PhillipCapital “Decision Makers” conference Key Takeaways 30 June 2014
Please refer to Disclosures and Disclaimers at the end of the Research Report.
Ground Zero Investor ConferenceKey Takeaways 23rd & 24th June 2014
30 June 2014PhillipCapital (India) Pvt. Ltd.
We organized a ‘PhillipCapital Ground Zero Investor Conference’ on June 23rd and 24th at Mumbai. In the two‐day event, we hosted regulators, companies, independent consultants, and heads of verticals. The purpose of the conference was to provide insights into the core sector, which has taken a beating because of policy paralysis and indecisiveness, resulting in a significant slowdown in growth. This note summarizes the key insights provided by various participants. Mr. Pinaki Mishra (MP) DMICDC Ms. Rama Bijapurkar MIDC
Project Monitoring Group
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Agri Inputs Channel Partner Aarti Industries Allcargo ACC Ltd.
Association of Biotec Led Enterprises OMD India (Media buyer)
Bajaj Auto and Hero MotoCorp channel partner Ambuja Cement
Cement Channel Partner Arihant Superstructures
Multi‐brand ceramics dealer Bharti Airtel (Ex COO West Zone)
Con. Of Indian Farmer Asso. (CIFA) CRH
Digicable ENIL
Engineers India IFTRT
Godawari Power & Ispat IT Consultant
Granules India Iron Ore Expert
Tata Motors commercial vehicle channel partners Jagran Prakashan
HUL Distributor JLL Real Estate
ITC Distributor LIC HF
Jakson Power M&M tractor channel partner
North India Jeweler Marico India
JK Agri Genetics Navin Fluorine
JLL Infra Consultant Omkar Speciality Chemicals
Larsen & Toubro Reliance Cement
Maruti Suzuki channel partner Secondary Steel Producer
P&G Distributor Shilpa Medicare
Rolta India Tilaknagar
Steel Trader & Structural Steel Uttam Galva
India Research Team
30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
CEO TRACK
Pinaki Misra ‐ Member of Parliament • Stalled projects revival: Mr Misra highlighted the center’s focus on taking the states
along in its road map of reviving investments, and hence overall growth. Thrust on giving clearances to various projects stalled can see big‐ticket investments like POSCO and Vedanta move ahead.
• MMDR Bill: Central government is looking at reviving the MMDR bill (Mines and Minerals (Development and Regulation), currently lapsed), with certain modifications. This could see the royalty on various minerals move up. Royalty on iron ore may to move up to 15% from the current 10%.
• Mining Lease renewals • As per the SC directive, Odisha government plans to complete the lease renewal
process for 26 iron ore and manganese mines within six months. They plan to complete the renewal process by September‐October 2014 (the Supreme Court’s deadline is Nov 2014). The state government will take up the lease‐renewal process for the non‐working mines after this is complete. However, the state government plans to partially take back mines that have significantly high reserves and are not yet developed. These mines will be allocated to the industry for captive use.
• Coal blocks: Mr. Misra was non‐committal about the coal block clearance in the state due to the ongoing Supreme Court case. The new central government’s approach towards the case will play an important role. UPA’s defense has made the case weak and could lead to some negative implications.
Rama Bijapurkar: Decoding the Indian consumer • Consumer India is totally under‐served. Big domestic companies want to go
overseas. MNCs want to flog what they already have. It is a no man’s land – lots of unfulfilled needs. The consumer is ready and waiting, but suppliers lag far behind.
• Companies need to innovate to extract value from the consumer. Today, consumers have high expectation from companies. They are spoilt for choices.
• The top 20% of India has been largely unaffected by the rise in inflation and slowdown, but it has significantly reduced its spending.
• With improving consumer confidence, the top 20% will again start spending which will lead to a cyclical upturn. In 2009, we witnessed a cyclical upturn in autos where there was pent up demand. Consumer electronics and other discretionary segments could also see demand revival in this upturn.
• India continues to remain a market constrained by suppliers, but cracking the code requires significant amount of innovation. For example, shampoo sachets provided unparalleled reach and market development opportunities for companies but it took the genius of HUL to innovate such products.
• India will remain a small supplier’s markets owing to its diversity and constraints of reach. Small suppliers will continue to innovate and bridge the need gaps of consumers in India. This presents one of the biggest areas of growth.
• The third trillion dollars of GDP and third decade after liberalization will be marked by a shrinking of discretionary income ‐ subsidies are going, public goods are scarce, and prices are rising (electricity, water, education, fuel / transport etc.) food inflation is supply‐side driven and income growth will be slower. Structurally, we will see a moderation in consumption growth compared to the second decade; inter‐
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category competition will be intense and a killer fight for the consumer rupee will ensue.
• India is made up of several mini Indias, each being affected differently by a different set of forces, a portfolio straddling several mini Indias is the only way to fully derisk the topline of companies and also to fully ride growth.
• The rural urban divide has blurred. Increasing distribution coverage will help those who have not fully played the distribution card but not for those who already have. And there are both kinds that exist.
Delhi‐Mumbai Industrial Corridor Development Corporation (DMICDC) • Delhi Mumbai Industrial Corridor is conceived to be developed as a Model Industrial
Corridor of international standards, with an emphasis on expanding the manufacturing and services base. The idea is to develop DMIC as a ‘Global Manufacturing and Trading Hub’.
• DMICDC acts as a pass‐through entity for specific projects and will raise various financing instruments such as Project Development Fund that can be used as a Revolving Fund and would specifically be used for undertaking project development activities on a Public Private Partnership basis.
• DMICDC is not a purely government organization and it has investment from Japan (~26%) and domestic financial institutions (~25%). It will develop industrial cities around Multi‐modal High Axle Load Dedicated Freight Corridor (DFC) between Delhi and Mumbai, covering an overall length of 1,400km, with end terminals at Tughlakabad and Dadri in the National Capital Region of Delhi and the Jawaharlal Nehru Port at Mumbai.
• It will develop an area of around 150‐200kms on both sides of its alignment. Its project influence area (PIA) comprises 430,000 square kilometers, which constitutes around 14% of India’s total geographical area.
• Six DMICDC states contribute ~50% of India’s principal crops, constitute 45% of the country’s GDP, and 58% of value of output. The development of industrial regions in these states will result in a 70% contribution to GDP by 2030.
• The developmental planning for DMIC aims to double employment potential in five years (15% CAGR), triple industrial output in five years (25% CAGR), and quadruple exports from the region in five years (32% CAGR)
• As per McKinsey, ~30 people move to cities every minute and there is a need for organized structure to develop planned cities. DMICDC will be the largest ongoing urban development anywhere in the world.
• DMIC will have 24 investment regions developed in three phases out of which 7 will be developed in the first phase over the next five years. Each state has one investment region, except Maharashtra, which has two. The master plan for all seven industrial regions is ready.
• DMICDC is planning to use information technology to the fullest in addition to having a physical master plan for all these cities. Cisco and IBM are to create a digital layer on top of the physical plan for these cities. The entire city control and governance will be managed from one place with an integrated approach on a massive scale.
• The Greenfield development makes it easy for DMICDC (most current developments are retrofitting with existing cities). Key aspects in master planning of this industrial area are: 1. Reduce travel distance by providing robust transportation system where
average travel time would be 20‐30 minutes. 2. Recycling and reuse of water and solid waste.
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3. Energy sufficiency through use of renewables. 4. Conversation of agricultural land. 5. Use of information technology to manage cities.
• Industrial region at Dadri where eastern and western freight corridors meet will have five gas‐based power projects with 1,000MW each. For every power project, it has created an SPV which will complete land acquisition and all clearances from state and center, including forest clearance.
• Certain projects are getting support from Japan such as the water desalination project in Dahej, Gujarat, which is in the process of financial closure and a solar project in Neemrana, Rajasthan. This model 5‐MW solar project will have micro grid control from Hitachi, which will replace DG. Japan is funding 70‐80% of project cost as a grant.
• To monitor real‐time container movement, DMICDC is working on logistics data software for connectivity with all logistic players.
• DMICDC expects major revenue from land monetization and it will be captured at an SPV level to create revolving corpus for future development (either in the same city the land was sold in, or for creation of other cities). It has done detailed cash flow analysis for all cities and expects 17‐18 years to breakeven.
• Apart from DMICDC, four more corridors will be developed by the Ministry of commerce, where DMC will provide support. Bangalore – Mumbai, Chennai – Bangalore, Amritsar ‐ Kolkata on eastern DFC, and Chennai ‐ Kolkata, where the first phase would be Chennai to Vizag.
Maharashtra Industrial Development Corporation (MIDC) • Maharashtra remains one of the most developed states in terms of power capacity,
water supply, road and rail connectivity, and number of ports and airports. • The state contributed to ~14% of the national GDP – MIDC plans to increase this to
more than 25% over the next five years. • The industrial policy 2013‐18 aims at an investment of US$ 91bn in the state, leading
to a 12‐14% growth for the manufacturing sector and its share of contribution to state GDP to increase to 28%. MIDC plans to provide various tax incentives and duty exemptions to attract investors.
• Key projects being developed are Aurangabad Megacity (also falls under DMIC), Dighi port cluster (also under DMIC), and dedicated Japanese cluster at Supa Parner.
• The current land acquisition policy in the state is actually better than the one proposed by the new land acquisition bill and provides much better compensation to PAP (project affected people).
Project Monitoring Group (PMG) • PMG is a facilitator and not a decision‐maker — decisions are taken by the
ministries. • Out of the 442 projects in PMG, 155 projects have been cleared, 40 projects cannot
be resolved, and 230 projects (worth Rs 11lakh crore) are yet to be cleared. • The focus of the new government is on ground‐level implementation along with
clearances. Based on data collated so far, except for 26 projects where there are additional issues, most of the cleared projects are being implemented/executed.
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• From July to December 2014, most of the departmental processes (related to project approvals) will be digitized. Expected timeline: Forest ministry (in July), Environment (August), Mines (November), and Coal (December).
• Encouraged by the success of PMG, states have formed their own PMGs. By July‐end, approximately 16‐17 important states will have their own PMG looking at projects in the range of Rs 1‐10bn. Projects above Rs 10bn will be referred to the Central PMG. This will ensure better State‐Centre coordination.
• Currently, the PMG is being encouraged to streamline the process of clearances by various departments.
• Issues being faced — fuel linkages, environment, land acquisition, law and order, and water availability.
• A railway line between Jharkhand, Orissa, and Chhattisgarh will be completed by December 2016, which should facilitate additional 300‐400 million tonnes of coal availability.
Agri Inputs JK Agri Genetics (JKAL) – Not Rated • JK Agri Genetics Ltd (JKAL), is a leading hybrid seed company engaged in R&D,
production, processing and marketing of Vegetables, Cotton, Rice, Maize and Pearl millets among others.
• Revenue of Rs 190 cr – largely formed by Vegetables (Rs 45cr); Cotton (Rs 45 cr); Rice (Rs 38cr) and Maize (Rs 22 cr); Pearl millet (Rs 20 cr). JKAL guides for an overall topline growth of over 20%; subject to normal monsoons
• It has commercialized four new products in cotton (has two products under trials) and is hopeful of these products gaining acceptance. Nine have been shortlisted for marketing RR Flex technology and JKAL is one of them.
• JK says it is the market leader in okra and has 10% market share in hybrid rice (market size 30 kmt).
• It pays full income tax (MAT rate applicable due to losses of previous years) and has the highest spend on R&D (8‐10% of revenues) vs. other Indian seed makers.
• It is developing a biotech gene for rice and is second in line for a GEAC clearance. Should the GEAC approve, JKAL can begin field trials.
• It is aiming at doubling its revenues over the next two years and expects margins to improve on fixed‐cost absorption.
• Cash/Debt of Rs 13/15cr respectively. JKAL has declared a maiden dividend of Rs 2.5/sh (8% payout). EPS grew 32% yoy in FY14 to Rs 33/sh (12.7x PER)
Agri Inputs Channel Partner view • Seeds: Cotton continues to be promising — Bhakti to cannibalize Mallika; Jadoo not
under threat. • In Andhra Pradesh, rains have been scanty. Should it not rain by the 15th to 30th of
July, farmers could consider rotation to other crops such as maize and soya (however, soya seeds are in short supply). Some farmers have planted cotton even before the first rains and thus a re‐sowing possibility remains bright. The dealer was confident of sales picking up from the end of June.
• Jadoo, Jackpot and Bhakti are top‐selling cotton‐seed brands. Bhakti will cannibalize Mallika (lost market share immensely), but will not eat into Jadoo’s market share. Dealer discounts have not changed much compared to last year.
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Agrochemicals: New molecules gaining acceptance • The dealer feels new molecules are gaining acceptance and farmers’ enquires are
higher for them. Syngenta, BASF, UPL, and Insecticides India have new molecules and thus expect their brands to do well. With no new launches, Bayer’s and Rallis’ market share is under immense threat.
• The average crop‐chemical retail prices have gone up by 15‐40% over the last year — acephate, glyphosate, and monocrotophos have seen the maximum hikes. However, irrespective of this increase, farmer purchases have not slowed. However, a below‐normal monsoon could impact crop chemicals offtake majorly.
• The credit period varies and ranges from a month to three months. Key brand/corporate mentioning Tamarind gold (acephate) and Confidor (imidacloprid) of Bayer; UPL (Lancer); Rallis (Acetaf)
Fertilizers: Excess inventory persists • The dealer was of the view that excess inventory persists in the channel (largely
complex fertilizers and DAP) and as a result, companies are extending 3‐6 months credit. Margins in fertilizers are very thin over other agri inputs.
• Coromandel is correcting its strategy of sales only through Mana Gromor outlets and is ensuring that about 50% of their sales are earmarked through age old dealer channel and the rest goes through Mana Gromor.
• Imported fertilizers are generally inferior (as they are in powder form rather than granular) and thus result in wastage while spraying, thereby increasing farmers’ costs. Imported products are only used when domestic products are in short supply.
Consortium of Indian Farmers Association, Secretary General • Mr. Reddy was of the view that 90% farmers are illiterate, have no awareness about
government programs, nor are aware of success stories or new technologies. • He feels that mechanization in all commodities should be a national priority as it will
ensure timeliness in agriculture and attract youth. There should be a 50% subsidy on all agriculture equipment and no custom duty on machinery/equipment.
• Fertilizer subsidy is misused and abused — it does not reach small marginal and tenant farmers in backward states, tribal areas, and rain‐fed lands. The consortium has made a plea to the PMO to give direct fertilizer subsidy in cash to each farmer depending on land holding and crop through Bank/Post Office. It has also suggested that subsidy should be given directly to farmers for purchase of machinery, drips, etc.
Automobiles Channel Partners Bajaj Auto and Hero MotoCorp channel partner • Bajaj Auto is losing market share due to confused product strategy surrounding its
Discover brand. Impact of variant rationalization in Discover is yet to be seen. • Lack of support to its dealership is another key issue as dealers have to incur costs
on advertising and discounts amid sliding volumes. While Hero is providing up to 15 days credit to its dealers, Honda and TVS are compensating through higher product margins. Dealerships are getting restless, as the company is unable to provide any concrete revival plans.
• Hero dealers are upbeat on volume growth and their product launches. Dealers expect double‐digit volume growth in the current year. Their average inventories are less than 30 days.
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Maruti Suzuki channel partner • Dealers are positive on volume outlook with ~15% growth expected in FY15 —
uptick is based on new customer acquisitions and new products. • Share of petrol vehicles in overall sales is improving in urban areas, while diesel
vehicle demand is still robust in rural areas due to less awareness. • Celerio volumes remain robust and dealerships are selling as much as they receive.
Dealerships are upbeat on Ciaz (to be launched in this festive season) as the company has taken a lot of inputs from dealers/customers on this product. Ciaz volume will also be helped by customers’ desire to upgrade from old Swift/Dzire as Maruti has a good share of repeat customers.
• The company helps its dealerships a lot in terms of their cost rationalization and viability.
Tata Motors commercial vehicle channel partners • Dealers do not expect CV volume to revive before 4QFY15. Average discounts have
come down by ~Rs40k/vehicle, but remain volatile — discount levels go up by the end of the month. Average inventories are still high at ~35‐40 days.
• Increasing the warranty to four years had a positive impact on customers. New range of vehicles like stripped‐down Prima or Ultra series have positive customer traction.
• They do not see much threat form Bharat Benz or Volvo‐Eicher as TTMT’s products are almost on par or better than competitors’ are. They say competitors’ mileage (fuel efficiency) claims are inflated. Competitors’ dealerships are also under much higher stress due to very low volume.
• Second‐hand truck prices have not moved up and depend on the recovery of new vehicle sales and a reduction in discount levels for new vehicles.
M&M tractor channel partner • Dealership is expecting a robust 15‐20% growth in FY15 volumes as failed monsoon
(if happens) will impact volume next year. Discounts are very negligible currently. Dealer also has good support from M&M finance — many of its competitors face financing problem.
• Volume from non‐farm usage to also help volume as share of marginal farmers’ in new purchases is increasing. Ownership viability of these customers also depends on non‐farm usage and rental farm income of tractors.
IFTRT (Commercial vehicle advisory group) Key takeaways from our interaction with IFTRT director • M&HCV volume pick up to take time as freighter capacity is still underutilized, as
excessive tonnage sold in the last boom cycle (2010‐11) is yet to finish. Freight rates have also not moved up significantly, but incidences of vehicle repossession by financiers are low unlike in the past cycles.
• LCV volume is likely to pick up in a year as the market is undergoing adjustments and these vehicles have become very crucial in last‐mile connectivity and e‐commerce boom.
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Banking LIC Housing Finance ‐ Sudipto Sil‐ Asst. Chief Manager, Finance • Borrowing mix to change —proportion of bank borrowings is likely to decline to 20%
by FY15E while NCDs and public deposits could increase. Over the next two years, the proportion of public deposits will increase to 5‐10% of total borrowings by leveraging the network of LIC agents.
• Asset‐mix to also gradually change with Individual, LAP, and developer mix comprising 90%, 5%, and 5% of the loan book, respectively.
• Repricing of loans (as they shift from fixed to floating) in FY15 will be ~Rs 60bn. However, LICHF will witness greater repricing in FY16 (of Rs 300bn) which will drive spreads and NIMs. The current differential between fixed and floating rates is 100‐120bps.
• The company previously raised funds at 9.22% for 3 years and 8.9% for 6months, which is lower than the cost of funds as on FY14. This should also help in improving NIMs.
• LICHF does not anticipate any further stress in its developer book. In case of Orbit’s Saki Naka property, which the company has taken over, construction has commenced and LICHF expects to realize cash flows of Rs 400‐500mn.
• About recent NHB guidelines asking HFCs to create deferred tax liability on special reserves, they indicated that the financial impact of this will be minimal.
• It aims to double its balance sheet in 3.5‐4 years, which translates to a 20%+ advances growth for FY15‐16. The company expects loan growth to be driven largely by volumes than increase in Average Ticket Size (ATS), although ATS is expected to increase slightly because of demographic changes.
Capital Goods L&T – Aerospace & Defense Key takeaways from our meeting with the senior management of the Aerospace and Defense business of L&T are: • FDI in defense is likely to be hiked to 49% versus the current 26%; may not
necessarily lead to transfer of technology. While media reports have suggested that FDI in defense could be raised to 100%, as per management, it is more likely to be raised to 49% without prior approval from the government. However, the bigger constraint in terms of transfer of technology is whether the foreign government is willing to allow the transfer of technology to India. If not, then even a 100% FDI would not have any material impact.
• Budget may have announcements on removing preferential treatment currently being offered to PSU defense companies. In the upcoming budget, private defense players are hopeful that the government would remove the preferential treatment meted out to the PSU defense companies versus the private sector players. These include preferential treatment in terms of milestone and advance payments, tax treatment, etc. In the managements’ views, these are likely to be addressed by the upcoming budget.
• Opportunity on offer in defense is large – will fructify over the next 3‐5 years. Management has cited that L&T has participated in a number of programs from defense, which could see orders and therefore revenues coming through over the next 3‐5 years. These include artillery guns (Rs 30‐40bn), repeat orders for Aakash missile (Rs250bn in total of which part comes to the private sector), tactical communication system for the Indian army, 4 landing platform docks worth Rs240bn, and Rs14bn for corvette ships.
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• Proposed JV with Mazgaon Dock for submarine orders is on hold. L&T was planning to enter into a JV with Mazgaon Dock for manufacture of submarines and a similar JV was to be formed with Pipapav Yard for ships. This has been put on hold — MDL will be manufacturing and delivering submarines to the Indian Navy on its own now, without any participation from the private sector. The new government has to take a call on the way forward for these specific orders and execution of the same.
Jakson Power – OEM for Cummins India • Q1FY15 volumes seen up 30‐40% QoQ; driven by pre buy and power shortages in
the North. Management cited a sharp jump in volumes in Q1FY15 driven by power shortages in the north alongside pre buy on account of the new CPCB norms which are coming into place from 1st July 2014. Volumes are up 30‐35% QoQ in Q1FY15 after very weak volumes in Q3FY14 and Q4FY14. A stronger‐than‐expected pre buy over the past few months coupled with improvement in demand has led to lower inventory in the channel (15‐30 days) as well. However, management does expect Q2FY15 to be sluggish as demand gets pulled in to Q1 due to the pre buying.
• Expect a recovery in volumes going into CY15. Management expects volumes for CY14 to be flat at best with a possibility of a single‐digit decline. However, CY15 is seen to be a far better year with a recovery in volumes expected to be driven by a pickup in infrastructure and real estate (commercial and residential). With the DG market moving from continuous use to standby use, the need for DG sets is likely to continue with the industry expected to revive to a secular growth trend from CY15 onwards.
• New CPCB norm DG sets to be introduced over the next month; pricing premium over the market to be maintained. As per the management, the CPCB II compliant engines will be shipped out to the dealers over the next one month; while the management has not quantified the price increase for these, it will continue to maintain the premium it charges over competition. While Cummins sets are already compliant with the new norms, some of its peers may not be able to meet the deadline.
• KOEL has discontinued its “10 year free service” scheme. KOEL had launched a 10‐year free service scheme on all diesel gensets over 15kva in November 2013, which came with the condition that the customers were to use only genuine spare parts from KOEL dealers. This has now been discontinued — in our view, this is because KOEL was not able to generate the requisite volumes in its spare‐parts sales to compensate for the loss of revenues from free service/maintenance.
Engineers India • FY15 to see a surge in orderflow driven by consulting orders. Management expects
to book four large consulting orders over Q1‐Q215 namely — in Q1 Dangote Refinery, Nigeria (Rs8.5bn), OPIC Petrochemicals, Oman ($40nm) and in Q2 HPCL Barmer Refinery – Rs12bn. While Engineers India is L1 in the BAPCO Refinery, Bahrain bid with the lowest bid of $127mn (Foster & Wheeler at $190mn), the order is yet to be placed with them. The bid placed with BAPCO is valid till June 14 and the management is hopeful of a favorable outcome soon. Apart from these four large orders, management also expects to book Rs5‐6bn of base orders (consulting) in the domestic market from the likes of ONGC and other oil companies. For the remainder of FY15, the management has cited potential order pipeline primarily from overseas which includes a $10mn consulting order for a fertilizer plant, brownfield refineries (2*$40mn each).
• Focus remains on MENA and S. E. Asia given the slowdown in the domestic markets. The company is aggressively eyeing overseas markets in the MENA region – primarily the 6 Gulf Cooperation Council countries along with Northern Africa
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(Algeria, Nigeria) for consulting jobs. While the M. East remains a highly competitive market with the presence of European, American and Korean players, EIL is able to secure orders on account of its lower price. It is also eyeing the markets in Iraq and potentially Iran as well once trade sanctions are lifted. The other key overseas markets are S.E. Asia, especially Indonesia (apart from Philippines and Malaysia) where they have already bagged orders. The management has not been too aggressive in recent bids and can earn margins of 30‐35% in its overseas consulting jobs.
• Annual capex in the range of Rs1bn — would invest an additional Rs0.8‐1bn annually if the fertilizer JV takes off. EIL’s capex is at Rs1bn in FY15, which is primarily for the new offices being set up in Gurgaon and Mumbai. Talks are on with the Ministry of Petroleum and Natural Gas to revive the proposed fertilizer plant JV with National Fertilizers Limited at Ramagudem. This plant would be set up with a cost of Rs47bn of which EIL’s share is expected to be at Rs4bn. EIL would get the order for this fertilizer plant on a nomination basis and would qualify to bid for fertilizer plants in the future.
• Structural shift to a higher mix of consulting revenues; expected to sustain at 60‐65% of total. Management has cited a structural shift in the overall revenue mix towards higher consulting revenues (expected to sustain at 60‐65% of revenues). This is an obvious consequence of winning: (a) large overseas consulting jobs. Note that the company is aggressively targeting the markets in MENA and S.E. Asia for consulting orders and does not expect to pick up/pursue turnkey jobs in these geographies, (b) domestic projects are also being eyed for consulting jobs first and only if lost, the company would like to participate in the turnkey/construction bids. Note that consulting margins are typically in the range of 30‐35% and management expects margins to sustain around these levels in the medium term.
• Margins expected to see a pick up from Q2FY15. Management cited a change in mix alongside dip in margins in both segments for the low margins in Q4FY14. The mix would turn favorable as consulting orders in its order book are at ~55% and are expected to grow to 70‐75% by FY15. Moreover, project closure costs along with an increased share of brown field projects also adversely affected margins.
Cement We had an exhaustive presence from the cement sector. There were 19 individual participants. The corporate participants included names like ACC, Ambuja Cements, Binani Cement, CRH, Reliance Cement, Zuari Cement, Murli Industries while on the Ground Zero front we had the largest distributor from South & North‐East India, a very large distributor from East India, three very large distributors from West India, Chief General Manager (Marketing) of a leading Central India manufacturer. On the consultants / individual participants front, we had two people — one being Ex MD – Andhra Cement, Ex‐Senior Joint President – Birla Corporation & EX‐Joint President – Manikgarh Cement and the other being the Ex‐President of Mangalam Cement and a Senior Ex‐Personnel at BK Birla Group. The overall takeaways from all these meetings can be briefly summarized as under: • Demand outlook seems very positive especially January 2015 onwards. Even double‐
digit demand growth seems possible if things unfold in the right way with proper execution.
• Pricing may remain range‐bound in monsoons. However, one may expect significant price surge late 3QFY15, given the expected demand‐pull. Also, cost‐push like freight hikes will lead to an increase in price of cement very soon.
• Road development projects and other infrastructure projects like DMIDC, metro construction in various cities, and irrigation projects are likely to be the key driver for cement demand in the near future.
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• More consolidation very likely and this will only better the pricing dynamics of cement.
Key takeaways from corporate participants: • ACC Limited: ACC believes looking at pan‐India utilizations is misleading. On a
regional basis, North, East, and South‐West are currently recording utilizations of 85%, 95%, and 60%, respectively. Pricing power will be back in the industry as soon as industry sees utilization levels touching 80%. Industry currently operates at EBITDA/tonne of Rs 750 while the minimum basic required EBITDA/tonne is Rs1,500 which means a price hike of Rs30‐40/bag is inevitable in the near to short term.
• Ambuja Cements: Ambuja Cements sounds positive on EBITDA improvement driven
by consolidation. It sounds optimistic on achieving an EBITDA/tonne of Rs1,500 in the next three years. On expansion, it said that until Lafarge and Holcim consolidation is complete, it won’t undertake any greenfield expansion project. On near‐term pricing and demand, it said volumes and pricing are moving on expected lines.
• CRH: The management sounds optimistic on demand and price growth led by new
government projects. Though current demand‐pull is not huge, it is sufficient to absorb the cost‐push. Current price hikes (Rs60‐80/bag in Andhra Pradesh) have partially been absorbed in most of the markets.
• Reliance Cement: Reliance Cement has launched full‐fledged operations with an
integrated plant at Maihar, Central India. Current capacity is at 5mn tonnes p.a. The next phase of expansion includes second production line at Maihar and expansion in Maharashtra. Equity contribution is now in place and the expansion work is likely to start very shortly — 1,700 channel partners are already appointed. It is looking aggressive on its launch and is optimistic on pricing as well. The company targets its positioning in Category “A” brands.
Chemicals Omkar Speciality ‐ Pravin Herlekar ‐ Chairman & MD • Omkar Speciality (OSL) is primarily involved in manufacturing niche specialty
chemicals and pharma intermediates since its inception in 1983. Company is managed by technocrats and professionals, having in‐depth knowledge and expertise in specialty chemicals genre.
• OSL has a diversified portfolio of over 200 products, including a range of organic, inorganic and organo inorganic intermediates making it less susceptible to shocks during adverse global market conditions.
• Pharma intermediates & APIs contribute around 70% its revenues, rest 30% is contributed by specialty chemicals that is largely driven from cattle & poultry feed, glass industry, water treatment and chemical user segments.
• OSL has a competitive edge over its peers largely on the back of its R&D focus, operational flexibility and consistent launch of newer products with IPR filings.
• In FY14 of the total sales of Rs 2.40bn, domestic markets contributed around 74% and exports were 26%. Segment wise, Iodine derivates form a major portion of sales with 54%, intermediaries forming 17%, and APIs forming ~14%.
• OSL is looking aggressively to expand its exports operations with presence in about 21countries, including regulated markets such as Europe, Canada, Asia (China, Bangladesh, Pakistan), South America and Australia.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
Navin Fluorine (NFIL IN) – Not Rated • Navin Fluorine (Navin) is part of the Mafatlal Industries and manufactures fluro
chemicals. The company pioneered refrigerant gases in India. It derives a quarter of its revenues from exports and has plants in Surat and Dewas
• Navin has four business segments – refrigerant gases (32% of revenues), specialty chemicals (32%), inorganic fluorides (23%), and CRAMs (13%).
• Navin’s flagship product (R 22) is a refrigerant gas used in more than 90% of room air conditioners. However, given its ozone‐depleting properties, it has to be completely phased out by 2030. To comply with regulatory stipulations, while the production levels will be cut by 10% in FY15, a rising demand for air conditioners (rapid increase in middle‐class households) could drive demand and margins.
• Specialty Chemicals – Navin has a strong portfolio of 40 fluorine compounds that find application in segments such as pharma, agrichem, and petrochems. It has introduced 6 new fluorinated compounds in FY14 that have a growing application and it is further augmenting its manufacturing/research capacity to speed up new product development. With increased global enquires, Navin is also confident of a good export opportunity.
• CRAMS – It is spending Rs 600mn to expand its capacity in Dewas, MP, and targets revenues of Rs 1.8bn over the next three years. Expected commissioning is December 2014. Manchester Organics (a UK‐based research organization acquired in FY11) would help Navin get access to new markets and clients and help move up the value chain.
• Inorganic fluorides – intends launching new molecules with a wider use base; export opportunity is promising.
• Has guided for revenues of Rs 10bn over the next four years — an impressive CAGR of 20%. Earns steady rental incomes of ~ Rs 100mn; steady payout of ~ 25/30%; net cash Rs 1.6bn (25% of market cap).
Aarti Industries • In its specialty chemical operation (dominated by Benzene derivatives), Aarti holds
leadership position in the global market. Aarti manufacturers more than 155 products under specialty chemical and about 45 products in the pharmaceuticals space.
• Agro chemical is the leading target industry for Aarti’s specialty chemical business with 30% share followed by polymers 27%, pigments 19%, and dyes 5%. BASF is its largest customer (8% of sales).
• Lately, the company is expanding its Toulin‐based specialty chemical operation, which should support growth.
• Has invested Rs 4bn in the last couple of years and has a capex plan of Rs 3bn over the next two years, which would lead to a sustainable annual sales growth of 15‐18% over the next 3‐4 years.
• Management expects margins to remain stable and targets ROCE of 22‐25% from about 19% currently.
• The average capacity utilization of its facilities is 70%.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
FMCG HUL • Volume growth has slowed down to low single digits. However, value growth is
expected to be 12‐15%. Detergent category is expected to see value growth of 12‐15%.
• Premium brands are picking up slowly, which shows improvement in consumer sentiments.
• Has set value growth target of 15%‐20% for FY15. • Fair & Lovely was not doing well mainly due to color change (it was changed from
white to pink) issue. This was corrected, and product is likely to show growth in next two quarters.
• In soaps, Lifebuoy and Lux are doing well. However, the hand wash (Rs 20 pack) is not doing so well.
• Monsoon is likely to impact the company negatively. P&G • Unprofitable retailers are being removed. The company is focusing more on
profitability instead of reach or market share. • The laundry segment, which contributes 35% revenue is showing flattish growth. In
recent times, the company has not launched any new product in the hair‐care segment. The competition is catching up in the diaper segment. However, Pamper is showing a healthy growth rate of around 20%. Whisper is not doing well. Hair care is also showing flattish growth.
• Through it Teva Pharmaceutical tie‐up, P&G India plans to sell Teva products under the brand name Vicks. The distributors are being asked to get drug license by June 2014.
• The company has achieved the target it had set for Oral‐B in the initial phase of launch. P&G India plans to launch the product nationally by September 2014.
ITC • Excise duty hike is expected to impact volume growth adversely. In recent times, the
volume growth has declined to 1‐2%. VST Industries will see a steeper decline in volume due to the excise duty hike.
• Food segment is doing very well — premium segment biscuits are doing well, but growth in personal care segment is flattish.
• There is lot of competition in soaps at a regional level. In south India, ayurvedic products are doing well. Due to regional players’ success, growth continues to remain challenging in soaps.
• ITC is planning to launch different types of beverages. Although it has not launched any frozen products yet, it is pursuing the launch of dairy products actively.
• Supply chain efficiency using technology like Vazra (automatic billing from retailer to ITC), Dhanush (to improve visibility and availability).
• Although other higher‐length sticks have seen volume de‐growth, its 64mm cigarette sticks volume has grown (this is more profitable).
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
Marico Industries • The Company is expecting a volume growth of 10% in coconut oil and overall volume
growth of 6‐8% in FY15. Says it plans to pass cost inflation to consumer. • In April 2014, it took a price hike of 25% (as compared to April 2013) in coconut hair‐
oil products because of significantly high copra price. • Market share of branded coconut hair oil is expected to increase to 80% over the
next 5 years. It is likely to help Marico in achieving its volume growth targets of~ 7‐8% volume growth.
• The consumer upgrade from loose edible oil to branded oil had slowed down. Even then, the company grew at 9% amid this slowdown in FY14. If situation improves and upgrade increases, then its revenue growth could increase to 12‐15%.
• It had a market share of 57% in the premium refined oil segment in FY13. However, recently Nielson changed its consumer research criteria, and as a result, the company’s market share was 55% in FY14.
• Top‐5 players in India controls 30‐35% of highly competitive deodorant market and other major players have 2‐3 % market share each which is very different from other FMCG segments. As a result, market consolidation is expected in the deodorant segment in the near future.
• In newer products which Marico acquired from Reckitt Benckiser, deodorant forms one third of the youth portfolio, cream and gels forms another one third of the portfolio, and serum forms the rest. The company plans to take serum portfolio to other regions and plans to improve distribution for creams and gels.
• Rail freight increase is not expected to impact costs. The company uses road transportation.
• Ad spending/sales ratio is expected to be 11‐12% in FY15. Due to higher value growth, ratio may be lower. Advertisement rate has increased but it is unlikely to impact the company adversely.
• Operating margin expected at 14%‐15% in FY15. Margins of its India business are higher.
• Effective tax rate is expected to be 30% in FY15 as compared to 27% in FY14. • If copra prices decline, the company would like to decrease prices of its recruiter’s
pack (100ml) first and maintain volume growth. Later, it may decrease prices of other SKUs.
• It plans to launch products in hair oil and edible oil related categories; does not plan to diversify in to completely unrelated categories.
Tilaknagar Industries • The company was facing bottling issue (bottler had stopped operations due to
financial difficulties) in Chennai, which had impacted volume growth negatively in Q4FY14. While it is actively trying to resolve the issue, its volume growth in Q1FY15 and Q2FY15 will be adversely affected. The situation likely to improve from Q3FY15.
• Alcohol manufacturers are demanding 15% hike from the government. However, the government is likely to allow only an 8‐10% price hike in FY15.
• Tilaknagar Industries gets 55% of its revenue from the brandy segment, 21% from rum, 23% from whisky, and the rest from vodka and gin. Growth is strong in brandy and rum; not so strong in whisky.
• Diageo’s entry will impact the market in a very positive way; it will be inclined towards upgrading products, which will also impact other players in the market such as Tilaknagar Industries and Radico Khaitan in a positive way. Diageo will also be inclined to improve the corporate governance at United Spirited. We should see the positive impact 3‐6 months after Diageo acquires 51% in United Spirits. The process of premiumization, corporate governance improvement, and a visible impact could take 3‐6 years.
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• Tilaknagar Industries has strong presence in south India and it is gaining ground in East India after acquiring IFB Agro’s IMFL portfolio.
• Performance is expected to be good in FY15 and it is expected to be significantly better in FY16.
• Due to election, price increase was not allowed recently. Also, there was no significant positive impact of election in Q1FY15.
• Currently, the company has a debt of Rs. 8.3bn. It is planning to raise Rs 1bn (equity infusion), which will be used to retire debt.
Infrastructure JLL Infra Consultant • According to JLL infra research, revitalization of infrastructure sector can happen if
the following steps are taken • Railway reforms ‐ Corporatization of the Indian Railways (Rakesh Mohan
Committee). The government would need to set up an Indian Rail Regulatory Authority (IRRA) to distance the IRC from the government. The IRC would be governed by a reconstituted Indian Railways Executive Board (IREB). The government of India would be in charge of only setting policy direction, and constituting the IRRA and the IREB.
• Denationalization of coal mining ‐ Coal mining was nationalized in 1973. It now needs to be denationalized with a sense of urgency.
• Resurrection of the river‐linking plan ‐ To address the phenomenon of simultaneous droughts and floods and secondly foster to the inland transport system, this proposal needs to be resurrected.
• Reshaping IIFCL to catalyze long‐term funds ‐ restructuring of the role of India Infrastructure Finance Company Ltd (IIFCL) from that of a normal lender to one that provides guarantees for bonds and extends subordinated debt.
• Creation of Independent regulatory authorities ‐ Single regulatory commission for all infrastructure sectors would eliminate proliferation of regulatory commission. It would also be more productive and cost – effective.
• Setting up of land bank corporations ‐ Energetic and visionary state land bank corporations need to be created. They should be empowered under the clause of "public purpose" to acquire large tracts of unused, unusable or waste land.
• Promotion of hydroelectricity ‐ India has exploited only 24 per cent of its hydro potential at an installed capacity of around 35,000 megawatts against an "identified potential" of 148,701 Mw.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
IT Services Meeting with IT Consultant
US
• Growth expected from non‐key verticals such as healthcare and life sciences, retail and TTL.
• Retail demand would be driven by SMAC and BI; current lag is due tounexpected hassles in the vertical, which is not expected to continue.
• BFSI, manufacturing verticals – Rebids for large transformational services expected by 2H.
• IMS to drive large part of growth.
Europe
• EU to be the leading growth driver for Indian IT companies ‐ Re‐bids as well as fresh deals.
• UK leads the geography, with public sector and manufacturing being a strongfocus.
• Southern and East Europe remains underpenetrated, with a very low outsourcing presence.
APAC
• Asia ‐ Pacific region remains volatile and spends remains lumpy. • Domestic business to be muted for another 2 – 3 quarters. Government spends
expected to be strong. • Australia sees strong spends, with telecom and banks being key outsourcers. • Middle‐East showing promising signs of spends – strong opportunities for
companies like Wipro, Tech Mahindra, and some midcaps like NIIT Tech. Rolta India ‐ Mr. Hiranya Ashar: CFO, Director of Finance Between FY09 and FY13, Rolta has been transforming itself from a traditional outsourcing vendor to an end‐to‐end PPS (product platforms & solutions) vendor with strong core competencies in verticals such as defense + homeland security, E&U, and e‐governance projects (~80% of revenues). Investing more than Rs 45bn on acquisitions, IP products, intangible assets, and development of prototypes, the company has escalated itself to compete with MNCs such as IBM and Accenture in key verticals. • Robust deal flow in ES, GIS, and defense & homeland security in FY14 and 1QFY15 to
drive revenues ‐ The Indian Ministry of Defense has announced Rs 500bn (US$8.3bn) budget for transforming the existing legacy defense technology (platform & systems as well as communications & networking) to a single unit Command & Control system (C2). Rolta made significant additions from Homeland Security, E&U, and ES verticals in its fresh deal pipeline over the last 12 months ‐ worth an overall TCV of $250mn+ for an average span of 3‐4 years.
• Monetization of IP products should enhance margins. • The company has high levels of debt (over Rs 40bn, 1.8x equity) which it expects to
reduce to 1x equity in 3 years and 0.5x equity in 5 years.
Logistics Allcargo Logistics Limited ‐ Savli Mangle‐VP‐IR, Sharad Jain‐IR • Allcargo is one of the leading integrated logistic players with global presence spread
across 90 countries. The company will benefit from its established position in the NVOCC, CFS, and projects businesses.
• The 100% acquisition of US‐based Econocaribe Consolidators (revenue of ~USD125m) through wholly owned subsidiary ECU Line is expected to increase MTO revenue significantly in FY15 along with consolidating its position in important US market. Expects volume growth of 15‐16% in MTO business (organic growth of 7‐8%) let by global recovery and US acquisition. Margins are expected to improve by 200‐250bps from current level of ~5% over next four to five years.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
• CFS business is operating at ~55% capacity utilization and margins have come down from ~50% to now ~38% mainly due to increased rebates to shipping lines. Land available at Nagpur, Hyderabad, and Bangalore will be developed in phased manner.
• Project business has 60% revenue from equipment leasing and 35% from project logistics. The division has an order book of Rs 3bn and capital employed is Rs 8.5bn. The division’s performance is strongly linked to the India capex story and has seen improvement in fleet utilization.
• The company has already finished all its major capital expenditure in the last three years and has no major capital expenditure plans. The recurring maintenance capital expenditure would be ~Rs 500‐700m per year.
• Diversified revenue streams reduce the business risk significantly by providing stability to cash flow. We believe Allcargo will be a major beneficiary of increased global trade and recovery in domestic industrial activity.
Media Digicable (unlisted MSO) • Still many loose ends in the implementation of phase‐1 digitization: Even after over
18 months of analog sunset in phase‐1 areas, Digital Addressable Systems (DAS) aren’t yielding commensurate benefits for MSOs.
• In the television broadcast value chain, MSOs are the ones who have invested substantially for digitization, but are yet to see commensurate returns on investments. MSOs are attempting to pick up more money from last mile owners (LMOs), but receivables continue to increase.
• Regulatory support is immensely important for long‐term success of the television broadcast industry – Positive regulatory intent and action is needed for ensuring returns for stakeholders. While acknowledging and appreciating the vital role of the regulator in pushing ahead with DAS, it also imperative that the regulator ensures enforcement of agreements between LMO/MSO. This is essential for MSOs to receive commensurate cash in a timely manner.
• For MSOs intelligent packaging is the way forward and DAS cable tariffs need to increase to Rs 500‐600/month for viability
• For the future, a significant investment (~Rs 10,000‐15,000/point) needs to be made in upgrading the last mile. This is essential for delivery of on‐demand and non‐linear content. Such an investment can be easily recovered as time‐shift content and high‐speed broadband can command ARPU of Rs 1,500/mo.
• Implications: cautious outlook for MSO's (Den/Hathway) as on‐the‐ground situation is still far from conducive.
Jagran Prakashan We hosted Mr. Amit Jaiswal, company secretary and head‐investor relations of Jagran Prakashan. Below are key takeaways of the interactions: • Ad outlook, H2FY15 could see improvement: While businesses are still cautious in
the near term, H2FY15 could be better. In FY14, election benefits were offset by absence of government tender ads.
• Share of Hindi advertising in the print advertising pie to increase – Jagran endorsed the FICCI‐KPMG forecast, which projected an increase in the share of Hindi advertising in print media from 31% in 2013 to 36% in 2018.
• Market structure conducive for profitable growth – Jagran believes that concerns pertaining to increase in competitive intensity seem unwarranted. Dominant players in the regional newsprint space are unlikely to enter each other’s key profitable
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
markets, as it would be counter‐productive for the market leaders as well as new entrants.
• Substantial reduction in operating losses of Mid‐Day and Nai Duniya for FY15 – management expects a turnaround in Mid‐Day and substantially lower losses in Nai Duniya, despite an increase in circulation from 0.6mn currently to 0.7‐0.75mn for the latter.
Entertainment Network (India) Limited (ENIL) • We hosted Mr. N Subramanian, Group CFO, ENIL and Mr. Dalpat Jain, VP – Strategic
Finance & Investor Relations. Below are key takeaways of the meetings: • Phase‐3 license auctions (radio) could happen by Oct'14: The government has
initiated the process of appointing auctioneers. • Key benefits of regulatory changes: Industry size expansion led by greater
geographic reach giving long‐term growth visibility, and networking, which can lead to significantly lower overheads.
• Auctions will likely see rational participation: ENIL believes that unlike telecom, radio will see more discipline among participants as only a few stations are profitable and financials of most rivals are in shambles.
OMD India (media planning & buying, part of the global Omnicom Group) Below are key takeaways of the meetings: • FY15 outlook for advertising; cautious optimism: sentiment improving, but is yet to
manifest into higher ad spends. • Sector outlook: FMCG continues to see increased ad spend while auto could see
incremental spends driven by new launches. New categories such as online (now accounts for ~10% of television advertising), could see continuation of their trailblazing growth. Trends remain muted in financials and real estate.
• Continued challenge in implementation of ad cap guidelines – while clarity on ad cap guidelines is awaited, the market situation seems to indicate that commensurate rate increases will take a while to get absorbed. Broadcaster‐advertiser negotiations for inventory offsetting rate increases are ongoing.
• BARC launch could get delayed against expectations of a September‐December 2014 rollout. The Broadcast Audience Research Council (BARC) is rolling out a new system of television measurement system. The BARC system will give data of total audience reached by television. The current advertiser currency is % ratings (GRP/TRP) — this will change to ‘audience reach’ 6‐12 months after BARC system is in force. This can be a long‐term tailwind for ad yield increases.
• Implications: cautiously optimistic outlook for broadcasters. BARC and implementation of ad‐cap guidelines are key moniterables for TV broadcasters.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
Metals Godawari Power & Steel Limited Iron ore mines • Ari Dongri mine has a capacity of 0.7mn tonnes, which it plans to increase to 1.2mn
tonnes; awaiting environment and other statutory clearances. • Boria Tibu mine has recently started operations and is still in the development stage.
It is currently producing 4,000‐5,000 tonnes per month, which will increase to 25,000 tonnes per month after the development stage is over.
• The company has guided at 0.6mn tonnes of iron ore production in FY15. • Once both mines are fully operational (Ari Dongri at expanded capacity), the mines
will meet Godawari’s entire iron ore needs (for sponge iron) and 70% of the needs of its pellet plant.
Pellet plants • The company has 1.8mn tonnes capacity in Chhattisgarh. Old plant (0.6mtpa) is
currently operating at 100% while the new plant (1.2mtpa) is at 75‐80% utilization. The new plant is likely to operate at 100% in the next 2‐3 months. The company also operates a 0.6mn tonnes pellet plant in Orissa through a subsidiary.
• The Company is currently making an operating margin of Rs 1,300‐1,500 per tonne in Chhattisgarh while the margins are higher at ~Rs 1,800‐2,000 per tonne in Odisha.
Solar Thermal Power plant • Godavari has set up a 50MW solar thermal power plant in Rajasthan at a capex of Rs
8.3bn. It has raised Rs 6.3bn debt to finance the project. • Has signed PPA with NTPC for 25 years at a fixed tariff of Rs 12.2 per unit. • Current PLF was 25% due to lower Direct Normal Irradiance. • EBITDA for FY14 stood at Rs 300mn. Guided Rs 1.25‐1.3bn EBITDA for FY15. Capex • The company is likely to spend Rs 3bn in the next 2 years — Rs 2bn on balance steel
projects, Rs 1bn on maintenance. Debt • Consolidated debt currently stands at Rs 21bn. Has already reached peak debt and is
not likely to increase from current level. Others • Guided for Rs 5‐6bn consolidated EBITDA in FY15 vs. Rs 3.5bn in FY14. • Can earn an EBITDA of Rs 9‐9.5bn at current prices once both mines are fully
operational. Steel Trader & Structural Steel • A steel price hike is expected next month (to pass on higher rail freight and raw
material costs). Cannot say how well it will be absorbed by the customers. • Steel producers have seen a fall in production in the current quarter on non‐
availability of iron ore. • Demand situation has moved from bad to worse in the last one month. Poor
demand from projects and liquidity crunch have impacted business significantly. • Demand is likely to fall further as monsoon is a seasonally weaker period. He
believes that demand is likely to improve in the next 8‐12 months. • Increase in imports is generally a wakeup call for domestic steel companies. They
adjust with the situation immediately.
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• Import parity price for steel is higher than domestic price after adjusting rebates/ discounts offered.
• Inventory: Traders are not ready to stock material as they are losing money. Re‐stocking demand hasn’t started yet.
• JSPL structurals are ~Rs 2,000‐2,500 costlier than SAIL (per tonne) due to superior quality. SAIL’s IISCO plant will start operations in the next 5‐6 months.
Iron ore expert Goa • Supreme Court (SC) has not mentioned anything against miners in their order except
rule 37 & 38 of Mineral Concession Rules, 1960. Rule 37 and 38 deals with transfer and amalgamation of lease, respectively. Deemed transfer of leases could face a problems subject to the manner in which the official arrangement is done for the transfer.
• SC has capped production at 20mn tonnes on an ad‐hoc basis. It has given an expert committee 6 months to revisit the limit, but the committee has not even visited the mines in the last two months after the order was issued.
• He expects mining to begin from September‐October 2014 on an optimistic basis if the state government adheres to their deadlines.
Karnataka • Supreme Court has not restricted exports from the state. However, it is not feasible
as the pre‐condition for the export realizations makes them unviable. SC has said that the export price should be higher than the average of the last one‐year e‐auction price, irrespective of the grade.
• Auctioning of category C mines does not require any changes in MMDR bill as it is as per the SC directive. However, this will take time as it is has only been cleared by the Chief Secretary and the state cabinet approval is still pending.
• 70‐75% iron ore in e‐auction is procured by three players (JSW Steel, Kalyani Steel, and BMM Ispat).
Odisha • Feasibility of export of ore depends on iron ore grade even if export duty and
differential rail freight is removed. Current low prices makes export of iron ore not feasible.
• The miners will oppose the 50:50 rule in the state once the export feasibility is back. Others • Miners will oppose export duty and differential rail freight in the upcoming budget. • Miners are ready to pay 15% royalty provided there is clarity on MMDR bill. Secondary steel producer Sponge iron • Sponge iron industry in Odisha is operating at 50% utilizations on non‐availability of
raw material and poor liquidity. 60% of the sponge iron producers are operating on hand‐to‐mouth raw material availability while the balance have less than 15 day’s worth of inventory.
• Sponge iron producers are currently making a margin of around Rs 1,000 per tonne. Raw material/ Finished steel prices • Raw material prices are likely to fall in the coming months. However, the major fall
will be seen after monsoons. He believes that lump prices can see a correction of Rs 1,000‐1,500 per tonne after monsoons.
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• Semi‐finished/finished product prices will fall once raw material prices start correcting.
Others • Trial run at Rourkela Steel Plant (RSP) has started and it will take 6 months to
stabilize operations. • SAIL needs to give higher discounts to customers due to inferior product quality. No
plant other than SAIL’s Bokaro steel plant receives quality certification from various agencies.
Uttam Galva Steel Limited Capacity • Annually, it supplies ~50,000 tonnes of color coated products to Samsung for their
refrigerators. Samsung procures ~80% of their requirement from the company. • Arcelor Mittal provides technical support, partial raw material requirement and
helps in marketing strategy. • The company is targeting 15% growth in volumes. • Cold rolled/ galvanized/ color coated capacity operated at 72%/ 79%/ 74% utilization
levels in FY14. • It sells 30% of its volumes in the export market to over 150 countries. • Has excess land (180‐185 acres) at Pali road, Maharashtra. Management is looking at
developing it in next 2‐3 years.
Pharmaceuticals Association of Biotec Led Enterprises (ABLE) ‐ Goutam Das COO of ABLE and Ex‐COO of Syngene • The size of the global pharma outsourcing market is about US$ 75bn. Emerging
trends: More new molecule (NCE/NBE) and simultaneous loss of blockbuster drug patents provokes innovative pharma players for more contract research (CRO); increasing need for life‐cycle management of drugs post patent expiry and increasing activity of small biotech companies. Led by these, the global pharma outsourcing should maintain double‐digit growth in the near to medium term.
• On the other hand, the Indian CRAMS market (~US$ 4bn) is well poised to deliver a healthy annual growth of 20‐30% led by its strong execution track‐record in contract manufacturing (CMO) and more importantly, rising focus on contract development and manufacturing services (CDMO).
• In fact, the rising share of CDMO revenue in the overall CRAMS operation should drive value growth for Indian CRAMS industry in the medium to longer term.
• CRAMS in chemical synthesis has been the focused area for Indian players. India lacks knowledge and capability in the biologic CRAMS. However, Biocon’s research services arm – Syngene is the only established Indian CRO in the Biologic space.
• Syngene’s unique R&D capability in both chemistry as well as biologics compared to chemistry focus of other Indian peers and the cost advantages in India would help the company grab a lion’s share in the anticipated flow of pharma outsourcing into India.
• Divi’s Lab is the pioneer in global pharma CRAMS, but it lacks capability in biologics. Similarly, although Dr. Reddy’s is one of the leading players of biosimilars in India, it lacks capability in the biologic manufacturing services front.
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Granules India • The company the largest pharmaceutical formulation intermediates manufacturer in
the world with facilities at Hyderabad. Its high‐shear and fluid‐bed granulation processes are built around a six‐ton batch size, which is the key attraction for global customers for cost effective granulation.
• Most of its product portfolio is matured drugs. Hence, in order to expand its business presence into newer therapies, it has acquired Auctus Pharma for Rs 1.2bn. Actus manufactures 12 APIs (as well as key intermediates of those APIs) covering therapeutics like – antihistaminic, antihypertensive, antithrombotic and anticonvulsant. Auctus’ revenues were Rs 1.08bn with PAT loss of Rs67mn, due to minimal asset utilization of it Vizag‐based USFDA‐approved facility. However, Granules expects to enhance Actus’ utilization and to forward integrate the API operation to formulations, leveraging its own strength in APIs and PFIs in global market; to this end, it is setting up a formulation facility in Vizag.
• On CRAMS, Granules has set up a 50‐50 JV company with Belgium based Omnichem, a part of the Ajinomoto Group. The JV is setting up a facility (with an investment of Rs 1.7bn) in the Vizag SEZ for contract manufacturing high‐value APIs for Omnichem’s existing customers; has acquired land for this. Management guides for a commercial commission of the plant in Q3FY15.
Shilpa Medicare • Shilpa Medicare, incorporated in 1987 and listed in 1995, is an established supplier
of niche APIs, intermediates and formulations. It also undertakes CRAMS business. • So far as revenue model of the company is concerned, CRAMS with sales at Rs 2.5bn
account for 44% of total revenue (i.e., Rs 5.7bn in FY14) followed by oncology‐led APIs with 35% sales contribution at Rs 2.0bn and non‐oncology APIs with 21% sales contribution. Recently, the company has developed capability and facility for oncology‐based formulations, which should drive value growth for the company in the medium to longer term.
• Under CRAMS, it manufactures and supplies an intermediate to a European player under a long‐term supply contract. This supply arrangement is for a single product, which provides almost its entire CRAMS revenue. This segment is growing at >20% annually.
• Though CRAMS seems to be the largest revenue contributor, manufacturing and supplying of oncology APIs is the prime focus of the company. The key oncology products of the company are – Gemcitabine, Carboplatin, Oxaliplatin, Busulfan. Gemcitabine is the leading product in the oncology API basket.
• Key customers for its Oncology APIs are – Actavis, Intas Pharma, Dr. Reddy’s Lab, Cipla, Fresenius Kabi, Sun Pharma. Though it supplies to domestic peers along with MNCs, most of its oncology APIs supply are targeted at the export market.
• Looking at the CRAMS opportunity in oncology formulations, and to leverage its strong association with domestic as well as global formulators for oncology APIs, Shilpa has set up a formulation facility with an investment of Rs 1.5bn in Jadcherla, Andhra Pradesh. The facility is currently producing exhibit batches and awaiting regulatory inspections. Management expects incremental revenue flow from the facility FY16 onwards.
• Having oncology formulation aspirations, the company has already filed 7 ANDAs with USFDA (including 4 fillings by customers) and expects to file about 10 more ANDAs in next 12 months.
• Shilpa has signed a technology transfer agreement with global innovators – Gilead for manufacturing HIV/AIDS drugs like – tenofovir, emtricitabine, cobicistat, and elvitegravir and supplying to over 100 countries. This could prove to be key growth driver in 2 years.
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• In FY14, Shilpa Medicare reported 54% growth in revenues to Rs 5.71bn with 140bps expansion in operating margins to 20%, resulting in a 59% growth in net profit to Rs 756mn (i.e., 13% net margin).
Real Estate Arihant Superstructures ‐ Ashok Chhajer ‐ Chairman • Arihant Superstructures is a real estate developer builder and its building projects in
location of Mumbai, Navi Mumbai, Badlapur, Thane, Panvel, Kharghar, Vashi, Khopoli, Karjat, Taloja and Jodhpur, Barmer‐ Rajasthan.
• Through its subsidiaries, it has ~15mn square feet of buildable real estate space across the housing sector – all its land bank is fully paid up.
• At present, ASL has 12 projects in hand with an average selling price bandwidth of Rs 2,500‐6,000 per square feet. Average land bank price for the company is ~Rs 250 per square feet.
• ASL has also expanded its presence in other geographies like Jodhpur (Rajasthan), where it is constructing ~1,350 houses for the EWS and LIG segment (government of Rajasthan’s first PPP housing project).
• Sold ~1mn sq. ft. in FY 14, which in value terms translates into Rs 4bn; will continue the sales trend in Q1FY15 with sales of 250,000 sq. ft. and value of Rs 800mn.
• The company is aggressively adding new projects — it has added 5 new projects with a saleable area of 2.4mn sq. ft. in the last 8 quarters. In FY14, its topline was Rs 1bn and PAT was Rs 16.8mn.
JLL Real Estate • In the real estate sector, the activity and interest level have gone up after the
formation of the new government. JLL said it is seeing increased site visits (residential) as well increased footfalls in developers' offices (both buyers and sellers). The number of queries is 1.5 times higher than six months ago.
• Expectations from the new government are high as far as real estate reforms are concerned such as introduction of REITS (Real Estate Investment Trusts). JLL thinks that REITs will have long‐term benefits. It is of the opinion that for REITs to pick up in India, the government should give tax breaks as well as clarity on taxation.
• Opening up of REITs will be beneficial for developers who have significant office portfolio or shopping center portfolio, which is income yielding in the listed space. Companies like DLF, Prestige, India bulls, and Phoenix Mills may be beneficiaries.
• According to its own research for the top seven cities (Mumbai, NCR‐Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata), the residential market in the first quarter of 2014 has seen a spurt in new launches while sales remained stable resulting in a marginal increase in unsold inventory. Amongst these macro markets, NCR Delhi recorded fewer launches — its share was the lowest since Q2 2012 —while Kolkata’s contribution increased.
• Vacancies persist in the office space, which are keeping rentals under check. Rentals are expected to pick up only in the last quarter of 2014 or early next year as the overall economic outlook improves and polices on infrastructure are out.
• In retail, Indian cities are facing higher vacancies.
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30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
Retail India North India Jeweller • Lower sale of coins compare to last has affected topline, but profitability remains
intact as coins have thin margins. • Average ticket size was Rs 80,000. • Revenue growth in FY14 was marginally positive (2‐3% yoy). • During Q1FY15 there is an uptick in consumer demand. • If gold prices remain steady, the store can see 15% volume growth. • In the last two years, volume growth has been positive, but less than 5%. • Wherever there is product innovation or launches in stores such as Tanishq, there is
improvement in sales. • Tanishq has introduced made‐to‐replenishment concept where there will be a new
launch, new brand addition, or new collection every two months. • In North, preference for studded jewelry is more and the trend is expected to
continue irrespective of gold price. Gold jewelry in North is usually stored in bank lockers and not worn.
• Kalyan’s stores in the north have 100% men vs. Tanishq stores, which have 80% women.
• Competition from other organized players is increasing. However, the credibility of the Tanishq brand is high.
• In North stores, 60% of the customers are repeat customers. • Every store has to undergo renovation every 5 years. • Product/design are more important for North customers than the making charges.
Tanishq has far better designs than competition. Multi‐brand ceramics dealer • Dealers margins for Kajaria would be in the range of 10‐15%. • Growth in the tiles industry in Coimbatore is driven by a good demand in the
residential segment. Purchasing power in tier‐2/3 cities is more and consumers are becoming more hygiene conscious. It has been observed that in a middle‐class family there are now three washrooms (Parents/ kids and guests).
• Kajaria has recently forayed into sanitary‐ware segment. It is expected to capture the market within two years, driven by favorable policies for dealers and brand recall.
• For sanitary ware and faucets, one needs to keep quality staff that is aware of product technicalities.
• Kajaria’s USP: Quality, service (efficient supply chain, availability of products, and brand awareness), and policy for dealers (Kajaria does not sell directly to consumers unlike Johnson)
• 40% of Johnson’s revenue came from Tamil Nadu. Being perceived as a South Indian brand, the loyalty of consumers towards it is very high
• Typically, a hardware shop stocks 70% tiles and 30% sanitary ware, including faucets. • Pricing for the Kajaria products is at a premium. • After election results, consumers sentiment is positive. Dealers are looking for
different avenues such as hospitality and engineering projects. • In sanitary ware, Cera is growing faster than Parryware and Hindware. • Out of the total revenue‐mix for the dealer, 70% is retail, 20% project, and 10% sub‐
dealer. Out of the 70% retail market, 5% would be renovation and 65% would be new buyers.
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• With GST tax regime, the share of the organized market would increase as the evasion of sales tax and CST would lead to lower price competitiveness between organized and unorganized players.
• There is room for conversion of consumers for high‐value products.
Telecom
Bharti Airtel ex‐COO (West Zone), Enterprise • The Indian enterprise market is seeing strong growth traction, driven by need to
curtail costs and improve profitability. While Bharti/RCom/Vodafone are key players, their offerings are an overlay to their core B2C mobility businesses. Thus, these players lack the robustness of offering compared to a pure‐play enterprise services player such as Tata Communications (TCom). TCom’s enterprise services business strength is also validated by its position in Gartner's Magic Quadrant.
• At this moment, RJio's entry strategy seems unclear, but its substantial capex (including on fiber/backhaul) looms large on the sector.
• Significant investments in Intra‐city/backhaul fiber needed to support data revenue growth: While B2C data is growing at a rapid pace, telcos could soon face a situation where they might be forced to invest substantially in backhaul for sustainability. New business models have to evolve to prevent voice revenue cannibalization by OTT apps (say voice chat on Whatsapp)
• Implications: Positive read across TCom and validation of its robust enterprise data strategy. Escalating capex to support data growth points towards a cautious outlook for telcos (especially Bharti/Idea).
30 June 2014 / INDIA EQUITY RESEARCH / GROUND ZERO INVESTOR CONFERENCE ‐ Key Takeaways
Management
(91 22) 2300 2999(91 22) 6667 9735
Research Engineering, Capital Goods Pharma
Deepak Jain (9122) 6667 9758 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Aditya Bahety (9122) 6667 9986
Retail, Real EstateInfrastructure & IT Services Abhishek Ranganathan, CFA (9122) 6667 9952
Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Neha Garg (9122) 6667 9996Sachit Motwani, CFA, FRM (9122) 6667 9953 Varun Vijayan (9122) 6667 9992Paresh Jain (9122) 6667 9948 Technicals
Midcap Subodh Gupta, CMT (9122) 6667 9762Vikram Suryavanshi (9122) 6667 9951
Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Production ManagerVivekanand Subbaraman (9122) 6667 9766 Metals Ganesh Deorukhkar (9122) 6667 9966Manish Pushkar, CFA (9122) 6667 9764 Dhawal Doshi (9122) 6667 9769
Dharmesh Shah (9122) 6667 9974 Database ManagerCement Vishal Randive (9122) 6667 9944Vaibhav Agarwal (9122) 6667 9967 Oil&Gas, Agri Inputs
Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportDeepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971
Anjali Verma (9122) 6667 9969
Sales & Distribution Kinshuk Bharti Tiwari (9122) 6667 9946 Sales Trader ExecutionAshvin Patil (9122) 6667 9991 Dilesh Doshi (9122) 6667 9747 Mayur Shah (9122) 6667 9945Shubhangi Agrawal (9122) 6667 9964 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989Sidharth Agrawal (9122) 6667 9934Dipesh Sohani (9122) 6667 9756
Economics
Consumer, Media, Telecom
Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)
Automobiles
Banking, NBFCs
Contact Information (Regional Member Companies)
SINGAPORE
Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,
Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834
www.phillip.com.sg
MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,
No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099
www.poems.com.my
HONG KONG Phillip Securities (HK) Ltd
11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307
www.phillip.com.hk
JAPAN Phillip Securities Japan, Ltd
4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026
Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp
INDONESIA PT Phillip Securities Indonesia
ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia
Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id
CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.
No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001
Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn
THAILAND Phillip Securities (Thailand) Public Co. Ltd.
15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand
Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th
FRANCE King & Shaxson Capital Ltd.
3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France
Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com
UNITED KINGDOM King & Shaxson Ltd.
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UNITED STATES Phillip Futures Inc.
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AUSTRALIA PhillipCapital Australia
Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia
Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au
SRI LANKA Asha Phillip Securities Limited
Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka
Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm
INDIA PhillipCapital (India) Private Limited
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