restructuring. LTV-related details Max LTV in retail housing is 80–85%; the average is 40–45% currently. LAP – Max LTV is at 60%. Builder loans – 1.5–2x primary security and 50% additional security; hence,

builder loan LTV is at max 40%. Others It would look at capital infusion at the appropriate time; there is no proposal as

yet. There were two main reasons for QoQ improvement in yield: a) interest accrual

and b) lesser competitiveness. Write-offs stand at INR3.5–4b to date. Specific product segment yields: LAP and LRD – 10–10.5%; developer loans –

13% During the quarter, NHB funding came in at 5–5.5%.

M&M Financials Buy Current Price INR 131 Business updates The company foresees rural turnaround to certainly be much faster v/s the

urban markets. Dealerships are open and operational. Even MMFS’ 300 ‘smart branches’ are

operational. June was a great month in terms of disbursements and collections. The

company disbursed loans for 30k vehicles and collected INR22b in June (i.e., INR29b demand; ~75% collection efficiency). Disbursements could have been higher in the month if dealers had more inventory.

Tractors, small cars, and small LCVs and pre-owned vehicles saw good traction. 30–40% taxi aggregators are returning to activity, but recovery is likely to be

prolonged. The company has 80k taxi aggregators of 2m customers. Due to production constraints at OEMs, disbursements may be below demand.

Thus, expect 2Q to be muted, but 2HFY21 to be a strong period. 50% of the opex reduction in 1Q is sustainable going forward. Expect a 15–20%

drop in overall opex in FY21. This would be driven by rent renegotiations, branch rationalization, advertising expense reduction, no/low increments, etc. The expense ratio would rise to 2% (from 2.85%) over the medium term.

A rights issue that was priced attractively was only to reward shareholders. It is confident of maintaining market share in various OEMs in FY21. Asset quality / Moratorium INR5b collections were reported in April and INR10b in May. 50–52% of the Tractors portfolio opted for Morat. 1.0. Collections in July thus far are better v/s June. Moratorium rate by value and volume is 48% currently (30% in Tractors). Expect

decline.

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40% of customers paid full installments in June. The company is confident of maintaining asset quality, barring slight delays in

repayment; even post the lifting of the moratorium. 60% moratorium customers of the 75% have not paid a single full installment

since April. The increase in the GNPL ratio QoQ is attributable to the Tractors segment

(many of these customers did not opt for moratorium as they expected cash inflows). However, this is likely to reverse given good crop output.

It aims to take NPL to 4% levels. Provisions made this quarter comprise – Stage 1, 2: INR1.8b and Stage 3:

INR4.7b. Liquidity/Funding The company has INR85b of liquidity on the balance sheet. Others Asset quality trends are more on geography than product segment. Madhya Pradesh is doing better than other states. Recovery in M&HCV would be prolonged. Digital repayments have increased to 50% currently from 35–40% earlier. It has not changed loan-to-value (LTVs). RWA/Total assets % declined YoY in FY20 due to a higher share of liquid assets. According to management, June demand is not pent up. Southern India has been facing challenges since before the COVID-19 outbreak.

Expect some pick-up in mining activities in Karnataka post-October. MAS Financial Services Buy Current Price INR 808 Business update NBFC partners’ collection efficiency was at 80%/93% in Jun/July’20. NBFC MFI

ranged between 40% and 80%. Expect disbursements/collections to normalize mid-3Q/3QFY21. Of the total reduction in opex QoQ in 1QFY21, a ~33% reduction is attributable

to variable costs/pay and the balance 67% to travel/advt./professional fees, etc. It did not implement pay cuts during the quarter, but converted some fixed

components to variable. Expect the mix of fixed variable pay to be 50:50 in the coming year (historically,

70% has been fixed pay). The 80bp opex to AUM ratio is not sustainable; it may return to ~1.4% once the

situation normalizes. 87% of the focused book is from the MSME segment. Asset quality Collection efficiencies are calculated against demand/billing for the month for

the on-book portfolio. The overall collection ratio on AUM would be +/-2–3%. Write-backs/Collections (~INR3.5b) from the pre-COVID-19 (Feb’20) period were

not included in calculating the ratio. If a customer started paying in June (with no installments honored in

April/May), they were issued a fresh repayment schedule. Moratorium was offered to all customers. Borrowers were educated and

requested to pay if they could. Normal collection efficiency pre-COVID-19 was at 97%.

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Liquidity/Margins Lending yield was at 15.29% (15.68% in 1QFY20). In July, it raised INR1b under term loans, INR1.50b under the PCG scheme, and

availed an INR1.25b refinance facility from SIDBI. Cost of borrowings stood at 9%, 8.5%, and 6.2%, respectively.

Repayment obligations were at INR6.50b in FY21. Expect some compression in CoF (anticipate further linkage to MCLRs). HFC: It is focused on growth in the semi-urban and rural regions. Tax adjustments and COVID-19 provisions have led to decline in HFC PAT. Others: Tier I capital is entirely of internal accruals. Tax rate is at 25% (last year: 35%). NBFC – MFI partners have started receiving funds from NABARD and other

lenders as well.

Muthoot Finance Neutral Current Price INR 1,129 Business Updates Most branches were closed in Apr’20, but the situation is back to normal now.

Bulk of the lending in 1QFY21 came from top-ups. Guidance of 15% AUM growth for FY21, irrespective of gold prices. Don’t see much competition from banks on back of recent increased LTV cap. Going slow on auctions of NPLs as the collateral buffer is adequate. Rather, the

company is giving time to its customers to repay. More than 40% customers are now transacting online. Barring depositing gold

and taking back gold, the customer can do everything online. The company took two new initiatives this quarter – (1) ‘Loans@Home’ wherein

MUTH’s staff visits a customer’s home, collects the gold and disburses the loan instantly. Currently, MUTH is doing this for ticket sizes above INR200k. (2) ‘Gold Unlocker’ – Customers can keep jewelry in MUTH’s lockers and take loans whenever they want.

Average LTV of the outstanding portfolio currently stands at 54%. Opex reduction in 1QFY21 is not sustainable over the long term. Expect yields to remain stable at 22%. Plans are afoot to open 250 branches over the next 12 months. Liquidity/Funding Cost of borrowings increased QoQ due to the full impact of ECB cost (which

came in on 1st Mar’20). MTM on ECBs goes into ‘OCI’ directly. ECBs raised last year came in at double-digits (first tranche) and single-digits (second tranche).

INR15b worth CPs mature every month. Will maintain 10% liquidity on the balance sheet. Subsidiaries MFI – Have slowly started lending (disbursed INR1b in Jul’20) and should be

back to normal in the next 2-3 months. 60%+ of the portfolio is SHG and the remaining is JLG.

Housing Finance – Will wait for the moratorium period to end and see how customers are behaving. Will resume lending after that only.

Vehicle Finance – Only collections happening right now.

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Expect share of subsidiaries to decline from 12% currently to 9-10% by end-FY21 due to muted growth

Provisions for subsidiaries were made for the loan book under moratorium. Collection efficiency in July: MFI – 76%; HL – 87%, VF – 75%. Others MUTH is offering free COVID-19 insurance cover up to INR100k to all new gold

loan customers. Internally, the company combined its 1Q-2QFY21 targets to a single 1HFY21

target. The company is confident of achieving the same. When gold prices rise, competition typically increases, but only temporarily. Got discounts on rentals from their landlords for 1 month. When customers come to MUTH, they come with an amount in mind. Only 10-

20% of customers come to take loans at maximum LTV. Average loan duration is 3-5 months. 80% of customers are repeat customers (not necessarily renewal customers). 4% of the portfolio is from new customers in 1QFY21, while in FY20, it stood at

27%. In FY20, the company auctioned only ~INR5b worth of loans. Gold loan interest rates vary between 12-23%. PNB Housing Finance Neutral Current Price INR 316 Business updates The company received sanction to sell down INR3.5b worth of corporate

accounts to banks. It increased corporate loan yields by 100–125bp in the quarter. INR5b per month has been collected in retail lending in the past three months.

INR1.25b corporate collections were made in April. This increased to INR4b in May and INR5b in June.

The search for a new CEO is happening ‘very fast’. It would maintain two to three months’ worth of borrowing repayments of

liquidity on the BS. Yield: HL – 9.52%, LAP – 10.6%; Corp – 12.5–13% Asset quality / Moratorium Around 5k of 40k moratorium customers in the second phase subsequently

withdrew from the moratorium. Around 90% of Morat 2.0 customers had also availed Morat 1.0.

IPL – One mortgaged parcel of land was auctioned in the quarter, and the company received INR250m earnest money. The developer paid an additional INR250m in July 2020. The principal outstanding is now at INR690m from INR1.01b in March.

Supertech – The promoter and other parties are interested in resolving the account. However, this would take some time to reach resolution.

Vipul Ltd. – PNBHOUSI had a court case with the promoter. The court has allowed PNB HOUSING to auction the property under SARFAESI.

Radius – INR2.5b is outstanding. PNBHOUSI has started legal proceedings. Two developers are interested.

Ornate – INR1.81b is outstanding. The company has been admitted to NCLT.

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IREO – The promoter entirely paid over-dues. Hence, the company is now classified as 0dpd (earlier it was in Stage 2 due to SICR). The builder is expected to make further payments by 5th August.

60% of the construction finance book is under principal moratorium. Still, the company received INR6b repayments from customers, but this was left in the escrow account for the developer to use.

INR34.22b of the construction finance book is for projects that are less than 50% constructed. Of this, INR10b is NPL, while the rest is 0dpd.

The increase in moratorium since 5th June (prior earnings call) is due to customers now knowing that it was an opt-in option. Later, when the company reached out to customers, some of them opted for it.

Collection efficiency in July is 98.1% (this comprises non-moratorium customers only).

It received INR7b extra EMI repayments from retail customers in June. Guidance Target INR130b retail lending disbursements in FY21. No fresh corporate

sanctions would be granted in FY21. AUM growth would remain steady this fiscal.

Expect share of retail AUM to increase to more than 85% in FY21. Repco Home Finance Buy Current Price INR 180 Business updates Disbursements are currently at 50–60% of run-rate levels. Expect 5–8% AUM growth for the year. Balance transfers by banks from REPCO’s book have increased from INR700–

800m per month to INR1b. There have been no comments on the quantum of possible restructuring. Housing prices have declined only moderately (~10%). However, this is not a

concern for management. Asset quality/funding The moratorium rate is at 35% in the second phase. 8.7% of customers by value (6.2% by volume) have not paid a single installment

since March. Collection efficiency in August should be at 65–70%, excluding pre-payments. Expect the GNPL ratio to reach 4.5% in 3Q, but moderate thereafter on account

of restructuring. It is too early to comment on collection trends in September, but expect 90%

collection efficiency in the month. It would keep INR500–600m provisions in excess of the ECL model. Liquidity/Funding It borrowed money from NHB during the quarter at ~5% and from banks at ~8%. It was able to raise CPs at 6.5–7%. Others In 2018, the company had purchased a small book of INR400m from Shubham

Housing Finance.

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Shriram City Union Finance Buy Current Price INR 938 Business Updates 118k lac 2W disbursements in May-Jun’20. Exploring option of ECLGS, now that it is open to individuals too. This will be

done on a case-by-case basis. It is not looking at a large quantum of disbursement. In two months, it expects INR3-4b disbursements at best.

Prefer to give customers time to repay rather than restructure loans. May restructure ~10% of loans.

Cost reduction is due to manpower rationalization (stopped recruitment coupled with usual attrition). No new hiring for the next two quarters.

No comments on the Shriram Group merger (probably shelved for now). Waiting for moratorium period to end before kick-starting disbursements

properly. Guiding C/I ratio of 37-38% when business picks up. Do not foresee a big impact on the gold loan business due to increase in LTV cap

to 90% for banks. In fact, banks may be wary of giving loans at high LTVs due to gold price volatility.

In the HFC segment, ~60% of business volumes were achieved in Jun’20. Asset Quality/ Moratorium Will take a call on incremental COVID provisions depending on the situation post

lifting of the moratorium. Collection efficiency in Jul’20 improved to 80% of which overdue collections

comprise 3-4%. In 2W lending, it was 90%. In MSME financing, it was 70% (should normalize by end-Sep’20).

Collections in Apr/May/Jun/Jul’20 stood at INR5.6b/INR10b/INR14b/INR15.5b. Gold finance collections stood at 0/INR3b/INR4b for the three months of the quarter.

~20-22% of customers by number and 25-26% by value have taken full moratorium – i.e. they have not paid a single installment. This number would be higher in case of MSME financing (~30-35%).

Expect incremental credit cost of 90-100bp due to COVID-19. Liquidity/Funding Want to increase liquidity buffer to INR20b. Currently, comfortable for the next 3-4 months on the liquidity front. Its debt

obligations are not that high. Raised ~INR5.5b in 1QFY21 from banks (of which, it raised INR3.5b from SIDBI at

6.2%, balance were term loans at 9%). Also raised ~INR5b from retail fixed deposits. Plan is to raise INR10b worth of borrowings every month.

From Sep’20 (i.e. post moratorium), it expects to do securitization transactions on 2Ws. In 2HFY20, SCUF will do securitization of the MSME book.

Raised INR3.5b from SIDBI in 1QFY21 (at 6.2%). Expect to draw down some sanctions from banks over the next 10-15 days.

Others All, but 18-20 branches are open. Some branches are open only for part of the

day.

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Results Update

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Shriram Transport Finance Buy Current Price INR 643 Business updates Accrued interest for the quarter is INR40b. Capitalized interest is probably close

to INR10b. It sanctioned INR30b in ECLGS, but has disbursed INR1b thus far. The cap on

lending rate at 14% is a constraint as the company does not want the customer to be accustomed to these low rates.

It is not looking at raising further equity capital. It lowered LTV to 65% from 75% a year ago. Reduction in opex this quarter was due to the renegotiation of rentals (15–20%

cut) for the next few years, restricted travel, and senior employees taking pay cuts. ~700 employees have left the organization (they were unable to resume work).

It started physical auctions in July in a few states. It has 15k repossessed vehicles outstanding currently.

Resale values of trucks have improved (due to BS6). However, this is as per just a few transactions.

Many customers are not getting return loads easily. Asset quality / Moratorium Morat 2.0 has been offered to most eligible borrowers. Most customers have made partial payments only. Total collection was INR36b in 1QFY21 (i.e., 33% of pre-COVID-19 demand).

INR23–25b of collection was seen in July (53% of pre-COVID-19 demand). Collection efficiency in value terms in April/May/June/July was at 15%/30%/51%/53%. Collection efficiency in July was largely flat MoM due to lockdown in certain states, such as Maharashtra and TN.

Less than 10% of customers would need restructuring, according to management.

Provisions on the balance sheet are probably adequate as of now. Credit costs could normalize in 2HFY21.

Liquidity/Funding NIM for this quarter was low due to higher liquidity on the balance sheet and an

INR190m impact due to forex-related accounting. The company raised money through the following schemes: TLTRO – INR2b; PCG

– INR16b (further PCG proposals amounting to INR26–30b); Special Liquidity window – Nil; SIDBI – INR3.5b (1yr tenure).

During the quarter, INR21b was securitized v/s INR23.6b QoQ. Unutilized bank lines currently amount to INR20b. Liquidity position in PPT is as of 12th August. All branches started accepting deposits only in June. July witnessed good

traction. INR150b is targeted via deposits by end-FY21. Cost of deposits is at par with other sources such as banks and the capital markets.

Cost of incremental borrowings is declining. Hence, it should reach a 7% NIM by 4QFY21.

Others Driver-owner profitability has been better than for other segments as: a) mostly

essential goods are carried and b) the lack of driver availability has impacted

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Results Update

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large fleet operators. Note that freight rates are up 15–30% across various product categories, which have offset the diesel cost increase.

There is no update on the Shriram Group merger. The customer takes working capital loans for annual insurance payments too. Most disbursements happened in the second half of June. SHTF has tied up with BPCL and IOCL, in addition to HPCL earlier, for extending

fuel credit to customers. Ola/Uber drivers are facing difficulties in some cities, such as Mumbai and

Chennai.

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HEALTHCARE

The COVID-19 led impact on domestic formulation (DF) segment was a result of limited MR-Doctor connects and lesser footfalls at clinics. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors to improve DF sales gradually. The DF sales growth outlook is expected to gradually pick up, but cost calibration should keep margins at elevated levels over the near term.

Capacity utilization has improved 70-90%. The trade generics segment has seen better off-take as compared to branded generics in 1QFY21. On the US generics front, ANDA approvals were higher but volumes for certain products were impacted in 1QFY21 due to stock piling in 4QFY20. Companies, post completion of remediation measures, are pursuing virtual inspections to ensure regulatory compliance at sites. Thus, the outlook remains steady for the US generics segment. The vaccine development for prevention of COVID is on at a rapid pace. Specifically, Bharat Biotech and Cadila Healthcare are expected to complete Phase-II clinical trials and subsequent statistical analysis by end-CY20.

KEY HIGHLIGHTS FROM CONFERENCE CALL Outlook FY21 Commentary on Covid-19 ARBP would file one biosimilar in the EU market in

FY21. It intends to file two biosimilars annually over the next 2–3 years in both the US and EU markets FY22 onward.

The EU business margin is in the low double digits currently. ARBP expects this to improve with the easing of the lockdown.

R&D expense would remain at 5–5.5% of sales as clinical trials for potential products would commence from the coming quarters.

Traction in Injectables is expected to be better in 2Q. Overall, normalcy is expected to return over 6–9M.

Stockpiling in the EU and Growth Markets in 4QFY20 led to lower sales in 1QFY21.

Cipla has guided for a modest increase in R&D in 2HFY21 as clinical trials for two products would begin in the US.

Cipla experienced price erosion of 25–30% since its generic version launch of Albuterol Sulfate.

It would take two to three years to develop biosimilars in EM for Cipla. It plans to target the larger markets in EM.

Cipla expects INR4–5b savings in opex on an annual basis in FY21, led by lower travel/conference expenses on account of COVID-19.

Amid the current COVID-19 crisis, Cipla has managed to grow its Domestic Formulations revenues, with strong 46% growth in Trade Generics sales.

Potential injectable sales to the US could be USD150–200m by FY23–24 on the back of 45 ANDAs filed and 30 under development.

R&D is expected at 7–8% of sales for FY21. ~60% of R&D spend would be utilized for US Generics. The other half would be used for the development of biosimilars and vaccines.

CDH reduced net debt to INR52b (from INR67b) at end-1QFY21 owing to better working capital management. However, considering some reversals, CDH has guided for a net debt reduction of INR10b by FY21.

The enhanced use of digitization would further strengthen growth in the DF segment; this is expected to offset some of the lost MR-doctor connect due to COVID-19.

CDH is also expected to begin phase 2 trials for its COVID vaccine after having established a safety profile in Phase 1 of the trials.

With approval in place for g-Proair, LPC would launch it in the US market soon.

The g-Apriso launch is reflected to a certain extent this quarter; the full impact would be seen in the coming quarters.

LPC would launch the Enbrel biosimilar in the Europe market in 2QFY21. The first wave of launch would be in Germany, followed by France, Sweden, and some other countries.

The India business was impacted by COVID-19. LPC’s employee cost includes cost related to the

restructuring of marketing resources for the US market and COVID-related higher spends. This is expected to be lower than INR7.6b (quarterly run-rate) from 2QFY21.

Aurobindo Pharma

Cipla

Cadila

Lupin

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Alembic Pharma Neutral Current Price INR 911 APLM guided for the US base business to have a quarterly run-rate of USD70m.

ALPM plans to launch 15–20 ANDAs (three launched in 1QFY21) in the US this year, providing scope for revenues in addition to the base business.

ALPM guided for capex of INR7b for FY21, comprising pre-op expenses of INR3.5b across new facilities of ALPM and maintenance capex of ~INR3b. It plans to spend INR6–7b in the next two years on injectable facilities and the Jarod expansion for additional lines and investments to build API capacity.

While R&D spend was INR1.4b (1QFY21), it is expected to be ~INR7b for FY21. Opex for 1QFY21 was lower due to lower travel/promotional cost on the DF

front. With the resolution of the serialization issue in non-US markets, the

1QFY21quarterly run-rate of INR1.8b could be considered sustainable over the mediumterm.

The substantial adverse impact of lower sales of liquid forms of dosages was partially offset by higher Azithromycin OSD sales in the DF segment.

The DF business showed signs of growth in June and the first 20 days of July.ALPM expects DF sales to continue to grow and liquids to see an uptick as hospital visits pick up, particularly in Pediatric and Gynaec.

Sartans forms about 40% of US sales. While new competition has emerged for these sets of products, APLM has been able to hold on to its market share.

The company filed five general injectables at the end of 1QFY21. Fund raising has been planned for investing in complex injectables/505b2 and

reducing financial leverage. ALPM has not indicated any plans to enter the Biosimilars segment.

The API business grew 53.5% YoY for the quarter, partly led by the higher off-take of Azithromycin.

The Aleor R&D capitalization was INR250m for the quarter.

Alkem Labs Buy Current Price INR 2,898 US business grew 28% YoY in CC terms for the quarter, led by new launches and

market share gain in existing products. ALKEM filed 4 ANDAs and received 2 approvals in 1QFY21. Cumulative ANDAs

pending for approval are 58. There are 65-70 products that are currently being marketed. Annual R&D spend would be 6% of revenue.

Accordingly, US sales trajectory is expected to be on an improving trend. Typically ALKEM maintains API inventory of 45-50 days. Branded generics and trade generics composition was 72:28 in the domestic

business for 1QFY21. Trade generics grew in healthy mid-teens. 1QFY21 saw the DF segment seeing spillover of some business from 4QFY20.

Spillover of some business from 1QFY21 to 2QFY21 is expected as well. There was considerable reduction in marketing and promotion expenses for the

quarter, which is expected to increase in the coming quarters, starting 2QFY21. At the same time, revenue growth prospects are also improving.

Accordingly, 2QFY21 is expected to be better than 1QFY21 for DF.

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Results Update

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Results Update

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The company intends to launch 10-12 ANDAs in the US in FY21.

Aurobindo Pharma Buy Current Price INR 803 Revenue from AuroMedics (injectables) declined 24% to USD51m. Injectables traction is expected to be better in Q2. Overall, normalcy is expected

to return over 6–9M. It has filed 14 ANDAs, including three for injectables. ARBP launched six

products, including one injectable in 1QFY21. Stockpiling in the EU and Growth Markets in 4QFY20 led to lower sales in

1QFY21. The net debt reduction was attributable to better working capital management

in the US. Receivables have not been factored for the past two quarters R&D expense would remain at 5–5.5% of sales as clinical trials for potential

products would start from the coming quarters. ARBP has guided for capex of USD150–200m for the year. ARBP intends to launch 50 ANDAs, driving YoY growth in the US market in FY21. ARBP would file one biosimilar in the EU market in FY21. It intends to file two

biosimilars annually over the next two to three years in both the US and EU markets FY22 onward. ARBP filed one inhaler in 1QFY21, and work is in progress for a few more inhaler products.

ARBP has completed the CAPAs at Units 1, 9, and 11/Aurolife and awaits feedback from the USFDA on desktop reviews. ARBP would complete the CAPA at Unit 7 soon and await further action from the USFDA.

The EU business margin is in the low double digits currently. ARBP expects this to improve with the easing of the lockdown.

Biocon Neutral Current Price INR 433 Growth in Generic Formulations was led by healthy global demand in

Formulations as well as API. Within the Generics segment, Formulations/API contributed in a 20:80 ratio.

Biocon has a 60% procurement dependency on China in the Generics segment. It has very little dependency for raw material in the Biosimilars segment in China. It continues to look for alternate vendors to secure its supply chain.

Post the easing of the lockdown, hospitals have started seeing better traction in patients.

Net R&D spend is expected to continue at 11–12% of sales (ex-Syngene). BIOS stands by its capex plan at USD200m (ex-Syngene) for the next two years,

split equally between Biosimilars and Generics. This would be utilized for the future product pipeline.

BIOS-Mylan’s Trastuzumab biosimilar market share saw a positive trend and that for Pegfilgrastim was steady at 6% despite higher competition. New contracts, led by Mylan’s efforts, would lead to better market share going forward.

BIOS is on track with regard to developing Insulin Aspart.

Click below for Detailed Concall Transcript &

Results Update

Click below for Detailed Concall Transcript &

Results Update

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BIOS-Mylan is working with the USFDA on the pathway for the interchangeability of Insulin Glargine.

BIOS guided for effective tax rate of 25% for FY21.

Cadila Healthcare Buy Current Price INR 370 CDH received 12 approvals and filed 5 ANDAs in 1QFY21. R&D is expected at 7-8% of sales for FY21. ~60% of the R&D spends would be

utilized for US Generics. The other half for development of biosimilars and vaccines.

CDH has successful site transfer of Doxycycline injection from Moraiya to Liva. CDH witnessed better growth in branded generic segment compared to trade

generic segment of DF. CDH gained market share in Gynecology, pain and anti-diabetes therapy over

the past 3-6 months. Potential injectable sales to the US could be ~USD150-200m by FY23-24 on the

back of 45 ANDAs filed and 30 under development. CDH re-launched 1 injectable from Liva, after site transfer from Moraiya. CDH completed remediation at Moraiya and awaits feedback from the USFDA

for desktop audit. CDH reduced net debt to INR52b (from INR67b) at end-FY20 due to better

working capital management. However, considering some reversals, CDH has guided for net debt reduction of INR10b by FY21.

Cipla Neutral Current Price INR 726 Cipla expects INR4–5b savings in opex on an annual basis in FY21, led by lower

travel/conference expenses due to COVID-19. Cipla has guided for a modest increase in R&D in 2HFY21 as clinical trials for two

products would begin in the US. Cipla now has 65% of Proventil’s market share. It has 6%/8% market share of

Albuterol/Albuterol Generics + AG weekly Rx. Albuterol is a 60m unit market. There are opportunities to take market share in the generic Albuterol market rather than just Proventil. Pricing has reduced by 25–30% from Jan’20 levels.

Cipla’s partner for one of the inhaler products is expected to address all of the queries by the end of CY20.

Cipla experienced price erosion of 25–30% since its generic version launch of Albuterol Sulfate.

Cipla would initiate clinical trials for two more inhaler products in 2HFY21. Cipla has almost completed the remediation measures related to regulatory

issues in Goa and would soon submit the response to the USFDA. During this quarter, Cipla launched the Dihydroergotamine Mesylate nasal spray

with a 180-day competitive generic therapy (CGT) exclusivity. Biosimilars in EM are progressing well. Most of the partnerships have been

completed and products filed. It would take two to three years to develop biosimilars in EM. Cipla plans to target the larger markets in EM.

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Regulatory authorities in the SA market expedited approvals, driving growth for Cipla in this market.

ETR is expected to be ~28.5% for FY21. Divi’s Lab Buy Current Price INR 3,150 The overall outlook for API manufacturers has improved on account of lower

supplies from Chinese companies. This could be attributed to manufacturing issues within Chinese companies or resistance in purchasing from them.

The YoY growth in revenue was led by 39% YoY growth in volumes for the quarter.

The Generics and Custom Synthesis mix in sales was 59:41 for the quarter. DIVI has validated COVID-19-related products such as HCQS, Favipiravir, and

Remdesivir. However, these products have not contributed to 1QFY21 revenues. The DC-SEZ and DCV-SEZ units, which were partially commercialized in

Feb’20/Mar’20, have not contributed to revenue for the quarter. Nutraceutical sales were up 30% YoY to INR1.3b for the quarter. The near-term

growth outlook may be subdued on account of COVID-19; however, long-term growth remains steady.

Geography-wise, Europe / North America accounted for 74% of revenue for 1QFY21.

DIVI indicated the ability to handle differentiated technologies is one of the key drivers of its CS business.

DIVI has INR8b in capital work-in-progress (CWIP). It would be completing the majority of capex at Units 1 and 2, including validation and exhibit batches, byFY21. Thereafter, DIVI would seek regulatory clearance before starting commercial supply.

Considering 5–6% annual demand growth for Naproxen, it would imply a mean additional requirement of 700–800t on an annual basis.

DIVI awaits legal resolution at the Kakinada site before it would incur capital expenditure on the site.

It had cash of INR15.4b at the end of 1QFY21. DIVI added a gross block of INR2.2b in 1QFY21. Dr. Reddy’s Labs Neutral Current Price INR 4,401 US Generics pricing has been stable in the portfolio. DRRD launched seven products in Germany, two each in the UK and Spain, four

in Italy, and one in France. The Russia decline was primarily due to COVID-19-related lockdown. China, Myanmar, Vietnam, and Kazakhstan performed well within the ROW

segment. Markets related to hospitals or govt. tenders fared better than those markets that were impacted by patient/doctor connect, such as Russia and India.

DRRD is making good progress on the Rituximab Phase 3 clinical trials. DRRD would intend to focus on India/EM from any M&A activity perspective.

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Results Update

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DF sales were impacted due to lower doctor-patient interactions on account of COVID-19. Expect sales to improve sequentially from 2QFY21. The India business includes 20 days’ sales and profits for the Wockhardt portfolio.

DRRD indicated no plans to participate in government initiatives on the API front as the products are antibiotic products and the company does not have a significant presence.

DRRD indicated decline in India sales did not impact margins for this segment.

Glenmark Pharma Neutral Current Price INR 485 GNP has guided for EBITDA margin of 19-20% in FY21. GNP expects some

benefits of lower SG&A to continue throughout the year. GNP expects Ryaltris NDA approval for the US market in 2HCY21. R&D expense is expected at ~11% of sales for FY21 (55% for innovation and 45%

for generics). Ichnos Sciences has initiated the process to raise capital in the US to fund

development of its pipeline and future growth plans. It is expected to complete the process in 2HFY21.

No plans to raise capital for Glenmark Life Sciences. Derma portfolio forms ~35% of US sales. GNP has guided for 8-10 ANDA launches in FY21. API sales were lower due to higher utilization of the facility for manufacturing

Favipiravir API. GNP has 45%/25 % Europe/LATAM sales from in-licensing products. GNP is on track to resolve regulatory issues at its Baddi facility. The company has guided for ~INR7b capex for FY21 (INR1.3b for 1QFY21). ETR is expected at ~28% for FY21.

Granules India Buy Current Price INR 345 GRAN has filed 3 ANDAs and received approval for 6 ANDAs in 1QFY21. The

company has plans to launch 7-8 ANDAs/Dossiers in FY21. Top 5 key molecules contributed ~85% of revenues and would continue to

account for 70-75% of the business over the next 3-4 years. Onco block is only a part of the new API block and accounted for ~INR800m of

the INR2.8b capex spent in FY20. Onco block would be used for CDMO business. Capex would be used to build (a) complex product manufacturing facility, which

would comprise using Multi-Particulate technology allowing GRAN to add new molecules like Omeprazole to its offerings, (b) building new blocks for API, and (c) backward integration.

Oncology business would be the primary focus for Contract Development and Manufacturing (CDMO) with strategic partners.

Granules spent INR150m on account of COVID at its manufacturing sites. It expects some amount to continue in the coming quarters.

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Results Update

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Results Update

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IPCA Labs Buy Current Price INR 2,016 The new plant at Dewas is expected to increase API capacity by 300 TPA (+20%

from current levels). The Institutional business is expected to generate INR2b+ revenues for FY21.

The Promotional business would grow 17–18% YoY for FY21, including spillovers from previous quarter.

HCQS sales have normalized on an overall basis. Some API demand is witnessed in the LATAM market.

IPCA has worked on two Drug Master Files (DMFs); these are high in value and small in volume. Remediation measures have been completed and IPCA awaits inspection before filing these DMFs with the USFDA.

IPCA is tracking well on Sartans and would further increase capacity on these products.

IPCA has received approval for some of its products in the UK under its own label, and it plans to launch the products from 3QFY21.

COVID-19-led CQS/HCQS sales stood at INR2.6b for 1QFY21. Overall sales are expected to grow 18–19% YoY in FY21, with 10–12% growth in

the DF business, a 20% YoY increase in API, and better opportunities in Export Formulations. Gross margins are expected to expand 100–150bps YoY in FY21 on lower raw material cost and a product mix change.

Overall, operational expenses are expected to grow 5–6% YoY in the near term. With environmental clearance in place, IPCA would commence construction at

Dewas post the monsoons; it intends to spend INR2.5–3b capex over the next 15M to expand API capacity.

Jubilant Life Sciences Buy Current Price INR 738 JLS has entered into licensing agreements for COVID-19-relateddrugs/vaccines,

which would aid incremental revenue of INR500m for FY21and INR2.5b for FY22, subject to approvals.

Radio pharma sales are back at ~90% of pre-COVID-19 levels, after reachinglows of ~50% in April/May’20.

JLS guided for double-digit growth in the LSI business, with higher EBITDA growth and healthy cash flows in FY21.

Remediation has been completed for the Rourkee and Nanjangud facilities and is cleared by Canadian and Australian regulators.

Net debt reduction stood at INR3.4b in 1QFY21. Two proprietary drugs would enter Phase 1 clinical trials in FY22. Phase I would

be funded from internal accruals, post which the company may look at licensing. The CDMO business was impacted as the API manufacturing plant was closed

down for 2M as a person working in the plant was tested COVID-positive. The plant is now operating at normal levels. Growth would be driven by higher demand / better prices, and supported by the recent completion of the debottle necking exercise.

Remdesivir was launched in India in the first week of Aug. The company plans to double capacity in the next two months from ~200k vials/month currently.

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Results Update

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The company has entered into a licensing agreement for one of its products in Radio pharma, used as an imaging agent for Rheumatoid Arthritis. The product would enter Phase 3 trials.

Laurus Labs Buy Current Price INR 1,258 Based on the USFDA approval for TLE 400 / TLE 600, it is in the process of getting

its products approved in ROW markets; thus, commercialization is expected in the coming quarters.

Supported by a long-term partnership with a leading Generics player in the EU, LAURUS has better visibility in the Formulations business from the EU market over FY21 and beyond.

Laurus has maintained its market share in Pregabalin for the US market. While cash flow expected to increase owing to such a strong performance, the

company intends to plow back cash for growth rather than debt reduction. It plans to increase overall API manufacturing capacity by 20% over 12 months

and Formulations capacity by 80% over 15–18 months on the expectation of an increase in demand.

Based on growth visibility in Formulations as well as the API segment, LAURUS is confident of sustaining the momentum in earnings.

HCQS sales reflected in Formulations/API are less than 5% of sales and GM at the consolidated level.

Overall growth for the quarter was led largely by higher volume off-take. Laurus has guided to clock revenues of INR13.5b in the ARV-API segment for

FY21, led by better off-take in Tenofovir, Lamivudine, and DTG and slower decline in Efavirenz sales.

LAURUS would incur capex of INR3.5b for FY21 (spent INR910m in 1QFY21) toward debottlenecking and brownfield expansions.

Lupin Buy Current Price INR 967 g-Apriso launch is reflected to a certain extent this quarter and would have full

impact in the coming quarters. Revenue of US branded products stood at USD2-2.5m in 1QFY21. LPC would launch Enbrel biosimilar in Europe market in 2QFY21. The first wave

of launch would be in Germany followed by France, Sweden and some other countries.

LPC is expected to file Peg-filgrastim in the coming quarters. Fostair product is expected to be a limited competition launch. LPC foresees

approval for the same by end-CY20 and launch by the fiscal year end in the EU. On the regulatory front, Somerset site is ready for re-inspection and the Goa

and Pithampur sites are expected to be ready by next month for re-inspection. ETR stands at 35-40% in FY21 and should normalize to 32-33% going ahead. LPC expects approval for g-Proair (Albuterol Sulphate) anytime this month and

would launch it in Sep-20 in the US market. LPC’s employee cost includes cost related to restructuring of marketing

resources for the US market and COVID related higher spends. This is expected to be lower than INR7.6b (quarterly) from 2QFY21.

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Results Update

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Results Update

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US revenues declined considerably in 1QFY21 due to lower sales of seasonal product (g-Tamiflu), Metformin recall and demand contraction (due to stocking up of inventory in previous quarters).

Management has guided for 5-8% of YoY growth in FY21 for the India market.

Strides Pharma Buy Current Price INR 686 STR has put the new investment related to the Sterile Injectables business on

hold considering the long gestation nature of the business and unprecedenteddevelopments related to the Ranitidine withdrawal and the COVID-19 outbreak.

STR has a steady base business, with no price erosion in its US portfolio. Based on WHO’s approval, STR would start filing TLD in different

countries,aiding growth in 2HFY21. STR filed one ANDA related to g-Levothyroxine. It would file for another three

RLDs by the end of 3QFY21. ETR is expected to be 10–12% for FY21. STR would commence phase I clinical trials for Glargine in 2QFY21. STR is contemplating going to the EU/US on its own for Glargine. Based on

changes in the regulatory pathway, development cost has reduced to USD25–30m, against USD70–75m initially, providing the company the impetus to conduct its own clinical studies.

Sun Pharma Buy Current Price INR 505 Generic pipeline includes 95 ANDAs; 6 NDAs are awaiting approval with the

USFDA. SUNP continues to update the USFDA on its Halol plant with remediation almost

complete. It is engaging with the USFDA on future course of action. Desktop audit could be a possibility.

The recent regulatory approval for Illumya in Japan is a step toward expanding reach for the product.

SUNP launched 10 products in India in 1QFY21. There has been saving in branding/promotions due to the lockdown. However,

the company expects expenses to return once normal operations resume. Expansion of field force in India is nearing completion. Chronic share in DF is 50% and this segment was up 10% YoY in 1QFY21. Semi-

chronic/Acute categories have declined in 1QFY21. Global Specialty sales at USD78m were down from USD126m QoQ due to

reduced off-take of Illumya/Levulan, which are clinically administered products. Cequa also witnessed decline as ophthalmic clinics were closed; However, market share has been intact.

Absorica LD’s progression was gradual, largely due to COVID-19 pandemic. SUNP has indicated break-even in some specialty products in FY22E. Specialty R&D stood at 39% of total R&D spends. If outlook for clinical studies

improve with easing of the lockdown, then R&D spends would rise accordingly.

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Results Update

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Torrent Pharma Neutral Current Price INR 2,837 TRP filed one ANDA during the quarter, taking the cumulative count of ANDAs

pending approval to 47. TRP guided for 1–2 ANDA launches based on approvals from third-party sites. It expects to file 12–14 ANDAs in the US in FY21.

TRP would restart production at the Levittown facility in 3QFY21 for already approved products. The transformation from OTC to Rx would lead to a gradual pickup in the business.

Despite the lack of launches, US sales declined only marginally, led by increasing market share in key products and favorable currency.

Price hikes are expected to be 7–8% YoY in the DF business based on the competitive landscape; TRP is in a position to take better price hikes than competitors.

85% MRs are now back in the field as the business has continued to improve. TRP also expects the Sub-Chronic and Acute segments to pick up going forward.

Compared with the 8–10% growth forecast (pre-COVID-19), the Brazil industry is estimated to grow ~4%. TRP is expected to fare better than the industry.

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Results Update

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MEDIA

Gradual opening up of the economy has led to rise in advertisement spends by corporates, which has led to

healthy recovery in ad revenues of broadcasters. Commencement of production and shooting of daily shows should further drive viewership, aiding ad revenues. Subscription revenue is likely to remain on a steady track and threat from NTO 2.0 regulations is expected to have a short-term impact on major broadcasters like ZEEL and SUNTV. SUNTV has guided that ad revenues could potentially decline 15-20% while ZEEL expects to grow ad revenues from the 2HFY21. Subscription revenues would moderate in FY21, after witnessing strong growth in FY20, led by NTO 2.0 regime.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY21 Impact on Ad Revenues & Subscriptions

SUNTV is committed to investing INR1b on the Sun NXT platform in FY21 as liquidity remains strong.

Management expects to generate ~INR1b in revenues from IPL in FY21.

The company’s FY21 PBT is expected to be at FY20 levels. The cash position remains strong; SUNTV added INR2b in cash

in 1QFY21, and cash is now at INR30b.

Ad revenues are currently at 75% of pre-COVID-19 levels, and overall decline in ad revenues is expected to be 15–20% in FY21.

Subscription revenues could be better in 2QFY20 as recharges were affected in 1Q.

The purchase of movie rights should moderate from FY21. Working capital and inventory are expected to decline from FY21.

Expect margins to improve sequentially over time, potentially exceeding 30% by FY22E. Margins for full-year FY21 are expected to be better than 1QFY21.

Management remains committed to a target of >50% PAT to FCF conversion from FY22E.

Domestic subscription growth should moderate in FY21.

ZEE targets growth in ad revenues from 2HFY21.

Sun TV Network Buy Current Price INR 486 Advertisement business Recovery: Ad revenues are currently at 75% of pre-COVID-19 levels; overall

decline in ad revenues is expected to be at 15–20% in FY21. Discounts: Sun TV is not offering any discounts on ad rates in the current

scenario. Ads from new sectors: Strong ad volumes were seen in the Pharma and

Healthcare sector (up 150–200% on ads; FMCG ads form 55% of total ads). Ad rate: The current rate of advertisement stands at 6 ad minutes/hr (v/s 8

minutes/hr at pre-COVID-19 levels). Subscription business NTO 2.0: Management remains committed to keeping ARPUs intact post the

NTO 2.0 regime. Subscription revenues to rise: Subscription revenues could be better in 2QFY20

as recharges were affected in 1Q due to the lack of access to physical recharges from vouchers/stores.

Rising share: Subscription revenue currently forms ~40% of total revenues and is expected to rise going ahead.

Region-wise share of subscription revenue: This stands at: Tamil Nadu – 45%, Andhra Pradesh / Telangana – 35%, Kerala – 10%, Karnataka – 15%, and the rest from other languages.

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Sun TV

Zee Entp

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Bangla: The Bangla genre is a much larger market for Sun TV, including Bangladesh – a potential market.

Digital platform Sun NXT and IPL franchisee Digital revenues: Digital revenues are growing at 100% YoY. Sun NXT has 17.5m

subscribers. Investment: It is committed to investing INR1b on the Sun NXT platform in FY21

as liquidity remains strong; it would continue to plow back its profits from OTT to further grow the OTT business.

Loss from IPL: The company notionally lost ~INR1.5b PBT in 1QFY21 due to the postponement of the IPL season.

IPL revenue expectations: Pre-COVID-19 revenue from IPL ticket sales was at INR250m. Management expects to generate ~INR1b in revenues from IPL in FY21.

Others Liquidity: The cash position remains strong; it added INR2b in cash in 1QFY21,

and cash is now at INR30b (v/s INR28b in Mar’20). Amortization: Amortization expense for FY21 would be lower as movie

production has taken a hit. INR2.5–2.75b amortization charges may be expected in FY21.

PBT to be steady: The company’s FY21 PBT is expected to be at FY20 levels. Receivables: Receivables stood at INR2.8b in 1QFY21. Provisions: The company has taken INR140m provisions on account of the

COVID-19 impact.

Zee Entertainment Neutral Current Price INR 218 MD & CEO comments Transparency: Management remains committed in bringing more transparency

to financial disclosures for investors. The company has taken measures to strengthen its treasury and investment policies.

Movie Investments: In recent years, cash generation has lagged profits due to aggressive investments in movie acquisitions and content creation for the ZEE5 platform. While ZEE plans to go slow on purchase of movie rights from FY21, working capital and inventory should also decline.

Profitability: Management remains committed to a target of >50% PAT to FCF conversion from FY22E.

Business performance Recovery in viewership/ads: Sharp recovery was seen in airing of new programs

from Jul’20, and thus, viewership rose too. Ad revenues have also resumed with easing of lockdown restrictions and new content has begun airing on TV.

Viewership trends: Daily reach increased 10% and daily viewers reached 636m during the lockdown.

Dividend: In 1QFY21, the company has paid INR580m in dividend to preferential shareholders.

Ad trends: FMCG advertisements have been steady. Discretionary sectors like Consumer Durables, Automobiles, Telecom, etc. should also show a rise in ad volumes with onset of the festive season.

Re-organization: The company has moved four of its subsidiaries under one holding company to improve the group structure.

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OTT platform – ZEE5 Users: Users of ZEE5 declined due to decline of AVOD users, as new programs

weren’t aired but SVOD has seen a rise in number of subscribers. OTT movie: Released one movie on OTT platform as cinemas were shut. The

company is looking at another movie release over the OTT app. ZeeMusic added 6m subscribers on YouTube channel.

OTT Trend: AVOD subscribers mostly consume TV content. In the SVOD category, 70%/30% consumption is toward movies and original shows/ TV content.

Investment: ZEE5 investment will be steady going into FY21. Business outlook Ad revenue growth: The company is aiming to grow ad revenues from 2HFY21. Subscription growth: Domestic subscription growth should moderate in FY21.

The NTO 2.0 impact is expected to remain only in the short term. Capex: Capex should continue with the same intensity as the previous quarters.

Sugarbox investments are delayed due to the COVID-19 impact. Margins: Expect margins to improve sequentially over time, and should cross

30% by FY22E. Margins for full-year FY21 are expected to be better than 1QFY21.

Content costs should return to normal levels in 2QFY21. Inventory & Receivables: Inventory and advances are expected to decline in

FY21. Receivables of the company should decline from FY21.

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METALS

Companies have highlighted that domestic demand has improved in 2QFY21 as the economy opened up post the lockdown. Exports are likely to remain elevated YoY; with domestic volumes picking up, share of exports in total volumes should decline sequentially to 30%. Managements of Tata Steel and JSW Steel have guided for higher capacity utilization in 2QFY21. Tata Steel has guided for >95% utilization and improvement in realization in 2QFY21 on the back of repetitive price hikes in the domestic market, better product mix and higher export realizations. It has also guided for sequential improvement in realization in excess of INR3,000/t. For FY21, both Tata Steel and JSW Steel have guided for flattish sales volumes whereas JSPL has guided for volume growth in the range of ~15% on the back of unutilized capacity and its ability to sell excess volumes in the export market. On the other hand, managements of Hindalco and Hindustan Zinc have highlighted that domestic demand for base metals has improved resulting in lower dependence on exports. Hindalco has guided that exports are likely to contribute ~65% of its volumes in 2QFY21.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY21 Capex Cycle

Aluminum integrated CoP declined 6% QoQ and is guided to remain flattish in 2QFY21.

The Utkal alumina expansion of 500kt should get commissioned in 4QFY21.

The company has no repayment scheduled for the next two years for the India business. Apart from bridge loan re-financing, the next repayment of USD1.7b in Novelis is scheduled in FY23.

Novelis guided for EBITDA/t of USD450–475/t on a sustainable basis. Novelis’ capacity acquisition of Aleris stands at 4.0mtpa.

FY21 capex guidance is at INR15b for the India business. For the Novelis business, the company has guided for capex of USD450–500m.

It reiterated its guidance for full-year sales volumes of 15.0mt (flattish YoY).

It further expects to benefit from lower coking coal prices to the extent of USD20–25/t of coking coal.

The company operationalized its four mines in Odisha in Jul’20 post the finalization of contracts with MDOs and transporters. It guided for iron ore production of ~17mt from these mines in FY21.

JSTL has curtailed its FY21 capex to INR90b (v/s earlier guidance of INR164b) to preserve cash. This includes capex on projects nearing completion. It expects the 5mtpa Dolvi expansion to be commissioned in 4QFY21.

The company guided for production volumes of 1.8mt in 2QFY21 and ~7.4mt in FY21.

With lower exports and higher value-added product sales, the company expects Steel NSR to improve in 2QFY21.

The company expects to repay debt of INR55b in FY21 through cash flow generation. The Oman divestment deal would lead to additional debt reduction by INR60b.

The company has scheduled the INR50b repayment over the balance 9MFY21.

JSPL has no growth capex in the pipeline. As a result, its capex is likely to remain lower in the range of INR6–8b for FY21 (v/s ~INR9b in FY20).

Hindustan Zinc Neutral Current Price INR 238 Domestic Zinc-led demand improving in 2QFY21 Management has highlighted that global Zinc mine production should decline

5% YoY in FY21 v/s pre-COVID expectation of 4% growth. Accordingly, it expects refined Zinc production to decline too in FY21.

Zinc demand in China is strong. As a result, Zinc inventories in China are declining despite increased imports.

Management expects domestic Zinc demand to revive by end-2QFY21. Lead demand is also expected to improve on the back of replacement demand.

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Results Update

Hindalco

JSW Steel

JSPL

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Operational Highlights Mined metal production declined ~19% sequentially (5% YoY) to 202kt due to

fewer operation days in 1QFY21. However, production stood 16% higher YoY during May-Jun’20.

Capacity utilization ramped up to 90% during May-Jun’20 and was 11% higher YoY.

Refined Zinc production declined 9% QoQ to 157kt, whereas Lead production was down 10% QoQ to 44kt. Zinc sales were down 6% QoQ to 163kt, whereas Lead sales also declined 6% QoQ to 45kt.

Silver sales were up 1% QoQ to 146t, due to higher inventories at end-FY20. During 1QFY21, share of Zinc exports stood at 70% v/s normal level of 25%.

Expect domestic export mix to normalize in 2QFY21. Due to higher exports in mix, realized metal premiums over LME were lower. During 1QFY21, Ore grade declined to 7.3% v/s 7.9% in 4QFY20 (7.3% in

1QFY20). Management expects Ore grade of 7.5% in FY21. During 1QFY21, company contributed INR1.01b toward ‘PM-Cares’ Fund. Reported CoP stood at USD1,019/t during 1QFY21. However, adj. of donation

(USD53/t) and one-time start-up cost (USD12/t), CoP stood at USD953/t, down 4% QoQ (11% YoY).

CoP, however, was flat sequentially in INR terms at INR72,004/t (down 3% YoY). CoP benefitted from lower coal, diesel, metcoke prices sequentially; however, these benefits were offset by lower volumes, lower grades, and weak acid credits.

Guidance: Volumes growth expected in FY21 Guidance for mined metal and finished metal production is in the range of 925-

50kt for FY21 (v/s 916kt of mined metal in FY20). Guidance for saleable silver production stands at 650t for FY21. FY21 growth capex is expected in the range of USD100-140m. Total capex for

FY21 is expected to remain around USD300m. CoP is likely to remain around USD950/t, higher mine development cost is likely

to inflate CoP. Overall, CoP is expected to remain below USD1,000/t. Commissioning of back-fill plants at Zawar is now expected to be completed in

2QFY21. Fumer plant commissioning was delayed due to lack of OEM support, which in turn, was due to visa and travel restrictions.

Hindalco Inds Buy Current Price INR 179 Aluminum smelters and refineries continued operations despite lockdown.

However, copper smelters remained closed until mid-May. Aluminum production declined ~11% QoQ to 291kt and sales 4% QoQ to 303kt.

Exports contributed ~80% to volumes. Aluminum VAP sales (excluding wire rods) were down 55% YoY to 35kt due to

weak domestic demand. Copper cathode production declined by 45% QoQ to 41kt and sales by 33% QoQ

to 58kt. CC rod sales were down 58% QoQ to 31kt due to lower production. DAP sales, however, rose 34% QoQ to 102kt on the back of high demand.

Global Aluminum market update 2QCY20 consumption trend In 1QCY20, in the backdrop of COVID-19, global consumption declined by 10%

YoY to 15.4mt, against a 1% YoY increase in production to 15.9mt.

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Results Update

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Global consumption ex. China declined by 30% YoY to 5.2mt, whereas consumption in China grew by 5% YoY to 10.2mt.

The Aluminum market remained in surplus of 2.8mt in 1HCY20. FRP market outlook Flat rolled product (FRP) demand is expected to decline 9% YoY in CY20; on the

other hand, growth of 8% is expected in CY21 on recovery and the base effect. Beverage Can demand remained resilient in North America and Europe and is on

an improving trend in South America. FRP demand for Automotive is showing MoM improvement in terms of

consumption toward pre-COVID-19 levels; however, near-term visibility remains limited.

In the Aerospace segment, demand is likely to remain low. Global Copper market update Global refined copper consumption declined by 5% YoY in 2QCY20 to 5.8mt.

Growth came from ex-China, where demand declined by 16%; China demand grew by 6% YoY.

Concentrate production is expected to decline in CY20 due to COVID-19 as the major mines are either operating at lower rates or continue to be in lockdown. As a result, spot Tc/Rc is expected to remain tight this year.

Benchmark Tc/Rc for CY20 is settled at 15.9cents/lb, 23% lower than CY19. Domestic market Aluminum demand and imports: Domestic demand for aluminum plunged by

57% YoY to 433kt in 1QFY21; imports (including scrap) also declined by 58% YoY to 246kt in 1QFY21. Domestic FRP demand contracted by 46% YoY in 1QFY21.

Copper demand and imports: The Domestic Copper market size declined by 53% YoY to 91kt in 1QFY21. The market share of imports decreased to 44% in 1QFY21 (v/s 46% in 1QFY20).

1QFY21 insights and outlook Realized premiums over aluminum LME declined due to ~55% QoQ/YoY decline

in VAP volumes. With VAP sales improving, premiums are also likely to increase. While derived aluminum CoP declined ~13% QoQ, management informed that

decline in integrated CoP was at 6%. Conversely, the remaining decline was due to lower VAP sales and fixed cost reduction.

Management has guided for aluminum CoP to be lower by 5–6% v/s 4QFY20 levels. It informed that CoP has plummeted in 2QFY21 as input prices are bottoming out.

Jindal Steel & Power Buy Current Price INR 202 Indian Steel operations: NSR to improve in 2QFY21; volume growth to continue During the quarter, the company exported 900kt of steel (~58% of volumes). It

exported steel to China, Europe, Southeast Asia, and the Middle East. Steel NSR declined by INR4,600/t QoQ, primarily due to lower value-added

products. However, blended realization declined by just INR3,020/t QoQ on higher sales of traded goods, which had a positive impact of ~INR1,100/t.

The company informed that it had lowered steel-making cost from INR23,500/t to INR20,500/t sequentially, i.e., INR3,000/t due to lower iron ore, coal, and consumables costs. It expects this cost reduction to sustain in 2QFY21.

During the quarter, the company changed the accounting of PCI Coal consumption from the ‘Other Expenses’ head to the ‘Raw Materials’ head. This

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has lowered other expenses by INR1.0b and increased raw materials cost by the same amount.

The company guided for sales volumes of 1.8mt in 2QFY21 and expects exports of 0.6mt. It also guided for sales of 3.9mt in 2HFY21, thereby guiding for sales of ~7.4mt in FY21.

With lower exports and higher value-added product sales, the company expects Steel NSR to improve in 2QFY21.

The company guided for the benefit of lower coking coal costs to the extent of USD25–30/t of coal to kick in over 2QFY21.

JSPL is currently utilizing free-of-cost Sarda iron ore inventory at the rate of up to 1.8mt/qtr. JSPL is also purchasing iron ore from SMPL, NMDC, OMC, and other parties to achieve the required blend.

Capex in 1QFY21 stood at INR1.1b, with FY21 guided at INR6.0–8.0b. Jindal Power Ltd Lower coal cost and higher realization offset the impact of lower volumes in

1QFY21. Besides supplying for 800MW of PPAs (out of 3400MW capacity), JPL sold power

in the merchant market during peak hours to earn higher tariffs. With improving power demand, it expects volumes to improve from 2QFY21.

JPL received an installment of INR1.6b from TANGEDCO toward its receivables. It further expects to receive INR1.7b in July and a substantial reduction in the receivables amount over the next six months.

JPL expects to sign two three-year PPAs of 420MW under the PFC Pilot Scheme- II; power supply should commence from 3QFY21.

JPL has opted for interest and principal repayment and is utilizing cashflows to procure coal inventory at lower rates.

JPL also plans to bid for the coal block in the upcoming coal auctions. Debt position Consolidated net debt declined by INR13.0b QoQ to INR346.2b (USD4.6b). Breakup of gross debt at each entity: Standalone – INR148b, JPL – INR72b,

JSPML – USD710m, WCL – USD330m, and Oman – INR55b The company expects to repay debt of INR55b in FY21 (with INR50b over the

rest of 9MFY21) through internal accruals. The Oman divestment deal, if approved, would lead to additional debt reduction of INR60b.

JSP expects to refinance its overseas debt in Australia and Mauritius, which mostly falls due in FY21.

Oman divestment consideration: Although the equity consideration to be received by JSPML for the sale of the Oman business stands at USD251m (INR19b), Oman has outstanding loans of ~USD200m to JSPML, which would be fulfilled against the equity consideration. The cash receipt by JSPML for the sale of the Oman business would thus be only ~USD50m. The company would seek all the necessary approvals for the transaction by July-end.

JSW Steel Buy Current Price INR 288 1QFY21 insights: The company operated at 80% capacity utilization during May-Jun’20. Steel sales volumes declined 24% QoQ to 2.80mt due to the COVID-19

pandemic. Exports consisted 57% of volumes - 1.48mt (up ~200% QoQ).

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Semis contributed 13% of sales volumes (v/s 4% in 4QFY20). Automotive sales declined 50% to 0.2mt, in line with overall decline in passenger and commercial vehicles.

Indian subsidiaries contributed EBITDA of INR1.7b (v/s INR2.3b QoQ) whereas key overseas subsidiaries reported EBITDA loss of INR2.4b (v/s INR3.0b QoQ).

Net sales realizations declined by INR4,800 QoQ, due to lower prices, higher exports and adverse product mix.

Raw material cost benefitted due to lower iron ore prices during the quarter. Overall costs declined 4% QoQ.

Near-term outlook and guidance: Domestic steel inventories have declined QoQ on the back of higher exports,

which bode well for pricing in the domestic market. The company expects domestic steel demand to improve gradually in 2QFY21.

As a result, it expects share of exports to remain low sequentially. JSTL has informed that were moderate price hikes in Jul’20. It expects another

round of price hikes in Aug’20. The company expects NSR to improve in 2QFY21 on the back of improved

product mix, lower exports and improved pricing. On the cost front, it expects to benefit on coking coal costs to an extent of

USD20-25/t of coking coal and improved operating leverage. The company has reiterated its FY21 production and sales guidance of 16.0mt

and 15.0mt, respectively. The company expects positive EBITDA contribution from its overseas

subsidiaries from 4QFY21. Update on iron ore mines: The company operationalized all four mines in Odisha during Jul’20 post

finalization of MDOs and transporters. It has started dispatches from mines to Dolvi and Vijayanagar plants. It expects to produce 1.2mt during Jul’20 and ~17mt in FY21.

It expects to operationalize three more mines in Karnataka during the quarter, which would help the company produce ~7mt.

The company has paid upfront fees of INR12.9b toward mines in Odisha, which would get offset against premium payable on iron ore extraction.

Capex and project update: During 1QFY21, the company spent INR23.7b against its planned capex of

INR90b for FY21. With improved availability of workforce at all locations, project execution work

has ramped up slowly. The 8mtpa Pellet plant and Wire Rod mill at Vijayanagar are expected to be

commissioned in 2QFY21. The CRM1 complex capacity expansion at Vijayanagar from 0.85MTPA to 1.80MTPA is expected to be commissioned progressively in 2QFY21 and 3QFY21, respectively.

The 5MTPA Dolvi expansion, including the captive power plant and coke oven Phase 2, remain on track and is likely to get commissioned by end-FY21.

Similarly, downstream modernization cum capacity enhancement projects at Vasind, Tarapur and Color coating line at Kalmeshwar are expected to be commissioned in 2HFY21.

Liquidity Position: Reported Net-debt increased by INR10b during 1QFY21 to INR545b (INR535b at

end-FY20).

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Revenue acceptances stood at USD1,307m whereas capital acceptances stood at USD364m.

Net Debt/EBITDA stood at 5.74x at end-1QFY21 (v/s 4.5x at end-FY20). The company had liquidity of INR87.5b at end-1QFY21. Update on Bhushan Power and Steel (BPSL) acquisition: The erstwhile promoters of Bhushan Power and Steel (BPSL) and certain

operational creditors have filed an Appeal before the Supreme Court against the NCLAT order declaring JSTL the winner of the bid process to acquire BPSL.

Management has informed that the BPSL transaction would not be consolidated with standalone operations and would be accounted under ‘Equity Method’.

NMDC Buy Current Price INR 90 Operational highlights and outlook Production declined 22% YoY to 6.60mt while sales decreased 28% YoY to 6.3mt. Reported realization (excl. royalty) declined 26%/25% YoY/QoQ to INR2,167/t. Export sales stood at 0.3mt, down 50% YoY. Operating cost (excl. royalty) was up 39% YoY to INR1,214/t, due to lower

volumes (~INR240/t and contribution to the ‘PM-CARES’ fund (INR1.5b). Management has informed that COVID-19 impacted production/sales by 1.8mt/

2.4mt, resulting in loss of INR7.37b/INR3.17b in revenue/PBT. NMDC has taken cumulative price hikes of INR700/t in Jul-Aug’20, thereby,

reversing most of the INR900/t price cuts take in 1QFY21. It expects pricing to improve further.

Management expects FY21 production to remain at FY20 levels (31.5mt). It has also informed that receivables have declined in 1QFY21. With rising steel

prices, faster recovery of dues from RINL is expected. Update on Demerger and Steel plant In its board meeting, NMDC has approved the demerger of its 3mtpa Nagarnar

steel plant. De-merger process of the Nagarnar Steel Plant should get completed in 9-10

months. Shareholding pattern in the demerged entity would remain as that of NMDC. It is evaluating options of listing or divestment in the demerged entity.

The company has spent cumulative capex of INR170b on the steel plant out of the total planned capex of INR200b.

It aims to raise debt of INR50b in phases to meet further capex and working capital requirement for the steel plant. Debt raised would be transferred to the demerged entity. Interest on debt would be capitalized till the time of commissioning.

It expects to commission the steel plant by Jun’21. However, we remain skeptical on commissioning of the same in FY22.

Iron ore/coal for the steel plant would be supplied by NMDC from its mines at arm’s length price.

Other updates Management has informed that it is in talks with the Karnataka government for

lease renewal of the Donimalai mine and expects to receive approval for the same. It remains confident of receiving lease renewal for the Kumaraswamy mine, which is due in 2022. Clearance for 7-10mtpa expansion for the Kumaraswamy mine should come in over the next 3-4 months. It expects to immediately ramp up capacity.

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Management is confident of volume growth in the future as it expects to meet iron ore requirement of its steel plant and additional demand from RINL.

Tata Steel Neutral Current Price INR 407 Operational highlights and Outlook India domestic steel demand declined ~55% in 1QFY21 due to the lockdown. As a result, Tata Steel India sales volumes declined ~27% QoQ as the company

exported nearly half of its volumes. Domestic demand is improving – in Jul’20, demand recovered to ~75% of FY20

average monthly demand. Automotive steel demand is picking up, which is evident from auto customers

revising their orders upwards on weekly basis. However, recovery in Medium and Heavy Vehicle (M&HCV) segment – a key driver of steel demand from the auto segment – is likely to be slow.

Domestic steel inventories have declined to normal levels, which bodes well for domestic prices.

Management has informed that HRC prices are higher by INR2,000-2,500/t (v/s end-Jun’20). It has not ruled out the possibility of further hikes as HRC prices are still lower than pre-COVID levels.

Share of exports would remain at ~25% in 2QFY21. It would gradually decline and come in line with domestic demand improvement.

The company has guided for realization improvement in excess of INR3,000/t QoQ due to improved pricing and product mix in 2QFY21.

Capacity utilization for 2QFY21 in India operations has been guided to be higher than ~95%.

Demand and pricing in Europe is improving slowly. Europe Steel demand is projected to decline ~16% in CY20.

Tata Steel Europe is operating at ~75% utilization. Financial highlights EBITDA was impacted due to lower volumes and prices. During the quarter, idle fixed costs of INR24b were absorbed. Adjusting for the

same, consol. EBITDA would have stood at INR29b. In standalone operations, idle costs were INR7.66b.

Operational performance in Europe was hit by the double whammy of – (a) lower demand leading to lower volumes and adverse mix (less of auto volumes), and (b) lower spreads due to low prices and higher iron ore prices. As a result, it reported EBITDA loss of INR6.3b during the quarter.

European operations positively benefitted from the government aid of EUR50m (INR4.4b) and one-off profit on sale of carbon credits of GBP78m (INR7.6b).

Adj. for these benefits, European loss would have been substantially higher at INR18.3b.

TSE cash flows were aided by sale proceeds of carbon credits worth GBP132m (INR12.9b) and deferral of payments to the government of ~GBP80-100m for two quarters. However, it may have to incur cost on carbon credits if capacity utilization improves.

Capex spend in 1QFY21 stood at INR18.5b due to outstanding payment toward certain projects. However, management has maintained its capex guidance for FY21 at ~INR50b.

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The company generated FCF of INR7.0b in 1QFY21. Working capital release during the quarter stood at INR25.8b (India – INR22b). It expects working capital release in India operations to sustain.

TSE’s 2QFY21 performance is expected to improve. It has been guided to report EBITDA similar to 1QFY21 level (without benefit of carbon credits).

Employee cost in Tata Steel BSL was higher by 27% YoY to INR1.28b due to payment of incentives related to previous year.

Other highlights: Net-debt stood flat QoQ at INR1,070b. However, Net-debt to TTM EBITDA

increased to 8.5x (6.1x at end-FY20). The company raised long-term debt of INR59.3b during the quarter.

Debt maturities for FY21/FY22E stood lower at ~USD250m for each year. The next hearing on the Tata Steel-BSL merger is scheduled for end-Aug’20. The

company expects to close the merger process in FY21.

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OIL & GAS OMCs expect some more time before 100% demand is retained, with further pickup in demand from the industrial

and commercial space. Thus, refining margins are also likely to remain subdued due to poor product cracks, which are weighed down by demand destruction. However, the OMCs have reiterated that marketing margins and GRM trends over the longer term would stand at normalized levels. RIL is further planning to streamline its O2C integration business and focus on expanding its fuel marketing business. In the current challenging operating environment, RIL’s ability to optimize between feedstock and sales mix provides an edge in improving its performance. The company’s strong growth path remains in its digital and retail business. MAHGL and IGL stated that CNG volumes have recovered to 70-75% of pre-COVID levels, although it is likely to range between 80-85% of pre-COVID levels in the near term. However, margins are likely to remain strong owing to lower domestic and spot prices. GUJGA has mentioned that current sales volume stands at 9.5mmscmd (v/s 9.4mmscmd of average sales in FY20), aided by strong recovery post the lockdown. Apart from probable benefits of the NGT’s stringent norms to curb industrial pollution, the company also plans to set up ~60 CNG stations in FY21 (out of 100 planned), which would increase the reach of CNG in Gujarat and encourage conversion. Post completion of the Kochi-Mangalore pipeline, PLNG expects utilization to increase to ~30-35% and reach 40-45% after 2-3 years. Utilization levels at Dahej should remain at current levels even 4-5 years down the line, primarily due to back-to-back tie-ups despite competition coming in. GAIL has stated that Gas trading, Gas transmission and Petchem operations are back to pre-COVID levels. Growth guidance for the company continues on the back of incremental volumes of ~8-12mmscmd from the commencement of fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Oil & gas Outlook of FY21 Snapshot of the quarter Impact of COVID-19 GAIL has hedged ~90% of US cargoes

(volume) for CY21. According to GAIL’s guidance, due to

the commencement of the three fertilizer plants on the Jagdishpur–Haldia pipeline, most US Henry Hub (HH) contracts would be sold within India.

Due to COVID-19-led lockdown, some delays may be witnessed in gas off-takes from the Ramagundam fertilizer plant (~2mmscmd) and Matix fertilizer plant (~2.25mmscmd).

GAIL reported lower-than-estimated EBITDA, led by poor performances in gas trading, petchem, and LPG HC. With a revival in crude oil prices, we believe these segments would remain lucrative for the company in the coming quarter.

Capex guidance for FY21 stands at INR45–50b (spent INR4b in 1QFY21) and at INR80–90b for FY22E.

Gas trading, gas transmission, and petchem operations are back at pre-COVID levels. Also, demand from fertilizer/power is stabilizing again.

Projects stalled due to COVID have picked up; the Kochi–Mangalore pipeline is likely to be completed soon (in about two months).

JHDBPL has already reached very close to the Matix plant (the plant is complete).

Improvement in product demand

would translate into higher cracks, leading to better GRMs in the latter part of the year. OMCs restated that on a long-term basis, GRMs and marketing margins would trend at normalized levels.

IOCL continues strong capex of INR260b annually, while HPCL has guided for capex of INR115b in FY21. BPCL has revised down its capex to INR80b for FY21 (from INR120b earlier).

Singapore GRM continued its decline and stood at -USD0.9/bbl in the quarter – a record low in the last two decades.

OMCs clocked core GRMs of -USD0.9–4.4/bbl in 1QFY21, with inventory loss of -USD6.4–0.9/bbl per barrel.

Implied gross marketing margins were better than expected and higher sequentially for the OMCs at INR8.2–8.9/bbl (v/s est. ~INR7.5/bbl).

In Aug’20, total sales volumes reached ~90% of pre-COVID sales; MS and HSD were at 87% and 82% of pre-COVID levels, respectively.

In the near term, companies expect demand for MS at 85–90% and HSD at 80–85% of normal levels. LPG demand, though, should remain strong.

OPEC+ managed production cuts well (in line with demand), as various economies globally came out of lockdown. Thus, crude oil prices hovered around ~USD45/bbl over the

Offtake of crude oil by refineries from ONGC was unaffected. However, a reduction was seen in gas production due to lower off-

ONGC has guided that the KG Basin would see some delay in production as many vendors have enforced force majeure. Despite the domestic gas price

GAIL

OMCs (IOC/BPCL/HPCL)

ONGC

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last two months. Starting Aug’20, OPEC+ also eased production cuts by 2mnbopd (to 7.7mnbopd).

Gas production is expected to be boosted by KG-DWN-98/2, and incremental production of oil should largely offset oil depletion from the major older fields.

take by some customers, which has now been restored to normal levels.

ONGC reported EBITDA beat on lower other expenditure, primarily due to lower travelling/employee cost, lower statutory levies and cess, and lower feedstock gas prices at the Dahej petchem plant.

No subsidy sharing was witnessed for ONGC and OINL in 1QFY21.

ceiling declining, production at the KG Basin would not be impacted.

Production guidance in FY21 for oil stood at ~22.7mmt and for gas at ~24.9bcm.

OINL has guided for oil and gas production to be marginally lower YoY in FY21.

Small-scale LNG (ssLNG) has the potential for 8–9mmtpa of LNG for trucks over the next 8–10 years.

Negotiations are on with Qatargas over LNG pricing.

PLNG further stated the MOU with Tellurian may be extended, with the final decision expected in FY21.

Better-than-estimated volumes have led to marginal EBITDA beat.

PLNG highlighted that post the lifting of the lockdown, RLNG demand recovered gradually.

Expect strong volume growth of 6–7% to continue for FY21/FY22, with higher adoption from Power and CGD aiding volume growth.

In Jul'20, operations at Dahej/Kochi recovered to pre-COVID levels, with utilization at 104%/20%.

Demand from the CGD sector is only ~50% of pre-COVID levels (~15mmscmd v/s ~28mmscmd earlier). Although, the Fertilizer/Refinery sectors have registered growth of ~7mmscmd each v/s last year.

RIL expects global demand recovery to remain capped in the near term with concerns of high inventory and further delayed recovery in jet fuel demand. Also, China is likely to export more with an increase in its refinery throughput, deepening the supply glut and enhancing the pressure on product margins.

Huge new petrochem capacity additions from China and the US are likely to keep margins under pressure. However, improving demand for PE and PP across the Essentials sector should support demand, and consequently, margins.

RIL reported GRM of USD6.3/bbl, the lowest since 2QFY10, primarily due to the shrinking of product cracks and the Lt-Hv crude differential.

The premium over SG GRM stood at USD7.2/bbl as RIL used flexibility in its refining configuration to manage yield.

The company recognized exceptional gains related to its deal with BP for the Petro-Retail business.

The company enjoys a huge benefit from petrochemical integration, which translated into higher utilization, despite lower demand, in the lockdown.

In the current challenging operating environment, RIL’s ability to optimize between feedstock and the sales mix provides an edge in terms of performance improvement.

Bharat Petroleum Neutral Current Price INR 428 Debt decreased to INR405.5b (v/s INR478.2b at end-FY20). Outstanding receivables from the government stand at INR48b (v/s INR62b at

end-Mar’20). No under-recoveries exist currently on PDS. Also, subsidy of LPG has declined, led by fall in global crude prices.

Capex plan for FY21 stands at INR80b (moderated from INR125b). The company spent INR9b in 1QFY21 (50% each in refining and petchem). Ongoing projects have not seen any impact from the capex reduction with them running in full swing. Minor projects of <INR1.5b is under review.

Mozambique E&P project should be completed over the next four years as planned (Gas by 2024), while Brazil project is expected to go with FID by end-Dec’20, subjected to regulatory approvals.

Click below for Results Update

Petronet LNG

Reliance Inds

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Reliance Industries Buy Current Price INR 2,319 RJio Analyst Meet Takeaways Building new digital products and services: (a) Jio TV - Linear and non-linear

content app with OTT agnostic characteristics, (b) Jiomeet - the audio/video conferencing app, (c) Jiohaptik - AI based automated chatbox, (d) Jiofiber - broadband services, and (e) EasyGov -Governance app among many others.

Creating in-house capabilities to dr ive technology upgrade toward 5G and leverage the c apabilities to (a) build new AI and IOT-based new product solutions for consumers and enterprises, and (b) export technology to other telcos globally.

RJio digital plans for India India digital society plan: There are 4 key elements of digital society such as (a)

connectivity, (b) business platform, (c) consumer platform, and (d) disruptive technologies.

Connectivity: RJio has created pan-India 4G LTE network for data and the largest voice network on VoLTE globally. Additionally, it has launched narrow band LTE with minimal investments.

Business platform: It has sizeable mass of subscribers – both retail and business customers. Management believes that wireline and wireless network can be integrated to provide better services.

Consumer platform: RJio is looking to provide high quality/value solutions to its customers and has already prepared media solutions for this purpose. It is now exploring the commerce sector. Further, management is looking to extend these solutions to healthcare, IoT, etc. For instance, its Jio TV+ can be used across platforms with a single login, thus, offering inter-operability.

Disruptive technology: Cloud services, automation products and natural languages’ processing could be new technologies.

5G/Jiophone capabilities Next frontier: The world has begun increasing the pace of 5G adoption for

incremental capacity and to augment other digital services. Management believes that India can lead the way forward in this segment.

Internally built capability: Unlike partnering with others for 4G, the company is preparing the 5G stack internally. Further, it is looking to deploy the technology initially in India and could later scale it to sell globally.

Cloud native 5G capabilities: RJio has end-to-end suite of 5G technologies with cloud enablement.

Jiophone production: RJio has gained good expertise in hardware and is now planning to develop and produce Jiophone internally.

New products and services Jiomeet: The app has end-to-end encryption and supports unlimited participants

with cloud-ready architecture. It has gained a large set of customers in a short period of time since its launch. It is a highly scalable and a feature-rich product.

Jiohaptik: This is an AI-based automated chat-box and was used in ‘MyGov Corona Helpdesk’. It has been used by >30m citizens over the last 3 months.

EasyGov: This app provides various schemes of central and state government on a single platform. It contains information of 350 central/state government welfare schemes.

Jio e-learning: RJio has launched 65 educational channels on JioTV with both national and state content.

Jiofiber: The company is aggressively rolling out last mile fiber and has set up capacity/home pass for faster rollout. Further, it is creating a platform to ramp

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up capacity. These would enable integration of home IOT, smart home solutions, AI-based automation and IOT devices like energy metering, smart solutions and would be a key differentiator.

Financial and operating metrics Fund raise: Jio Platforms has raised INR1.52t via stake sale of 66.48% to 13

investors. Of the total fund, INR223b would be retained by Jio Platforms. EBITDA: RJio’s EBITDA was up 55% YoY to INR72.3b (including other income)

with margin of 44%. The company did not lose revenue in the lockdown due to digital enablement of

recharges. Subscriber: The company added 15.1m gross subscribers with lowest industry

level churn.

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RETAIL Retail sector witnessed a complete shutdown during the lockdown period and has seen almost insignificant

revenues during Apr-May’20. However, since Jun’20 pace of store reopening has been significant across states. Though footfalls have been lower, the conversion rate and bill size of customers has improved significantly. ABFRL/SHOP/V-Mart have negotiated rents during the lockdown period and reduced rental expense in FY21 as business is expected to remain muted. Retailers are also focusing on increasing their sales via the online channels and invest in marketing, branding and logistics to scale up online sales. ABFRL/V-Mart/SHOP have guided for muted capex/store adds in FY21 until normalcy returns. V-Mart; however, might look at expansion opportunities via attractive deals from 2HFY21.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Business scenario and outlook Impact of COVID-19

GM declined due to fixed manufacturing cost impact on low production; it should revert to previous levels as business returns to normal.

Net debt should reduce to INR20b by end-FY21 from the peak of INR32.5b in 1QFY21. This would be led by INR7.5b proceeds from a rights issue and INR5b from WC.

The company is creating a WFH category, and ramping-up athleisure, comfort wear, and e-commerce to increase sales.

E-commerce operations resumed in the third week of May’20. In Aug’20, >90% of stores have opened up, and the management expects all stores to be operational by end-Aug’20.

Demand should remain muted in 2QFY21, while the festive season should lend support in 3QFY21. Revenue should remain flat or increase marginally YoY in 4QFY21.

Average ticket size improved 34% and conversion rate increased 20%.

Rent declined 60–65% YoY in 1QFY21 and should decline by 50% in 2QFY21. SHOP is negotiating for the period after Sep’20 for a rental reduction.

Overall store days declined by ~82% YoY in 1QFY21. Due to WFH policies, the Athleisure, Sportswear, Masks, Personal Grooming, Kidswear, and Women’s Ethnic Home Wear categories are performing better.

Rental waivers have been negotiated with all the landlords. The full benefit of rents has not been reflected in 1QFY21 as some of the MoUs were not signed. 1QFY21 saw only INR25m in rent savings, but full-year FY21 rent savings are expected to be INR180m.

The company has utilized only INR130m of its working capital limit, and INR2b remains available. Liquidity would continue to be strong in FY21, and the company would remain debt-free for the remainder of the fiscal.

No major capex is planned for 2QFY21, but the company would continue to seek attractive real estate deals for store launches in the long term.

Units sold / Transactions were up 18% YoY; people are purchasing less formal wear and more casual and leisure wear. Pent-up demand was witnessed in the initial weeks of stores being re-opened.

The high-priced product mix would be reduced marginally as customers are currently focusing on value buying.

Aditya Birla Fashions Buy Current Price INR 132 Key highlights COVID-19 impact: Almost 90% of stores are operational as of Aug’20. Gross margin impact: GM declined due to fixed manufacturing cost impact on

low production, and should revert to previous levels as business returns to normal.

Net debt: This should reduce from the peak of INR32.5b in 1QFY21 to INR20b by end-FY21. This would be led by INR7.5b proceeds from a rights issue and INR5b from WC.

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Aditya Birla Fashion*

Shoppers Stop

V-Mart*

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Revenue COVID-19 impact: Stores remained closed for Apr/May’20 (revenue at 8% of last

year’s levels), with partial operations having commenced in Jun’20 (revenue at 24% of last year). E-commerce operations resumed in the third week of May’20. In Aug’20, >90% of stores have opened, and the management expects all stores to be operational by end-Aug’20. Normalcy should return in the business (YoY growth) in 4QFY21.

E-Commerce: When normalcy returns, the share of e-commerce in revenue should increase from the high single digits to the teens. This could be attributed to the company’s efforts to increase sales through online channels.

Expansion: ABFRL is well-positioned to exploit the real estate opportunity that has arisen from the COVID-19 crisis. It seeks to build a more efficient and wider network by adding 200 LFS and 20–30 Pantaloons stores in FY21 (commencement from 2HFY21). It would accelerate the pace of store additions in the next fiscal.

Cost measures Cost rationalization: ABFRL’s cost rationalization measures led to QoQ

reduction of INR2.37b/INR1.83b/INR350m in rent / other expenses / employee expenses in 1QFY21; of the INR2.37b rent reduction, INR1.58b benefit is accounted for in other income and the rest in rental cost.

Rent: Management seeks to reduce rentals at two levels: a) through minimum rental guarantee and b) by aligning rent with revenue. These measures would reduce rentals only for FY21; it would shift to normal rental agreements as normalcy returns.

Employee cost: Reduction in employee cost should come from salary reductions (Jun’20 onward), the freeze in hiring, and natural attrition. The major benefit of this is yet to reflect in ensuing quarters.

Other expenses: Control on store expense, advertisement cost, travel expense, and staff welfare expense, etc. should reduce this line item. The benefit of cost rationalization measures should be realized throughout the year.

Gross margin: Its gross margin decline could be attributed to manufacturing overheads due to low production; GM should revert to previous levels as the business returns to normal. It is consistent across product categories within brands.

Balance sheet Net debt: Net debt should reduce from the peak of INR32.5b in 1QFY21 to

INR20b by end-FY21. This would be led by INR7.5b proceeds from a rights issue and INR5b from WC; INR3–4b of the INR5b should come from inventory liquidation and the rest from creditors/debtors.

Inventory: As of Jun’20, ABFRL’s inventory levels were similar to FY20 levels on account of lower sales and some fresh adds due to previous commitments; inventory is still fresh as stores were closed for most of the period. ABFRL offered discounts similar to last year in EOSS, while industry-wide discounts were lower than last year.

Business segments Lifestyle: The company is creating a WFH category, ramping-up athleisure,

comfort wear, and e-commerce (21% revenue contribution) to increase sales. As

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of Jun’20, ~80% of stores were open, with sales having reached ~30% of pre- COVID-19 levels. Decline in the wholesale channel was due to the late opening of departmental stores (major customer).

Pantaloons: This brand is taking longer to recover as it has mainly large-format stores. However, its own / partner e-commerce channel saw 4.2x/2.5x daily volumes v/s 1QFY20. The share of private labels has improved as customers seek value, and share of kids wear has gone up (mostly own brands).

Other business: Innerwear and Athleisure were the quickest to bounce back, with Jun’20 sales at 83% of Jun’19 levels; Innerwear grew due to strong pent-up demand, while Athleisure’s growth may be attributed to a newly generated interest in the category. ABFRL added 400 distribution outlets, and e-commerce sales were at pre-COVID-19 levels.

Jubilant Foodworks Neutral Current Price INR 2,328 Outlook A gradual improvement has been seen in operating hours as well as customer

confidence. JUBI was the first to introduce zero-contact delivery, and later zero-contact

takeaway and dine-in. Management expects near-normalcy by the exit of FY21. With the ongoing COVID-19 crisis, a fundamental shift is expected toward

delivery-based players. Management expects a significant amount of restaurant closures, to the extent

of 20–30%, in FY21. Significant structural moves JUBI has decided to make bold structural moves, including shutting down 105

non-profitable Domino’s stores. These are mainly at malls and tech parks and are dine-in focused, either fully or over two-thirds. On the other hand, it plans to open up 100 stores so there is no material net reduction of stores in FY21.

Stores closures would not lead to a significant impact as 50% of equipment may be salvageable and new equipment cost would be doubled. No P&L impact would be seen, and since these are old stores, value on the books was on written-down value (WDV).

JUBI introduced delivery charges of INR20 for the first time in 1QFY21, which is already an accepted industry practice for peers. There has been no impact on customer ratings even after the introduction of the delivery charges.

Other successes The Domino’s app saw a record 4.5m downloads in 1QFY21. JUBI achieved INR294m rent reduction in 1QFY21, primarily in April and May.

This translates to approximately one full month of rent savings. JUBI seeks more long-term reductions as well.

New/Recent ventures JUBI is experimenting with an Indian brand (Biryanis of India) on QSR. Hong’s Kitchen and the Indian brand would also be optimized for delivery and

carryout.

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Overseas business Sri Lanka – Delivery and dine-in were back at pre-COVID-19 levels at the end of

the quarter. JUBI achieved positive EBITDA for the quarter. Bangladesh – JUBI is the only QSR to have not seen a single day of closure in the

country. JUBI aims to open up five stores each in Bangladesh and Sri Lanka in FY21. The management expects 300–400 store launch opportunities in the long term. Other points With discounts back in the system, gross margins are likely to be sequentially

lower in 2QFY21. Delivery charge introduced in June would, however, aid profitability.

Shoppers Stop Neutral Current Price INR 174 COVID-19 recovery: SHOP has 72 departmental stores operational as on Aug’20

with 70% lower footfall. Demand should remain muted in 2QFY21 while festive season should lend support in 3QFY21. Revenue should remain flat or increase marginally YoY in 4QFY21.

Revenue break-even: SHOP should reach break-even on quarterly basis at revenue of INR7-8b/INR9-10b in FY21/FY22E.

Cost reduction: SHOP’s opex declined YoY by INR1.86b (INR1.12b in other cost and INR740m in rentals), including one-time exit employee cost of INR110m. SHOP is targeting annual savings of INR4.5b in FY21, of which, INR2-2.5b should be sustainable.

Revenue COVID-19 Impact and recovery: Stores were completely closed during Apr-

May’20. SHOP reopened 52 departmental stores in Jun’20 (80% footfall decline) and has opened 74 stores (70% footfall decline) as of now. Sales were down 60% YoY in Jul’20; however, some stores in tier 2 cities have reported sales level of 80-100% YoY. Demand should remain muted in 2QFY21 while the festive season should lend support in in 3QFY21. Revenues too should remain flat or increase marginally YoY in 4QFY21.

Operating metrics: Overall store days declined by ~82% YoY in 1QFY21. Due to WFH policies, athleisure, sportswear, masks, personal grooming, kids-wear and women ethic home-wear categories are performing better. Further, average ticket size improved 34% and conversion rate increased 20%.

Omni channel: SHOP was working on omni channels from the last 2-3 years and COVID-19 has propelled this initiative. Ecommerce contributes 18% to total sales with significant drop in losses YoY.

Private brands: Share improved due to (a) better product and price range, (b) consumer’s focus on value products, and (c) the ‘Personal Shopper’ program, which recommends private brands. Ecommerce growth in private brands was 20% in 1QFY21 (v/s 14% in 1QFY20). SHOP lost last 3-4 weeks due to backward integration of IT, which should get completed by end-2QFY21.

Expansion plans: SHOP is targeting to open 5 of the 12 pre-decided stores in FY21. The remaining stores would be delayed. In the long run, store opening

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Results Update

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target remains the same; however, it is targeting smaller size stores in tier 2 cities, which have lower capex and variable rental with lower payback period.

Cost Cost reduction: SHOP’s opex declined YoY by INR1.86b (INR1.12b in other cost

and INR740m in rental), including one-time exit employee cost of INR110m. The company is continuously looking to reduce cost and is targeting annual savings of INR4.5b – of which, 40% should come from rentals and 60% from other cost. INR2-2.5b of total cost savings should be sustainable.

Rent reduction: Rent declined by 60-65% YoY in 1QFY21 and should decline by 50% in 2QFY21. SHOP is negotiating for the period after Sep’20 for rental reduction.

Inventory: SHOP has written off INR550m of inventory in 1QFY21, in line with its conservative policy. Industry-wide discounts are lower and SHOP is not looking at going ahead with steep discounting.

Titan Buy Current Price INR 1,168 Performance and outlook Management is satisfied with the performance in a difficult quarter. The company’s confidence on medium-term growth prospects has only

increased in the past two months. Innovation and digital journey on delivery (6% of sales) are the key factors

driving growth in tough times. Jun’20 retail jewelry recovery was 77% (v/s Jun’19). Jul’20 retail sales were 101%

of Jul’19 aided by activation during the quarter. Jul’19 was also a month of weak sales.

Management has stated that recovery in the jewelry segment could be faster than the earlier guidance of 4QFY21. However, management has still maintained recovery guidance of 4QFY21.

There are some pre-purchases for weddings scheduled in 3QFY21 as gold prices are going up.

Management believes TTAN gained share in Jun-Jul’20 v/s the market. Good demand was witnessed in the first 8 days of Aug’20 as well. Rather than

customers being spooked by higher gold prices, they are currently advancing purchases both on gold and studded jewelry.

Watches sales stood at 50% of last year levels in Jul’20. It was better than Jun’20 when recovery was at 21%. Focusing on gifting paid off in Jul’20. Need 60-70% recovery for break-even.

Components of jewelry sales Golden Harvest Scheme normally contributes 21-22% of sales but was closer to

30% in 1QFY21. Exchange gold for the quarter is lower than last year, both in 1QFY21 and Jul’20

YoY. Contribution of anniversary and birthdays to sales has gone up in value terms

YoY.

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Results Update

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Costs and Margins Ineffective hedges’ impact for the quarter negatively impacted other expenses.

On the other hand, stock gains affected it positively canceling the former out. Management has not quantified these amounts.

Gross margins were lower than usual due to INR6b sale of bullion, where there were no profits.

Proportion of studded gold is likely to be lower in FY21. This implies that gross margins could be down, going forward.

V-Mart Retail Buy Current Price INR 1,889 Business update Stores are operational: June saw 75% operational days. The company reported

negligible revenue up to mid-May-20. From mid-June, 80% of stores turned operational.

Rental waivers: Rental waivers have been negotiated with all the landlords. The full benefit of rents has not been reflected in 1QFY21 as some of the MoUs were not signed. 1QFY21 saw only INR25m in rent savings, but full-year FY21 rent savings are expected to be INR180m.

Margins and provisions: Gross margins stood at 31%; total provisions are now at INR280m.

Inventory: Total inventory stood at INR4.3b; new order placements to vendors have been very low.

Cost efficiency: A major reduction has been seen in employee cost, manpower, and advertisement cost in 1QFY21.

Farmers-incomes: Farmers-incomes have been growing, aided by minimum support price (MSP) and a good monsoon.

Customer base: The company¡¦s customer base comprises the self-employed, employed, farmers, and agricultural income-dependent people, with family incomes below 50k/month.

The COVID-19 impact Changing shopping trends: Units sold/transaction were up 18% YoY; people are

purchasing less formal wear and more casual and leisure wear. Pent-up demand was witnessed in the initial weeks of stores being re-opened.

Lockdown effects: The core markets of UP, Bihar, and other northern states saw various state- and city-wise lockdowns in July, affecting the businesses of retailers.

Business focus: The priority focus is on safety, and maintaining its brand reputation and liquidity position.

Footfall: While 40–50% of footfall has returned for comparable stores, various changes have been observed in consumer patterns.

Open stores: 75% of company stores are now open as of the 1st week of Aug’20.

Product mix: The high-priced product mix would be reduced marginally as customers are currently focusing on value buying.

Click below for Results Update

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Vendors: Vendors are facing weakness on account of the lack of orders and delayed receivables. The company has made payments to vendors and has been helping them overcome their liquidity challenges.

Shrinkages: Shrinkages rose as revenues declined; we maintain our target for ~1.5% over the long term and expect shrinkages to come in at ~3% in FY21.

Peers: Other retailers with outlets at malls and in high streets are facing major challenges related to footfall, cash, and rent. V-Mart is comparatively better placed than other retailers.

Business outlook Store expansions: No major capex is planned for 2QFY21, but the company

would continue to seek attractive real estate deals for store launches in the long term.

Credit availability: The Company has utilized only INR130m of its working capital limit, and INR2b remains available. Liquidity would continue to be strong in FY21, and the company would remain debt-free for the remainder of the fiscal.

Online channel: Online revenues are currently less than 1% of total revenues; the company’s focus is on growing the channel further to reach 2–3% of total revenue. The focus is on making omni-channel profitable in the long term.

Challenges in past two years: Stores that have been established in the past two years have not performed as well as older stores due to broader economic challenges. These stores had lower SSSG and management needs to evaluate the markets in further depth, along with stiff competition in these areas.

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TECHNOLOGY

Despite the COVID-19 led disruption in 1QFY21, revenues saw limited impact while deal wins were healthy. Supply side challenges are largely behind as ~99% employees were enabled for the WFH model. Demand side challenges are also expected to subside given that clients are now prioritizing IT spends. Deal discussions, which were earlier at a standstill have picked up again. Deal pipeline is healthy and has returned to pre-COVID levels. In terms of verticals, BFSI, Healthcare and Hi-tech remained largely resilient and are expected to be growth drivers in the near term. Retail, Energy and Utilities and Manufacturing were the most impacted verticals and will continue to see further challenges over the next couple of quarters. Deal closures have been slower than usual given that clients have added another layer of decision making. However, deal ramp-ups have been largely on track. The near-term outlook is positive and the worst is now behind. Expect 2QFY21 to see largely stable revenues and margins.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Revenue outlook Sustaining Margins (%)

It reinstated revenue growth (1.5–2.5% CQGR, CC) and EBIT margin (19.5–20.5%) guidance.

HCL now has a strong platform to drive the Products business, and over the long term, it is expected to evolve across segments such as automation and enterprise software.

Mode 2 would lead to growth in the coming quarters, whereas Mode 1 and Mode 3 would be relatively slower in terms of growth.

It has recently won numerous deals in consolidation and believes that the medium- to long-term outlook is healthy.

EBIT margin guidance is 19.5–20.5% for FY21. The guidance band is 100bp more v/s FY20.

It reinstated guidance – revenue (0–2% YoY CC) and margin (21–23%) – for FY21.

1QFY21 revenue and margin performance reflect its unparalleled resilience in navigating COVID-19-led disruption.

Net new and large deal wins have grown significantly, and the supply side has been further streamlined to meet digital requirements.

Customers’ 3–5 year cloud strategies (pre-COVID-19) are now seeing significant acceleration. Multiple large end-to-end deals are in the pipeline.

EBIT margin guidance is 21–23% for FY21.

Deal wins were healthy during the quarter (USD6.9b). Continued traction in large deals, a healthy pipeline, and better resilience are observed in BFSI.

Expect revenue growth to drive margin improvement as well going forward, even as currency benefit is unlikely in the near term.

The propensity of outsourcing is expected to go up as platform solutions see accelerated adoption going forward.

The medium-term EBIT margin target band of 26–28% is intact.

Margin performance was led by control on SG&A costs. Despite the elongated decision-making cycles, the deal pipeline

has improved. Ramp-up in recently won mega deals was largely on track.

Verticals such as BFSI, Healthcare, and Hi-tech are doing fine, and activity levels are inching up in these areas.

BFSI and Healthcare are expected to have increased share of revenue given the huge scope to improve wallet share.

The EBIT margin target of 14–15% is being pushed to FY22.

Wipro’s ability to control costs and collections has resulted in improvement in the EBIT margin / cash conversion, despite a sharp drop in revenue.

The outlook is for maintaining margins within a narrow band (v/s Jun’20).

Expect 2QFY21 to be stable and growth to come from 3Q. The deal pipeline is healthy and the order book is better v/s last

year. BFSI is expected to be moderate in the near term.

The company would maintain margins in the narrow band for the remainder of FY21.

HCL Technologies

Infosys

TCS

Tech Mahindra

Wipro

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Cyient Neutral Current Price INR 379 1QFY21 turned out better than the management’s initial expectations. Barring Aerospace & Defense, the company expects most other verticals to be

back on the growth path from 2QFY21. For FY21, management forecasts revenue decline of 10–15%. Performances

from the Services and DLM segments are expected to be similar. While supply-side issues in the early part of 1QFY21 impacted utilization,

management hinted at 300–400bp headroom for improvement. Focus on cost optimization is expected to continue. Management estimates

FY21 EBIT margins to be around 8%. Better-than-expected performance In 1QFY21, revenue (USD) / EBIT (INR) / PAT declined by 17%/49%/10% YoY v/s

our estimate of 19%/33%/32% YoY. The Services segment reported a plunge (-14.3% QoQ, CC), while DLM grew

(+8.5% QoQ). Decline in Services was largely attributed to verticals such as Aerospace & Defense, Communications, and Portfolio.

Across geographies, while Europe / America reported sharp decline (18.5%/17.8% QoQ), APAC was resilient with growth of 11.8% QoQ.

Medical & Healthcare (+18.2% QoQ) and Semi-Conductor, IoT and Analytics (15.6% QoQ) saw sequential growth, while other verticals reported double-digit decline.

HCL Technologies Buy Current Price INR 721 The business impact in 1QFY21 was lower than management initially feared.

Revenue decline was led by a) COVID-19 and b) offshoring in large deals, which were ramped-up in FY20.

A third of the COVID-19 impact was witnessed due to supply-side issues. 1QFY21 witnessed cases of deal ramp-downs, volume reductions, and requests

for price cuts by clients. However, demand-side challenges have now stabilized, with management indicating the worst is behind.

HCLT signed 11 transformational deals in 1QFY21 and gained wallet share in some of the consolidation opportunities.

While renewals have been robust in 1QFY21, net new deal wins have also grown (YoY).

The deal pipeline is robust (+40% QoQ). Digital and IMS are witnessing significant traction in transformation, cloud adoption, security, etc.

While the Auto, Aero, and Energy verticals would take longer to recover, BFSI, Retail & CPG, Telecom, and Healthcare should do well going forward.

The company has guided for a CQGR of 1.5–2.5% (CC) for the next three quarters, which translates to -2.3% to -0.8% YoY revenue growth (CC) for FY21.

The EBIT margin was guided to be in the range of 19.5–20.5%, 100bp higher than its FY20 guidance.

Click below for Detailed Concall Transcript &

Results Update

Click below for Detailed Concall Transcript &

Results Update

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Hexaware Technologies Neutral Current Price INR 417 2QCY20 revenue was impacted by (a) concession to clients, (b) increased

offshoring, (c) reduction in price realization, and (d) supply side constraints, which were largely offset by increase in volume.

Supply side constraints were more prominent in BPO, while IT too witnessed some impact given the limited interest of some clients to move to work from home (WFH).

Net new deal wins were largely stable in 2QCY20. Deal wins over 1HCY20 (USD115m) were up 60% YoY. The company witnessed wallet share gain in some existing accounts and material improvement in pipeline in 2QCY20.

The company called out Jun’20 as the bottom with expectation of flat-to-small volume growth inSep’20 and Dec’20.

HEXW expects margins to be more or less stable over 2HCY20 (+/- 30bp v/s 1HCY20). Reversion of travel/facility costs and seasonally weaker 4QCY20 are the key margin headwinds. Potential tailwinds include increased offshoring, absence of visa costs and reduced impact of price discounts.

Challenges at the top-3 client (Freddie Mac) are now behind. HEXW expects this account to grow in the foreseeable future.

BFS is expected to be largely stable with key clients recovering. HEXW remains cautious on the Manufacturing/Consumer verticals, which are showing some signs of recovery. TT is expected to remain at the current level for some time before recovering slowly through CY21.

Currently, shareholder voting is underway on the delisting proposal. Result is likely to be announced by 10th Aug’20. Barings wants to run the business in the same way post delisting with no impact on employees and customers.

Infosys Buy Current Price INR 945 Management still sees elements of uncertainty in the global economy. Despite

this, visibility is higher given that the business has adapted to some of the shocks brought on by the pandemic. Accordingly, revenue and margin guidance was reinstated, which came as a surprise.

For FY21, Infosys has guided for revenue growth of 0–2% (YoY, CC). We currently build in growth at the higher end of the band (1.1%, USD).

The company has guided for EBIT margins of 21–23%. As the back-ended productivity benefits from some of its earlier investments kick in, we expect an EBIT margin of 22.4% for FY21.

Management indicated supply-side challenges resulted in 10% impact on overall revenue (v/s 20% impact in case of TCS) during the quarter.

The deal pipeline is robust. Infosys is seeing significant traction in cloud, digital, cyber-security, workplace transformation, cost efficiency, and consolidation-related opportunities.

While BFSI started off on a weak note at the beginning of the quarter, volumes improved, led by the Banking sub-segment in the US and APAC.

Even as the Communications vertical largely stabilized, the Energy & Utilities, Retail, and Manufacturing verticals should see some challenges in the near term.

The company does not expect any material impact from the recent H1B visa ban in the near term as it has de-risked the business model through localization.

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Results Update

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Results Update

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L&T Infotech Buy Current Price INR 2,499 Management has indicated that the worst (due to COVID-19) is now behind.

While 2QFY21 should be flat, LTI expects growth to return over 2HFY21. Deal pipeline (+19% YoY) is healthy and the company is optimistic of announcing

a few large deals in 2QFY21. While deal activity in BFSI, Hi-Tech, CPG and Pharma is healthy, management

anticipates deal activity in Manufacturing, Oil and Gas and Automotive to recover from 2HFY21.

LTI is expected to remain in the leadership quadrant on industry growth in FY21. Management does not foresee any material impact due to the H-1B visa

changes in the near term. LTI is aiming to push for further offshoring in order to reduce dependence on visas.

LTI foresees net margins in FY21 to remain in a narrow band (v/s FY20). Strong and in-line performance LTI reported revenue (CC)/ EBIT/ PAT growth of 11%/29%/17% YoY (v/s est.

10%/28%/8%). On sequential basis, revenue declined ~4.7% (CC). While part of this decline

(~1.4%) was due to the absence of pass-through revenue during this quarter, the rest was driven by the COVID-19 crisis.

Verticals like Manufacturing (-16% QoQ, CC) and Energy and Utilities (~11% QoQ, CC) were the most disrupted. Hi-Tech (-0.1% QoQ, CC), Insurance (-2.7% QoQ, CC) and BFS (-4.1% QoQ, CC) remained relatively resilient.

Mindtree Buy Current Price INR 1,182 Management indicated the worst impact of COVID-19 was largely behind. It

hinted that 2QFY21 should be better than 1QFY21. Within the top account, Mindtree indicated it is well-diversified across areas

such as analytics, networks, customer/tech support, and marketing operations. Additionally, it now has decent exposure to annuity-/project-based work in the account.

Verticals such as CMT and CPG are witnessing good traction in terms of the deal pipeline. However, deal closures have been slower. The company expects continued softness in Travel, Transportation, and Hospitality.

Management indicated it does not foresee any material margin headwinds. While promotions were extended to eligible candidates, the company is yet to

reach a decision on salary hikes for the year. Portfolio declines sharply, excl. top client Mindtree reported revenue (USD)/Adj. EBIT/PAT growth of -4%/75%/130% YoY. The company reported yet another quarter of strong performance from the top

account (Microsoft, +10% QoQ and +44% YoY). With the exception of this account, the remaining portfolio saw steep decline (16% QoQ; 16% YoY).

While the top account now contributes ~30% to revenue, the Hi-Tech and Media vertical accounts for half of the overall revenue.

Along expected lines, the sharp decline in revenue was largely attributed to the Travel, Transportation, and Hospitality vertical (-55% QoQ). BFSI and Retail witnessed high single digit decline.

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Results Update

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Results Update

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Mphasis Neutral Current Price INR 1,155 1QFY21 revenue was impacted as enterprises reprioritized IT spends and cut

down on discretionary spends. Management indicated that the worst is behind, and revenue should grow

sequentially. A couple of large deal wins (USD100¡V200m+ TCV), a healthy order book, and a robust pipeline drive this confidence.

The company expects the EBIT margin to remain stable, in the range of 15.5-16.5% in FY21, despite large deal ramp-ups over the next few quarters.

Large deal wins and new client additions were led by Direct International. The Banking and Capital Markets, Insurance, and Logistics/Transportation

verticals are expected to do well going forward. While MRC of USD250m (up to Sep-21) is still due, management expects the

DXC business to remain under pressure. The Blackstone portfolio now contributes 4¡V5% to overall revenues and is

expected to double over three years. Largely in-line revenue and margins In 1QFY21, revenue (USD) / EBIT (INR) / PAT increased by 3%/12%/4% YoY v/s

our expectation of 2%/8%/7% YoY. Overall revenue declined 4.6% QoQ (CC) in line with our expectations. Direct

International (DI) revenues were largely stable, while DXC revenue witnessed sharp decline (16% QoQ, CC).

Barring Banking and Capital Markets (BCM), all the other verticals reported sharp sequential revenue decline.

While revenue from the Top client declined ~11% QoQ, the Top 2¡V5 clients reported healthy growth of 3% QoQ.

The EBIT margin contracted ~60bp QoQ and came in ~50bp ahead of our estimates. EBIT margin contraction was largely led by a sharp fall in utilization (300-400bp QoQ).

Coforge Ltd Neutral Current Price INR 2,092 Order intake remained healthy at USD186m, with the next 12-month executable

order book of USD465m (18% YoY increase). Management guided for mid-single-digit revenue growth (CC) in FY21. For

2QFY21, the company implied at least 7% QoQ (CC) growth. Headcount reduction (~5% QoQ) happened in the latter half of 1QFY21.

Accordingly, the full impact of efficiency gains related to headcount reduction should reflect in 2QFY21.

EBITDA margins (before RSU) for FY21 are expected to be stable (v/s FY20). For 2QFY21, management expects 150bp sequential margin expansion.

OCF conversion in FY21 is expanding provisions over 1QFY21. The share of revenue from airliners fell to ~5% from ~13% in 4QFY20.

Accordingly, management is confident that there would be no further decline from current levels.

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Results Update

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Persistent Systems Buy Current Price INR 1,011 Sequential growth in 1QFY21 was led by volume increase from new projects,

which more than offset the impact of deal ramp-downs and price discounts offered to clients.

Growth in IP segment was driven by reseller channel while royalty income remained stable.

The company is cautiously optimistic on performance in the coming quarters. Management indicated an ability to sustain margins by utilizing levers like offshoring, automation, etc.

Healthy deal pipeline, with good contribution across channels (internal sales team, advisory and PE firms) was hinted at.

Increase in DSO by 4 days was led by (a) slippages in collections from a large customer (2 days), and (b) slowdown in overall collections (2 days). DSOs are expected to recover to earlier level going forward.

Strong beat led by broad-based performance Persistent reported revenue (USD)/EBIT/PAT growth of 10%/26%/9% YoY (v/s

est. 0%/-17%/-25% YoY). Revenue grew 3.1% QoQ (USD), way ahead of our expectations. Besides just the

quantum of the beat, quality of growth was also robust. Despite a strong 4QFY20, growth in Services (+1.8% QoQ) was a surprise. IP led

revenue reported robust growth of ~10% QoQ (on a low base). Across verticals, BFSI (+4.8% QoQ) and Healthcare (+5.8% QoQ) led growth while

HiTech (~49% of revenues) was largely stable.

Tata Consultancy Services Neutral Current Price INR 2,374 Of the revenue decline witnessed in 1QFY21, 20% was attributable to supply-

side issues, which should be resolved going forward as economies start up again.

BFSI turned out more resilient than anticipated. Supply-side issues in this vertical were overcome by Apr’20. Some of the incremental demand is being driven by the ramp-up of IT infrastructure to support the distribution of government stimulus funds across economies.

In Retail & CPG, while the technology spends to enable the online business channel increased considerably, recovery is expected to take longer.

Globally, ~1% of employees are currently working from office. Management expects ~5% of employees to return to office by the end of the year.

32 projects were virtually ramped-up during the quarter. The company virtually on-boarded people across multiple geographies.

Management indicated large deal wins during the quarter were very strong, allaying concerns around large deals in the current context. It further added the quarter also saw many small deals.

Of the deal wins reported in 1Q (USD6.9b), the US geography contributed USD3.3b. The BFSI/Retail vertical contributed USD2.1b/USD0.9b. While deal closures were polarized, the pipeline is said to have a good mix of deals.

The company hinted that the worst impact of COVID-19 was behind. It maintained its earlier outlook of flattish revenue (INR, YoY) by Dec’20. This translates to ~2% CQGR over the Sep and Dec quarters.

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Results Update

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Results Update

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While positive momentum is witnessed in Europe, management is cautiously optimistic on the situation in the US.

As demand improves and growth revives, margins are expected to expand. It was suggested that discretionary spend would continue to be optimized.

Collections improved in 1QFY21, which was a positive surprise. Management believes this was largely driven by a strong balance sheet support lent by governments to businesses across the world. However, it is implied that WC cycles need to be keenly observed.

Tech Mahindra Neutral Current Price INR 765 Around 7% decline in revenue was attributed to the COVID-19 impact. 25% of

this impact was driven by supply-side challenges. In addition to COVID-19, seasonality at Comviva further hurt revenue and margins.

Management indicated that the worst related to COVID-19 is behind, and it expects revenue and margins to improve from hereon. Supply-side issues are largely out of the way.

Deal wins were weak due to slow movement in the pipeline in the first half of the quarter. However, the deal pipeline accelerated as the quarter progressed.

Despite decision-making cycles remaining elongated, the company has hinted at improving deal pipeline.

Ramp-up in recently won mega deals was more or less on track. However, management indicated that timelines related to Phase II of the AT&T deal ramp-up are uncertain as of now.

The company does not expect any material headwinds related to pricing or collection going forward.

Wipro Neutral Current Price INR 293 Wipro’s new CEO has indicated that the company’s focus is on profitable

growth. On YoY basis, order book is looking better. Deal pipeline is also stated to be

healthy. As the company enters 2QFY21, deal activity is expected in Consumer, Technology and Communications while it remains cautious in other verticals.

In BFSI, there is good demand around RTB and cost optimization spends. Thought visibility has improved slightly (v/s Mar’20), management has refrained

from providing guidance. Near-term focus is on tightly controlling incremental spends. The company has

hinted at maintaining IT services’ margins in a narrow band (v/s Jun’20). Revenues in line; Margins – a surprise Wipro reported revenue (USD)/EBIT/PAT growth of -6%/7%/0.1% YoY. While revenue decline in Americas was largely in line with overall revenue

decline (4.4% YoY, CC), Europe remained a drag (-7.7% YoY, CC). While other verticals were reasonably resilient, Communications (~17% YoY, CC)

and BFSI (~7% YoY, CC) witnessed the biggest drop in revenue. Unlike TCS and Accenture, we do not believe Wipro’s Healthcare vertical (14% of

revenue) has benefited much on account of COVID-19.

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Results Update

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Results Update

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EBIT margin of IT services segment was surprising (19%, 300bp higher).Sequentially, margin expansion was driven by (a) operational efficiencies and cost control (+100bp), and (b) favorable currency (+100bp). Part of this was offset by the increase in provision for doubtful debts (-50bp impact).

Zensar Tech Neutral Current Price INR 174 1Q revenue was impacted as clients ramped-down some projects as part of their

immediate cost-control initiatives in response to COVID-19. Decline was pronounced in legacy/traditional projects.

Revenue reached the trough level and is expected to stabilize in 2QFY21 and would be followed by growth in 2HFY21.

Guidance of 15% for the EBITDA margin by 2HFY21 remains unchanged. Increased offshoring, pyramid correction, automation, and aggressive cost rationalization should be the key tailwinds.

The USD1.5b deal pipeline (v/s USD1b in 4QFY20) remains healthy, with robust demand in Cloud and Infrastructure Services and Digital Application Services.

Across verticals, Retail is expected to stabilize by 2QFY21 and grow in 2HFY21. Zensar is reworking its value proposition within BFSI. The deal pipeline in Hi- Tech remains healthy.

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Results Update

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TELECOM

Telcos have reiterated their stance that ARPUs should reach INR200 in the near term and INR300 in the long term for the industry to be sustainable. Further, managements have noted that 2G would exist in the market for at least the next 3-4 years and telcos would continue to offer 2G services until revenue share from these services become insignificant. Capex remained muted this quarter due to the nationwide lockdown; however, the companies would start deploying capex with the opening up of the economy. Bharti Infratel’s management mentioned that energy margin should reduce from 3-5% to 0-3%. However, it is continuously engaging with telcos to move back to the long-term fixed energy contract that is expected to bring back margins to previous levels. TCOM’s capex guidance remains intact and the company would keep investing in business opportunities. Further, it does not have any immediate plans to monetize its land parcel and would look for other means to deleverage.

KEY HIGHLIGHTS FROM CONFERENCE CALL

Outlook for FY21 Impact of AGR Verdict It plans to scale the Home Broadband business in

small towns over the next 6–12 months via partnerships with local cable operators.

The EBITDA margin for Home Broadband should be 55%, with ARPU of INR800.

It seeks to expand its sub GHz spectrum in states where it is not currently present.

It is looking to shut down the entire 3G network, but would continue 2G until its revenue share becomes insignificant.

Bharti would need to pay INR14b of Videocon’s AGR dues.

Bharti needs to pay INR34b annually for 10 years of the AGR timeline.

Its net debt has increased to INR1.1t.

Energy margins should reduce to 0–3% from 3–5%.

Management seeks to get 10–15% of total revenue from the non-tower business in future.

NA

TCOM saved INR1b in employee cost, which should be the new base.

Management expects the Innovation business to perform better with improvement in economic activity.

It has no immediate plans to monetize the land parcel and would look at means of deleveraging.

TCOM would continue to invest in business opportunities.

It is looking to restrict investments to 16 priority circles and profitable districts in the remaining six circles.

It has initiated a new cost optimization plan to save INR40b annually over the next 18 months.

It seeks to increase the penetration of its 4G and unlimited plans.

VIL needs to pay INR66b annually for 10 years of the AGR timeline.

Its net debt has increased to INR1.7t.

Bharti Airtel Buy Current Price INR 492 Key highlights RPU: Management has reiterated its stand that ARPU needs to reach INR200 in

the near term and INR300 in the long term for business to be sustainable. This would largely come from incremental price hikes or changing the structure ofprice plans to ensure it can leverage incremental data growth.

Digital strategy: Bharti is looking to acquire quality customers that could provide additional revenue opportunity through advertisements. Further, it islooking to

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Results Update

Bharti Airtel

Bharti Infratel

Tata Comm

Vodafone Idea

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build new partnerships to generate revenue and to build uniqueproducts and services for an additional revenue stream.

Deleveraging strategy: 80% of the debt pertains to deferred spectrum and leaseliability. Thus, market debt is limited, which can be gradually reduced by improving FCF along with (a) USD235m from the Carlyle group, (b) stake in fiber

assets, and (c) Bharti Infratel’s stake sale at a later stage. Strategic investment: Bharti does not have any liquidity issue or operational

needs for a stake sale. However, the company will continue to build up new partnerships in line with its digital strategy.

Enterprise business opportunity: It has ample growth opportunities in (a) the connectivity space, and (b) other solutions such as cyber security, cloud (Airtel has private, public and edge cloud), data centers, video conferencing andcollaboration.

COVID-19 impact Mobile business: The segment saw minor revenue contraction due to (a) zero

revenue from international roaming, (b) SIM consolidation (concentrated at low ARPU feature phone subscriber), and (c) slow 4G adds due to supply shortage of smart phones. However, the company started to see smartphone shipment at

pre-COVID level, which should aid in subscriber mix improvement. Subscriber churn stood at 4m.

In Apr’20, recharge points were not available to customers due to the nation wide lockdown. In May-Jun’20, district-level lockdown impactedrecharges, especially on weekends as lockdown was stringent during those days.

Home broadband: Part of the growth was hampered due to closure of small offices and stores owing to the lockdown.

Enterprise business: The company witnessed pressure on demand from SMEs during the lockdown, however, demand for WFH solutions, video conferencing,data centers and cyber security increased.

Broadband business Massive growth opportunity: Management believes that there is massive

growth opportunity for home broadband in smaller towns and cities. Strategy for expansion: Airtel is partnering with local cable operators (LCO) to

make inroads in smaller towns. It already made partnership in 14 towns and saw good demand there, thus, it is planning to scale up this business over the next 6-12 months. The company partners with LCOs on revenue sharing model –LCOs are responsible for laying last mile fiber and its maintenance. Investment requirement for expansion in smaller towns are huge, and thus, it opts for partnership model.

Enterprise business Carlyle investment: The Carlyle group will invest USD235m in Airtel’s data center

business for 25% stake. Massive growth opportunity: This segment has ample growth opportunities in(a)

connectivity space, which is the company’s core business, and (b) other solutions such as cyber security, cloud (Airtel has private, public and edge cloud), data centers, video conferencing and collaboration and partnerships. However, the structure of this business would be different from B2C business.

Network strategy 3G shutdown: Management believes it will take some time for all 2G customers

to move to 4G. The company plans to continue 2G until revenue share of its

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customers becomes insignificant. However, it is looking to shut down the entire3G network.

Renewal strategy: Bharti is looking to expand sub GHz spectrum in states where it currently does not have any presence like Maharashtra, Gujarat, Kerala, and Haryana. Except that, there is abundant spectrum in mid bands.

Outlook ARPU: Management has reiterated its stance that ARPU needs to reach INR200

in the near term and INR300 in the long term for business to be sustainable.Organically, ARPU growth could come from mix improvement and transition to post-paid while major portion is likely to come through incremental price hikes.Management is confident of price hike and restructuring in current plans to benefit from increased data usage.

Digital strategy: Bharti is looking to acquire quality customers that could provide additional revenue opportunity through advertisements. Further, it islooking to build new partnerships to generate revenue and to build unique products and services for an additional revenue stream.

Bharti Infratel Neutral Current Price INR 202 Key highlights New growth opportunities: The WFH model, being the new norm, would open

up demand for new technologies such as 5G, and BHIN is equipped and well-placed to exploit them.

Increase in receivables and lower exit charges: Management allayed concerns of an increase in receivables, which should be considered in conjunction with unbilled revenues (which have seen only a marginal increase). The shortfall of INR580m in exit charges is attributable to delay in payments.

Energy margin: This was seasonally down in the first quarter. Furthermore, some contracts were up for renewal, and operators chose to move to a pass-through model that could reduce the Energy margin to 0–3% from 3–5%.

Business normalizing: The business is on track and has largely recovered from the revenue/profitability losses due to large-scale exits.

Operational performance Operating metrics: The consolidated towers/co-locations base increased by

3.4%/0.6% YoY to 95,801/174,260, with an average sharing factor of 1.82x. The number of co-locations declined QoQ by 0.6% as BHIN continues to see some exits and two operators are currently not rolling out tenancies.

Adjusted EBITDA: After adjusting for INR1.25b write-backs in Jun’19 and INR580m exit charges (not recognized in 1QFY21), EBITDA would stand at INR18.65b, similar to EBITDA in 1QFY20.

Increase in receivables: Receivables increased on a reduction in unbilled revenue, which was higher in 4QFY20 due to technical issues. As a result, a marginal increase was seen in both receivables and unbilled revenue.

Exit charges: Exit charges are lower due to shortfall of INR580m, which is delayed as the company is yet to receive the payment. The amount is finalized and agreed to by the payer; however, as per company policy, it recognizes exit charges only after receiving them.

Return ratios: RoCE pre-tax and RoE post-tax would be ~24% for 1QFY21.

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Business recovery: Management highlighted the business is on track on a normal basis and has largely recovered from the revenue/profitability losses due to large-scale exits.

Dividend: The board has declared dividend of INR2.3/share as it received dividend from Indus, in line with the company’s policy of passing on the dividends received from associates to shareholders.

Change in management; update on merger/AGR Merger update: The board has extended the long stop date of the merger to

31st Aug’20, with each party retaining the right to terminate the contract. AGR update: The Supreme Court, in its last hearing, upheld the amount decided

by DoT and reserved the order on the timelines of repayment. The next hearing is scheduled for 10th Aug’20, and the management is hopeful of a favorable outcome.

MD & CEO’s resignation: Mr D S Rawat would cease to be the CEO of the company from 3rd Aug’20. However, he would continue as Advisor to the Board for a few months to provide guidance.

Interim CEO: Mr Sachin Nayak would be interim CEO until the completion of the merger or a new CEO is appointed.

COVID-19 impact Increased demand: BHIN witnessed a surge in demand for connectivity, with a

heavy reliance on the wireless network. Delayed new rollouts: Due to lockdown restrictions, new rollouts were delayed

by a few weeks. However, the impact has not been material on financial numbers. Furthermore, new rollouts have resumed at healthy levels, and state authorities are also being supportive owing to the essential nature of the business.

New growth opportunities: Management believes WFH being the new norm would open up demand for new technologies such as 5G, and BHIN is equipped and well-placed to exploit these new growth opportunities.

Active sharing: Management is continuously following up with DoT on this issue and believes it could present significant growth opportunity. It could be a good revenue stream and would be a win-win situation for operators and infrastructure provides as it would lower their cost.

Tata Communications Neutral Current Price INR 864 Key Highlights COVID-19 impact: Revenue impact stood at INR450-500m with cost savings

ofINR500-600m from travel/office cost savings. The rest two-thirds EBITDA gain achieved from strong cost efficiency measures should sustain, in our view.

Healthy order book to drive growth: Despite some impact of COVID-19 on deal conversions, TCOM witnessed healthy addition in its order book, which is equally growing in India/international markets and across business verticals. This should step up data revenue growth.

Monetization opportunity and deleveraging plans: The 26% stake in datacenter partnership is important for TCOM. The company has no immediate plans to monetize the land parcel, but it would look at other ways to deleverage.

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Operational performance Core business: TCOM witnessed margin expansion due to a structural shift in

cost and some one-time cost reduction due to COVID-19 (INR500-600m). The structural shift in costs is primarily due to reduction in employee expenses (INR1b) as the company shifted headcount from international locations to India.

Data business: It is a key revenue growth driver. It saw marginal QoQ revenue growth due to one-time gain in 4QFY20 and benefit of increase in traffic from customers, which was offset by lower revenue from other part of the businesses.

Traditional business: Increased bandwidth usage led growth in this business. Further, margins expanded on cost efficiency and lower costs due to the lockdown.

Growth services: The business continues to scale up on back of new deals. Transformation business: The segment saw revenue decline on loss of revenue

from termination of an onerous contract and also due to delay in execution of projects due to the lockdown. Further, TCOM was successfully able to terminate difficult contracts that reduced losses.

Voice business: The segment saw lower-than-expected revenue decline due to uptake of traffic led by the lockdown. Further, EBITDA margin improved due to better destination mix of traffic.

PAT: Reported PAT stood at INR2.6b with 5.9% margin owing to strong EBITDA performance.

Capex/OCF: Capex stood at INR3.7b; OCF was at INR2.5b v/s -INR840m in1QFY20.

Leverage/Return ratio: 12 months’ trailing net debt to EBITDA stood at 2.6xwith RoCE at 13.6%.

COVID-19 impact Delay in deals: Deal conversion is taking longer than usual due to the COVID-19

pandemic. However, some sporting events have started again. TCOM recently delivered the World Health Organization (WHO) Lady Gaga show through Amazon in the US.

Cost reduction: TCOM saved INR500-600m in travel costs, G&A expenses, marketing costs and through concessions received from the government. These costs should come back to normal level with business resumption.

Outlook Cost outlook: TCOM saved INR1b in employee expenses as it shifted its

headcount from international markets to India, which is the new base. Innovation business: The business was impacted by the COVID-led lockdowns;

however, management expects it to get better with improvement in economic activity. TCOM has robust pipeline for net foundry.

Growth services: Post COVID, the segment could see revenue decline from collaboration portfolio, which should be offset by growth in the media business.

Capex: Capex guideline remains intact with TCOM looking to deploy capex around customer success and for future growth.

Order book: TCOM witnessed healthy addition in its order book, which is equally growing in India/ international markets. Further, the order pipeline is strong across business verticals. However, management is uncertain of the time line for translation into revenue.

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Vodafone Idea Under Review Current Price INR 11 Key highlights Investment strategy: Management is conscious of its liquidity situation. Thus, it

is restricting its investments in 16 priority circles and profitable districts of the remaining 6 circles. These 16 priority circles form 94% of the company’s revenue and 87% of industry revenues.

ARPU requirement: Management believes that price is unreasonable low and there is enough room for incremental price hikes. To generate healthy returns, ARPU should be in the range of INR230-250.

Steps to improve profitability and liquidity: VIL is discussing with tower operators to reduce loading charges and looking to control/optimize energy cost along with IT cost. The company has already repaid INR29.4b out of total debt of INR36.3b, which has to be repaid by Mar’21..

Strategic pillars: VIL has identified five strategic growth pillars such as (a) focused network investment, (b) market initiatives to drive ARPU, (c) focus on Enterprise business, (d) focus on partnerships to drive revenue, and (e) cost optimization initiatives.

Operational highlights EBITDA decline: EBITDA declined primarily due to revenue decline and was

largely offset by reduction in subscriber acquisition cost, marketing cost, and other expense as well as cost optimization initiatives.

Cash received: VIL received INR15.3b payment from the Vodafone group for AGR dues and INR1.1b in dividends from Indus Towers.

AGR provisioning: The company has recognized AGR liabilities as per the SC’s order accounting for rest of the outstanding balance as at Jun’20 (including Interest). The company will take funding decision post the SC’s verdict on repayment timelines.

Debt servicing: The company has an outstanding debt repayment of INR36.6b until Mar’21. Of this, INR29.4b was due in Jul’20, which has already been paid. Thus, the remaining outstanding balance stands at INR7.4b (until Mar’21).

COVID-19 impact Revenue impact: The nationwide lockdown impacted customers’ ability to

recharge, availability of physical recharge and customer acquisition, which impacted revenue. Additionally, delay in recharge, workers’ migration and SIM consolidation impacted revenue. Furthermore, businesses kept their SIM in custody (major reason for postpaid subscriber decline) and impact on inbound and outbound international roaming too impacted revenue.

Free validity: VIL provided free validity to >100m most severely impacted customers.

Gross addition impacted: It was severely impacted due to store closures led by nationwide lockdowns.

Capex: Capex remained muted as the company was unable to physically rollout the network due to nationwide lockdown led by the COVID-19 pandemic.

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UTILITIES

PWGR has witnessed a pickup in RE related projects in Rajasthan. The Pugalur-Thrissur project is also progressing well. But, overall execution pickup is uneven. On the supply side, manufacturers are having difficulty in restoring production. Nevertheless, PWGR has maintained its FY21 capex and capitalization target of INR105b and INR200-250b, respectively. For the sector, while receivables did increase in 1QFY21, it has now started to normalize. For PWGR, receivables increased from INR49b in Mar’20 to INR82b in Jun’20, but reduced to INR75b in Jul’20. Collection efficiency has increased and is >100% for Jun-Jul’20. For NTPC, outstanding over-dues have reduced to INR145b from INR164b at end-Jun’20. The company is hopeful of squaring off past dues by end of the quarter. In terms of capitalization, NTPC expects its capitalization run rate at 5-6GW per annum over the next 3-4 years.

Coal India Buy Current Price INR 125 The company is focusing on OBR, which would help it to increase production in

the coming months. It is targeting OB removal of ~1,500mt in FY21. Receivables have increased to INR230b in 1QFY21 from INR178b at end-FY20.

However, these receivables have decreased to INR210b at end-Aug’20. COAL expects the situation to continue improving and normalize Oct’20 onwards.

The company is focusing on import substitution. It is targeting ~100mt of substitution. It is planning ~75mt of coal for the Non-Regulated Sector (NRS) and would seek to provide better quality of coal.

COAL is targeting production and off-take of 660mt for FY21 (v/s earlier target of 710mt).

COAL has witnessed a premium of 9% on its e-auction sale in Aug’20. It will review the base pric under e-auction at end-Sep’20 based on market conditions. It plans to sell 20% of its volumes under e-auction.

The company has identified ~23 mines, which are producing <50,000t/ year and will either look to improve their productivity or seek closure. Labor at these mines would be transferred to other places.

COAL believes that it does not need any coal block allocation. It is tendering contracts for ~53 projects with average capacity of 3mt each. Besides, it has identified 15 mines, which can give ~150mt production at peak levels. Also, the company is looking at increasing production through higher EC at its existing mines.

Capex target for FY21 stands at INR100b. COAL has incurred capex of INR30b up to Aug’20 YTD.

Wage revision is scheduled for July next year and the company would start negotiations for the same in Mar-Apr’21.

COAL would try to maintain dividend at the same level as previous year.

JSW Energy Buy Current Price INR 59 Given the ongoing uncertainty due to lockdown, the agreement for the

acquisition of the GMR Kamalanga project has been terminated. Furthermore, there has been no progress on the Ind Barath acquisition.

The receivables situation is improving, with 20% decline posted from March’20-end levels. This has been led by improved collections for DISCOMs at the end of

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the quarter. The co. expects this to further improve as money from the REC+PFC scheme flows through.

O&M expenses have reduced on account of improving plant parameters, the deferment of some expenses (such as CSR), and partly, on lower merchant volumes leading to lower POC charges.

Other income was aided by higher cash and write-backs of earlier provisions of INR0.3b.

The co. expects its merchant capacity to fully tie up under LT PPA over the next two to three years.

NHPC Neutral Current Price INR 21 Work at Subansiri has resumed and the company is looking to complete it by

FY24. Package for powerhouse works would be awarded this week. Generation declined 5% YoY to 8.1BU in 1QFY21 due to shutdown of two

Chamera units and lower water availability. Plant availability factor was broadly flat YoY at 90.98%. Depreciation during the quarter was lower due to the completion of 12 years for

Dulhasti (impact of INR0.6b) and also on impact of change in life of plants. Finance cost decreased due to the capitalization of Subansiri (INR0.7b impact)

and partly on repayment and refinance of loans. PAF incentives stood at INR1.48b (v/s INR1.41b last year). Deviation income

stood at INR0.35b (v/s INR0.19b last year) Trade receivables rose to INR46.7b in 1QFY21 (v/s. INR38.2b in FY20). Major

receivables were from J&K, Uttar Pradesh, Punjab, and West Bengal. Since 1QFY21, this number has decreased and current trade receivables stand at INR44.2b.

The company expects to receive INR18b from the PFC-REC scheme on completion of certain formalities for the state of J&K.

NHPC is also planning to complete nala works at Parbati-II by Oct’20. Therefore, it should increase discharge of water. On linkages, NHPC is planning to generate 325MU from Parbati-II.

Capital expenditure FY21 capex is expected at INR53b with an equity requirement of INR21b

(including INR6b for JV & subs), FY22 capex is expected at INR76b with an equity requirement of INR31b

(including INR11b for JV & subs), FY23 capex is expected at INR81b with an equity requirement of INR30b

(including INR8b for JV & subs). NHPC is also targeting 6-7GW of renewable projects but will mostly be in the

trader mode. The company plans to do 0.6-0.7GW on the developer mode in small sizes.

For Subansiri, NHPC has signed PPA with DISCOMs, except for 103MW with Delhi, which is being pursued. For Parbati-II, the capacity is fully under PPA.

Regulated equity for S/A is at INR128b; NHDC has a regulated equity of ~INR20b.

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NTPC Buy Current Price INR 90 NTPC plans to reach ~130GW by 2032. The mix of Renewable in overall capacity

may be >30% by 2032. The co. seeks to develop solar parks at Kutch (5GW) and Rajasthan and possibly set up its own projects in these regions.

NTPC is studying and looking to utilize opportunities within the Distribution space.

The co. expects its regulated equity to increase at a 15% CAGR over the next three years. The capitalization run-rate would be at 5–6GW p.a. for the next three to four years.

Coal-based capacities of ~15GW is currently under construction. The co. would not take any new greenfield projects, but may expand capacities such as Singrauli, Lara, and Talcher, if required.

As per the board’s approval, the rebate was to be given if DISCOMs withdrew their force majeure conditions. In the current quarter, the co. has provided an INR8b rebate. The balance is to be paid only when DISCOMs withdraw their force majeure applications.

NTPC has discussed the possibility of a buyback in its previous board meetings and is looking into it.

Outstanding over dues have reduced to INR145b (currently) from INR164b at June end. The co. expects money from PFC and REC to flow through and is hopeful of squaring off past dues by the end of the quarter.

Late payment surcharge income rose YoY to INR4.7b (v/s INR1.7b in the previous year).

FC u/r, though, rose to INR2.25b (v/s INR1.2b in the previous year). PLF incentives were higher YoY at INR1.4b (v/s INR1.1b).

Power Grid Corp Buy Current Price INR 175 Works in hand PWGR currently has INR510b worth of works in hand. This consists of ongoing

works worth INR330b, new projects worth INR60b, and TBCB projects worth INR120b.

Receivables Receivables for PWGR increased to INR8.2b in Jun’20 (from INR4.9b in Mar’20).

Conversely, they reduced to INR7.5b in Jul’20. Collection efficiency increased June onward and came in at >100% for June and July.

INR12.4b has been received under the Atmanirbhar scheme. Order pipeline The current order pipeline stands at INR234b (INR160b for inter-state and

INR74b for intra-state). Ordering has been delayed given the postponement of tender timelines and

shift in bid opening dates for RE transmission works. The co. expects a pickup in ordering activity going forward.

Capex and capitalization Capitalization stood at INR11.8b, while capex was at INR19.1b for the quarter. FY21 guidance of capex and capitalization was maintained at INR105b and

INR200–250b, respectively. The co. expects Bipole-I of Raigarh Pugalur to get commissioned this quarter.

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Execution A pickup has been witnessed in RE-related projects in Rajasthan; Pugalur–

Thrissur is also progressing well. However, overall execution pickup is uneven. On the supply side, manufacturers are facing difficulties in restoring production.

Given the restrictions on imports, the company expects a change in equipment requirements / procurement for upcoming TBCB projects. However, this would not impact existing projects.

InvIT The company noted the process for InvIT is still under deliberation, but is

expected to be completed this year.

Tata Power Buy Current Price INR 57 Asset monetization TPWR received USD138m of the sale consideration of USD213m by the end of

June and the balance in July. TPWR expects the sale of its Defence business within the next few months. It expects the InvIT for its renewable assets to be completed by the end of FY21. Assets in Zambia and Georgia are also expected to be completed over the next

three to six months. Availability at Prayagraj stood at 78%. The co. expects to receive a portion of its

receivables as disbursement from the REC+PFC package flows through. TPWR expects the situation to improve for Tata Projects as the on-ground

situation improves. Cost of production at its coal mines has reduced with the revision in contracts

post the fall in coal prices. Regarding the Mundra PPA, the co. is in talks with the Gujarat government post

a change in the approval process from the HPC framework to GERC. TPWR noted it would approach CERC for an amendment upon approval from Gujarat and Maharashtra.

Receivables for the company stood at INR49b. It expects these to be at a similar level for the year.

Torrent Power Buy Current Price INR 325 One-off items: INR3.4b of claims were received under regulatory orders. This includes an

INR2.5b benefit from an APTEL order on carrying cost. The co. saw an INR0.61b impact due to the waiver of fixed charges in DL. In

addition, the co. made COVID-19-related donations of INR0.12b. Impact on DF business: Volumes for the DF business were down 37% YoY. T&D loss was also higher due

to adverse change in the sales mix. In July, volumes for the DF business were down ~25% YoY (Bhiwandi: -41% YoY; Agra: -1% YoY).

Volumes for the DF business are expected to decline ~20% YoY in FY21. T&D loss of 16% and 12.5% is expected for Bhiwandi and Agra, respectively, for FY21.

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Capex: The co. expects capex of INR15b p.a. for the DL business for the next three

years. However, there could be some slippage on DL capex for FY21 (expected to be INR8b in FY21).

Distribution opportunity: The framework for the privatization of DISCOMs is not clear. The co. believes

some of the states would go with DF, while some may use the DL model. The govt. has hinted at the privatization of DISCOMs in Union Territories. Odisha is also looking to privatize its distribution circles.

Provisioning: The co. has provisioned for just INR40m for receivables in 1Q. A large part was

covered in 4QFY20 (INR0.48b). However, there could be some provisioning in the coming quarters.

Collection efficiency in Bhiwandi stood at 85% (v/s ~100% in FY20), while it was 77% in Agra (v/s ~93% in FY20). TPW expects collection efficiency to improve, reaching 100% in Bhiwandi and 97–98% in Agra by the end of FY21.

Working capital: Given the extension of due dates for consumers, collection was also impacted.

However, June onwards, collection has recovered. The company expects receivables to normalize by 1HFY21. Debt reduction would continue in FY21.

Merchant volumes: The co. sold 921MUs of merchant volumes at a contribution of INR38p v/s

783MUs sold at a contribution of INR69p in 1QFY20. The co. had over-contracted gas volumes and was thus keen to sell on the open market, albeit at lower margins.

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Brigade Enterprises Buy Current Price INR 163 COVID-19 impact felt across business segments: Except for Office-leasing, all

other segments were impacted significantly by the COVID-19 led lockdowns. Office segment: Rent collection remained steady across operational assets with

98% rent collection in 1QFY21. So far, there have been no rental re-negotiations with existing tenants. Rentals from WTC Chennai are likely to start from 4QFY21.

Residential segment: Achieved pre-sales of INR2.5b (0.4msf), which were down 58% YoY owing to COVID-19. Trend is shifting toward demand from NRIs (~25% of pre-sales) and ‘ready to move in’ inventory (~30% of pre-sales). BRGD has launched one Affordable Housing project in 1QFY21 (Brigade El Dorado). Project pipeline for residential stands at 2.06msf. No moratorium was availed for residential debt. Collection from residential stood at INR2.8b.

Retail segment: For its retail tenants, BRGD has waived off 50% rent for the lockdown period (Apr-May’20). Footfalls are at 20-25% of pre-COVID-19 levels. F&B outlets and multiplexes are yet to open up. The company expects to see near-term pressure; however, the long-term outlook remains positive.

Hospitality segment: It is one of the worst-hit segments. All its hotels have started operations from 8th Jun’20. Majority of business is coming from repatriation guests. Outlook for 2QFY21 remains subdued.

Construction activity: Worker strength declined to ~30% during the lockdown. It has ramped up to 50% and is expected to normalize only by end-3QFY21. However, construction materials’ supply chain remains intact.

Cash flow from operation: Cash flow from operation was positive at INR822m, largely on account of reduced fixed costs and overheads.

BSE Buy Current Price INR 530 The board approved the management’s request to explore options to unlock

value in the Star MF Platform. Post regulation changes, BSE suspended over 1000 default companies last

quarter, which were billed, but were bad accounts and had to be provisioned for. These companies are now not required to be billed.

NSE’s competitive pricing has impacted BSE’s ability to charge in the Star MF, INX, and Commodity Derivatives segments. BSE would approach the regulator to intervene on anti-competitive practices; until then, BSE would continue with its liquidity enhancement schemes and no/low charges (Star MF).

BSE launched Commodity Options in GoldM and SilverKG contracts in June 2020. The exchange now has the second largest market share in the overall Commodity Derivatives market and the largest in Commodity Options.

BSE had commenced insurance broking with Motor segment. It has recently also expanded in health and life insurance.

License approval for the power exchange from the Central Electricity Regulatory Commission (CERC) is delayed but in progress.

BSE would maintain its capital allocation policy of returning 90–95% standalone profit to shareholders. No buyback is planned in the near term.

Others

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Container Corp Buy Current Price INR 384 LLF levied by Railways hiked by >5x in FY21; CONCOR trying to limit this to ~3x The Indian Ministry of Railways (MoR), vide its order no. 2015/LML-11/13/4

dated 19th Mar’20, communicated the LLF applicable on the railway land leased to CONCOR shall w.e.f. 1st Apr’20 be charged as per the extant policy of the Railways, i.e., @6% of the value of the land. This would be further increased by 7% annually. Based on this order, CONCOR received demand for INR7.77b from MoR as LLF for FY21 for the Okhla and Tughlakabad terminals in Delhi. LLF in FY20 was paid on the basis of volumes handled at the rate of INR1175/TEU of loaded containers, with total cost at INR1.4b in FY20.

As per CONCOR's assessment, the above demand is not as per the Railways’ extant policy and the company has represented the same to MoR. CONCOR has estimated an amount of INR4.5b for FY21 as LLF for all terminals on railway land by applying the extant policy of the Railways. It has accordingly provisioned INR1.2b for LLF in 1QFY21, which is higher by INR950m YoY. However, no cash payment has been made for the same.

As railway land was leased to CONCOR prior to 2006, CONCOR has also represented to the MoR to continue to charge LLF on the basis of the number of TEUs handled up to the time that it remains a PSU. The Railways’ response on this representation is awaited.

Due to higher LLF, CONCOR has surrendered 17 terminals (of the 41 operated on railway land) back to the Railways, and shifted the business to alternative locations. The company does not plan to surrender any other terminal as of now.

1QFY21 insights Volumes were down 21% YoY. The industry is facing tough times. While volumes

are low, competitive intensity is high, with discounts being provided by private players to gain market share.

CONCOR’s market share is down to 64% v/s 67.5% in 1QFY20. The company is focused on maintaining margins. The rail freight margin was at

28.66%, up from 28.16% in 1QFY20. Empty running charges for 1QFY21 were down 22% YoY to INR380m (EXIM – INR210m; Domestic – INR170m). Originating volumes were at 464,733 TEUs, including 413,587 TEUs for EXIM and

51,146 TEUs for Domestic. Lead distance in 1QFY21 – EXIM was at 683kms (738kms in 4QFY20) and

Domestic at 1,262kms (1,367kms in 4QFY20). The number of double-stacking trains stood at 338 v/s 758 in 1QFY20. The volume mix for JNPT and Mundra stands at 25% and 25.5%, respectively. Capex for FY21 is yet to be finalized, but would be scaled down due to tepid

demand conditions.

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Coromandel Intl Buy Current Price INR 748 Agri scenario The on-time arrival of the southwest monsoons supplemented quarterly

performance. As per the IMD forecast, average rainfall across India and the southern region is expected to be above 5% and 16%, respectively. Good rainfall led to improvement in the moisture content of soil and higher reservoir levels, in turn leading to better sowing. Crop sowing increased by 18% YoY across India and 50% YoY in Andhra Pradesh (AP) and Telangana.

Across India, growth was seen in oilseeds, pulses, and cotton. Also, in AP and Telangana, oilseeds and cotton reported higher growth v/s last year.

Industry The government announced MSP on the sale of kharif crops, which would lead

to minimum 50%+ gains on cost of production for farmers. The AP government launched Rythu Bharosa Kendras, an initiative to help

farmers in the ensuing kharif season. The Telangana government has also introduced regulations in farming to ensure the balanced use of nutrients.

In the Fertilizer market, phosphatic fertilizer saw higher volume growth, driven by favorable monsoon conditions and early demand for fertilizers. Phosphatic fertilizer sales volumes increased 37% YoY to 5MMT. Complex fertilizer sales increased by 52% YoY, while diammonium phosphate (DAP) grew 26%.

Company-specific Market share increased to 16.3% in 1QFY21 (v/s 12.9% YoY). The share of unique grade stands at 26% v/s (23% YoY). Retail stores: Retail stores were operational through the quarter. Stores

successfully implemented the direct delivery model for farmers’ requirements. Subsidy Subsidy/Non-subsidy revenue breakup stood at 80%/20% in 1QFY21 v/s

79%/21% in 1QFY20. Subsidy/Non-subsidy EBITDA share stood at 79%/21% in 1QFY21 v/s 84%/16% in 1QFY20.

Subsidy outstanding stood at INR25.9b as of 1QFY21 v/s INR17.8b in 1QFY20. Outstanding includes INR15b – amount claimed and pending with the government.

During the quarter, subsidy received from the government was low. In April, the company received INR5.2b, with no payments in May and June. In July, CRIN received INR3.57b as subsidy.

Others Working capital: The company posted very good collections from the market

and maintained optimum inventory levels. Capex: In the Crop Protection business, it has identified few off-patented

molecules; the focus would be on setting up multipurpose plants, and manufacturing and sales. In the Fertilizer business, investments would be made toward de-bottlenecking at the Vizag and Kakinada plants. It is also considering adding new trains.

Gross debt stood at INR13.8b as of 1QFY21 v/s INR16.3b as of 4QFY20.

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Essel Propack Buy Current Price INR 282 Essel Propack 2.0 The EBITDA margin improved on the back of a better product mix and operating

leverage, including optimized operating costs. Net debt reduced to INR2,482m in 1QFY21 from INR5,111m in 1QFY20. The prudent allocation of capital led to a reduction in capex to INR122m in

1QFY21. Plants: All 20 plants across the globe are operational. Hand sanitizer: Product innovation for the hand sanitizer tube happened within

15 days, followed by an immediate product launch. ESEL has turned a leading global supplier of hand sanitizer tubes, with strong performance reported in 1QFY21. It has partnered with 50+ brands (both multinational and local) and plans to deliver 150m tubes per year.

Liquidity: Gross cash was at INR3,101m as of 1QFY21. Personal Care Growth: Personal Care has achieved a 15.9% CAGR over the last 10 years. Hand

sanitizer is among the new launches planned by the company. The share of Personal Care in the total revenue increased to 49% as of 1QFY21

v/s 45% in FY20. With the launch of hand sanitizer in 1QFY21, revenue from the Personal Care

category increased by 21% to INR3,231m in 1QFY21; thus, contribution from the segment stood at 49% in Q1FY21.

EAP's Personal Care revenue (mainly driven by China) nearly doubled to INR696m (+91% YoY). Wallet share gains and growth in Health & Hygiene and Oral Care led to improvement in overall performance. New product additions (e.g., Eye Care) further added to growth.

EAP witnessed some revenue spillover from 4QFY20; thus, excluding this, revenue would have grown at 70% v/s actual growth of 91%.

Personal Care dominated revenue growth in Europe during the quarter (+37% YoY). Revenue contribution from Personal Care in Europe increased to 70% in 1QFY21 (v/s 64% in FY20).

Oral Care It remains a market leader in Oral Care. It has maintained a growth CAGR of 10.1% over the last 10 years. Other highlights A balanced portfolio and diversified presence have led to improved

performance and reduced the impact of the COVID-19 crisis. Margin: Margins have improved across geographies, particularly EAP, driven by

Personal Care and Oral Care. Personal Care ASP (average selling price) is 1.5x higher than Oral Care ASP; an increase in Personal Care primarily led margin improvement.

China – It launched a new category (Hand Sanitizer) and also witnessed strong growth from existing clients.

Americas: The COVID-19 impact is being seen in certain categories, such as Travel Tubes. The conversion of hand sanitizers in tube form has been delayed in the US compared with other geographies; however, penetration is expected to increase going forward. ESEL has a strong business pipeline in the US, with

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new customer additions also taking place; these additions, once complete, would complement growth in the region.

Demand: Marginal demand carry-forward was seen in 1QFY21. Strong growth in Europe: Revenue grew 30% during the quarter (27% growth in

terms of constant currency), driven by 37% growth in Personal Care and 19% growth in Oral Care.

RM prices: Prices were passed on as per the contract. Crude prices are not directly correlated to polymer prices. Supply-side correction is taking place in polymers, due to which polymer prices are increasing.

Platina tubes: It received approval for Platina (recyclable tube) in the US, Europe, India, and other geographies. Going forward, expect high growth potential from this segment (3–5 years).

Russia impairment: The company impaired INR161m as it scaled down the business in its Russia units.

The India region for ESEL registered double-digit growth in June. Godrej Agrovet Buy Current Price INR 491 Animal Feed Extended lockdown impacted volumes across the animal feed segments –

volumes declined 17% YoY in 1QFY21. Demand for animal proteins currently stands at 55-60% of Jan’20 level. There is

good demand being witnessed from an increasing number of milk farms. High yielding cows (giving 25 liters milk per day) have higher nutritional needs

v/s normal cows (giving 10-15 liters milk per day). Thus, high yielding cows require much higher quality animal feed.

Sequential improvement in volumes and favorable input prices are expected to drive profits in the near-term.

Broiler/layer feed volume decline was higher than the decline seen in fish/cattle feed volumes. However, shrimp feed volumes have grown over the previous year.

Crop Protection (standalone) Greater emphasis on efficient working capital management and cash collections

is yielding results. This was witnessed in cash collection of INR2.24b in 1QFY21 (v/s collection of INR1.31b in 1QFY20). Crop protection segment’s performance was impacted as the company took a conscious call to reduce the receivable for its distributors.

The company launched new herbicides during the quarter– ‘Delete Aqua’ and ‘Impool-X’.

Production disruption caused by the extended lockdown resulted in lower-than-expected sales volumes of higher margin specialty products. This adversely impacted segment results in the current quarter.

Lost 20-25 days of production in the Jammu plant and also 15 days in May’20, leading to lower profitability (as high margin products are produced there).

Vegetable Oil Lower FFB arrivals in the current quarter and lower yields (v/s in 1QFY20)

impacted segment profitability.

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Prices of crude palm oil (CPO) is INR70,000/MT and palm kernel oil (PKO) is touching INR80,000/MT. Further, palm oil prices are expected to increase. Price of CPO for the quarter is INR64,000/MT.

Dairy The extended lockdown has adversely impacted (a) milk demand from the

institutional segment, and (b) out-of-home consumption of milk products. Therefore, lower demand for milk and value-added products during 1QFY21 led to decline in volumes, sales and margins.

20-25% milk sales come from institutions. Post lifting of the lockdown, demand is returning to normalcy. Milk/chicken sales were 15-20%/45% compared to the previous year.

Sales of sweets are picking-up. Opening of HORECA will support margins of the milk business. HORECA/institutional sales account for 30% of the overall sales of products across chicken, oil, dairy, etc.

Astec LifeSciences Growth was driven by strong volumes and higher realizations in the enterprise

sales segment. Geographically, exports have grown faster than domestic sales. Pharma segment currently contributes 5% of total sales. The company cannot

expand further due to bandwidth issues. CRAMS constitute 20% of Astec’s sales with the balance coming from enterprise

sales. Management intends to take share of CRAMS in total revenue to 50% in the coming years.

Asset turnover ratio stands at 1.5-1.7x. Similar asset turn can be expected from the new herbicide capex in Astec LifeSciences.

Others Yummiez segment witnessed sharp uptick in volumes and sales, driven by

increased consumption of ready-to-cook products by households. Products are getting excellent customer response, which is reflected in its market share gains from both vegetarian/non-vegetarian frozen food product categories.

Yummiez posted record growth and benefitted from lower RM (soybean, corn, etc.) prices.

Indian Hotels Buy Current Price INR 99 Industry performance: As per industry reports, estimated revenue for the sector

in CY19 stood at INR1600b. Conversely, loss in revenue in CY20 is expected to be INR900b on the back of occupancy decline of 32pp.

Sea Rock Hotel: It signed a binding agreement to acquire 100% shareholding in ELEL Hotels and Investments Limited (ELEL) for the iconic Sea Rock Hotel. Going forward, IHIN plans to secure permission to build the property over the next 12–18 months.

Taj Cape Town: It restructured the holding of Taj Cape Town, which is now a wholly owned subsidiary of IHIN, by acquiring 50% holding in Tata Africa Holdings (TAH).

New hotel additions: The company signed up two hotels in the quarter – Vivanta in Lucknow and IHIN SeleQtions at the Tadoba Andhari Tiger Reserve, Maharashtra.

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Revenue: Through the RESET initiative, which consists of four levers, IHIN managed to add INR770m and INR1,040m to revenue and profit, respectively. Of this, revenue growth accounted for INR550m, followed by spend optimization / effective asset management / financial prudence, contributing INR520m/INR220m/INR190m. IHIN managed to reduce corporate overheads by 26% in 1QFY21 through the prudent allocation of corporate expenditure, reduction in sales and marketing activities, and redeployments and renegotiations.

In 1QFY21, the company managed to secure significant lease rental waivers across its hotels, amounting to INR520m (IHIN / subsidiaries / group companies – INR220m/INR60m/INR240m), with benefits received in 1QFY21 for IHIN and subsidiaries at INR190m.

Debt: During the quarter, the company raised INR5b through long-term debt to enhance its liquidity. Furthermore, it plans to monetize non-core assets and defer non-essential capex and other renovations plans to preserve cash.

Consolidated net debt in 1QFY21 stood at INR23.3b v/s INR19.2b QoQ. In the post-COVID-19 era, the company targets net debt of INR10b.

Exceptional items: An INR860m exceptional gain was recorded from an increase in investment values (derivatives contracts) by INR40m and profit from the acquisition of Taj Cape Town, South Africa, amounting to INR820m.

OTHER HIGHLIGHTS Capex: It plans to incur capex of INR2.5b in FY21. Operational rooms: Currently, 14k rooms are operational and 5–6k rooms are

not operational. RevPAR: The total revenue of INR4,500 per available room would lead to

breakeven, whereas for Ginger hotels, breakeven would be achieved at revenue per room of INR2,000.

With RevPAR at current scenario (down 50% YoY) and 50% occupancy level, would lead to neutral EBITDA.

Inorganic acquisitions: Various stressed assets are available in the market, but IHIN does not plan to take additional debt to fund acquisitions even though IHIN has the GIC platform if it intends to acquire debt.

It launched Qmin – a repertoire of culinary offerings, including home delivery, in addition to its proprietary Qmin App – for ease of use. The application is developed by the company’s internal team and has currently been launched in five cities; it plans to expand to another five cities eventually. Margins in the segment are expected to be higher as the company does not have to incur any additional cost as exiting infra and employees are used for the same.

It launched Hospitality@Home services, offering guests a variety of curated hampers from select iconic Taj hotels across key cities, through contactless takeaways.

Interglobe Aviation Neutral Current Price INR 1,294 Company is undertaking various pre-emptive measures to focus and strengthen each of the business verticals to come out stronger from the current crisis Revenue growth – from repatriation and charter flights, along with cargo

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INDIGO conducted ~290 repatriation flights for ~44,000 passengers and carried 395 tonnes of medical cargo. The company intends to continue with its charter flights and repatriation flights as a profit avenue until international operations are resumed.

Also, INDIGO has converted 10 aircraft to all-cargo airplanes and is now looking at the Cargo business as a new full vertical.

ASK guidance for 2Q/3QFY21 is at 40%/50–70% of previous year’s respective quarters. All of the older CEO Aircrafts with faulty PW engines are expected to be refurbished by the end of August’20.

ASK guidance is subject to support from the government framework, most importantly to current headwinds faced due to various state-led travel advisories and the imposition/extension of further lockdowns.

Liquidity – additional liquidity of INR50–60b targeted Supplementary rental adjustments such as moratorium for payment of aircraft

leases (to aid ~INR20b), sale and leaseback, etc., are expected to yield liquidity of INR30–40b.

Also, ~INR20b of liquidity is expected by putting up assets that the company owns on sale and the lease-back model.

Supplementary rentals are a variable for the company, while other maintenance costs are fixed in nature.

Cost reduction - various initiatives are taken to reduce fixed cost Leasing cost - INDIGO would honor its long-term commitments with lessors,

reflecting on its long-run planning. Thus, the provisioning of rental expenses is likely to continue at similar levels (~INR2.3b recorded in 1QFY21). Although, expect supplementary rentals (variable in nature) to come down further as capacity utilization returns to normal.

Payroll costs - Salary reduction, leave without pay, trimming of the workforce by 10%, etc., would further lead to a reduction in employee cost. Expect employee cost to be lower by 30% v/s pre-COVID-19 levels by the end of FY21 (v/s the earlier target of a 25% reduction).

Other costs such as non-aircraft rentals, IT costs, and maintenance costs, which account for 20-25% of the total cost, are expected reduce by 10-15%.

Info Edge Neutral Current Price INR 3,382 Recruitment: Billings for Naukri declined 44% YoY during the quarter. However,

billings have improved with each month post May’20. Traffic is now back at pre- COVID levels. Naukri has been working toward technological improvements in its platform. Apart from this, the company has been working on various initiatives, such as: 1) the enterprise version of Resdex, 2) a re-hiring service portal, 3) a separate platform for premium engineering jobs – Hirist, 4) an ultrapremium job market with personalized services – Bigshyft.

99acres: Paid listings declined 62% sequentially, thereby resulting in billings decline of 71%. 99acres continues to lead the market in this space. After dropping 80% in April, buyer traffic is now back at 85% of pre-COVID levels. However, supplier-side traffic is yet to return. Initial traction among dealers and developers has been seen in the past couple of months.

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Jeevansathi: INFOE would deploy the majority of its marketing dollars toward aggressively advertising for Jeevansathi. The company has also launched new features, such as video/voice calling and ‘Milan Samaroh’, on the portal.

QIP: INFOE successfully completed QIP of INR18.75b. It raised the money at a price of INR3090 (2.7% discount to floor price). Funds would largely be utilized for investments in standalone entities and big-ticket M&As to strengthen its market position. The company believes the liquidity crunch in the market due to COVID and the screening of Chinese investments would present opportunities for M&As at reasonable valuations. Funds would not be invested in AIF, for which the company would bring an additional investor on-board.

Zomato: Zomato’s delivery revenue is back at 60–70% of pre-COVID levels. This is largely attributable to higher delivery fees charged by the platform. Order volumes are yet to recover to similar levels. Zomato’s burn has reduced significantly during the quarter. However, it is expected to return to some extent as Zomato would eventually begin spending on brand-building and reinstate the salaries of its employees.

Kaveri Seeds Buy Current Price INR 524 Cotton Volumes increased ~5% in 1QFY21. Cotton sales increased slightly due to early

sowing this year. The company has gained some volumes in India’s North/West markets.

Cotton production was down in key states (Maharashtra and Gujarat) due to price decline and adequate stock in the market. This has discouraged farmers from shifting to Soybean in Maharashtra and groundnut in Gujarat.

Maize: Maize volumes increased 7% with revenue increase of 9%. Despite negative markets in Telangana, volume increased in all other states. Increase in value was driven by the premium segment product portfolio contribution.

Hybrid Rice Volumes increased 44% and revenue surged 53% in 1QFY21. Hybrid Paddy ‘KPH

468’ helped translate to strong growth and introduction of 2 New Hybrids ‘KPH 471’ and ‘KPH 7299’, which also helped strengthen future growth prospects.

Rice seeds segment is expected to cross cotton revenues over the next five years on the back of higher growth in hybrid rice. The segment is growing at 40-50% and is expected to continue its growth trajectory.

Selection Rice: Volumes grew 23%, whereas revenue increased 28% in 1QFY21. In selection rice, performance was consistent across geographies. Timely placement and rains have helped the segment grow across markets. Revenue growth was majorly driven by premium products, which reported higher growth compared to general product segments.

Vegetables Vegetables saw 250%+ growth in both volume and revenue. Revenue and

volumes were driven by three major crops, namely i.e. Hot Pepper, Okra and Tomato. Three new Hybrids in hot pepper ‘KHPH 1213’, ‘KHPH 1225’ and ‘KHPH 1217’ helped the robust growth in vegetables. New Hybrids ‘Kaveri 055’ in Tomato also helped strengthen future growth prospects.

The company achieved ~INR200m vegetable sales revenue in FY20 and plans to achieve 40-50% growth in FY21.

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COVID-19 impact: KSCL was running and operational even during the pandemic as the company is classified as an essential services’ entity. Supply chain was smooth and there were no issues with respect to labor; however, sowing of millet crops was delayed due to intermittent rains.

Lower operating expenses: The company did not pay royalty to Monsanto during the quarter, which led to savings of INR140m as compared to last year. Also, lower traveling expenses (due to the pandemic) coupled with lower advertisement and sales promotion expenses, led to lower operating expenses.

Higher surplus cash investments (in debt fund) led to increase in other income. Competitors: KSCL is the only company in India present in the cotton/non-

cotton segment. Major competitors are MNC players (in non-cotton segments), as domestic players are only present in cotton seeds.

Growth outlook and strategy: The company is focusing on developing a diversified and new product portfolio. Also, KSCL is highly inclined toward spending on R&D/infrastructure for new product development, leading to higher growth in North India.

Rabi outlook: Overall maize sowing should be subdued in 2HFY21; however, the company’s diversified presence across states/products should reduce the impact.

Volume outlook: In the cotton segment, the company expects volume growth of 5%, whereas in the non-cotton segment, 15-20% volume growth is expected in 2QFY21. Overall, volume growth is expected at 10-15%.

Exports: KSCL achieved INR200m exports in FY20 and aims to improve its share of exports. The company plans to focus on 6-7 countries initially and double its export revenue over the next 5 years.

KNR Constructions Buy Current Price INR 250 Sector update Capex from the state government is expected to decline, while that from the

central government is expected to increase. NHAI Awarding was at a lull in April and May, but picked up in June. INR530b worth of

project awarding is underway. ~460kms of projects were awarded in Jul’20. NHAI started awarding BOT projects once again after three years. Normalcy in construction is expected to return only post the monsoons. 10–11%

decline is expected in road construction in FY21. Road traffic stood at ~75% of pre-COVID-19 levels. Payment has been prompt from NHAI, with KNR receiving quick grants for some

projects. HAM project update Project completion: Chittor to Mallavaram – 27%, Ramsanpalle to Mangloor –

29%, Trichy to Kallagam – 49%, Magadi to Somwarpeth – 53% ~INR6.3b equity is required for five HAM projects, of which KNR has invested

~INR2.2b. The balance amount would be invested over the next three years. Divestment

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The deal to divest three HAM projects is on track and would be completed over the next two years, as per agreement.

CUBE deal: Certain cost increases related to insurance and revenue shortage have been reported on account of the COVID-19 crisis. KNR would accordingly evaluate the impact and book losses, and exit the project.

Irrigation project The projects won in 1QFY21 are under mobilization, with processes such as loan

tie-ups with banks in progress. The project is expected to commence over the next one to two months.

Revenue from irrigation projects stood at INR1.08b in 1QFY21 (v/s INR570m in 1QFY20).

Receivables Receivables from Telangana stood at INR5.4b at the end of 1QFY21. Bills have

been submitted and are in queue for a payout. Management expects the payout (INR4.4b) over the next couple of weeks.

Total receivables from the Telangana government stand at INR6.8b currently (unbilled revenue – INR4.4b, receivables – INR1.3b, work done but not billed – INR1.1b).

Tax rate Pending MAT credit would be utilized in FY21, and the company would migrate

to the new tax rate in FY22. Others Toll collections resumed from 20th April. They stood at INR70m for Walayar and

at INR103m for the Bihar project in 1QFY21. Gross debt stood at INR3.34b.

Lemon Tree Hotels Buy Current Price INR 28 COVID-19: Hospitality sector is one of the worst affected sectors globally,

leading to 70% shutdown/reduction in branded hotels in India in 1QFY21. Cost rationalization: Operating expenses reduced 62% to INR363m in 1QFY21 (v/s INR962m YoY). The

company managed 47% reduction in manpower expenses without laying off a single employee. On same hotel basis, operating expense reduced 71% YoY in 1QFY21.

Management is planning to maintain several cost rationalization efforts post COVID-19 as well, which is expected to expand EBITDA by 500-700bp.

In 1QFY20, operational expenses stood at 65%, with 50% coming from fixed cost and 15% from variable cost. The company had 5,000+ staff for 5,200 rooms, bringing staff per room to 1 person. Currently, same number of rooms is managed by 2,600 staff members (with slight cut-down in few services). With this efficiency, the company can manage the same number of rooms with 4,200 employees post COVID-19.

Operational hotels: 71% of owned/leased inventory were kept operational in 1QFY21 as cost of

restarting a closed hotel is high. Hence, the company has maintained higher rate of operational inventory.

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As at Aug’20, 90% rooms were opened. The company operated 3,700 rooms in 1QFY21, which has now increased to 4,600 rooms.

Demand Sources of revenue in 1QFY21 was institutional quarantine, demand from global

IT majors, on-duty doctors and paramedic staff staying at the hotels (to avoid transmitting to family members), etc.

As per management, domestic travel is likely to bounce back in 6-9 months whereas international and MICE would take minimum 12-15 months to recover.

Pre-COVID, revenue composition stood at 35-37% from online, 30% from large corporates, 30% from small corporates and MSMEs, and 10% from meetings and small conferences. Large corporates haven’t started yet, but MSMEs are showing strong bounce-back in demand. Also, major metros are showing strong traction and 2QFY21 is expected to be better than 1QFY21.

Demand from Tier 2 cities is from MSME customers; in Tier-1, it is from staycations.

MCX Buy Current Price INR 1,555 The company released updated software, including the feature of negative price

settlement. Currently, the overall Crude Oil margin is at ~100%, plus an additional margin of

INR50–95k. MCX has requested SEBI to reduce this margin requirement. The company received approval from SEBI to launch Bullion and Metal index

futures, scheduled to be launched shortly (14th Aug’20). MCX signed a MOU with M-Junction to jointly explore the viability of setting up

a JV to run a coal exchange (subject to approvals). Other avenues for future growth include spot exchanges for Bullion, Natural Gas, etc.

ETR is expected to be at ~20% for FY21. Strong beat across the board In 1Q, MCX’s reported revenue/EBIT/PAT grew by -8%/-8%/23% YoY v/s our

estimate of -20%/-31%/-23% YoY. Revenue decline (-8% YoY) was lower than expected on account of strong

recovery in volumes during May–June’20. The traded value of Gold/Silver/Nickel reported healthy growth (55%/98%/60%,

YoY), offset by declines in other commodities. The traded value of Crude declined 71% YoY, led by: a) higher margin

requirement, b) the shortening of trading hours, and c) negative sentiment due to the price settlement dispute. The share of the Crude segment in the total traded value is down to 15% (from 41% last year).

Overall traded value declined 18% YoY. The EBIT margin came in above our expectations (at 30% v/s. est. of 26%). The

margin beat was driven by higher-than-expected revenues and better cost control.

In conjunction with higher-than-normal other income, reported PAT was ~67% ahead of our estimates.

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Phoenix Mills Buy Current Price INR 611 On digital initiatives: PHNX has introduced digital assisted shopping experience

like Curbside pick-up and home delivery in PMC Bangalore, which has seen an encouraging response. Management expects these initiatives to aid pickup in demand.

On commercial business: The commercial business is one of the least impacted segments with steady occupancy and collection across operational assets. Construction at Fountainhead Tower 2 is complete while for Tower 3, it is expected to be completed in 3-4 months. Traction for leasing appears strong for these upcoming assets.

Phoenix Palassio: The mall commenced operations on 8th Jul’20. ~60% of the permissible stores are operational. Occupancy is likely to ramp up to 80% over the next couple of weeks as fit-outs of stores are in progress.

Debt levels: Total debt remained largely stable at INR47.5b with average cost of borrowing down to 9.14% in 1QFY21.

Cash flow position for 1QFY21: Total cash inflow stood at ~INR1,350 (Retail: INR400m, Commercial: INR330m, Hotels: INR118m, Residential: INR100m, IT refunds: INR400m). Total cash outflow stood at ~INR2,000m (Capex for under construction malls and office: INR660m, GST and other statutory payments: INR460m, Other operational expenses: INR850m).

Management does not expect any major retail brands to shut in the company’s operated malls. However, one of the worst hit tenant segments could be Food and Beverages (F&B). In case the stress in the system increases on account of the extended lockdown and restricted operations for the F&B segment, then management expects the impact of closure of these few outlets to impact ~1% of the total Gross Leasable Area (GLA) across retail assets.

~75% of total GLA will be permitted to open in malls in Pune and Mumbai (Maharashtra).

P I Industries Buy Current Price INR 1,870 Operating performance: Revenues grew by 41% YoY despite COVID-19-led

disruption to operations and the movement of goods during the initial phase of Q1.

Exports performance: Exports increased 23% YoY, driven primarily by proactive raw material inventory management and capacity planning. Demand for key commercialized molecules remains strong. Shipments have gained momentum.

Domestic biz performance Domestic revenues were up by 76% YoY. This was contributed by spillover

demand from 4QFY20, Isagro brand sales, and robust momentum in the Domestic segment on planned brand positioning to avail the advantage of early sowing.

The timely onset of the monsoons, which drove an increase in acreage (+19% YoY), led to strong domestic performance. Also, the increased use of herbicide (Elite) and the highest ever placement of Nominee Gold and other products complemented domestic performance.

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Results Update

Click below for Detailed Concall Transcript &

Results Update

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In FY21, the domestic Crop Protection industry is expected to expand at 10–15% and the company’s domestic revenue at 20%.

Current status of operations: Both domestic and export supplies have picked up pace, with all manufacturing facilities being operational and capacity utilization rebuilding to pre-COVID-19 levels.

Isagro Contribution from Isagro further enhanced during the quarter. ~13% growth

contributed by Isagro Asia marked a good beginning. Isagro’s revenue stood at INR990m in 1QFY21, with contribution from exports at

INR300m and the rest coming from the Domestic business. The company plans not to merge Isagro’s Domestic business and maintain it as a

separate subsidiary. This business would focus exclusively on the Fruits, Vegetables, and Plantation segment.

Gross margins The 280bp drop in gross margins was attributable to a change in the business

mix of exports, domestic, and Isagro. Standalone margins continued to be in the standard range, whereas

consolidated gross margins were majorly affected due to the Isagro acquisition and a change in the product mix (Isagro has lower gross margins).

Control on overall fixed overheads aided EBITDA margin improvement. New launches: The company is working on a large pipeline of products. It plans

to commercialize four to five products in FY21 (v/s four products commercialized in FY20). The average duration of new molecule development and launch takes 2–2.5 years.

Capex: Capex stood at INR640m in 1QFY21; capex was slower due to lockdown and lower labor availability. The company plans to spend INR5–6b over the next 1–1.5 years.

Other highlights Deferred revenue: INR850–900m deferred revenue from 4QFY20 was to be

recorded in 1QFY21, INR700–750m of which has been recovered. Free cash flow: FCF of INR2.98b (7% of revenue) was generated through better

working capital management. An increase in operating cash flow is helping fund continued strategic initiatives.

It increased inventory levels to securitize continuity in operations amid COVID-19-led uncertainties.

The company returned to its surplus cash position. Cash available (net of debt) was INR980m as of Jun’20.

Net sales-to-fixed assets improved to 2.04x in 1QFY21 v/s. 1.99x in 1QFY20. The order book remained robust at ~USD1.5b, providing high visibility for

sustainable growth over three to five years. COVID-19: CSM exports could have been better (affected by lockdown). In Apr,

it operated at lower than 60% levels. In the absence of COVID-19, the Domestic business could have been better. The estimated INR750–1,000m loss in revenue could be attributed to the lockdown. Hence, it is going forward with the normalization of operations, and business is expected to pick-up further.

Launched PI Mitra and digital campaigns such as Awkira Harvest Days, Sone Pe Suhaga, Digital Channel Partner Meet, etc.

Lower RM reliance on China: Three to four years ago, 30-40% of RM was imported from China, which has now been reduced to less than 10%. Hence, any

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geopolitical issue is expected to have a lower impact on the company. It is also working toward changing the supply chain landscape due to geopolitical concerns.

The company is focusing on de-risking the higher concentration of manufacturing in India through geographical diversification.

Quess Corp Buy Current Price INR 373 Management indicated guidance for reaching 20% ROE by 2023 remains

unchanged. In addition, the company expects 20% YoY growth in cash flows. It continues to focus on cross-selling its services. Customers using two or more

services across the portfolio now contribute 68% to sales. Even as the situation remains uncertain, the company believes the worst related

to COVID-19 was behind by 1QFY21. July has witnessed a 2x increase in the number of open positions (v/s June). Open positions in July are at 60% of pre-COVID-19 levels. Management expects recovery to be driven by the impending festive season.

While margins are expected to remain under pressure in the near term, the company expects an improvement over the medium term.

Headcount reduction in General Staffing was largely driven by headcount rightsizing in the Retail and BFSI verticals.

Even as the headcount in IT staffing declined (~7% QoQ), a new high-margin business (Digital Skills) partly offset this impact.

Excellus witnessed sharp revenue and EBITDA impact due to the closure of training facilities. Even as the government assured the coverage of fixed costs, the company had already recognized costs. Management expects cost reversals as and when reimbursements come in from the government.

Closure of educational campuses and IT offices impacted Facility Management and Terrier Security Services.

The HRO segment within Allsec Technologies has been a rare bright spot. Slowdown in hiring activity led to a significant drop in search activity and the revenue of Monster during the quarter.

Management does not expect any bad debt or receivables issue in the share of working capital-funded clients.

SRF Buy Current Price INR 4,207 Specialty Chemicals Shutdown of manufacturing plants due to the lockdown and supply-chain

disruptions impacted production in Apr’20. Availability of raw material and intermediates were adversely impacted.

Launched one new product in the pharma category. Demand outlook in key global markets remains healthy. Expect 20-25% growth

in the Specialty Chemicals business in FY21. Fluorochemicals Segment registered subdued performance during the quarter due to (a) lower

volumes and price of refrigerants in both domestic and export markets, and (b) lower sales from the solvents business.

The company is focused on developing new export markets, while strengthening its existing key markets, including the US.

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Results Update

Click below for Detailed Concall Transcript &

Results Update

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The SRF board has approved setting up of an additional facility to produce 100kMT of Chloromethanes at Dahej, which is expected to be completed by end-Jan’22. The projected cost stands at INR3.2b and would be funded through a mix of debt and internal accruals. SRF already has 95kMT of capacity, which is operating at 100% utilization. The capex would provide significant opportunity for import substitution in MDC and CTC as India is still a large importer and Chloroform is used for captive requirements.

MDC and CTC are saleable products and are imported in India. Production and launch of these products in India will help meet the substitution demand.

Project for integrated facility for development of PTFE at an estimated cost of INR4.2b has been approved by the board in Aug’19. The project is likely to be delayed by one year due to adverse changes in the global economic scenario due to the COVID-19 pandemic. Thus, the expected time-line for the project completion is Nov’22.

Packaging The segment delivered encouraging performance due to (a) strong demand for

both BOPET/BOPP film segment, (b) robust focus on quality and delivery, along with several sustainability and R&D initiatives, and (c) increased sales of valueadded products.

SRF commissioned a BOPET film line at Thailand in May’20, which will further strengthen its presence in the South-East Asian region and expand its customer base to new geographies. MoM, the plant is operating at 60% utilization level.

Start-up of some new film lines is expected during FY21, which will lead to a correction in prices.

The company is seeing strong demand for hygienic packaging due to the COVID- 19 pandemic, which it expects to continue post-COVID as well.

Commissioning of a new plant in Hungary has been delayed due to COVID-19, leading to travel restrictions. Trial runs have been completed and other approvals are in place. SRF will make an announcement over the next 10-15 days.

Technical Textiles Performance of the Tyre Cord Fabric segment remained under severe pressure

due to (a) COVID-19 related slump in auto sector demand, and (b) challenging macroeconomic environment.

Margins from Polyester Industrial Yarn remained muted due to the Chinese absorbing anti-dumping duty.

Better demand across segments was witnessed from Jun’20 onwards. Significant impact was seen in 1QFY21 due to the lockdown and compression in

tyre sales. Others The board has approved an interim dividend of INR5 per share. The company is looking to de-risk its supply-chain, which largely depends on

China for import of raw materials. Capex: SRF plans to spend INR12-13b on capex in FY21 across geographies and

segments. SRF has sanctioned investments of IRN1.4b for power and steam for carrying out

maintenance operations and augmenting its existing capacity. During the quarter, SRF received 3 patents, completely developed by its R&D

department. R&D spends will continue. Debt: Going forward, net-debt to EBITDA should decline from current level of

~2.5x, as surplus cash will be utilized to repay debt. SRF aims to maintain net debt to EBITDA in the range of 1.5-1.8x.

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Tata Chemicals Buy Current Price INR 293 India standalone operations Good demand was witnessed for Soda Ash from the Soaps and Detergents

segments as they are classified as essential commodities. However, this was offset by weak demand in the Flat Glass (mainly from Automotive and Real Estate) and Container Glass segments throughout the lockdown period. But, demand is slowly returning to normal in these segments.

Salt manufacturing in Mithapur continues to expand. Production and sales were the highest in the first quarter, with no supply disruption seen throughout the lockdown.

Limited operations commenced in Mambattu, Nellore (Andhra Pradesh) and Cuddalore (Tamil Nadu) in May’20 following the relaxation of local restrictions; the facilities are currently meeting customer requirements.

The Nutritional Solutions business witnessed slower demand off-take, yet received good traction from health-focused companies. It further commenced exports to the Southeast Asian markets, with encouraging customer response.

The Silica business posted good demand in food and non-food grade silica from the Essential Goods segment, although demand from the Tyre and Automotive segments was muted.

The company introduced InsperiCo, the world’s first branded recycled cobalt, extracted from recycling lithium-ion batteries, contributing to a circular economy.

North America operations During the quarter, the export market in the US witnessed a steep drop of 45%

v/s PY. Demand from the export market was significantly low in the Flat Glass segment across the globe.

Completed US operations’ debt facilities, due in June and August 2020, were refinanced with new facilities at Valley Holdings, Inc. (USD100m) and Tata Chemicals North America (USD275m).

High fixed cost, coupled with a reduction in export prices, has led to a fall in margins and realizations. The US domestic market has higher realization than the export market.

The contribution margin is expected to be roughly around 55%. An additional USD5m (INR380m) cost emerged during the quarter, which was a

one-time expense (re-financing in order to move to a different and cheaper financing structure).

Volume decline was majorly due to lower demand from customers. Port closures were only seen in the Southeast Asia market; 2Q is expected to fare better than 1Q.

UK operations UK operations did not suffer any significant disruption in production or sales,

with customer demand remaining as expected. Sodium Bicarbonate posted healthy growth in demand across user sectors.

Africa operations Kenya did not see any disruption in production, but dispatches to the India

market and Southeast Asian countries were disrupted due to lockdown in these countries.

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Results Update

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In Magadi, a drop in product price, coupled with no major fall in corresponding input prices, affected the business.

Other highlights Capex Expansion in the salt plant in India to 1.4mmt from 1mmt is on track. Aggregate capex was earlier guided for INR24b for Mithapur; INR6b of this has

already been spent, and the remaining INR18b would be spent over the next 2–2.5 years.

There will be no major drop in capex spend; INR1–1.5b less expenditure v/s last year is projected.

Nutraceutical: The factory could expand four times the current size and see strong customer demand.

Silica: Supply to the Tyre industry was constrained due to the lack of capacity. The Tamil Nadu government allocated additional land last month (July) that would be utilized for capacity expansion.

China market: Many plants in China have extended their maintenance shutdowns. However, historically, plants that have been in maintenance shutdown for more than a year mostly do not come back into the system. 2–5mmt of capacity is expected to be reduced from the China market.

Inventory with producers in India is estimated at 150,000–200,000mt. Globally, it is estimated at 0.9–1mmt.

TeamLease Services Buy Current Price INR 2,179 The General Staffing headcount reduction of 10% in 1QFY21 was below the

management’s expectation of 16–20% at the start of the quarter. Active dialogue with customers/associates, backfilling of open positions with unutilized associates, and the addition of new clients helped mitigate the impact, to an extent. Specialized Staffing was largely resilient.

Management is cautiously optimistic on the near-term outlook. The company expects modest decline or flattish revenue in 2QFY21, followed by growth in subsequent quarters.

Sectors such as Healthcare, IT, Pharma, Agriculture, E-Commerce, and FMCG are expected to recover faster. Recovery should be driven by the metros.

The company rationalized its core employee headcount ~24% QoQ to 1544. A major part of this rationalization came in the Permanent Recruitment and Government Training businesses.

With the focus being on digitization and technology adoption, Team Lease does not expect any substantial increase in core employees in the foreseeable future, even as recovery kicks in.

Even as some costs in the employee cost structure are permanent, the management expects some other costs to return as offices open up and travel picks up. Nevertheless, the EBIT margin is expected to bounce back to FY19levels (1.9%).

Price concessions given to some clients are for a limited duration and are expected to end by 3Q.

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UPL Neutral Current Price INR 499 Latin America Good agronomic conditions across most of LATAM, with an increase reported in

soya and corn acreages, are expected to complement performance in FY21. Expect the business to do well in FY21 as it has a lot of orders in this region. At

the current exchange rate, farmers are making good margins. A product to cure the Asian Rust disease would be launched in LATAM, where the company has a market of USD1.5b+. The region is expected to do well overall. Expect 2Q to offset the exchange fluctuation.

UPLL plans to increase prices in local currencies to gradually compensate for the significant devaluation, especially in the Brazilian real.

Strong currency fluctuations have led to the postponement of orders in Brazil from 1QFY21 to later in the year. Furthermore, the trade war between the US and China is expected to be a tailwind in the medium term.

COVID-19-related supply chain delays have shifted sales demand from 1QFY21 to 2QFY21.

Devaluation in the Brazilian real led to the postponement of orders from 1QFY21 to later quarters. The Brazilian currency devalued to 5.17 BRL/USD on July 30th from 4.02 BRL/USD on Jan 1st. The company is increasing prices across geographies to recover lost revenue due to the drastic currency fluctuation.

North America COVID-19-related pre-buying at the end of 4QFY20 impacted revenues in

1QFY21. It is well-positioned to capitalize on glufosinate demand growth in the US. In 4Q, pre-buying was witnessed due to the pandemic. North America is

expected to do well in FY21, particularly in the Fungicide and Herbicide markets. Europe Dry weather in Western Europe affected herbicide sales. However, Europe, like

North America, is expected to do well in FY21; Europe also has higher margins v/s other regions.

A good herbicide campaign in Northern Europe has aided growth. Robust crop prices were reported in Russia and Central Europe due to lower

yield. The impact of shipping and supply chain delays is resulting in a revenue shift to

2Q. South Europe experienced a challenging 1Q, primarily in Spain, France, and Italy,

due to COVID-19 uncertainties. India The Branded business grew 36%, with strong performance posted in Insecticides

and Herbicides. Despite the COVID-19 impact in the region, India recorded collections in

1QFY21. RoW Strong business growth was seen in Southeast Asia, primarily due to the return

of rains and synergies. Demand is recovering to pre-COVID-19 levels. Higher growth is expected in Vietnam from increased herbicides sales.

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Results Update

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Comments on financials Net debt was maintained at Mar’20 levels of INR220b. Cost synergies stood at USD11m (INR0.8b) in 1QFY21; on a cumulative basis,

synergies amounted to USD120m in 1QFY21. Revenue synergies stood at USD7m (INR0.5b) in 1QFY21; cumulative synergies

reached USD247m at the end of 1QFY21 (three-year guidance is USD350m). Working capital: The procurement team extended payables by 15 days and is

expected to maintain the trend throughout the year. Receivables stood at INR60b as of June’20, down from INR69.7b in Mar’20.

CFO stood at INR19b as of 1QFY21. Borrowings raised during the quarter stood at INR38.3b. This was including INR37.8b in a new bond issuance (10-yr dollar denominated) to buy back the five-year bond, due to mature in Oct’21.

Debt: Gross debt was INR325b as of Jun’20 v/s INR288b in Mar’20. Net debt was at INR220b as of June’20 (similar to March levels). Furthermore, the company is maintaining high cash levels (instead of repaying debt) to counter issues related to the global pandemic. Also, cost of borrowings is not very high.

Opening gross debt as of 1st April was INR288b, and corresponding cash was INR67.5b. Gross debt stood at INR325.9b as of June’20, and cash was INR104.6b.

Leverage ratio: It aims to reduce net debt to EBITDA to 2x by the end of FY21. It also targets reducing net debt by USD500m in FY21.

Guidance: Expect revenue growth to be range-bound at 6¡V8% and EBITDA growth at 10-12% in FY21 (in normal case scenario).

Others highlights Net working capital days significantly improved by 31 days to 84 days in 1QFY21,

v/s 115 days in 1QFY20, on account of higher payable days. Reduced operating cost: Operating cost was down by INR600m YoY- manpower

cost was down (due to a reduction in redundancy), travel cost declined, consulting contracts (postponed or terminated) were reviewed, and SG&A saw modest reduction. Fixed cost declined 8% YoY. Fixed cost reduction was well ahead of plan, capitalizing on COVID-19 contingency plans.

Manufacturing: It is seeing robust demand in manufacturing. All capacities are operating at near full capacity.

Product mix: It is seeing good margins in India. Gross margin improvement is ascribed to an improvement in the product mix and geography mix. The focus would be on high-margin products rather than volumes.

Post-synergies, UPLL has emerged as the number-one player in Mexico, Columbia, etc. The merger has also helped establish a strong footprint.

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Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL & its group companies to registration or licensing requirements within such jurisdictions.

For Hong Kong: This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Hong Kong. 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 Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in Hong Kong.

For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets services license and an exempt financial adviser in Singapore, as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform MOCMSPL.

Disclaimer: The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, 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 MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-30801085.

Registration details of group entities: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products *MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.