institutional equity research consumer...

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Consumer Electricals Heavy discounting, inventory push will lead to growth in Q2

INDIA | MIDCAP-ELECTRICALS | Q2FY20 Results Preview

9th October 2019

We see overall yoy revenue growth of 11%. Voltas, BJE (consumer business), Orient Electric, KEI and Polycab will outperform the industry. Havells (mainly because of Lloyd) and VGRD (mainly because of the south India floods) will underperform the index. Key highlights Q2 headwinds – heavy rainfall, economic slowdown, intensive competition and

inventory push – led to pricing pressure and lower stocking and secondary sales. Strong AC sales in Q1 resulted in lower inventory at the beginning of Q2. Companies

refilled inventory, which resulted in strong primary sales but low secondary sales. E-commerce sales (by Flipkart and Amazon) resulted in heavy discounts and lower

footfall in offline trade. Offline channel partners have tried to match online discounts to liquidate inventory, but this has impacted their margins.

NBFC-led liquidity issues are hurting channel partners, leading to lower stocking and primary sales. However, consumer financing is driving some growth in primary sales.

Softening qoq copper prices (by c.5%) will lead to lower volume growth in wires and cables (as the channel stocked less in anticipation of price reductions), but will lead to some improvement in margins. W&C companies have not cut prices in Q2FY20.

Liquidity issues hurt secondary sales of electrical products, but inventory push has resulted in primary sales growth. Strong volume growth in Q1 for cooling products resulted in lower inventory and higher primary sales in Q2, mainly for ACs. Channel partners have also stocked up seasonal product such as water heaters, but liquidity issues and floods have dented secondary sales. In Q2, the industry saw heavy inter-brand and inter-channel (offline vs. online) competition, resulting in heavy discounting and capped price hikes. Liquidity problems led to lower channel stocking in Q2, depressing primary sales for seasonal and non-seasonal products. Detailed update on page 2. Lower construction activity, correction in copper prices, and lower execution led to drop in volumes for wires & cables (W&C): A large portion of electrical companies in our universe are manufacturers of electrical W&C. Global copper prices are down 5% qoq and have been falling for a while now. The channel had stocked less, anticipating an even greater fall in prices, leading to lower volumes. A drop in construction activity and reduced project execution resulted in lower growth in W&C. In Q2FY20, companies have not cut any prices, which we believe will translate into some margin improvement. Outlook remains intact: Consumption fundamentals remain intact. Increasing power availability, improving demographic profile, and increase in housing stock are structural demand drivers. Shrinking presence of the unorganised sector also acts as a stimulus. Additionally, an excellent cash-conversion cycle and expanding product basket bode well for incumbents. In the short term, we see: (1) liquidity issues impacting primary sales, resulting in lower stocking by channel partners, (2) intensive competition by global and domestic brands putting pressure on pricing – resulting in margins being under pressure. We maintain:

Buy on Orient Electric, Bajaj Electric, KEI, Finolex Cables, and VGRD

Neutral on Voltas

Sell on Havells

Companies

Orient Electric Reco BUY

CMP, Rs 160 Target Price, Rs 214

Bajaj Electricals Ltd Reco BUY CMP, Rs 379

Target Price, Rs 548 V-Guard Industries Ltd

Reco BUY CMP, Rs 226 Target Price, Rs 259

KEI Industries Reco BUY


Finolex Cables Reco BUY CMP, Rs 400

Target Price, Rs 553 Havells Ltd

Reco SELL CMP, Rs 661 Target Price, Rs 626

Voltas Ltd Reco NEUTRAL


Polycab India Ltd.

Reco BUY CMP, Rs 667 Target Price, Rs 948

Note: TP revised factoring new Tax rate.

PC: Q2FY20 results preview

Rs mn Revenue EBITDA PAT

Orient Electric 4,296 218 59

Bajaj Electricals 7,451 471 154

V-Guard Inds 6,436 552 405

KEI Inds 1,173 1,173 563

Finolex Cables 7,606 988 1,109

Havells Ltd 23,355 2,852 2,023

Voltas 5,248 790 790

Polycab India Ltd. 20,167 1,430 1,430

Source: Company, PhillipCapital India Research

Deepak Agarwal, Research Analyst (+ 9122 6246 4112) [email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

MIDCAP-ELECTRICALS Q2FY20 RESULTS PREVIEW

Companies to watch – Q2FY20 expectations Voltas: Q2 started with lower inventory in the channel, which resulted in higher

primary sales (re-stocking). This led to growth in Q2 despite lower secondary sales in RAC – we expect 19% RAC revenue growth in Q2.

Bajaj Electric: Strong distribution network (BJE reached 210,000 touch-points) will result in strong growth of 16% in consumer durables. Due to lower execution and reduction in order book, E&P revenue decline by 40%. However, since this will improve the working-capital cycle, balance sheet and cash flows will be better.

Orient Electric: Premium products continue to see strong sales, resulting in market share gains. In Electrical Consumer Durables (ECD), we expect 10% growth yoy mainly driven by premium fans and water heaters. In Lighting & Switches (L&S), improving product mix and increasing penetration will lead to a growth of 24% yoy.

KEI: Increasing penetration in house wires will lead to strong growth in B2C. Healthy order book in B2B cables will drive growth.

Havells: Lloyd will take time to stabilise, as change in the distribution strategy, high competition, and shift in pricing policy is denting market share. We expect Lloyd’s revenue to fall 21% in Q2 mainly because of channel partners sitting on old inventory of ACs and the LED segment continuously facing high competition from Chinese brands, which is increasing pricing pressure. Havells S.A - we expect a 10% yoy growth, majorly driven by ECD and new products. Lower construction activity will result in lower volume growth in W&C and switches.

Key takeaways from our channel checks

Heavy rains and floods in Western and Northern (Maharashtra, Rajasthan, Gujarat, Uttar Pradesh) and some parts of Southern India (Kerala and Karnataka) impacted sales.

Q1 was strong for fans and air coolers, which led to confidence in stocking up water heaters for Q2 mainly in July and August; WH are expected to see strong sales. Companies are aggressively focusing on launching new products in this segment.

Channel partners talked about increasing competition in all product segments, which has capped price hikes and also about liquidity issues impacting primary sales and leading to lower stocking.

Consumer financing by NBFCs and credit-card companies has helped volume growth in Q2 (financing ratio in sales has increased to c.80% vs. 60-70% in Q1).

E-commerce (Flipkart, Amazon) is offering huge discounts – resulting in lower volume in trade and denting trade margins

Wires and Cables: In Q2 companies have not taken any price cut Co Name Sqmm March May Sept Discount%

Polycab

1 1,055 1,025 1,025 40%

1.5 1,580 1,535 1,535 2.5 2,540 2,465 2,465

Finolex

1 970 940 940 35%

1.5 1,440 1,395 1395 2.5 2,360 2,290 2290

Havells 1 1,160 1,125 1123 35%

1.5 1,725 1,675 1675 2.5 2,785 2,700 2700

KEI Industries

1 1005 1005 1035 50%

1.5 1510 1510 1555 2.5 2440 2440 2515

V-Guard

1 1,210 1,150 1150 45%

1.5 1,815 1,725 1725 2.5 2,910 2,765 2765 Source: PhillipCapital India Research, Channel checks



Modern trade prices: June and Sept 2019 prices, online October price s Brand June’19

# MT Prices

Sept’19

# MT Prices

Online Price

Oct’19 Price difference %

(online vs. GT)

Voltas 39,190 37,100 29,999 -19%

Blue Star 44,990 39,500 37,999 -4%

Lloyd 41,990 39,000 32,999 -15%

Whirlpool 36,990 35,990 30,999 -14%

Samsung 46,290 39,300 31,999 -19%

Daikin 38,990 40,000 36,313 -9%

Carrier 42,990 40,490 33,490 -17%

Mitsubishi* 52,500 52,200 n.a.

Fujitsu /O General 57,200 56,990 49,999 -12%

Hitachi 41,690 40,300 31,999 -21%

LG 44,000 38999 -11%

IFB 40,900 32798 -20%

Amazon Basics 25,499

Amstrad* 32,000 n.a. Note: * Mitsubishi & Amstrad available only with offline traders. Source: PhillipCapital India Research, Channel checks

General trade vs. modern trade for washing machines Top Load Fully Automatic 6.5 Kg Front Load Fully Automatic 7 Kg

WASHING MACHINES MT (Rs) Online

Price (Rs) Difference

(%) MT (Rs) Online

Price (Rs) Difference

(%)

LG 17,999 15,999 -11% 34,999 34,999 0% Whirlpool 14,569 13490 -7% 28,669 24,990 -13% IFB 17,949 15490 -14% 28,900 25,999 -10% Godrej 15,900 12,490 -21% 29,000 21,990 -24% Panasonic 19,444 17,299 -11% 24,994 25,999 4% Siemens 18,000 - 29999 27,499 -8% Bosch 17,500 15490 -11% 30,200 23,499 -22% Lloyd 18,500 11,999 -35% - 23,999 - Source: PhillipCapital India Research, Channel checks

General trade vs. modern trade for refrigerators REFRIGERATORS (271-300Ltr.) MT online Diff (%)

Whirlpool 28,880 23,990 -17% Samsung 29,100 23,590 -19% Godrej 27,000 25,123 -7% Haier 28,200 22,990 -18% Bosch 33,214 22,490 -32% LG 28,990 25,490 -12% Source: PhillipCapital India Research, Channel checks

Key events – during 2Q Company Name Date/Month Event

Blue Star July '19 Wins order of Rs 2.5bn from Mumbai Metro Rail Corporation. July '19 Opens an exclusive showroom with Springcool Pvt Ltd in the Maldives for its RAC products Sept'19 Began operation in Nigeria

Voltas

Aug'19 Introduced its Onam Celebration offer. Scratch card offers and 5% cashback on select credit cards.

Aug'19 Beko launches India's first 5-star-rated washing machines, including 21 models of twin tub, semi-automatic washing machines with dual power rain feature, and 2 models of front load washing machines.

Aug'19 Launches new brand shop at Gajuwaka, Vishakhapatnam, Andhra Pradesh for VOLT and Beko products. Exclusive scheme for Tata Power consumers, where they can exchange their old ACs for Voltas 5-star inverter ones.

Havells

July '19 Offered Euro 2 range of technologically advanced SPD (Surge Protection Device), RCCB and MCB. Sept'19 Launched India's first complete square-shaped pedestal fans- 'Aindrila'. Sept'19 Announces Vicky Kaushal as brand ambassador for its men's grooming range.

Sept'19 Havells India and Tata Power- DDL partnered where Havells circuit protection devices and ELCB will be made available across all Tata Power DDL Customer Care Centres at subsidized price from Oct 1, 2019

Polycab Oct'19 Polycab launched its first-ever Polycab experience centre at Lohar Chawl, Mumbai

Orient Electric July '19 Launches EyeLuv LED lights July '19 Launches nationwide "Scratch and Cash" offer (instant discount or cash back of up to Rs 5,000) on fans. Sept'19 Expands its switchgear business in Uttarakhand.

Huge festive season discounts offered by e-commerce players Offline trade has tried to match online discounts to liquidate inventory, but this has impacted their margins

As a result, channel partners are encouraging brands with lower presence online or those maintaining MOP (market operating price)



Key takeaways for companies from channel checks

Voltas o Strong AC sales in Q1 have resulted in lower inventory at the beginning of 2Q

in the channel. Voltas has refilled inventory, which resulted in strong primary sales.

o In July, secondary sales for ACs and air coolers have seen double-digit growth, but from August and September growth tapered down, mainly because of lean season.

o Competitors have reduced their prices, creating an intense business environment.

o In August, Voltas launched India’s first 5-star semi-Automatic washing machine under Beko. It is sourcing this machine from domestic OEMs.

o In September, Beko completed one year of India operations. The company is continuously increasing its presence by adding new channel partners and also opening exclusive stores.

o During Q2, Voltas announced an exclusive scheme with Tata Power (TP). It will be offering c.50% discount on MRP to TP customers in Mumbai.

o Voltas has c. 23% market share in Kerala.

Orient Electric

o In July, the industry saw double-digit volume growth, mainly driven by TPW fans, but in August and September, volume growth was dented mainly because of the lean season. OEL recently launched new variants in its table pedestal and wall (portable) fans, which led to better traction and growth in July 2019. Fan industry will see single-digit growth in Q2FY20.

o Premium products continued to see strong traction from customers resulting in strong growth for OEL in Q2, OEL saw market-share gains in fans and lighting.

o In the mass-fans segment, OEL did not cut prices while its competitor CG did, mainly to push volumes, and also gave higher credit to the channel.

o OEL remains aggressive in new product launches. It launched “EyeLuv” series in lighting in June – which is 30-40% costlier than other LEDs.

o It has appointed new channel partner for Maharashtra, resulting in strong market share gains in this region.

o It has also increased its position in modern and regional retail for products such as electric irons, water heaters, etc.

Havells

o While Havells continues to be a strong player in wires and cables, overall slowdown in construction activity is resulting in lower volumes.

o In switchgears, it has c.10% market share but is facing aggressive competition from regional (offering products at lower prices) and national brands.

o It is increasing its presence in online trade for its ECD segment; strong growth for products such as personal grooming and kitchen appliances.

o Moved to the direct-customer strategy (like FMCG companies) to try and tap customer directly; however, sales will be routed through channel partners.

o For REO, a Havells brand selling fans, switchgears and wires, the company is moving from the distribution to dealer model (opting for a different channel for RIO), mainly focusing on tier-2 and 3 market.

o In Lloyd, a change in the distribution network and intensive competition has impacted sales in Q2.

o In online trade - Lloyd reduced its prices and is at par with the industry average.

o In washing machines, Havells is still operating at lower SKUs. The TV segment prices are still under pressure due to intense competition.

o Havells is focusing on cost rationalisation, mainly employee costs.

Price difference between - Voltas (Window, fixed speed and inverter)

Voltas (1.5 Ton, 3 Star) June Price Sept Price Price

Window 25,600 25,192 25,600

Split (Fixed Speed) 33,200 33,200 33,200

Split (Inverter) 38,100 34,990 38,100

Source: PhillipCapital India Research, Channel checks

Voltas-Beko has launched the first 5 star rated washing machine in India

Aggressive branding to draw customer attention – for its recent launch – EyeLuv LED



Bajaj Electricals

o Strong distribution network with cross-selling opportunity has resulted in volume growth despite an overall market slowdown.

o Under RREP (Range Reach Expansion Program), Bajaj is continuously increasing its touch points/retailers in tier 2 and tier 3 cities.

o Aggressively focusing on filling product gaps. Continuously launching new products – added new products in kitchen and domestic appliances.

o Upgrading old products and increasing their prices. o Planning to launch a new range of water heaters (WH) and fans. Increased

prices in WH by 3%, effective October 2019 (in a specific model). o With its retail bounding program, BJE is increasing its cross-selling

opportunity and also focusing on increasing its frequency of billing. o Contribution from lighting and geyser has been more this season. Intense

competition from CG and Syska in the lighting segment. o BJE has also increased its focus on online trade (added more products on

online). o Nirlep and Morphy Richard's products are slowly gaining traction in modern

trade.

Polycab India Ltd

o It is aggressively focussing on FMEG products, leveraging its current wires and cables distribution network for FMEG segment

o Fans are positioned in the mass- to mid-premium segment; has been successful in gaining market share.

o W&C: Has not taken any price cut (2.3% hike in Q1FY20). o As the industry is experiencing a slowdown, dealers have anticipated the

situation and are on low inventory levels. o Slow payments from the retailers end have increased working-capital days. o For W&C, a channel partner said that Polycab is changing its strategy from

volumes to margins. VGRD

o South India market was dented by floods. o Increasing product offerings and touch points in non-south markets. o Increasing its focus on new product launches in the existing products basket.

Launched 5-star-rated water heaters (competition has only 4 stars). In fans, the channel expects c.30 new models in October 2019.

Whirlpool

o Continuously focusing on increasing its market share in refrigerators and washing machines, and also increasing penetration.

o In refrigerators, the company is focusing on increasing its share in premium products (added some products in the two-door segment). But it is currently facing difficulties, as prices are higher than competitors.

o In direct cool refrigerators, Whirlpool is the market leader – continuously seeing strong traction.

o In washing machines, the company have launched front-load and its top-load (360 degree) machine continues to see strong traction.

o To gain market share, Whirlpool has become very aggressive in promotional schemes and has also tied up with Bajaj Finance.

o In south India, the Onam festival drove good sales for the company, despite floods.

o In ACs, Whirlpool’s prices were higher than competition, resulting in lower volumes.

o Major sales contributor is the distribution model at 60%; retail is 36% and institutional 4%.

Kerala government rolls out Rs 500bn infrastructure projects to beat slowdown



o On the e-commerce platform, the company has only specific models and has cash-back prices.

IFB Ltd.

o Market experts expect only single-digit growth in Q2 for washing machine and refrigerators because of the off season.

o IFB has 50% market share in the south region. o In washing machines, it launched 7 SKUs in the 6.5-8.5kg range. o Has c. 500 stores, of which 35% are COCO (company owned company

operated) and the remaining are FOCO (franchise owned franchise operated).

o Plans to add c. 100 stores in FY20 (20-25 stores already opened in H1).

CG Consumer o In fans, the performance was muted in August and September (off season)

but channel partners have started stocking up inventory for the upcoming season.

o CG is a market leader in fans and still dominates the market, but due to severe competition, it has not increased prices. It is focusing more on the mass segment.

o Water heaters have seen strong growth. Channel partners have carried out higher stocking for the season.



Electricals (our coverage) in 2QFY20 – growth trends

Source: Company, PhillipCapital India Research Note: *Voltas & BJE company level PAT

PC coverage Q1FY20 performance (Rs mn) Q2FY20 Q2FY19 yoy growth (%) Q1FY20 qoq growth (%)

Revenue 85,896 77,563 10.7% 103,339 -16.9%

EBITDA 8,649 7,860 10.0% 11,004 -21.4%

PAT 6,532 5,901 10.7% 7,227 -9.6%

*Note: Excluding CG Consumer

Source: Company, PhillipCapital India Research

W&C company margins and copper-price movement

Copper prices trend over the last eight years (USD/mt)

Source: Company, Bloomberg, PhillipCapital India Research

Copper prices (USD/mt) 2QFY19 1QFY20 2QFY20 YoY QoQ

High 7,332 6,556 6,065 -17% -7%

Average 6,139 6,129 5,829 -5% -5%

Low 5,801 5,799 5,610 -3% -3%

Source: Bloomberg

7% 12% 14%

7%

16%

8%

19% 15%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Revenue growth (%)

0%

9%

-2%

16% 15%

11%

28%

36%

-15%

-5%

5%

15%

25%

35%

45%

EBITDA growth (%)

0% 13% 60% 19%

-27%

36% 6%

-55%

-60%

-40%

-20%

0%

20%

40%

60%

80% PAT growth (%)

4000

5000

6000

7000

8000

9000

10000

11000

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

Sep

-14

Sep

-15

Sep

-16

Sep

-17

Sep

-18

Sep

-19

LME COPPER 3 Month rolling forward

7332

6330 5989

5725

5500

6000

6500

7000

7500

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

LME COPPER 3 Month rolling forward

qoq -4.4%

From Q1FY20 to Q2FY20, copper prices corrected c.5%

From Q1FY20 to Q2FY20, copper prices corrected c.5%



KEI – gross margin and copper prices Finolex – gross margin and copper prices

W&C segment EBIT margin – copper prices

Polycab EBITDA margins / copper prices

Note: We have adjusted Polycab margins factoring high inventory (four months)

Source: Company, Bloomberg, PhillipCapital India Research

Valuation summary

___EPS (Rs)___ EPS Growth (%) ___PE (X)___ EV/EBITDA (X) ___ROE (%)___ CAGR Reco TP* %

FY20e FY21e FY20e FY21e FY20e FY21e FY20e FY21e FY20e FY21e EPS (%) (RS) Upside*

Orient Electric

6.0 8.5 85% 42% 26.4 18.7 16.0 12.1 35.8 37.2 62% BUY 214 34%

Bajaj Electricals Ltd

13.1 20.2 -20% 54% 28.8 18.7 12.7 10.0 11.5 15.6 26% BUY 548 45%

V-Guard Inds

5.3 6.8 36% 29% 42.9 33.2 30.2 23.5 21.0 22.4 32% BUY 259 14%

KEI Industries

33.1 41.6 44% 26% 16.0 12.7 9.2 7.7 25.4 24.4 34% BUY 500 9%

Finolex Cables

26.5 30.7 18% 16% 13.8 11.9 8.3 7.0 15.6 16.0 17% BUY 553 38%

Havells Ltd

12.6 18.6 0% 48% 52.5 35.5 29.7 24.6 17.7 23.1 21% SELL 626 -5%

Voltas Ltd.

14.8 17.5 31% 18% 35.3 30.5 26.1 23.4 14.3 14.8 24% NEUTRAL 608 -8%

Polycab India Ltd.

45.8 52.1 29% 14% 14.6 12.8 8.7 7.4 18.0 17.3 21% BUY 948 42%

Source: Company, PhillipCapital India Research Estimates Note: *TP has revised mainly because of change in TAX rate.

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

2,000

4,000

6,000

8,000

10,000

2Q

FY1

2

4Q

FY1

2

2Q

FY1

3

4Q

FY1

3

2Q

FY1

4

4Q

FY1

4

2Q

FY1

5

4Q

FY1

5

2Q

FY1

6

4Q

FY1

6

2Q

FY1

7

4Q

FY1

7

2Q

FY1

8

4Q

FY1

8

2Q

FY1

9

4Q

FY1

9

2Q

FY2

0

Avg Copper prices (USD/mt) (lhs)

KEI - Gross Margin (%)

0%

5%

10%

15%

20%

25%

30%

35%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2Q

FY1

2

4Q

FY1

2

2Q

FY1

3

4Q

FY1

3

2Q

FY1

4

4Q

FY1

4

2Q

FY1

5

4Q

FY1

5

2Q

FY1

6

4Q

FY1

6

2Q

FY1

7

4Q

FY1

7

2Q

FY1

8

4Q

FY1

8

2Q

FY1

9

4Q

FY1

9

2Q

FY2

0


Finolex - Gross Margin (%)

-4%

1%

6%

11%

16%

21%

-

2,000

4,000

6,000

8,000

10,000

12,000

2Q

FY1

2

4Q

FY1

2

2Q

FY1

3

4Q

FY1

3

2Q

FY1

4

4Q

FY1

4

2Q

FY1

5

4Q

FY1

5

2Q

FY1

6

4Q

FY1

6

2Q

FY1

7

4Q

FY1

7

2Q

FY1

8

4Q

FY1

8

2Q

FY1

9

4Q

FY1

9

2Q

FY2

0


Havells - Wire & Cables PBIT Margin

0%

2%

4%

6%

8%

10%

12%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2Q

FY1

2

4Q

FY1

2

2Q

FY1

3

4Q

FY1

3

2Q

FY1

4

4Q

FY1

4

2Q

FY1

5

4Q

FY1

5

2Q

FY1

6

4Q

FY1

6

2Q

FY1

7

4Q

FY1

7

2Q

FY1

8

4Q

FY1

8

2Q

FY1

9

4Q

FY1

9

2Q

FY2

0


V-Guard - Electrical PBIT Margin

9.0% Q3FY18

17.2% Q4FY18

11.6% Q1FY19

11.7% Q2FY19

17.2% Q3FY19

12% 1QFY20

6%

8%

10%

12%

14%

16%

18%

5500

5900

6300

6700

7100

7500

Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Copper Prices (US$ mt) Polycab EBITDA margin (rhs)



Earnings Estimates –Q2FY20

(Rs mn) Sept-19E Jun-19 qoq (%) Sept-18 yoy (%) Key expectations

Voltas

Revenues 14,584 26,540 -45.0% 14,214 2.6% Q2 started with lower inventory in the channel, resulting in strong

growth in Q2 despite lower secondary sales in RAC (we expect 19%

growth).

Strong volume in UCP, will lead to 90bps margin improvement, and in

EMP, a margin decline of 40bps.

Higher JV losses will impact PAT.

EBITDA 1,054 2,912 -63.8% 1,085 -2.9%

EBITDA margin (%) 7.2 11.0 7.6

PAT 790 2,094 -62.3% 1,035 -23.6%

EPS (Rs)

2.4 5.0 -52.5% 3.1 -23.6%

Finolex Cables

Revenues 7,606 8,077 -5.8% 7,140 6.5% In electrical cables, lower commodity prices (-4.4%) to result in volume

growth (PC est.: 8%), in communication cables, we see a decline of 10%

Fall in copper prices will lead to margin improvement.

Other income – dividend income from Finolex Industries.

EBITDA 988 1,060 -6.8% 858 15.1%

EBITDA margin (%) 13.0 13.1 12.0

PAT 1,109 816 35.9% 929 19.3%

EPS (Rs) 7 5 35.9% 6 19.3%

Orient Electric

Revenues 4,296 5,683 -24.4% 3,731 15.1% ECD to see 10% growth. Due to it being the off-season, fans will see

lower growth but water heater will see strong growth. L&S up 24%.

Premium products continue to see strong traction, resulting in market

share gains.

Tight control on costs to result in improvement in OPM.

Reduction in debt, but higher BG and WC resulted in higher interest

cost.

We expect same tax rate for Q2FY20.

EBITDA 218 441 -50.5% 171 27.7%


PAT 59 189 -68.9% 69 -14.6%

EPS (Rs)

0 1 -68.9% 0 -14.6%

Bajaj Electricals

Revenues 13,186 12,978 1.6% 15,984 -17.5% Slowdown in demand, but strong distribution network will result in

strong growth of 16% in CD. Due to lower execution and reduction in

order book, E&P growth to decline by 40%.

Lower margin in E&P to dent overall margins.

Higher E&P debt will result in higher interest cost, impacting

profitability.

EBITDA 765 749 2.0% 799 -4.3%


PAT 154 174 -11.7% 341 -54.9%

EPS (Rs)

2 2 -11.7% 3 -54.9%

KEI

Revenues 11,338 10,814 4.8% 9,968 13.7% Higher revenue from EHV and B2C will lead to growth.

Improving product mix and tight control on cost will result in better

margin yoy.

EBITDA 1,173 1,139 3.0% 1,008 16.4%

EBITDA margin (%) 10.3 10.5 10.1

PAT 563 458 22.9% 414 36.1%

EPS (Rs) 7 6 22.9% 5 36.1%

V-Guard Industries

Revenues 6,436 6,994 -8.0% 5,976 7.7% South impacted mainly because of floods and non-south market by

liquidity crunch and floods in other major cities. We expect south

growth at c. 3% and non-south at c. 15%.

Lower advertisement and tight control on other costs will improve

margins yoy.

EBITDA 552 711 -22.4% 498 10.7%


PAT 405 525 -22.8% 382 6.1%

EPS (Rs) 1 1 -22.8% 1 5.5%

Havells

Revenues 23,355 27,120 -13.9% 21,910 6.6% Havells S.A. to report 10% yoy growth, majorly driven by ECD and new

products. We expect margin of 13.9% in 2Q.

In Lloyd, we expect a market share loss (heavy competition by China and

domestic brands). We expect 21% fall in revenue and margin at 2.1%

mainly because of higher ad spends, currency, and higher RM cost.

EBITDA 3,014 2,757 9.4% 2,625 14.8%

EBITDA margin (%) 12.9 10.2 12.0

PAT 2,002 1,739 15.1% 1,786 12.1%

EPS (Rs) 3 3 15.1% 3 12.1%

Polycab

Revenues 20,167 19,330 4.3% 18,006 12.0% Strong growth from exports, increasing presence in FMEG segment, will

lead to growth

Continuous fall in copper prices over the last six months may impact

margins.

Reduction in debt to result in earnings growth.

EBITDA 2,017 2,053 -1.8% 2,052 -1.7%

EBITDA margin (%) 10.0 10.6 11.4

PAT 1,430 1,353 5.7% 895 59.7%

EPS (Rs) 10 10 5.7% 6 59.7%

Source: Company, PhillipCapital India Research Estimates



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the



securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report. PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through PHILLIPCAP. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.

The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither PHILLIPCAP nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report.

PHILLIPCAP may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of PHILLIPCAP.

http://www.phillipcapital.in/



Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States.

The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments.

Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by PHILLIPCAP with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein.

No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior written consent of PHILLIPCAP and PHILLIPCAP accepts no liability whatsoever for the actions of third parties in this respect.

PhillipCapital (India) Pvt. Ltd. Registered office: 18th floor, Urmi Estate, Ganpatrao Kadam Marg, Lower Parel (West), Mumbai – 400013, India.

institutional equity research consumer...

Documents