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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
Contents
Daily Alerts
Company alerts
Bajaj Corp.: Management meet notes - on a strong footing
Sector alerts
Technology: Accenture - another strong broad-based growth quarter
Telecom: Auction outcome details - largely in line, with some customary surprises
Infrastructure: Indian AC industry - bring on the heat
INDIA DAILY March 27, 2015 India 26-Mar 1-day 1-mo 3-mo
Sensex 27,458 (2.3) (6.0) 0.8
Nifty 8,342 (2.2) (5.7) 1.7
Global/Regional indices
Dow Jones 17,678 (0.2) (2.5) (2.1)
Nasdaq Composite 4,863 (0.3) (2.0) 1.2
FTSE 6,895 (1.4) (0.7) 4.3
Nikkei 19,491 0.1 3.7 9.4
Hang Seng 24,541 0.2 (1.1) 5.1
KOSPI 2,023 0.0 1.9 3.9
Value traded – India
Cash (NSE+BSE) 267 226 209
Derivatives (NSE) 5,785 5,816 1,093
Deri. open interest 2,812 2,777 1,585
Forex/money market
Change, basis points
26-Mar 1-day 1-mo 3-mo
Rs/US$ 62.8 (10) 123 (84)
10yr govt bond, % 7.9 1 9 (22)
Net investment (US$ mn)
25-Mar MTD CYTD
FIIs 99 3,678 16,162
MFs (63) (632) 4,802
Top movers
Change, %
Best performers 26-Mar 1-day 1-mo 3-mo
SIEM IN Equity 1355.2 (0.7) 2.1 58.5
HDIL IN Equity 101.3 1.0 (15.2) 49.6
LPC IN Equity 1973.0 (1.8) 13.6 40.2
AL IN Equity 68.5 1.6 2.3 37.6
RBXY IN Equity 819.3 (1.4) 19.1 33.3
Worst performers
BOI IN Equity 197.4 (2.7) (16.2) (34.5)
PNB IN Equity 148.2 (4.7) (10.8) (33.3)
UNBK IN Equity 162.0 (2.4) (7.6) (32.8)
RCOM IN Equity 60.1 (1.9) (13.9) (25.3)
BOB IN Equity 161.0 (2.9) (11.0) (24.6)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
LHO growth accelerates a tad; however, overall consumer demand weak
Management highlighted that while LHO market growth, as per Nielsen, has picked up from -
1% in December 2014 to 1% in January 2015 and 2.5% in February, overall consumer demand
still remains weak. Cooling oils growth has come under pressure in 4QFY15 due to weaker off-
take, especially in North due to unseasonal rains and relatively cooler temperatures.
ADHO continues to grow ahead of market; several other growth drivers in place
While we model 14% volume growth in ADHO in FY2016E driven by low base (in 1HFY16E)
and market share gains, our interaction with the management suggests several other growth
drivers – (1) NOMARKS continues to post good growth driven by better traction in both creams
and facewash and distribution expansion; we model NOMARKS to post `800 mn revenues in
FY2016E (+40% yoy), (2) BJCOR has recently launched a new low-cost Amla brand in five states
– Bajaj Amla with Almond and Rosemary oil positioned against Shanti Amla at `20 for 80 ml;
we note Marico has cut prices of Shanti Amla 80 ml SKU from `23 to `20 (in response,
perhaps), and (3) BJCOR is planning to increase its focus on international markets such as
Nepal, Bangladesh, the UAE and Africa; we note BJCOR has four dedicated country managers
across key geographies and is planning to set up a manufacturing (third-party) facility in the
UAE.
We remain positive; retain BUY and raise TP to `510 (from `495)
We model 27.7% yoy growth in PAT in FY2016E aided by – (1) 18% yoy growth in ADHO
revenues (14% volume growth and ~4% weighted average price hike) and (2) 260 bps jump in
GMs to 64.3% aided by 20% dip in LLP prices; we note BJCOR has locked in LLP for six months
at `60.5/kg (current LLP prices stand at `62.5/kg and FY2015E average for BJCOR stood at
`77.6/kg). While we expect A&SP to jump 80 bps yoy to 18.8%, we expect bulk of the increase
to be driven by higher promotional expenses (especially at consumer levels in the form of
freebies).
We remain bullish on BJCOR driven by – (1) volume growth pick-up, (2) strong earnings growth
visibility and (3) modest valuations (P/E of 20X FY2017E EPS; at ~40% discount to sector
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Accenture delivers yet again; 10% growth in 2QFY15, FY2015 revenue growth outlook raised
Accenture reported local currency (l/c) revenue growth of 12% in the February 2015 (2QFY15)
quarter. Growth was strong in both consulting (+11% yoy in l/c) and outsourcing (+13% yoy in
l/c) segments. Digital, contributing 20% to overall revenues, grew 20% and forms the bedrock
of ACN’s growth; part of the growth is aided by a number of acquisitions in the past 12
months. From a vertical standpoint, communications, media and tech grew 15% and products
segment grew by 13%. Accenture reported second-highest bookings of US$9.4 bn in the
quarter.
ACN raised FY2015 (Aug year-end) revenue growth guidance to 8-10% from 5-8% in l/c. The
management indicated continuation of strong growth in 2HFY15, while attributing the growth
to significant market share gains across all streams of businesses. Accenture targets gross
addition of 90,000 employees in FY2015.
Currency impacts reported USD growth and EPS
Fx impacted ACN‘s reported USD revenue growth by 6.5%. We note that ACN derives 36% of
revenues from Europe, which has suffered from currency depreciation against USD. ACN, as a
result, cut FY2015 (Aug year-end) EPS guidance by 1%. An interesting aspect of the
performance was 140 bps yoy decline in gross margin in the Feb 2015 quarter, presumably due
to currency movements. However, 170 bps decline in SG&A expenses resulted in overall 30 bps
yoy increase in EBIT margin.
Read-through—the difficult part but positive overall
Accenture’s result read-through is always open to contradicting interpretations. Strong
outsourcing-based growth for Accenture can be a reflection of a strong demand environment
(positive for Indian IT) or alternately led by market share gains (negative for Indian IT). The
management’s statement of growth led by market share gains across all key segments stirs up
the plot even more. Yet we believe that the overall read-through is a positive. We based this on
Growth in consulting business indicates a solid discretionary spending environment.
ACN indicated that growth in consulting business was across all segments, digital,
management, strategy and operations. Strong growth in consulting is a useful indicator of
discretionary spending even after making concessions of market share gains.
Another quarter of double-digit yoy growth in outsourcing segment. Solid growth in
outsourcing indicates that Accenture is participating in and winning deals as much as any
other offshore IT pure-plays. What makes this growth creditable is that ACN does not have
high exposure to IMS, the primary growth driver of other IT companies. The performance of
ACN demonstrates that growth is still possible in apps portfolio provided vendors are capable
to structure and deliver multi-service lines deals in an outcome-based format. ACN’s
outsourcing business comprises application services, business process management and
relatively low exposure to infra.
Technology India
Accenture—another strong broad-based growth quarter. Accenture reported an
outstanding local currency (l/c) revenue growth of 12% yoy and raised l/c revenue
growth guidance to 8-10% for FY2015E (August year-end) from 5-8% earlier. Growth
was strong across consulting and outsourcing segments. Read-through of ACN’s
results, tricky as it may be, is a positive for Indian IT based on strong growth in the
consulting business. Infosys and Tech Mahindra are our key picks in the sector.
NEUTRAL
MARCH 27, 2015
UPDATE
BSE-30: 27,458
Technology India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7
Maintain constructive view, recent correction is an opportunity to buy
We believe that demand in FY2016 will be similar to FY2015. Several US indicators such as
the Consumer Confidence Index, PMI and unemployment rate have been robust for the past
few quarters and point towards a healthy US economy. IT spends are likely to pick up in
banking and financial services. Indian IT companies are seeing significant market share gains
as large deals come up for re-bid. Demand is Europe is robust led by higher outsourcing. We
see recent correction in the stock prices as an opportunity to buy.
Exhibit 1: Accenture interim results, August fiscal year-ends (US$ mn)
Source: Company, Kotak Institutional Equities
Exhibit 2: Kotak Institutional Equities: valuation summary of key Indian technology companies
(b) Hexaware Technologies is December year-ending.
Mkt cap.
EPS growth (%)
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Auction details out; some surprises as always even as broad results are on expected lines
Some quick top-down highlights first, before we jump into the details –
Total aggregate payout of `1.1 tn, of which upfront payment would be `290 bn.
Aggregate payouts for various players—Idea – `303 bn, Vodafone `260 bn, Bharti – `291
bn, RJio – `101 bn, RCOM – `43 bn, TTSL – `79 bn, and Aircel – `23 bn. Telenor did not win
any spectrum.
Bharti, Vodafone, and Idea renewed a minimum of 5 MHz of 900 MHz spectrum in all of
their renewal circles. In fact, Bharti enhanced its 900 MHz holdings in five out of its six
renewal circles.
RCOM could not renew 900 MHz spectrum in five out of its seven circles, but did buy
alternate 1800 spectrum in two circles. The company faces the reality of having to shut
down its 2G GSM operations in three circles (Assam, Bihar, and West Bengal; GSM
operations in these circles contribute roughly 13% of its overall wireless revenues).
Bharti and Vodafone made good strides in terms of buying fresh spectrum for enhancing
data spectrum footprint. Idea could not do much on this front given that the company’s
primary focus was ensuring that it renews 900 MHz spectrum in its nine renewal circles.
R-Jio largely focused on completing its FD-LTE spectrum footprint and managed to expand
this to 20 circles from 14 before the auctions. The only two circles where RJio does not have
FD-LTE spectrum (either 1800 or 800; it bought substantial 800 MHz spectrum in these
auctions and we are assuming it is for FD-LTE) are Punjab and UP (West).
What do these results mean for the sector/ listed incumbents? A lot…
We believe that the incumbents met their two key objectives—(1) renew a minimum 5 MHz of
900-band spectrum in their respective 900 circles, and (2) enhance data spectrum footprint
wherever possible. On the second aspect, Bharti did better than Vodafone and Idea; however,
we believe that all three are well-positioned from a hi-speed data spectrum standpoint in their
respective leadership circles (more on this later). From a renewal pressure standpoint,
incumbents can now look forward to a long phase where they do not need to worry about
‘business continuity risks’ emerging from the unique spectrum renewal approach that the
government adopted. To sum up, we believe the positives just about balance out the negatives
in the form of financial pressure arising from massive payouts. We stay positive on both Bharti
and Idea.
Telecom India
Auction outcome details—largely in line, with some customary surprises. Circle-
wise spectrum won (and lost, RCOM in particular) by various players was largely in line
with our expectations in terms of renewals. In fresh spectrum buyouts, the top-3 players
(Bharti, Vodafone and Idea) and R-Jio bought to enhance data-spectrum breadth and
depth while players such as TTSL and Aircel bought spectrum to de-risk some of their
key renewals (due in the next 3-4 years). Auction outcome may lead to some cuts in our
near-term estimates, but does not change out medium-term positive view on the two
listed incumbents—Bharti and Idea.
CAUTIOUS
MARCH 26, 2015
UPDATE
BSE-30: 27,458
Telecom India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9
Incumbents now even better placed, spectrum-wise, to capture upside from
data (3G and 4G) growth
Exhibits 1 and 2 depict the spectrum footprint of R-Jio, Bharti, Vodafone, and Idea after
these auctions. While R-Jio has now broadly completed its pan-India FD-LTE footprint to add
to its 2300 MHz TD-LTE footprint, we believe that the incumbents’ combination of 2G + 3G
+ 4G spectrums (different combinations in different circles for different incumbents) is
superior to R-Jio’s, and that incumbents are not likely to lose to R-Jio on this count. More
specifically:
Bharti’s 3G footprint (commercially launched + circles with the requisite spectrum) now
covers 98% of its revenues and its 4G (LTE) footprint covers 71%. The company does not
have any ‘2G only’ circles anymore and can offer mobile broadband in all its circles.
Idea: 3G footprint 80%, 4G footprint 61%; 5 2G-only circles contributing 13% to its
Chennai and Tamil Nadu 5.0 — 4.4 — — — — — — — 4.4 — — —
Gujarat 3.8 — 4.4 — — — — 2.5 — — 4.4 — — —
Haryana* 3.8 — 4.4 — — — — 1.3 — — 4.4 0.6 — —
J&K* 2.5 — 4.4 — 5.0 — — 2.5 — — 4.4 — 5.0 —
Karnataka 5.0 — 4.4 — — — — — — — 4.4 0.6 — —
Kerala* 5.0 — 4.4 — — — — — — — 4.4 — — —
Maharashtra* 5.0 — 4.4 — — — — — — — 4.4 — — —
Punjab* 3.8 — 4.4 — 5.0 — — 2.5 — — 4.4 0.6 5.0 —
Rajasthan 3.8 — 4.4 — 5.0 — — — — — 4.4 — 5.0 —
UP (East)* 5.0 — 4.4 — — — — — — — 4.4 — — —
UP (West)* 5.0 — 4.4 — — — — 1.3 — — 4.4 — — —
Post-auctionPre-auction
800 MHz
1800
administered
1800
auctioned 2100 MHz 2300 MHz 800 MHz
1800
administered
1800
auctioned 2100 MHz 2300 MHz
Delhi — — 5.4 — 20.0 — — 5.4 — 20.0
Kolkata — — 5.0 — 20.0 — — 10.0 — 20.0
Mumbai — — 6.6 — 20.0 5.0 — 6.6 — 20.0
Assam — — 5.4 — 20.0 5.0 — 5.4 — 20.0
Bihar — — — — 20.0 5.0 — — — 20.0
Himachal Pradesh — — — — 20.0 5.0 — 5.4 — 20.0
Madhya Pradesh — — 6.4 — 20.0 5.0 — 6.4 — 20.0
North East — — 6.4 — 20.0 5.0 — 6.4 — 20.0
Orissa — — 5.0 — 20.0 5.0 — 5.0 — 20.0
West Bengal — — 5.6 — 20.0 — — 5.6 — 20.0
Andhra Pradesh — — 5.8 — 20.0 — — 5.8 — 20.0
Chennai and Tamil Nadu — — 6.2 — 20.0 — — 6.8 — 20.0
Gujarat — — 6.0 — 20.0 — — 6.0 — 20.0
Haryana — — — — 20.0 5.0 — 4.0 — 20.0
J&K — — — — 20.0 5.0 — — — 20.0
Karnataka — — 5.0 — 20.0 — — 5.0 — 20.0
Kerala — — 5.0 — 20.0 — — 5.0 — 20.0
Maharashtra — — 5.0 — 20.0 — — 5.0 — 20.0
Punjab — — — — 20.0 — — — — 20.0
Rajasthan — — — — 20.0 — — 10.0 — 20.0
UP (East) — — — — 20.0 3.8 — 3.0 — 20.0
UP (West) — — — — 20.0 — — — — 20.0
Pre-auction Post-auction
India Telecom
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 17: TTSL - spectrum holdings before and after the auctions
Source: DOT, Kotak Institutional Equities
Exhibit 18: Aircel - spectrum holdings before and after the auctions
Source: DOT, Kotak Institutional Equities
800 MHz
administered
1800
administered 1800 auctioned 2100 MHz
800 MHz
administered
800 MHz
auctioned
1800
administered 1800 auctioned 2100 MHz
Delhi 3.8 — — — 3.8 1.25 — — —
Kolkata 2.5 4.4 — — 2.5 — 4.4 — —
Mumbai 3.8 4.4 — — 3.8 2.5 4.4 — —
Assam — — — — — — — — —
Bihar 2.5 4.4 — — 2.5 — 4.4 — —
Himachal Pradesh 2.5 4.4 — — 2.5 — 4.4 — —
Madhya Pradesh 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
North East — — — — — — — — —
Orissa 2.5 4.4 — — 2.5 — 4.4 — —
West Bengal 2.5 4.4 — — 2.5 — 4.4 — —
Andhra Pradesh 2.5 4.4 — — 2.5 3.8 4.4 2.6 —
Chennai and Tamil Nadu 2.5 4.4 — — 2.5 — 4.4 — —
Gujarat 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
Haryana 2.5 4.4 — 5.0 2.5 1.3 4.4 — 5.0
J&K — — — — — — — — —
Karnataka 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
Kerala 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
Maharashtra 2.5 4.4 — 5.0 2.5 2.5 4.4 — 5.0
Punjab 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
Rajasthan 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
UP (East) 2.5 4.4 — 2.5 — 4.4 — —
UP (West) 2.5 4.4 — 5.0 2.5 — 4.4 — 5.0
Pre-auction Post-auction
900 MHz
administered
1800
administered 1800 auctioned 2100 MHz 2300 MHz
900 MHz
administered
1800
administered 1800 auctioned 2100 MHz 2300 MHz
Delhi — 4.4 — — — — 4.4 — — —
Kolkata — 4.4 — 5.0 — — 4.4 — 5.0 —
Mumbai — 4.4 — — — — 4.4 — — —
Assam 4.4 1.8 — 5.0 20.0 4.4 1.8 — 5.0 20.0
Bihar — 4.4 — 5.0 20.0 — 4.4 — 5.0 20.0
Himachal Pradesh — 4.4 — — — — 4.4 — — —
Madhya Pradesh — 4.4 — — — — 4.4 — — —
North East 4.4 — 1.8 5.0 20.0 4.4 1.8 5.0 20.0
Orissa — 4.4 — 5.0 20.0 — 4.4 — 5.0 20.0
West Bengal — 4.4 1.2 5.0 20.0 — 4.4 1.2 5.0 20.0
Andhra Pradesh — 4.4 — 5.0 20.0 — 4.4 — 5.0 20.0
Chennai and Tamil Nadu 7.8 2.4 — 5.0 20.0 7.8 2.4 10.0 5.0 20.0
Gujarat — 4.4 — — — — 4.4 — — —
Haryana — 4.4 — — — — 4.4 — — —
J&K 4.4 — 1.8 5.0 20.0 4.4 — 1.8 5.0 20.0
Karnataka — 4.4 — 5.0 — — 4.4 — 5.0 —
Kerala — 4.4 — 5.0 — — 4.4 — 5.0 —
Maharashtra — 4.4 — — — — 4.4 — — —
Punjab — 4.4 — 5.0 — — 4.4 — 5.0 —
Rajasthan — 4.4 1.6 — — — 4.4 1.6 — —
UP (East) — 4.4 1.8 5.0 — — 4.4 1.8 5.0 —
UP (West) — 4.4 — — — — 4.4 — — —
Pre-auction Post-auction
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Indian room air-conditioning industry is poised for steady growth
The Indian room air-conditioning (AC) industry is poised to grow steadily given (1) increasing push
towards higher urbanization, (2) a growing middle class and increase in discretionary spending,
(3) easy availability of financing schemes, (4) climate across several Indian states is conducive to AC
demand, and (5) lower penetration of ACs than other home appliances and versus Asian peer
countries. We estimate a 13-15% volume CAGR over FY2015-20, which will lead to a per-year
sales volume of 5.5-6.3 mn in FY2020 versus 3.1 mn in FY2015; value growth will be US$2.7-3.0
bn in FY2020 versus US$1.4 bn in FY2015.
Competition – top eight players control >85% of the market share
There are around 32 players in the Indian room-AC market (Appendix 2), which may sound
worrisome from a competition standpoint; however, the top-eight players control >85% of the
market (Exhibit 5). Several new players continue to enter the market and smaller existing players
try to gain market share with little or no success. For established players, higher market share
supported by large distribution networks (>50% of the sales for Voltas and Blue Star come from
Tier 2-4 cities), strong brand names and quality products form a virtuous circle and become an
enduring advantage. In Exhibit 5, we spell out recent efforts by top-eight players to increase
market share.
Air-conditioning purchase—first-hand experience
We recently visited several local multi-brand outlets and found that (1) the multi-brand stores
typically offer around 10-15 brands (top-eight companies’ brands mostly find a place in these
stores while remaining companies’ brands are unevenly scattered across stores), (2) there can be
a sharp variance between the MRP prices, store prices and final negotiated prices (explained on
page 10 through some examples), (3) online prices are not always cheaper than physical store
ones, as we found out while purchasing an LG inverter AC, and (4) to reduce barriers for first-
time buyers, there were several easy-financing schemes offered through credit cards and NBFCs.
How Voltas gained market share in the past few years…
Voltas’ cooling products business gained market share (20-21% currently from lower double
digits in 2006) led by (1) its consumer-centric smart brand positioning and the trust factor that
comes from being a Tata brand, (2) its expanding distribution with about 9,700 touch-points
(highest reach in the category), and (3) its evolving model mix in terms of new technology,
features and price points.
We increase Voltas’ target price to `275 (from `260 earlier) on rollover to March 2017
estimates. We have a REDUCE rating given little margin of safety at the CMP; implied
expectations factors (1) full recovery of its EMP business margin in FY2016-17 (we expect the
issue to persist longer than anticipated, as has been the case so far), and (2) cooling products
business trading at full valuations (Exhibit 27). If Voltas was a pure cooling-products business,
then we could have been more confident about the estimates and would have been
comfortable with slightly higher valuation than is reasonably warranted for higher longer-term
compounding.
Infrastructure India
Indian AC industry—bring on the heat. The Indian room AC industry is poised to
grow steadily—we estimate a 13-15% volume CAGR over FY2015-20. While 32 players
vying for the market share may sound worrisome from a competition standpoint, top
eight players controlling >85% of the market gives comfort. Voltas (REDUCE) and Blue
Star (Not Rated) are well known proxy plays for the sector’s growth, but fully valued at
their CMPs (Exhibits 27-28).
CAUTIOUS
MARCH 26, 2015
UPDATE
BSE-30: 28,112
India Infrastructure
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH
INDIAN ROOM AIR CONDITIONING INDUSTRY: WELL-POISED FOR GROWTH
The Indian room AC industry is well-poised to grow steadily given (1) increasing push
towards higher urbanization (Exhibits 7-8), (2) a growing middle class and increase in
(4) climate across several Indian states conducive to AC demand, (5) lower penetration of
ACs relative to other home appliances (Exhibit 12), and (6) low penetration than in Asian
peer countries (Exhibit 13).
We estimate a 12.5-15.0% volume CAGR over FY2015-20, which will lead to per-year sales
volume of 5.5-6.3 mn in FY2020 versus 3.1 mn in FY2015 (Exhibit 1). Value growth will be
US$2.7-3 bn in FY2020 versus US$1.4 bn in FY2015 (Exhibit 2).
Exhibit 1: Air-conditioning volumes are likely to grow to >5 mn in FY2020 versus 3.1 mn in FY2015 Trend in volumes sales of air conditioners, March fiscal year-ends, 2000-2020E (mn units)
Exhibit 2: Air-conditioning sales likely to grow to US$2.7-3 bn in FY2020 versus US$1.4 bn in FY2015 Trend in sales (by value of air conditioners, March fiscal year-ends, 2000-2020E (US$ mn)
Another development in room ACs is the rising share of 1-ton ACs due to the price gap
( `5,000-8,000) between a 1-ton and 1.5-ton AC and shrinking room size in the urban
market. In fact, several players such as LG and Voltas have launched ACs in the 0.75-ton
segment at 8-10% lower prices than 1-ton ACs.
Exhibit 4: Proportion of 1-ton ACs likely to continue rising, given shrinking room size Room AC product mix in terms of volume, March fiscal year-ends, 2012-15E (%)
Competition – top eight players control >85% of the market share
There are around 32 players in the Indian room AC market (Appendix 2), which may sound
worrisome from a competitive standpoint. However, the good part is that the top eight
players control >85% of the market share (Exhibit 5).
Several new players continue to enter the market and smaller existing players try to gain
market share with little or no success so far. This is because for established players large
distribution-led scale advantages support higher market share (>50% of the sales for Voltas
and Blue Star comes from Tier 2-4 cities); besides their strong brand names and quality
products form a virtuous circle and become a competitive advantage. As we explain below
(air-conditioning purchase – first-hand experience), this probably corroborates the thesis
that ‘nothing succeeds like success’ and implies that the smaller players have to work twice
as hard to gain share from larger players.
In Exhibit 5 details the top-eight players’ recent efforts to maintain or increase market share.
Exhibit 5: Top-eight players in the market have captured >85% market share AC players’ strategies to capture higher market share
Company Remarks Market share Dealers
Voltas # Recently introduced a ‘smart’ range of all-weather ACs, which allows users to keep track
of the amount of electricity guzzled by downloading an app called Voltas Remote
# Looking to diversify into new releated consumer product categories
# Export target of at least 100,000 units p.a over the next two years (10% of the annual
sales) vs. 25,000 to 30,000 units now
20-21% >6,500
LG India # Recently launched an innovative product; an inverter AC that can keep mosquitoes away!
It also has Himalaya cool and monsoon comfort technologies, geared for Indian
conditions
# Market share target of 25% in CY2015 with a turnover of Rs25bn, a growth of 25% yoy
(vs. 10-15% in last few years)
18-19% na
Samsung # Recently launched an innovative product; an inverter air conditioner that can also keep
mosquitoes away! It has also launched Himalaya cool and monsoon comfort
technologies, designed especially for Indian conditions
12-13% na
Hitachi # US-based Johnson Controls and Japanese Hitachi have entered into a global joint
venture (JV), which is going to have a bearing on the India business
# Hitachi Groups has increased its focus in India and plans to hire additonal 30%
employees to touch 13,000
9-10% 2,100
Daikin # Looking at setting up a second manufacturing plant to double its capacity as exisinting
plant at Neemrana running at >90% utilisation (further investment of Rs3.3 bn)
# Plan to sell 0.5mn ACs in FY16 vs. 0.425mn in FY15
# Moving from “prominence to dominance” in India by launching new technology;
looking for exports to Sri Lanka, Bangladesh
8-9% 2,650
Panasonic # Katrina Kaif is the brand ambassador. New campaign launched ( ‘need for more’),
positioning the product as a LifeConditioner
8-9% na
Videocon # Recently launched ‘Wi-Fi enabled’ AC range which can be controlled using a smartphone
app. Further investment planned at Rs1 bn.
# Wants to increase market share to 15% in an years' time from present ~8% and has
assigned Rs450 mn towards advertisment and Rs600mn towards R&D spends
7-8% 6,000
Blue Star # Looking at setting up an air-conditioner manufacturing facility in South India, having a
capacity of 500,000 units p.a (further investment of Rs1.5 bn)
# Targeting a market share of 10% in FY16 as compared to the current 8.5% in terms of
value; plans to spend Rs350mn of advertisment in the forthcoming summer season
7-8% 3,500
Source: Industry, media sources, Kotak Institutional Equities estimates
We note that of the 32 players offering ACs, only 17 offer window ACs while they all offer
split ACs (Appendix 2). LG is the leader in split ACs while Voltas is the market leader (by a
wide margin) in the window AC market. Hitachi has worked its way up in window ACs
while Samsung vacated the window AC market in FY2012.
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
In Exhibit 6, we highlight key financial parameters of companies’ home appliances segment.
The operating margin and pre-tax RoCE data indicate that a price war is not likely to capture
higher market share, especially from MNC players.
Exhibit 6: MNCs’ financials indicate price-war is unlikely to capture market share Financials for home appliances segments of various AC companies, March fiscal year-ends, 2011-14
2011 2012 2013 2014
Revenue (Rs mn)
Samsung India (a) 35,246 34,753 36,806 51,958
Hitachi Home & Life Solutions (b) 7,640 7,981 9,300 10,997
Daikin Airconditioning India 6,974 11,962 16,037 18,204
Blue Star (c) 7,889 9,326 9,652 10,755
Voltas (d) 15,608 15,388 18,356 20,524
Whirlpool India (e) 27,028 26,579 27,727 28,346
Operating profit (Rs mn)
Samsung India (a) (1,103) (142) (635) (184)
Hitachi Home & Life Solutions (b) 634 300 480 533
Daikin Airconditioning India (274) 429 (126) (36)
Blue Star (c) 902 875 804 948
Voltas (d) 1,599 1,298 1,655 2,567
Whirlpool India (e) 2,191 1,734 1,617 1,477
Operating profit margin (%)
Samsung India (a) (3.1) (0.4) (1.7) (0.4)
Hitachi Home & Life Solutions (b) 8.3 3.8 5.2 4.8
Daikin Airconditioning India (3.9) 3.6 (0.8) (0.2)
Blue Star (c) 11.4 9.4 8.3 8.8
Voltas (d) 10.2 8.4 9.0 12.5
Whirlpool India (e) 8.1 6.5 5.8 5.2
Capital Employed (Rs mn)
Samsung India 10,333 8,731 7,301 7,344
Hitachi Home & Life Solutions 2,353 2,390 3,040 3,154
Daikin Airconditioning India 2,781 3,399 6,446 7,955
Blue Star 1,390 2,068 2,195 2,513
Voltas 1,908 1,903 2,371 2,747
Whirlpool India 5,026 5,299 5,911 5,799
Pre-tax ROCE (%)
Samsung India (a) (11) (2) (9) (3)
Hitachi Home & Life Solutions (b) 27 13 16 17
Daikin Airconditioning India (10) 13 (2) (0)
Blue Star (c) 65 42 37 38
Voltas (d) 84 68 70 93
Whirlpool India (e) 44 33 27 25
Notes:
(a) Numbers pertain to home appliances segment (washing machines, air-conditioners, refrigerators and
(e) Numbers pertain to home appliances segment (washing machines, air-conditioners, refrigerators and
microwave ovens).
Source: Companies, Kotak Institutional Equities
Many macro factors support the longevity and durability of the ACs business in
India
We explain through Exhibits 7-16 how a plethora of factors supports the longevity and
durability of the ACs business in India.
India Infrastructure
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
A rising share of manufacturing GDP (to 25% over the next 10-15 years from current 16%)
will entail higher urbanization (Exhibits 7-8), as seen in China. The corollary is a growing
middle class and increase in discretionary spending (Exhibit 9), adequately supported by easy
availability of financing schemes (Exhibits 10-11). The room AC industry will clearly benefit
from these factors, which will also be supported by (1) low penetration levels in India than
other home appliances (Exhibit 12) and versus Asian peer countries (Exhibit 13) and
(2) climate across several Indian states being conductive to AC demand (Exhibit 14).
Exhibit 7: Urban population at 31% in India versus 51% in China Share of urban population in India and China, calendar year-ends 1987-2011 (%)
25
31
24
51
15
20
25
30
35
40
45
50
55
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
India China
Source: World Bank, Kotak Institutional Equities
Exhibit 8: Indian cities likely to house 40% population by 2030 Share of urban population in India, March fiscal- year-ends 1971-2030 (%)
10
15
20
25
30
35
40
45
300
500
700
900
1,100
1,300
1,500
1,700
1971 1981 1991 2001 2011 2030
Total population (mn) Urbanisation rate (%)
Source: Ministry of Urban Development, Kotak Institutional Equities
Exhibit 9: India will see a massive uptick in affluent households Distribution of Indian households by consumption expenditure, March fiscal year-ends, 2011-25E
While working on this report, the author decided it might be a good time to complete a
long-pending task and replace his old 3-star air-conditioner with the latest inverter
technology machine. Accordingly, he visited several local multi-brand outlets (on March 21,
2015) and these are his key takeaways:
Multi-brand stores typically house 10-15 brands. Top-eight AC companies’ brands (by
market share, Exhibit 5) find a place in most stores while the rest are scattered across
stores. This probably corroborates the thesis that ‘nothing succeeds like success’ and
implies that the smaller players have to work twice as hard to gain share.
Display models at the stores may not necessarily be the best products that a
company offers. Your own preparedness and a knowledgeable sales staff help you
choose the right product, which may not be displayed but is available on request.
Sharp variance between the MRP, store price and final negotiated price. For
example, the LG BSNQ186C844 that yours truly finally decided to buy had an MRP of
`59,990, store price of `51,000 and was finally offered for `43,400. We are sure that
comparable models such as Hitachi’s RAU018KVEA with a similar MRP and store price
(`51,690) and Voltas’ SAC18VDY) with an MRP of `54,490 and store price of `48,990,
would have been finally offered at much lower rates. It is interesting that the final price at
the physical store for the LG product was lower than its online prices (click here and here).
Different brands have promotion schemes for installation, which help save an
additional `1,000-1,500. For example, Carrier (promoting 100% copper machines) was
offering split AC installation for `499 versus `1,500 charged by other brands.
Consumer financing schemes. There were several consumer-financing schemes offered
through credit cards and NBFCs, with minimal document requirements (click here) and
low processing charges relative to the size of the purchase.
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
HOW VOLTAS GAINED MARKET SHARE IN THE PAST FEW YEARS…
Voltas’ cooling products business gained market share (to 20-21% currently from lower
double digits in 2006) led by (1) its consumer-centric smart brand positioning and the trust
factor that comes from being a Tata brand (details below), (2) its revamped expanding
distribution with about 9,700 touch-points across India (highest reach in the category),
(3) evolving model mix in terms of new technology, features and price points, and (4) an
involved leadership team with a focus on the AC category.
We have tried to measure Voltas’ competitive advantages through its brand strength, cost
advantages and customer-switching costs if any and conclude that Voltas has created a
brand advantage through its durability positioning and differentiated products (which has
led to reduced customers’ search costs, but does not give the company pricing power).
These advantages, along with scale-based cost advantages lead to the company’s high
market share.
#1: Brand strength. In FY2005 and FY2006 Voltas’ cooling-products division (UCP)
reported losses, and in FY2007 it earned a marginal profit. The two main reasons for the
losses—high fixed-cost structure (company eventually reorganized its business model to
‘asset-light, people-light and pocket-heavy’) and a lack of differentiation (commodity
product) in what had become a highly competitive environment.
Stiff competition and no differentiation—these challenges drove Voltas’ team to look at the
possibility of differentiating its ACs by creating a unique identity for its brand. When MNCs
entered the fray and the pitch was international, Voltas differentiated itself as an ‘India-
centric’ brand. The journey began in 2006 with the company running a successful campaign
‘India ka dil, India ka AC’ (Exhibit 19); the campaign’s key was being able to understand the
requirements of the customer much in advance and use smart advertising to target the focus
group in a better way. This was followed by its ‘energy efficiency’ campaign (save karo India)
in 2007 (whose pitch was that while the customer saved money, the nation saved on power
consumption) and the ‘sensible cooling’ campaign in 2010 (that had a series of tips on how
customers could program their ACs to consume less power).
Exhibit 19: Differentiated itself as an ‘India-centric’ brand with this successful campaign in 2006 Picture of Voltas’ “India ka dil, India ka AC’ campaign in 2006
Source: Company estimates, Kotak Institutional Equities
India Infrastructure
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
The winning concept came in 2012 with Voltas’ ‘all weather AC’ that focused on helping
customers stay comfortable all through the year, irrespective of the outside weather. The
challenge was to communicate this in an interesting manner and Voltas choose to
communicate it through a common man (Mr Murthy) rather than a celebrity endorser.
People remembered Voltas and Murthy rather than the other brands. The campaign
involving Mr Murthy and his family members has continued since 2012, and scores high in
terms of brand effectiveness. This can be recognized from the fact that Voltas recently (click
here) won the coveted EFFIE Award for Effectiveness in Advertising, in the 'Best On-Going
Campaign' category, for its sustained AC campaign featuring the much-loved Murthy.
Voltas has previously won the prize in 2013, for its first phase of the 'All-Weather AC'
campaign, in the Consumer Durables category.
Exhibit 20: Voltas successful ‘all weather AC’ campaign where customers remembered Voltas and Murthy rather than the other brands
Source: Company, Kotak Institutional Equities
Voltas’ branding strategy (supported by Tata Group-led durability and trust) has made the
brand valuable, as it has reduced customers’ search costs, though it does not give the
company pricing power. Voltas cannot charge a premium over similar ACs, but it is working
hard to ensure that its products live up to its reputation for quality and durability that its
brand conveys.
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Exhibit 21: In FY2014 Voltas’ brand equity Index jumped to 3.9
vs. 3.3 in FY2013, the highest amongst all consumer durable
brands March fiscal year-ends, 2012-14
0
1
2
3
4
5
2012 2013 2014
Source: Company, Kotak Institutional Equities
Exhibit 22: Voltas has steadily gained market share in room ACs Market share (%);March fiscal year-ends, 2005-14
0
5
10
15
20
20
05
20
06
20
07
20
08
20
13
20
14
Over 500 bps
gain
Source: Company, Kotak Institutional Equities
#2: Cost advantages. These can typically stem from four sources—cheaper processes,
better locations, unique assets, and greater scale. Voltas certainly does not have the first
three, which leaves us with the fourth, greater scale (distribution and
manufacturing/sourcing).
Let us start with distribution advantage: Voltas now has about 9,700 touch-points from
~1,000 in 2006 (expanded aggressively in tier-2, 3 and 4 markets). It has a high all-India
market share (multi-brand outlets) at 20-21% and a 29-30% share in North India (which is
almost 40% of the domestic AC market). Large distribution network, supported by a strong
brand name, good product and high market share (virtuous loop), can be the source of
competitive advantages, given that the fixed cost is shared over a larger base; this means
that the company can potentially underprice competitors and still generate higher profits.
When a smaller company tries to compete with a company that has an established
distribution network, it is most likely that the larger company has covered its fixed costs and
is making large incremental profits as it delivers more while the smaller one needs to take on
larger losses (or make less profit per unit) for some time until it gains enough scale.
# 3: Customer switching costs. So far, the Indian AC industry has no switching costs;
typically, these make it tough for customers to use a competitor’s product or service.
However, with the ‘Internet of Things’ (IOT), companies such as Samsung and LG can
eventually create switching costs. We note that some of the Indian companies, such as
Samsung and Onida, have recently launched ‘Wi-Fi’ based ACs, which is a step towards IOT
and the eventual strategy of creating switching costs. We note that companies such as
Apple and Whatsapp have created high switching costs led by the ‘network effect’.
India Infrastructure
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 23: Advertising expenses steady for past few years Voltas’ advertising expenses as a percentage of UCP sales, March fiscal year-ends, 2007-14
0.0
0.5
1.0
1.5
2.0
2.5
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Source: Company, Kotak Institutional Equities
Exhibit 24: Net warranty provisioning benign for past few years Voltas’ net warranty provisioning as a percentage of UCP sales, March fiscal year-ends, 2007-14
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Source: Company, Kotak Institutional Equities
Exhibit 25: Commission paid has been benign for past few years Commission other than to Sole Selling Agents as a percentage of UCP sales, March fiscal year-ends, 2007-14
0
1
2
3
4
5
6
7
8
9
10
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Source: Company, Kotak Institutional Equities
Exhibit 26: Cooling products EBIT margin has shown a sturdy
uptick last year, which the management expects will continue EBIT margin (%),March fiscal year-ends, 2007-14
0
2
4
6
8
10
12
14
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Source: Company, Kotak Institutional Equities
Voltas: little margin of safety at CMP
We increase our target price to `275 (from `260 earlier) on rollover to March 2017
estimates. We have a REDUCE rating given little margin of safety at the CMP, which implies
(1) full recovery of its EMP business margin in FY2016-17 (we expect the issue to persist
longer than anticipated, as has been the case so far), and (2) cooling products business (ex-
other businesses value) trading at full valuations (Exhibit 27).
If Voltas was a pure cooling-products business, then we could have been more confident
about the estimates and would have been comfortable with slightly higher valuation than is
reasonably warranted for higher longer-term compounding.
Infrastructure India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15
Exhibit 27: SOTP valuation for Voltas, March fiscal year-ends
2017 Rationale
EMP EV 15,880 10.5x EV/EBIT (15x P/E)
EPS EV 12,117 10.5x EV/EBIT (15x P/E)
UCP EV 69,976 17.5x EV/EBIT (25x P/E)
less: other income 18,328 At avg. target multiple; segmental EBIT includes other income
(a) We have used adjusted book values for banking companies.
(b) 2015 means calendar year 2014, similarly for 2016 and 2017 for these particular companies.
(c) Exchange rate (Rs/US$)= 62.69
Price/BV (X) RoE (%)Dividend yield (%)
In
dia
Da
ily S
um
ma
ry - M
arch
27
, 20
15
49 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Economy India
Kotak Institutional Equities Research coverage universe
Distribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of December 31, 2014
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
provided investment banking services within the
* The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over
the next 12 months; Add = We expect this stock to
deliver 5-15% returns over the next 12 months; Reduce
= We expect this stock to deliver -5-+5% returns over
the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. Our
target prices are also on a 12-month horizon basis.
These ratings are used illustratively to comply with
applicable regulations. As of 31/12/2014 Kotak
Institutional Equities Investment Research had
investment ratings on 155 equity securities.
19.4%
40.0%
23.2%
17.4%
2.6% 3.2%1.3% 1.3%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.