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INSTITUTIONAL EQUITY RESEARCH

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6th Annual Ground View Conference Key takeaways

INDIA

3 June 2019

Our 6th Annual GV Conference on 27th & 28th May 2019, in which we hosted listed and unlisted companies, consultants and dealers, was a big success! This report highlights the key takeaways from our interactions. CXO TRACK Pittie Group Praj Industries

GROUP MEETING PARTICIPANTS

India Research Team

AGRI INPUT Distributor from North (UP) – Agro inputs Distributor/Dealer (MP) – Agro inputs Madras Fertiliser (Ex Chairman) – Fertiliser AQUACULTURE Waterbase Ltd AUTO Auto Expert Hero Motocorp Dealer (Largest Dealer – North) BFSI Cholamandalam Finance CIBIL Kosamattam Finance (Unlisted Gold finance company) Magma Finance Tata Motor Finance CAPITAL GOODS Engineers India National Mission for Clean Ganga CEMENT Cement dealers (North & West) JK Cement Star Cement FMCG Britannia contract manufacturer confectionaries-cakes

(Western Region) Central India Distributor - Zydus Wellness, Capital Foods,

Emami, Nivea Contract manufacturer (detergent, personal care products) HUL distributor Largest distributor Himalaya (CPD, cosmetics, babycare) and

Jyothi Labs

IT SERVICES Mindtree LOGISTICS & SHIPPING Blue Dart Container Corporation of India Patel Integrated GE Shipping METALS Welspun Corp MIDCAP CG Dealer - North Havells Dealer - North Tile Dealer South (Somany, Morbi players) Visaka Industries Yash Paper PHARMA Pharma - Expert on USFDA Syngene International Ltd RETAIL ABFRL Spencers Retail V Mart Retail Contract manufacturer for women-wear (Pantaloon,

Reliance, Zara) Future Lifestyle & Fashion TELECOM COAI


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ANNUAL GROUND VIEW CONFERENCE KEY TAKEAWAYS

The opinions expressed below are those of the conference participants. They do not purport to reflect the opinions or views of PhillipCapital (India) Private Limited and/or its analysts.

CXO TRACK

Pittie Group Pittie Group is a conglomerate with diverse interests, including media, entertainment, e-commerce, fast-moving consumer goods (FMCG), wellness and quick service restaurants (QSR), apart from the core real estate business. Pittie Group is the Sole Distributors of Patanjali in Mumbai (General Trade) & Pan India (Modern Retail). In the spiritual segment, ‘Shubhkart’ provides a one-stop shop for all Puja products and it has a portfolio of more than 200 of its own branded products and 1 lakh from the marketplace. Launched in the year 2017,’ChakaaChak’ is a brand dedicated to providing affordable and efficient cleaning solutions with its quality cleaning products like dish cleaners, floor mops, brooms, floor cleaning liquids, etc. Started in 2011 "Yogurtbay" is a popular Indian dessert brand with its healthy, delicious and mouth-watering line of gourmet yogurt and smoothies. Launched in 2014, EPIC TV is India’s only Hindi language India centric infotainment television channel renowned for its high-quality original content.

On Patanjali slowdown: Apart from supply-chain issues, other problems such as unavailability of raw materials (herbs, etc.) and increase in raw-material prices led to the company restricting supply, as it did not want to take a price hike. This led to a slowdown in several categories.

Patanjali has brought in several changes in supply chain and distribution: 1. Different verticals and sales team for different categories which are unique

to Patanjali. 2. Now entire sales team is handled by the company vs. earlier handled by

distributors – Pittie. 3. Different SKUs for different regions. 4. Earlier there was a lot of focus on increasing topline, not on competition.

Now the focus has shifted to become more nimble and agile vis-à-vis competition.

5. Constant innovation to increase share in a particular category. For example – it has launched several SKUs for MT (larger pack, combo packs)

Pittie is confident that it will bounce back more strongly ahead, as it is now far more structured and organised in scaling up further.

Divya Pharmacies: Patanjali’s first venture’s sales were Rs 15bn in FY19.

Patanjali does not pay money to buy MT shelves.

Three franchise model: 1. Shops purely for Patanjali products. 2. Medicines + consultation. 3. Mega stores (super market stores); there are over 200+ mega Patanjali

stores in India currently (1500-2000 sq. ft.).

Most franchise partners’ sales are around Rs 0.5mn per month; most franchise stores are owned by franchise partners, which is why ROE are higher.

Private label: Pittie group has built its brand by leveraging the experience of distribution in FMCG products, increase of e-com, and MT’s contribution in overall retail over the years. As e-com and MT’s contribution increases from current 2% and 10%, barriers to entry for new players will come down significantly.


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Pitte’s strategy on building its new brands (private label): It believes that using its knowledge (experience) in FMCG , coupled with leveraging its distribution strength (largest distributor in India) will make more sense to build its new brand, rather than launching differentiated products (like most new-age companies do). The latter requires more investment and returns are lower.

Praj Industries Praj is the market leader in bio-fuel technology with 70% market share in

domestic ethanol market along with strong presence in international market. Praj has diversified within its core competency into emerging businesses like industrial water treatment, critical process equipment’s and bio products. The company has around 70% revenue from domestic market and 30% from exports.

It is knowledge based company and has developed expertise and experience in bio-processes, engineering and projects. “Praj Matrix” – R&D centre is backbone of technology development and is working on bio-ethanol and bio-chemicals processes.

Government has announced target of 20% ethanol blending in petrol by 2030 from current c.7% blending. There is opportunity for 3x capacity expansion over the next 10-15 years for ethanol manufacturing in India. Ethanol is also used as a basic building block for development of bio chemicals and jet fuels – which is opening up new opportunities for the company.

Expect strong demand for distillery plants by addressing three major issues by the government: 1. Movement of ethanol between states is easy now post GST. 2. Allowing ethanol production from different feed material like agri water,

damaged food grain and fruits, cane juice and B-heavy molasses. 3. Attractive and differentiated prices for ethanol from different raw material.

Strong government support to sugar mills with: 1. Rs 55bn financial package. 2. Interest subsidy for expansion. 3. Export incentive. 4. Higher price for ethanol. 5. Differential pricing with widening scope of raw material for bio ethanol is

expected to create demand for distillery and Bio-CNG projects. Distillery proposals to avail financial support were c.140 in the first phase and increased to 268 in the second phase, which is very big opportunity for the company.

All future blending demand will come from 2G technology globally, with government push. Europe (EU) is increasing ethanol blending from 7.5% to 15% with strong mandate from 2G technologies.

CBG (compressed bio gas): Opportunity to convert current CNG stations to CBG stations in future. CBG has 10% higher energy content at the same price, which will drive future demand. CBG technology is viable from day one and can provide solutions with smaller capacity size (c.Rs 500mn) compared with 2G plants with a size of Rs 10bn. There are already around 250 LOIs for setting up CBG plants in India.

The Government of India, under the “Sustainable Alternative towards Affordable Transportation” (SATAT) policy, envisages implementation of 5,000 Compressed Bio-Gas plants in the next five years in phased manner with c.250 plants by 2020, c.1,000 plants by 2022, and c.5000 plants by 2025. On completion, these will produce c.15mn tonnes of bio-CNG per annum, which is 40% of the current CNG consumption in India at c.44mn tonnes.

Ethanol supply in 2017-18 was c.1.5bn litres (c.5% blending), while blending is expected to increase by c.58% to 2.37bn litres, representing 7.2% in 2018-19 – the highest so far.


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CCEA has allocated Rs 18bn under the "Pradhan Mantri JI-VAN Yojana” for supporting twelve 2G bio-ethanol projects. Additionally, Rs 1.5bn have been allocated for supporting ten advanced bio-fuel demonstration projects.

Group meeting participants

AGRI INPUT

Distributor from North (UP) – Agro inputs Major MNCs brands in pesticides – from Bayer and Syngenta. Popular domestic

brands – from UPL, PI Industries, Dhanuka, Excel Crop, Crystal Crop, Rallis.

PI Industries and Dhanuka have a good portfolio of products in UP, but recently Crystal Crop has started doing well, built up a strong portfolio of products by expanding its market network. Farmers are ready to pay premium for MNC brands, considering brand image and assured quality, compared to local brand or unlabelled products.

Rallis’ sales are affected over the past few months due to a limited product offering, less discounts or non-competitive product schemes, and limited sales efforts. However, it has changed some strategies since April 2019 – by implementing competitive discounts schemes and increasing visibility of field officers – which is expected to improve sales in the coming season considering Tata’s strong brand name.

Farmers’ distress over the past few years is largely due to flat income and increasing cultivation cost, especially labour. A sharp rise in production of crops is not being compensated by the government fully via MSP; also, there are not enough storage facilities available, forcing farmers to sell privately at below cost of cultivation.

Government announcement of various schemes such as Crop insurance, PM-KISAN, Soil Health Card, DBT are in the right direct direction for resolving famers distress over the long term and their benefits will be visible gradually.

DBT’s first phase will stabilize in 3-4 months and the government is likely to implement direct transfer of subsidy to farmers’ bank account after implementing the pilot project.

Inventories are very high for DAP and complex grades in UP compared to the last year, mainly due to high imports and limited rabi season demand. Many companies have started providing discounts on MRP for DAP in the range of Rs 1,000-1,500 per tonne.

Most farmers and distributors are expecting a normal monsoon (equal distribution) – which should absorb the current excess inventories by June and July. If there is poor rainfall, then sowing areas will reduce by 5-10% including the main kharif crop - paddy. This will create demand for herbicides as farmers will minimize cost of labour by applying more pesticides. This will create opportunities for products such as bispyribac sodium (Nominee Gold of PI Industries is a strong brand in UP).

Distributor/Dealer (MP) – Agro inputs Inventories are slightly more than last year’s levels for fertilisers and pesticides.

Companies have started offering discounts to push materials for the kharif season, but sales are limited as farmers are now waiting for the monsoon to arrive.

Fertiliser product offerings are less compared with pesticides, so it is very easy to sell to farmers. About 60% of pesticides sales are based on brand name, 20% on distributor/retailer advice, and 20% on a farmer’s own understanding (family/friends/neighbour influence).


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Major brands for fertilisers are from NFL, Coromandel, Zuari Agro, Deepak Fertiliser, Chambal Fertiliser, IFFCO, and Kribhco. In pesticides, Syngenta, Bayer, Excel Crop, UPL, PI Industries, and Dhanuka have good brand recall among farmers. Rallis has changed some strategies since April 2019 by providing additional discounts that are competitive.

The government’s announcement for various schemes is not fully benefiting farmers in MP due to limited awareness. Farmers gradually started taking crop insurance after realizing the importance of crop losses in the last season. The MP state government scheme “Bhavantar Bhugtan Yojana” had received good response from farmers due to compensation on the price difference between MSP and mandi price. Also, recently announced PM-KISAN is also getting a positive response from farmers.

DBT is still not stabilized in some pockets of MP, but it is expected to function smoothly in 3-6 months, once minor issues are resolved.

DBT is a step in the right direction – it will allow farmer to receive full benefits directly. Additionally, companies will be free from high working capital cycles and the government will be free from a backlog of subsidies.

Madras Fertiliser (ex-Chairman) – Fertiliser Presently, demand for urea is 31-32mn tonnes and production is 24 mn tonnes;

the rest is imported. The demand-supply gap has substantially increased over the past decade.

The government is very serious about becoming self-sufficient in urea consumption and is expected to revive old units (5 units – Ramagundam, Sindri, Baurani, Gorakhpur, and Talcher) in 2-3 years. It is expected to save some subsidy amount through its ‘Make in India’ initiative.

Inventories of P&K fertilisers have gradually increased over the past few months due to limited demand in the rabi season. Inventories for DAP and other complex grades are estimated at about 4-4.5 mn tonnes, which is 20-25% of annual demand; therefore, any delay in rainfall or uneven distribution of rainfall can create an oversupply supply such as the one in 2012. However, MFL and others are not importing or producing large volumes before getting more clarity on the monsoon.

MFL is expecting a normal kharif season, considering limited urea inventories in the pipeline.

Fertiliser DBT was implemented last year; presently, the government is stabilizing it, considering various issues such as networking and availability of PoS devices.

The government is likely to move towards the second phase of implementing DBT – that is, directly transferring subsidy to farmers’ bank accounts – by launching a pilot project under NITI Aayog (like it did while implementing the first phase). This step will be significant for the entire fertiliser sector, as it will gradually free companies from the subsidy regime.

AQUACULTURE

The Waterbase Ltd (TWL) TWL is niche player in the aquaculture industry with a presence in feed and farm-

care products. Its FY19 revenue was Rs 3.72bn. It has a pan-India presence with 184 dealers.

Key markets for TWL are Tamil Nadu and Andhra Pradesh; new and developing markets are Gujarat, West Bengal, and Odisha. TWL is also focusing on premiumisation by branding and packaging, after sales services, R&D inputs, feed performance, and enhancing farming techniques for disease management.

It has capacity of 1 hatchery (500mn Post Larvae) with a shrimp-feed capacity of 110,000 tonnes and processing capacity of 4,000 tonnes.


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It has taken new initiatives in farm care products such as NutriSorb (absorbs ammonia) and NutriGut (protects gut). It also taken new initiatives in processed seafood in the domestic market by launching the brand ‘Prize Catch’ for raw shrimps and pasteurised crab meat with a soft launch in Chennai, Bangalore and Goa. In phase 1, it plans to scale up in other major cities.

In FY19, the industry was affected by an overall slowdown in prices of culture, an extended winter, and high raw material prices.

AUTOMOBILES

Auto expert Demand remains subdued; the upcoming price hike due to BS6 emission norms

will also have a negative impact on volumes. Certain amount of pre-buying is expected in H2FY20.

Industry/segment-wide inventory correction has taken place in the last few months, but further correction is required as the channel is still way above normal levels.

Seeding of BS6 variants will start from the festive season with BS4 production expected to fully come to a halt from December 2019.

The Indian auto industry is shifting to publishing retail sales data. By March 2020, all RTOs will publish their data at Vahan portal vs. 68% currently. This will lead to correct inventory levels being reported as OEMs won’t be able to capture market share by pushing inventory.

Market has still not absorbed 25% capacity increases in CVs due to new axle-load norms. So it will take some more time for demand to revive.

Hero Motocorp dealer (largest dealer – north) Demand is postponed since September. Now the market has stabilised with all

headwinds (insurance, safety norms) over. We expect good demand this festive season.

BS-6 will lead to a price hike of Rs 4,500 (per two wheeler) but a bigger challenge will be to maintain brand value in terms of after-sales service.

Hero Deluxe is a predominant model in rural India. The recent price hike, a pause in government spending, and highly competitive models by Bajaj has led to a 40% decrease in effective footfalls.

Current inventory stands at 45 days vs. 30 days normal. It is expected to increase further to 60 days for festive season and BS-6 pre-buying.

BFSI Cholamandalam Finance Expects 15% disbursement growth for FY20; 30% of disbursements are from

existing customers while rest are from new ones.

Tractors are likely to report flat growth in FY20 after a good five-year run.

Will take the branch network to 1,200 by December 2019.

Credit costs to moderate further to 1% in FY20.

Average ticket sizes in home equity are c.5mn with the focus largely on residential properties.

CIBIL Consumption-lending business like Consumer durable, Personal loan, Credit

cards, where first time users are very high, is growing at a decent rate.

Delinquency in unsecured product segments is below 1%.


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Significant deterioration in asset quality in LAP over the last one year; GNPA increased to 3.5% from 2.67%.

New-to-credit customers with little or no credit history (CIBIL score) mostly apply for two-wheeler loans, education loans, and consumer durable loans.

CIBIL’s history is also limited for a large number of personal loan applications. In the absence of a proper credit history, monthly salary, bank statements and income tax returns are key parameter for decision making.

CIBIL score is based on asset-side information; majority population has average CIBIL score while only few have high or low scores.

Profitability of customers with high CIBIL score is low as they tend to pre-pay; however, their default rate is also low. Banks tend to offer loan to average CIBIL score people, provided they get the right pricing for the associated risk.

Smarter banks work on a portfolio approach – they provide loans to clusters (of people) with different pricing for each.

Over the last five years, a large numbers of new-to-credit customers have been added to CIBIL’s database; they do not have a long credit history.

Over the years, larger banks have developed competencies for the data-capturing process. Cleaning and authentication is very critical in the initial stages of data collection.

Incumbent banks with a long history of data (credit behaviour, salary, expenses details) tend to do well. How they use this data to make business decisions is important, rather than the cost.

Kosamattam Finance (unlisted gold-finance company) This is an unlisted gold loan finance company started in Kerala in 2004-05. After 2010, expanded in Tamilnadu, Andhra Pradesh, Telangana, and central and north India.

Strong player in southern India.

A trusted name in gold finance with a network of 928 branches across India with 650,000 customers and 3,250 employees.

Loan portfolio of Rs 22.4bn in FY18; 17% growth yoy.

Growth in loan portfolio over the years is a result of multiple factors such as good and efficient management decisions, better utilization of resources and workforce, macroeconomic scenario, and most importantly, certainty in the regulatory environment of gold loans NBFCs.

Trust and assurance is very important in gold financing; Kosamattam has been successful in gaining customer confidence.

Revenue/PAT at Rs 4.3bn/310mn in FY18 vs. Rs 3.5bn/160 mn in FY17.

Asset quality healthy: GNPA at c.1%.

Current credit rating is BBB stable.

Quick turnaround time, experience, and personalization are key parameters of success vs. competitors.

Maximum business per branch is Rs 60-70mn per year; most branches in Kerala are generating this amount of business.

Magma Finance 31 years of retail financing; PAN India presence across 21 states in India with 310 branches

34% AUM is from urban market and 66% from semi-urban and rural areas.

Comfortable liquidity position; continued business during the liquidity crisis.

Significant improvement in portfolio quality; GNPA reduced to 4.8% vs. 8.6% last year.

ROA of 1.9% in FY19; target is 2.5% next year.

Cost of fund increased to 9.7% vs. 8.9% last year

Next five-year growth drivers – CV, LCV, SME. LCV is a growing market with huge potential; targeting 15-20% disbursement growth in the next three years.


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Tata Motor Finance Wholesale and retail funding to new and used vehicles; exclusively for Tata

Motor vehicles.

Total AUM of Rs 380bn in FY19 vs. Rs 220bn in FY18; 15-20% growth came from a price increase.

Total AUM includes Rs 10-15bn of channel financing. Remaining AUM: 60% is M&HCV, 10% LCV, 30% others

Current ROE is 20% with a target of 22% in next two years; ROA is c.3%.

Has seen growth in strategic portfolio; current strategic customers are 50% of portfolio vs. 40% two years ago. Owners with more than 10 vehicles are deemed strategic.

Credit rate for strategic customers: Cost of fund + 2%. For retail/FTU: Cost of fund + 4-5%.

The company believes commercial space sector, specially road and mining, are performing well and will continue at least in the short-term based on stable government.

It has developed a very good collection strategy. For every single sales person, two collection agents are available. It believes that stronger the collection strategy, stronger the management. It even uses high-level of analytics in collections.

Recently, cost of fund has increased to 8.5% vs. 7.5-7.8% earlier.

Robust demand of LCVs coming from cash-management services, waste management, and recovery vans and ecommerce.

Waste management is the new lever of growth for LCVs, as it is directly linked to the Swachh Bharat program. An increasing number of municipal corporations are becoming a part of smart cities and the allocation (funds) come directly from the central government. Availability of Tata Motors’ LCVs in all tonnages is the biggest USP in this segment.

CAPITAL GOODS

Engineers India Management reiterated order-inflows guidance of Rs 18bn in FY20, driven by the

consultancy segment.

In FY20/21, it expects consultancy orders from IOCL Panipat (Rs 6.8bn), BPCL Rasayani (Rs 3-4bn), BPCL Numaligarh (Rs 7bn), HMEL Bhatinda Petchem expansion phase-2 (Rs 8-12bn), CPCL Nagapatinam refinery (Rs 8-10bn), GAIL PPU Usar (Rs 2bn), and Strategic Reserves (Rs 2.5-3bn).

Expects GAIL’s Kakinada project (Rs 310bn, stuck due to issues with previous state government) to start with the formation of the Andhra Pradesh government.

MRPL expansion (15-25 mtpa): Detailed feasibility has been completed; likely to be awarded by FY22.

Bina phase-2 expansion is currently on hold; sees it as a FY22 prospects.

Management has no clarity on the West Coast Maha refinery projects until land acquisition is complete – a tough challenge.

In the non-hydrocarbon segment, it sees opportunities from water, solar thermal, and data centres, but not as big as from hydrocarbon.

In the overseas markets, EIL expects new orders from Bangladesh, Nigeria (Dangote), and Abu Dhabi in the medium term.

It expects add-on orders from the Bangladesh refinery projects. While in Nigeria, Dangote fertilizer plant phase-2 is a prospect.

EIL is empanelled with Abu Dhabi National Oil Company (ADNOC), mainly for the brownfield expansion projects and sees opportunities from revamps and upgrades projects.


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In the past a few years, EIL has added South East Asia, Mongolia, and Abu Dhabi and is now looking for Africa.

In Africa, it is looking for EXIM funded projects where c.US$ 6bn Line of Credit (LOC) is still pending.

Recently won Mongolia refinery projects will have 65% Indian content and the execution timeline will be more than usual due to environment-related challenges.

National Mission for Clean Ganga We hosted Mr. Rozy Agarwal, ED Finance, NMCG, in our 2019 Annual Ground View conference. Key takeaways:

NMCG program has seen a sharp pick up in execution in the past 2-3 years with Rs 45-50bn spending (vs. Rs 60bn till date) out of the Rs 200bn of allocation.

The program has sanctioned Rs 311bn for sewage infrastructure projects adding 7,800mld STP (sewage treatment plant) capacity and 5,000kms of sewage networks. These include newly sanctioned projects of Rs 80bn on the twelve tributaries of river Ganga across 27 towns adding 2700mld STPs capacity.

Out of the sanctioned projects, it has completed Rs 22bn worth of projects until March 2019, adding 500mld of STPs and 930km of sewage network; Rs 114bn projects are under implementation, which will add 2000mld of STPs, and 2840kms of sewage network.

NMCG is likely to award Rs 180bn of projects over the next 6-8months, which will add 5300mld of STP capacity and 1,240kms of sewage network.

CEMENT

Cement Dealer (north, south, and east) Price hikes in south are sustaining, but no material incremental hikes have

happened in Q1.

Price hikes in North have been quite robust in Q1 – to the extent of over Rs 50/bag – and are still sustaining.

Price hikes in east India have been muted in Q1 as compared to the north and south.

Demand outlook from June remains positive, but issues such as shortage of labour have impacted demand materially in Q1.

JK Cement All capex plans are on track; expect to see full commissioning of new capex

within FY20.

With incremental efficiencies, it expects further cost efficiencies of c.Rs 50-100/tonne on overall volume.

Pricing outlook remains robust for Q1; sustainability is the key to be watched.

No immediate decisions on any further incremental capex yet. Will take a call by the end of FY21 and not before that.

Star Cement Capex plans for Siliguri on track with on-time commissioning expected by

December 2019.

EBITDA/tonne guidance remains at c.Rs 1,600 levels on a sustainable basis.

Demand and pricing outlook remains positive.

Will remain in consolidation phase. No immediate material capex announcements likely.


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FMCG

Britannia contract manufacturer confectionaries-cakes (western region) This was a contract manufacturer that makes breads, cakes and rusks for different FMCG companies and has a private-label for breads (since 1995). His take:

Parle: Makes cakes and rusk for Parle. Discontinued production of cakes for Parle from 2017 (due to lower volumes) and shifted to Britannia.

Britannia derives Rs 3bn from cakes. Most production is outsourced (despite cake manufacturing being relatively simple) because large companies find it difficult to manage work force.

Britannia management is thinking of transferring operation and management rights of its recently opened factory at Ranjangaon (Rs 5bn investment) to a third party as it is finding it difficult to stabilize operations, given political challenges in the region.

Cake market: 60% bar cake, 16-18% cup cake, other 22-24%. Britannia historically has been very strong in the south and east while Parle is strong in north and west for an entire range of products.

Cake shelf life is 90 days for Britannia, which is super-efficient in supply chain management – its cake reaches the retailer’s shelf within 15 days of production.

Britannia new product launches in cakes in recent time has failed, as KRA (Key Result Area) of the top management was driven by innovation, so to fulfil those KRAs, it launched many new products without proper market surveys and sales-feasibility analysis (example – launching kulcha in Mumbai was a clear non-starter, as there is miniscule consumption of Kulcha in MMR).

New product launches: Britannia continues with it even if initial response has been lukewarm, until wrapper (packaging material) is fully exhausted.

Britannia is a market leader (more than 50% market share) in bar cakes as small/unorganized players find it difficult to manufacture and match up in terms of quality. Mongins is the leading players in cup-cakes due to a chain of retail outlets.

Parle is struggling in cakes and rusks due to lower offtake and inefficient product recipe, which leads to lower gross margins. Parle does an annual revenue of Rs 150bn from biscuits business (out of which Rs 50bn comes from exports); it has been utilizing a steady stream of cash flows for expanding into non-biscuit categories.

Contracts for manufacturing cakes and rusks for leading FMCG companies are generally for a year, renewed annually. Not perturbed by contracts of short duration, as large FMCG players will see efficiency gains only once a contract manufacturer stays in their system for a longer period.

Britannia has bad returns/replacement policy vs. some of the new players.

Central India distributor: Emami, Bajaj Corp, Nivea, and Capital Foods Lot of Modern Trade (MT) outlets have come up in Madhya Pradesh in the last 2-

3 years and MT outlets in smaller towns are growing faster than in big cities due to which general trade across smaller towns has been impacted the most.

Frequent discounts and promotions by companies (Emami, Bajaj Corp) to push sales has to led to many wholesalers/distributors stocking smaller quantities instead of buying in bulk; they believe if companies keep the discounts funnel going, it will become difficult to sell the goods that they are holding at higher costs.

Wholesale has slowed down largely because of frequent schemes by companies (low stocking in anticipation of further discounts). GST and demonetisation impact on wholesale was seen, but only for 4-5 months.

Nivea: Have seeing strong traction in Modern Trade driven primarily by promotions and discounts. Three years back, Nivea was doing a business of Rs 75,000 in a small city (population 1.3mn) in central India, while now it is doing Rs 2.5-3.0mn in MT.


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Emami and Bajaj Corp: Both these companies are working with the ‘trading’ mindset and have lost focus on brand. They also have higher dependence on wholesale, which is dragging growth. In order to drive growth, these companies will have to focus on individual brand strategy and reduce their wholesale dependence sooner.

Capital Foods: Recently Ching’s has seen a slowdown, not because of competitive pressure, but due to unavailability of products (soups, noodles) across markets.

Contract manufacturer (detergent, personal care products) Large companies generally sign long-term contracts (5-10 years) with the

contract manufacturer. However, they squeeze them to a great extent.

Companies forecast demand for 3-6 months and accordingly give targets to their contract manufacturers.

Any increase in raw material prices is passed on to companies; also price declines.

After implementation of GST, many small/new companies are entering into the personal care business, as earlier higher taxation and leakages in the system led to many smaller/new companies going away from the segment.

New companies entering the market are looking at natural, differentiated products.

HUL distributor (central India) The distributor’s network covers 1,200-1,300 outlets (wholesalers, retailers,

chemist, etc.); out of the 1,400 outlets identified by Nielson in the region, this distributor has the highest touch-point coverage.

May (month) sales are below targets due to rural slowdown. Slowdown in consumer spending is temporary, because of liquidity-related challenges during elections. Moreover, the incumbent government has stopped a few schemes of the previous BJP government that were doling out cash – which has resulted less money with rural households, especially with farmers. He expects consumer demand to bounce back as liquidity comes into the systems (as election season has come to an end).

Aggressive expansion by organised modern trade players (Reliance – cash & carry + recent foray of Dmart) has started hurting businesses of city-based distributors. Moreover, Reliance’s recent tie-up with Kotak Mahindra Bank, which provides interest free credit to small retailers, has made matters worse – as this elongates the working capital cycles of distributors even more.

Segment wise

Soaps: HUL has recently launched Fair & Lovely Soap; marketing activity (TV + Promotional campaign) for this will start next fortnight. It plans to position this as a premium product and expects it to be priced marginally lower than Dove / Pears.

Detergent: Surf Excel is seeing fastest growth within detergents and there has been no significant change in premiumization trends despite recent slowdown in rural growth.

LUP (Surf Excel Rs 10) has seen the fastest growth as customers aspire to buy premium products. They like the price-value proposition. However, these customers (who have become loyal customers of Surf Excel) are generally from the lower economic strata and do not switch to larger packs because they lack future cash flow visibility.

Skin care: Ponds powder sales took a maximum hit this summer due to extended winters.

Hair Care: Indulekha has been a roaring success, as customers find this product has great utility value, despite being quite expensive. Last year, HUL has to deal with the counterfeit issue; many local players had started manufacturing as demand had far outstripped supply for Indulekha. Management has been pro-


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active in supply chain management this year and has made the required quantity available. Banking on Indulekha’s brand strength, its recent foray into the shampoo segment (Rs 5 sachet) has also seen decent traction.

Oral care: Toothpaste continues to be the weakest link; but for 2-3 months, we are seeing renewed aggression driving up growth for Close-Up in rural areas.

Shampoos: Broad-based growth across brands (Sunsilk, Clinic Plus, Dove, Tressme etc). However, sachets continue to grow much faster than larger packs.

Foods (GSK integration): Next lever for HUL growth is from Horlicks; HUL’s wide distribution network will drive its volume growth. Expects additional 10-15% revenue from Horlicks, as GSK Consumer has already parted ways with its own distributors and started giving business to HUL distributors in areas where the latter have the required strength.

New marketing campaign for Horlicks (post-acquisition) along with HUL’s distribution might, can work wonders for GSK Consumer’s brand portfolio.

Largest Distributor Himalaya (CPD, cosmetics, baby care) and Jyothy Labs - Mumbai region He alluded to the economic slowdown, with Jyothy Labs being hit the hardest.

Himalaya continues to be juggernaut; has never disappointed in delivering due to its naturals / herbal based positioning, superior product quality, right price-value equation, word-of-mouth publicity and steady introduction of new products across segments.

Jyothy Labs:

All segments (ex-dishwashing) are struggling due to presence of strong incumbents (detergents - Henko, soaps - Margo), unfavourable weather conditions (HI – Maxo), and muted category growth (fabric whitener – Ujala). Attrition levels have gone up within the sales force in western India; it has not been able to achieve its targets.

Dishwashing: This segment continues to do well with broad-based growth seen across bars and liquids.

Soaps: Although there is lot of potential to drive Margo’s growth, given strong brand equity, the management has not done enough.

Himalaya

It is a highly profitable business for any distributor, given strong brand equity and lower freight costs for transporting products. Management has the knack of launching new variants within existing categories and foraying into fast-growing and emerging categories. Moreover, once a new product / variant is launched, management aggressively backs it via promotions and schemes. Once a particular threshold is achieved, it gradually pulls back all promotional offers.

Baby care: Seeing solid growth as customers are facing trust deficit issues with Johnson and Johnson, who is a leading player in the segment.

Best-in-class service: Separate salespersons appointed for baby care and cosmetics products, leading to improved service standards.

IT SERVICES Mindtree Top client (Microsoft)

The company is witnessing strong growth from its largest customer (Microsoft). The increase in scope of work is attributed to newer services in digital, analytics, data, Microsoft Office 360, etc.

For MS account, some of the projects have an annual renewal cycle, while some deals are project-based.

With some of the work moving offshore for MS, Mindtree has seen increased margin for its Hi-Tech vertical (under which most of the revenues from MS are reported).


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Despite increased revenue share from MS (20% of Mindtree’s revenue), the management does not anticipate any client concentration risk, nor does it see any decline in the revenue growth rate.

Pricing for most MS projects are defined as per Master Service Agreement. If a project is complex or skill sets are not defined in advance for any particular project, then pricing for that project changes.

For FY20, the management expects its MS account to grow in double digits. Realization

Not seeing any pricing pressure from customers. With increased IMS revenue (with no additional employees) and increased share of license revenue, it expects realization to increase going ahead.

Pricing for newer-age technology projects is not determined on T&M or fixed-price basis, but is defined on the complexity of the project.

Others

Margins in BFSI were impacted by client-specific issues (with 1-2 large clients), which the company expects will stabilize soon.

Management remained optimistic of strong demand environment in its key verticals – travel and retail & CPG.

L&T takeover

There are certain observations raised by SEBI, hence the delay in L&T’s open offer. However, the management’s view is that these observations are largely procedural/technical, and SEBI will clear the open-offer proposal soon.

L&T group now owns 28.5% of stake in Mindtree (through CCD stake and open market purchases).

Mindtree’s management did not have any conversation with the L&T group regarding the prospective merger of Mindtree with LTI.

Macro issues: The company does not see any impact from the US-China trade war or delay in Brexit. It also does not see any spending cut by any of its of customers. Guidance: For FY20, the management has guided for “low-teen CC revenue growth”. It expects EBITDA margin expansion of 150bps from the recent changes in lease rental accounting – which will be neutralized at the EBIT level and will have marginal negative impact at the PAT level (20-30bps). The company expects further margin improvement of 100-120bps from: (1) operational efficiencies through higher fresher addition, (2) higher price realization through larger digital deals, and (3) other operational efficiencies.

LOGISTICS Blue Dart Blue Dart Express (BDEL) is leading express service provider in India with more

than 30 years of operational experience. The company has a domestic network covering 34,267 locations and more than 220 countries and territories providing reach and access to customers.

It is the first and only scheduled cargo airline with a dedicated fleet of freighters and infrastructure support. Its infrastructure comprises of a fleet of six Boeing 757 freighters offering a revenue payload of over 370 tonnes per day.

The company is a dominant leader in the domestic air-express industry and commands c.46% market share in the organized air-express market while it has a market share of 13% in the express ground segment.

It derives c.80% revenue from the air-express segment while the ground segment revenue accounts for the remaining 20%. E‐commerce revenue contributes


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c.18% to revenue and promises high growth, considering industry growth of 20‐30% over the next 5 years.

As economy matures, management expects strong growth in surface transportation. Transit time saving is c.10-15% after GST for vehicles. GST tax for express services is 18% compared to earlier effective tax of 15%.

It has starting two e-fulfillment centers at Gurgaon and Bangalore. It has warehouses at 79 locations across the country as well as bonded warehouses at the 7 major metros of Ahmadabad, Bangalore, Chennai, Delhi, Mumbai, Kolkata and Hyderabad.

The company has expanded its network aggressively in tier 2 and 3 cities, which has increased the cost base, resulting in pressure on profitability in the medium term.

Container Corporation of India Concor enjoys a significant competitive advantage and economies of scale due to

its nationwide terminal network. It has market share of c.73% in exim containers by rail.

Western Dedicated Freight Corridor will enhance its competitive edge significantly (hub-and-spoke model gaining prominence) by reducing lead times with higher speed (2x) and higher cargo carrying capability by double stacking of containers, thus yielding significant reduction in capital intensity resulting in improvement in return ratios. Concor has c.77% market share for rail movement at India’s largest container port – JNPT – and would be major beneficiary of DFCC due to double stacking of containers from JNPT after DFCC.

DFCC will increase ‘hubbing’ operations from Khatuwas and Palanpur (Gujarat) for the company.

To provide better service, it has increased free storage days and started online booking and tracking of containers. Continuous cargo visibility provided by the company is well appreciated by customers and is available on a mobile app.

Management hopes for strong volume growth with a price stabilization scheme announced for FY20. Concor has paid rail-haulage fees upfront to the Indian Railways, which will protect it from any future increase in haulage charges until March 2020.

Concor has started a distribution logistics business from March 2019 based on a survey done by PWC. It is planning to start 20 distribution logistics centers over the next 2-3 years. The immediate locations to start with are Mumbai, Hyderabad, Agartala and Pune. Distribution logistics business is an asset light model and all services will be offered by developers on revenue-share basis. It plans to expand into 50mn sq. ft. warehousing space over 2-3 years for distribution logistics.

The company started coastal movement in FY19. Currently it has a weekly voyage from Kandla Port to Cochin Port. It will expand coastal services to the East Coast soon and the company is not limited to containers alone. It will start coastal services for bulk and break bulk cargo movements. As part of waterways, Concor is also looking for waterways movement particularly in the northeast market.

Transportation of bulk cargo in domestic movement is a new venture that the company is looking at currently. Materials like cement and industrial salts in bulk could provide a huge opportunity for the company because it provides cost-effective solutions. To support new initiatives, it is planning to add another 270 rakes to its current fleet of 340. It is also adding container fleet aggressively. It added 8,000 containers in FY19, will add 4,000 in FY20, and planning to order 10,000 containers after FY20.

Total capital expansion planned is Rs 60bn over five years (50% rolling stock, 40% logistics parks, and 10% IT infrastructure).


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Patel Integrated The company has two major business segments: Air Cargo Transport (60% of

revenue) and Road Transport (Patel Roadways; 40% of revenue). It is a leading air-cargo consolidator with an asset-light model. In road transport, it provide less than truck load (LTL), door-to-door express cargo and full truck load (FTL).

The company has sold Patel Roadways including Express, less-than-truck-load (LTL), and full-truck-load (FTL) segments by way of slump sales in an all-cash deal of Rs 385mn to Innovative Logistics Services Pvt. Ltd., a 100% subsidiary of Stellar. The deal is positive for the company as roadways business was not adding to EBITDA and the deal will help reduce debt. Patel will continue to own tangible assets such as its truck fleet of 60 vehicles while Stellar will get its pan-India network.

After GST, the management is expanding the business in warehousing and logistics outsourcing. It has acquired land for warehouse at Bangalore (2.2 acres) which is expected to start in a month and Chennai (3 acres) and is looking to expand warehousing at Ahmedabad, Hyderabad, NCR Region, and other strategic locations in the coming years. Expects margins in warehousing at 40-50%.

Currently, freight market is weak and is expected to improve after elections. The government is also considering a separate logistics ministry. The logistics sector is expected to transform with infrastructure status, GST, and E-way bill development.

Tax invoices are also expected to be generated online on the GST portal to avoid under-reporting of cargo and tax evasion.

The company is not keen on increasing its own fleet and will increase outsourced (attached vehicles) for growth. Industry demand for commercial vehicles is mainly from the replacement market. The company does not have major impact of change in axle-load norms, as it mainly carries lighter parcel cargo.

GE Shipping It is one of the best-managed companies in the Indian shipping pack, and it is

known for its timing vessels purchase and sale of vessels in second hand market. It currently operates a diversified fleet of 47 vessels, comprising 29 tankers (12 crude carriers, 17 product carriers, 5 LPG carriers) and 13 dry bulk carriers with an average age of 11.4 years. In its offshore business, it own 23 assets including 4 jack-up rigs and 19 support vessels.

The company expects significant changes in the shipping sector with a change in norms for low sulphur emission and Ballast water treatment (BWTS). It has fitted 8 vessels with BWTS and 35 are scheduled in FY20. For low sulphur norms, one of its vessel has been fitted with a scrubber and 6 are scheduled in CY19. Reaming vessels will shift to use low sulphur oil from January 2020.

The shipping market may see some improvement in FY20 after these regulation as ship supply may be reduced with increased scrapping and low steaming of ships. To reduce the fuel consumption, the average speed of ships is expected to come down.

The company has added to its fleet aggressively in the past three years – mainly in the bulk and gas segments. It does not have any committed capital expenditure now and this will be based on opportunity in the market. It has made an enabling provision to raise up to Rs 10bn in its recent AGM.

Offshore business continues to remain weak, but charter rates for support vessels have improved from a very low base. The company has renewed the charter contract for three jack-up rigs and a fourth one is up for renewal by the end of FY20. E&P expenditure by oil majors was falling for the past three years, which it expects to stabilize this year, supporting the recovery in support vessels. The oversupply in rigs, with current global fleet utilization of around 65%, will take longer to recover.


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METALS

Welspun Corp Welspun Corp started FY20 with impressive order book of 1.7mn tonnes (US –

352KT, India -521KT, and Saudi -788 KT). The company expects all-time high sales volumes of 1.5-1.6mn tonnes in FY20 (India: 700-750KT; US: 400KT+; and Saudi: 400KT).

Welspun guided robust EBITDA (India + US) of Rs 11-12bn in FY20 (including other income). The Saudi mill is expected to breakeven at the PAT levels in 1HFY20.

Management remained bullish on water pipeline demand in India (states like Madhya Pradesh, Andhra Pradesh, Telengana, and Rajasthan has big infra plans) and improving outlook in the US given oil/gas prices.

Removal of Section 232 duty for Canada and Mexico is still not a big concern for Welspun, considering strong demand outlook.

MP facility (Phase 1: pipe mill) has been commissioned and the company expect to commission coating mill (Phase 2) in 6-8 moths. The facility has orders of 75KT.

Out of total Rs 3.5bn corporate bonds, Welspun has taken provisions to the tune of Rs 2.5bn so far and has also sold c.Rs 400mn so far in Q1FY20. Therefore, exposure to risky investment has reduced considerably.

Sale of its plate and coil mill is likely to conclude by September-October 2019. At the end of March 2019, net debt stood at Rs 2.9bn. Welspun expects to be a net cash company by the end of FY20, partially aided by strong cash flow and absence of any meaningful capex.

Management does not wish to acquire any defunct pipe facility and would continue to concentrate on its core pipe business and improving capacity utilization.

MIDCAP

CG Dealer - North Currently, there is a price war between distributors and wholesalers due to CG’s

new policy

In fans, consumers prefer Usha, Bajaj, CG/Havells and then others. Consumers prefer Havells’ products as they are premium ones and have better after-sales service vs. its competitors. Dealer expects fans volume CAGR at 7-8% by FY21 in Uttar Pradesh.

CG has improved its product basket and doubled its sales in the last 4 years. Because of its continuously launching new products, dealers and distributors do not buy other models as they fear inventory piling up in their system.

In fans, CG has taken a price hike of Rs 50-100 yoy in FY19.

In its other companies’ product portfolio, the dealer said that V-Guard is popular for stabilizers in UP and a good competitor in fans against CG.

In wires and cables, Havells is selling its products aggressively.

In retail wires, Havells is considered the best and in project wires, KEI has strong presence.

Havells Dealer - North Havells is the most expensive electrical brand in all its product categories

because of its strong brand image.

Demand in Wires and Cables is strong because of government projects, telephone connection wire lines, etc.

The company has 70% market share in Wires & Cables in Lucknow region. Its major competitor is RR Kabel, which is 6-7% cheaper.


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In appliances and consumer durables, residential demand is weak due to which retailers are facing difficulties in clearing inventories.

In switchgears, the company is entering the rural market with its Reo series MCBs (Miniature Circuit Breaker) to compete with Anchor. Its price is higher than its competitors, but it is accepted by the consumers, helping it to gain market share in this segment.

Overall, the Lucknow market has seen 5-10% growth in the last two years. Dealers’ businesses are taking a hit due to e-commerce.

KEI Industries Management expects improving product mix and strong order book, revenue

growth of 18-20% in FY20 (revenue target of Rs 60bn by FY21), and operating margins of 10-11%.

Currently KEI has market share of 12-13% for institutions and 7-8% for retail.

Increasing penetration and strengthening of the dealer network resulted in strong growth in retail (+29% yoy to Rs 4.1bn). Total active dealers were 1,450 (added c.166 dealers in FY19). Brand building activity and increasing touch points will help it to increase its B2C revenue share.

Currently, its retail share is c.34% and it expects this to rise to c.40% by FY20-21 (FY20: Expects 28-30% growth in B2C revenue). Currently, 50% of retail sales are under channel financing; expects this to increase to 70% over next 2-3 years.

In EHV (Extra High Voltage), as approvals are in place, management expect revenue of Rs 4bn in FY20. Currently this segment has an order book of Rs 5.7bn (L1 of Rs 1.1bn).

In EPC (Engineering, Procurement and Construction), total order book was Rs 23.9bn. In current order book, cables component is higher, so management expects a revenue growth of c.10% over the next 1-2 year.

KEI has a strong export presence in about 25 countries in the Middle East, Africa, and in Sri Lanka.

Capex of Rs 100-120mn for debottlenecking in its Pathredi plant over the next 3-4 months. Management expect this to add an additional revenue of Rs 1bn. Rs 1bn capex for expanding its house wire capacity in Silvassa (FY19 capex was Rs 410mn; Rs 600mn expected at FY20). Total capex for FY20 will be 820mn.

Total debt as of Q4 was Rs 7.3bn (including BG of Rs 1.4bn). KEII has paid Rs 1bn in FY19. With annual repayment of c.Rs 600mn, KEII expects to pay-off its term loan in two years. Additionally, it is increasing its B2C share. We expect reduction in its working capital debt over the next 2-3 years, although higher bank charges will result in higher interest cost in Q4.

Tile dealer south (Somany, Morbi players) Revival in growth led by improvement retail and commercial developments

picking up in Kerala.

Somany has not taken any price hike in Kerala, but has reduced discounts from to 15% in April 2019 from 20% earlier. Expects Somany to hike prices in the next 1-2 months.

Morbi players have hiked prices in April and May by 5-8%.

Price difference between Morbi players and brands has reduced by 5-10% over the last 2 months; expects further reduction.

Creditor days for Somany has reduced to 60-75 from 90-120 earlier.

Somany is improving its marketing and branding in Kerala. It has lost market share here over the last one years; HRJ (HR Johnson) has increased its share.

New team in HRJ is focusing on improving its product offering.

Yash Paper One of the major manufacturers of pulp. Product profile consists of pulp,

moulded products and paper.

Its paper plant runs at a CUF of 94% and operates majorly in the north market.


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The company launched its flagship brand “CHUCK”, which is a replacement of plastic cutleries in FY18 – which runs at 52% CUF.

Management expects 30-40% growth from its compost packaging segment and 35% from its flex packaging segment.

For CHUCK products, clientele consists all Shatabdi trains (20,000-22,000 units per day) running in India and it is the sole distributor of paper plates to Haldiram food joints.

Plans to add capacity in FY20 as it is expanding its distribution reach and demand for its products is strong. Plans to target caterers, QSRs, and trains.

These products cost 10-15% more than the plastic products (Styrofoam).

PHARMA

Pharma - Expert on USFDA Profile: Chemical engineer from IIT Delhi. Worked with various leading Indian pharma players – Torrent, Sun Pharma, Ranbaxy, Wockhardt, Alkem. Profile: Advanced market regulatory/quality compliance. Provides consulting to 65 companies (India and abroad) on regulatory compliance. Runs a pharma manufacturing operation.

Takeaways: As per the changes in USFDA practices (starting 2018) in terms of facility evaluation and inspection, USFDA communicates the classification of the inspection to facility owners within 90 days following the close of an inspection.

If the facility inspection indicates an initial OAI classification, Office of Regulatory Affairs (ORA) forwards electronic documents to the Office of Manufacturing Quality (OMQ) within 45 days of close of the inspection. OMQ makes a final classification and, subject to input from the Office of the Chief Counsel, issues a decisional letter in the following 45 days (thus within 90 days of inspection).

If the facility inspection indicates NAI/VAI classification, it communicates within 145 days by way of a directive, but not a decisional letter.

OAI is as good as a warning letter; separate warning letter may not be issued. If it indicates VAI classification, FDA will inspect the facility anytime within 12 months.

Indian players with a larger focus on injectables would continue to face major challenges in FDA compliance, as the Indian mind-set is not aligned to the hygiene requirement for sterile manufacturing. Hence, investors should be cautious.

China may not be a competitive threat at all for Indian pharma due to its practice of generating data in the Chinese language.

Most of the Indian players conduct bio-studies for the filed ANDAs at their own associate companies, which is very risky from the regulatory standpoint. Bio-studies should be done by a third party.

Syngene International Ltd Syngene International is the largest CRO (Contact Research Organization)) in

India and the second largest in Asia. It provides integrated services for small and large molecules, antibody-drug conjugates, and oligonucleotides.

It has three key business verticals: 1) Dedicated services (30% of sales) – provides dedicated infrastructure like R&D centres, which are customised as per the client’s requirements to support R&D activities. These are largely FTE base long-term contracts, 2) Discovery services (25% of sales) – these are multi-client infrastructure to provide services on discovery chemistry, discovery biology, in-vivo services, peptide synthesis, etc. These are largely FTE based short-term contracts, and 3) development and manufacturing services (45% of sales) - preclinical studies, stability, formulation, biologics, CMC, and clinical supplies, clinical development etc.

Synegene’s planned capex of US$ 200mn, of which US$ 100mn was towards capacity expansion as well as new centres for new services like Virology, Biologic


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plant, etc. and US$ 100mn for an API/intermediate manufacturing plant in Mangalore.

Expects to complete regulatory approval process for its greenfield plant at Mangalore by the end of FY20. Expects slow ramp-up with gestation timeframe of 12-15 months.

Also has plan for additional US$ 200mn capex over the next few years. Targets to achieve gross block of US$ 550mn over 2-3 years.

Sees strong visibility from biologic outscoring as multiple biotech companies are initiating new projects, but they lack the infrastructure to support R&D activities. Hence, it can be big opportunity in near future.

Syngene has cost advantage against Chinese peers as the billing rates from Chinese players is 300% higher than Synegne’s. Recent developments between US and China could create an opportunity for Asian companies due to the shift in outscoring from China to other countries.

Expects to maintain strong growth momentum over two years, led by capacity expansion, increasing outsourcing activities by global pharma players, and new client additions.

Syngene is looking at foraying into biologic services, integrated discovery services, and diversification of services – this would be the key growth driver for the company. Although it sees that peers – Lonza, Celltrion, Wuxi – are far ahead, with the size of the market, it expects to achieve meaningful growth.

Expects to maintain growth and margin at FY19 levels.

RETAIL

ABFRL Early EOSS (End of season sale) depressed growth in Q4FY19 for Pantaloons.

However, sales in Q1FY20 are improving post elections.

Management believes that SSSG (same store sales growth) will improve by reducing discounting and increase share of private label sales. Discounted sales are c.20% for Pantaloon.

In Madura, it is planning to add 350-400 stores on a gross basis while on a net basis +250. Most of the stores would be franchisee based.

In Louis Phillip, more than 50% of the revenues are from extensions. Shoes contribute more than Rs 1bn. Kids revenue is growing at +40% while innerwear is +100%.

Under Peter England Red, it opened 100 stores in FY19 and has launched shirts in the Rs 600-700 price range.

Pilot testing Style Up in the tier-2 and 3 cities in value mass fashion. Plan to open 10-15 stores in FY20. Currently, this business is not profitable.

Expects breakeven in innerwear in FY21 with revenues of c.Rs 5bn. Expects to increase retail footprint to 20,000 from 14,000 over the next one year.

A&P spends to remain at elevated levels over next 2-3 years. Company will invest aggressively on brand building in the lifestyle business.

Spencers Retail Company doesn’t have fashion in small stores while large stores have fashion; 4%

of the business is apparel while the management wants to increase its share. Apparel is sold under the ‘2BMe' brand.

For the last two years ,SSG has been flattish because of GST and highway liquor policy. FY19 SSG has started moving up. Food inflation is not as high now as it was earlier.

Currently food accounts for 63% of revenues, 18% non-food FMCG, and 10% liquor.

South City store accounts for 10% of the company’s turnover. It was shut as the mall was renovated and now it has started with a larger area.


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In June 2019 the deal with Nature’s Basket will be complete. They have 36 stores all over India of which 80% are in western India. Nature’s Basket’s operating costs are high but SSSG is also high along with a good private brand program. It also has a liquor licence for all its stores – which is hard to get and will help to increase Spencer’s liquor portfolio.

Large stores are more profitable; small stores are opened to capture the market. Older stores do better in terms of SSG and as the catchment grows.

Private label mix in Nature’s Basket: 15%. Spencers has 9% ex-apparel while including apparel it is 15%.

The company plans to increase food sales from this quarter by introducing private labels. Private label has 4-5% higher gross margin compared to branded products. Expects the contribution of private labels to increase to 20%.

Sees SSSG at 9-10% and does not want to open new stores in tier 3 and 4 cities. Will focus on opening new stores in tier 1 and tier 2 cities and improving its range of products vs. D-Mart, which sells fast-moving products.

V Mart Retail Currently, the company has two types of stores: Normal fashion stores (185) and

composite stores which comprises both kirana and fashion (38, of which 50% are in Uttar Pradesh). Incrementally it is opening only fashion stores.

Store opening to remain at elevated levels; targeting 50+ stores in FY20. Will focus on CAGR of 20-25% in space addition.

Planning to open one new warehouse in West Bengal in FY20 to cater to the east India market. Currently has one in Bilaspur.

Pilot testing of omni channel has started internally. Plans commercial launch in Q2FY20.

In Tier-4 cities, finding an ideal location to generate footfalls with easy accessibility and ample parking space is a problem. It is difficult to find skilled workers and training requires additional capital. However, economies of scale have been in its favour.

The company says it has seen no impact of Brand Factory, Reliance Trends, Max, FBB on its revenue as its products are priced at 30- 35% lower than national players.

While the company has a loyalty program for customers who contribute 65% of total revenues, it is working on a reward structure for loyal customers.

The company has started to use analytics to understand consumer behaviour and demographics of customers that visit the stores.

The management is not looking at increasing its ASP as the customer’s income is not increasing in line with aspiration levels.

67% is private label contribution. Flick is one of the most successful private label brands for V-Mart.

It is building fabric and design competencies internally to drive growth and be ahead of competition.

Margins would remain at 9-10% in FY20 given that rentals and manpower cost is rising, even as SSSG stays in the 5-7% range.

Contract manufacturer for women’s wear (Pantaloon, Reliance, Zara) Contact manufacturers have to provide something new constantly and hence

they have their own in-house design studio. They make 75-100 designs per month. Zara is always open to new designs and hence is ahead of the curve.

Foreign brands don’t want to work with contract manufacturers who will delivery in more than 75 days. Hence, they are compelled to reduce the lead time.

Competition is increasing from countries like Vietnam, Morocco, Turkey, and Bangladesh.

All companies perform an audit once a year.

Pantaloon is focusing on private label and wants to increase that share to 75% of revenues; so it has started giving higher volume orders to contract


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manufacturers across brands. With a large number of stores opening, the order value/quantities have increased in the last two years.

Indian mills are not geared to provide fabric in less than 30 days, so it was very helpful to be vertically integrated. However, companies have started providing fabric for faster delivery; now 70% of the fabric is supplied by companies and 30% is outsourced to contract manufacturers.

Indian brands have started to demanding quality products and timely delivery over the last one year. They have started to putting stringent clauses in contracts and penalizing contract manufacturers for loss of sales if there is a delay in delivery.

Indian brands have started giving larger share of business to exporters since they understand the importance of quality and timely delivery.

Companies are constantly trying to make products exceedingly cheaper and it is becoming difficult to take price hikes.

Pantaloon and Reliance have one of the best payment terms in the industry.

Margins are better in exports compared to domestic business due to c.8% export incentive. Contract manufacturers are improving efficiency and keeping operations lean to improve margins.

The company makes 12-15% margin; 40-45% is fabric cost, 10-15% value addition cost, employee cost is 15-20%, 10% corporate over heads etc. Earlier margins were 20-25%. Employee cost has increased the fastest on an increase in minimum wages.

Exports market has been shrinking, domestic market is growing. In the off-season they cater to the domestic business.

Future Lifestyle & Fashion Central:

o Plans to open 5 Centrals every year. o In order to increase the overall shopping experience, Central has come up

with Central HD, which offers differentiated services to customers such as free WiFi, billing without queue, etc.

o Management believes that 10 more cities can accommodate Central. While West and South India are saturated, they would focus on Gujarat and North India for new store opening.

o The company doesn’t want to increase the share of private labels in Central beyond 35%, currently at 30%. Hence, gross margin expansion in this format would continue for few more years.

Brand Factory: o Plans to increase its stores in the northern region and wants to target tier-2

cities. o Expected to open about 25-30 stores each year, and targets 250 stores by

2024. o The company also plans to increase its online presence by introducing brand

factory online in Q2FY20.

Brands: o Focus will remain on six power brands. o Top 5 brands include Clarks, Turtle, Cover Story, Mineral and Tresmode. o Could divest stake in Turtle over next 3 years. o Could increase stake in Cover Story to 100%, given the positive response,

from current 90%. o Bear and Converse are also on the verge of becoming power brands. o Wants to make Lee Cooper the largest denim brand in India. o aLL is already the largest plus size brand in India; expects it to grow by

+20%. Investment in investee companies will continue.


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TELECOM

COAI Regulator + government:

Both entities do not want the telecom market to be a 2-player market.

Vodafone’s exit would be seen as bad globally; that would be construed as the Indian market not being good for Foreign Investors and might affect future inflows through FDIs and FIIs.

Overall market conditions:

B2C is always a high-volume, low-margin business.

Jio is now not bent on dragging margins further with lower ARPUs; neither it is keen on increasing the rates.

With intense competition in the B2C segment, companies are now shifting focus to the enterprise-side of the business (B2B). Some areas which provide tremendous growth opportunities are: o Safety features in cars. o Drones (each requires a Sim card). o Smart cities (Jal boards connecting meters).

It will take 3-4 quarters for B2B business to pick up.

Industry recommendations to DoT:

The telecom industry has recommended reducing the upfront payments given for license/spectrum: o Reduce upfront license fees to 4% of license value vs. 8% earlier. o Reduce upfront spectrum charge to 1% of spectrum value vs. 3-5% earlier.

However, the finance ministry is against these changes, as it will lead to lower revenues, affecting the fiscal deficit.

Issues with BSNL and MTNL:

Being government undertakings, both have a significantly higher employee base vs. private players. Though both companies have started downsizing through VRS, a lot remains to be done on the margins front.

Also, the procurement process at these organizations is lengthy and time consuming; this sometimes leads to delays in rolling out newer services.

There is a very high trust factor for these organizations among consumers and they are more reliable on security and privacy from a data point of view.

Government of India is also not too keen on shutting them down, as it will send a wrong precedent.

Infact BSNL/MTNL will help GoI push Make In India as the services offered by both these service providers can be bundled with locally manufactured handsets (difficult to incentivize private players for this).

5G:

Roll-outs of the 5G services would be in packets.

Telcos will likely to shift to 5G as 4G cannot support large number of devices. The latency for 4G is 12millisecond while 5G latency is at 2millisecond.

Enterprise: 5G would be more suitable as it offers six sigma accuracy (for drones, driving, surgery etc) compared to 99.99% for 4G.

Others: Areas that the Government of India wants to develop with 5G are:

Waste management

Traffic management

Agriculture

Education

Health

Smart Cities


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