29 January 2020 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Research Team ([email protected]) Equities - India Close Chg .% CY19 % Sensex 40,967 -0.5 14.4 Nifty-50 12,056 -0.5 12.0 Nifty-M 100 18,232 -0.3 -4.3 Equities-Global Close Chg .% CY19 % S&P 500 3,276 1.0 28.9 Nasdaq 9,270 1.4 35.2 FTSE 100 7,481 0.9 12.1 DAX 13,324 0.9 25.5 Hang Seng 10,976 0.0 10.3 Nikkei 225 23,216 -0.5 18.2 Commodities Close Chg .% CY19 % Brent (US$/Bbl) 59 1.9 24.9 Gold ($/OZ) 1,567 -0.9 18.3 Cu (US$/MT) 5,675 -0.7 3.4 Almn (US$/MT) 1,738 -1.0 -4.4 Currency Close Chg .% CY19 % USD/INR 71.3 -0.1 2.3 USD/EUR 1.1 0.0 -2.2 USD/JPY 109.2 0.2 -1.0 YIELD (%) Close 1MChg CY19 % 10 Yrs G-Sec 6.6 0.02 -0.8 10 Yrs AAA Corp 7.8 0.03 -0.9 Flows (USD b) 28-Jan MTD CY19 FIIs -0.19 2.04 14.23 DIIs 0.10 -0.48 5.98 Volumes (INRb) 28-Jan MTD* CY19* Cash 412 369 369 F&O 15,658 16,486 16,486 Note: *Average Today’s top research idea Market snapshot Chart of the Day: Consumer (Rural India – Green shoots visible, but pace of growth uncertain) Consumer: Rural India – Green shoots visible, but pace of growth uncertain Once a key volume driver for Consumer companies, rural growth has been on a continuous slide for the past five quarters. Nielsen's data released on 21st Jan'20 too suggests continued slowdown in rural growth for the Dec'19 quarter. In fact, rural growth has slipped below urban growth for two successive quarters now. However, the worst now seems to be over based on the recent data on WPI food inflation, lower agri input costs and improved government spending post elections. High reservoir levels post the monsoon season augur well for Rabi crop cash flows. Questions, though remain on the pace of the recovery as corporate commentary over the past two months has turned incrementally negative. To play the rural recovery story - although the pace of revival may be slower than anticipated - we prefer HUVR for its nimbleness and CLGT for its newfound aggressiveness. Cos/Sector Key Highlights Consumer Rural India – Green shoots visible, but pace of growth uncertain Ecoscope Pre-Budget III: Why will 2020-21 be more challenging year? Maruti Suzuki Miss on higher discounts; demand outlook improving Airtel Africa A quarter of broad-based growth United Spirits Strong execution in P&A, RM pressure abating M & M Fin. Serv. Business growth continues to moderate Cummins India In-line revenues, margins surprise on cost optimization Team Lease Serv. This too shall pass! Pace of FMCG growth has declined sharply until 4QCY19 (3QFY20) Source: Nielsen, MOFSL Research covered Piping hot news Gadkari unveils InvIT road map for NHAI, initial target ₹20,000 cr The National Highways Authority of India (NHAI) will initially raise ₹15,000-20,000 crore in its maiden InvIT offer and then go for a larger round, depending on the response it receives from investors, Union minister Nitin Gadkari said.
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29 January 2020
Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Chart of the Day: Consumer (Rural India – Green shoots visible, but pace of growth uncertain)
Consumer: Rural India – Green shoots visible, but pace of growth uncertain Once a key volume driver for Consumer companies, rural growth has been on
a continuous slide for the past five quarters. Nielsen's data released on 21st Jan'20 too suggests continued slowdown in rural growth for the Dec'19 quarter. In fact, rural growth has slipped below urban growth for two successive quarters now.
However, the worst now seems to be over based on the recent data on WPI food inflation, lower agri input costs and improved government spending post elections. High reservoir levels post the monsoon season augur well for Rabi crop cash flows.
Questions, though remain on the pace of the recovery as corporate commentary over the past two months has turned incrementally negative.
To play the rural recovery story - although the pace of revival may be slower than anticipated - we prefer HUVR for its nimbleness and CLGT for its newfound aggressiveness.
Cos/Sector Key Highlights Consumer Rural India – Green shoots visible, but pace of growth uncertain Ecoscope Pre-Budget III: Why will 2020-21 be more challenging year? Maruti Suzuki Miss on higher discounts; demand outlook improving Airtel Africa A quarter of broad-based growth United Spirits Strong execution in P&A, RM pressure abating M & M Fin. Serv. Business growth continues to moderate Cummins India In-line revenues, margins surprise on cost optimization Team Lease Serv. This too shall pass!
Pace of FMCG growth has declined sharply until 4QCY19 (3QFY20)
Source: Nielsen, MOFSL
Research covered
Piping hot news
Gadkari unveils InvIT road map for NHAI, initial target ₹20,000 cr The National Highways Authority of India (NHAI) will initially raise ₹15,000-20,000 crore in its maiden InvIT offer and then go for a larger round, depending on the response it receives from investors, Union minister Nitin Gadkari said.
Tata Sons may bank on TCS to clear teleservices’ AGR dues Tata Sons has started the process of arranging funds for paying off statutory dues of Rs 13,823 crore owed by Tata Teleservices, top officials close to the development said…
Burger King gets Sebi’s go ahead to float IPO Quick service restaurant chain Burger King India has received markets regulator Sebi’s approval for an initial public offer. The company, which filed its draft IPO papers with the watchdog in November, obtained its final observations on January 24, as per the latest update with the Securities and Exchange Board of India (Sebi)…
Worldwide sales of smartphones decline for the first time since 2008 Worldwide sales of smartphones to end users declined 2% in 2019, the first time since 2008 that the global market for such phones experienced a decline, Gartner said…
Sidbi eyes Rs 4,500 crore exit from Bandhan Bank’s Holding Co Small Industries Development Bank of India (Sidbi) is all set to sell its minority stake in Bandhan Financial Services Ltd (BFSL), the holding firm for Bandhan Bank, for about Rs 4,500 crore…
Budget 2020: Govt may infuse fresh capital into regional rural banks The Centre is looking to infuse fresh capital into regional rural banks (RRB) to help them meet the minimum capital requirement of 9% and this may find a mention in the Union Budget on February 1, people close to the development said…
Maruti Suzuki hikes prices of some models by up to 4.7% The price of entry level model Alto has gone up in the range of ₹9,000-6,000, S-Presso between ₹1,500 to 8,000, WagonR between ₹1,500 and ₹4,000…
Import duty waiver on open cell TV panels may be extended The government is considering extension of zero duty import of ready-to-use open cell television panels beyond September after leading manufacturers like Samsung and LG reached out to the ministry saying the current norm is an anomaly which would hurt Indian manufacturing…
Kindly click on textbox for the detailed news link
Rural India – Green shoots visible, but pace of growth uncertain Once a key volume driver for Consumer companies, rural growth has been on a
continuous slide for the past five quarters. Nielsen’s data released on 21st Jan’20 too suggests continued slowdown in rural growth for the Dec’19 quarter. In fact, rural growth has slipped below urban growth for two successive quarters now.
However, the worst now seems to be over based on the recent data on WPI food inflation, lower agri input costs and improved government spending post elections. Also, high reservoir levels post the monsoon season augur well for Rabi crop cash flows.
Questions though remain on the pace of the recovery as corporate commentary over the past two months has turned incrementally negative, leading us to expect delayed recovery/overall growth in the rural sector.
To play the rural recovery story – although the pace of revival may be slower than anticipated – we prefer HUVR for its nimbleness and CLGT for its newfound aggressiveness. On the other hand, we are cautious on DABUR due to high wholesale dependence and international business contributing over 25% to overall sales. We are also cautious on BRIT owing to rising commodity costs and the fact that biscuits’ demand usually recovers with a lag.
Rural growth slowing considerably: Rural growth was at the vanguard of driving
volume growth for consumer companies until the past few quarters. According to Nielsen’s data for Dec’19 quarter, while urban growth is still healthy at ~7% levels despite the relative slowdown compared to the past, rural growth has declined sharply from ~18% to ~5% over the last five quarters. This has led to an overall revenue slowdown with rural growth notably dipping below urban over the last two quarters.
Green shoots evident: Recently, there have been green shoots on the rural growth front in the form of (a) higher food inflation over the past two months indicating higher realizations for farmers, (b) lower agri input costs, (c) improved government spending on rural, and (d) higher reservoir levels.
Rural growth to improve based on Nielsen’s forecast: In the third week of Jan’20, Nielsen expressed optimism on the growth path for the Consumer sector, led by their belief that the worst, in terms of the rural slowdown may already be over. The factors mentioned above are the key factors underpinning Nielsen’s optimism.
Notably, recovery is off a trough with weak management commentary: While these factors are likely to have an incrementally positive impact on rural demand, we believe that recovery will be off the troughs, coming out of a particularly tepid 2QFY20 and 3QFY20, when rural growth was at a 7-year low. We also note that despite the recovery, Nielsen’s overall growth forecast for CY20 at 9-10% is identical to the growth reported in CY19, albeit better than the 6.6% reported in 3QFY20. Moreover, in contrast to the earlier expectations of a sharp recovery from 4QFY20, corporate commentary from large consumer companies (such as HUVR, ITC, NEST, BRIT and MRCO) is largely cautious on substantial rural recovery over the next couple of quarters.
HUVR and CLGT remain our top rural picks: Despite our caution over the pace of rural recovery in the near term, we do have buy ratings on two companies under our coverage (HUVR and CLGT) that have substantial revenue share from rural or incremental share of revenue growth coming from rural.
HUVR remains our top rural pick because its reinvigorated nimbleness in recent years enables it to take better advantage of rural recovery v/s peers. Taking into account synergies from the GSKCH acquisition, the stock is trading below its 5-year average P/E.
CLGT’s new-found aggression in ad-spends and product pipeline may affect its near-term earnings growth, but any material market share gain will be positively received by investors. Valuations of 41.4x FY21 are also attractive v/s peers.
BRIT’s long-term topline and earnings growth opportunity is strong. However, rising commodity costs, historically lagged recovery in the biscuits’ category and expensive near-term valuations of 49.2x FY21 leads us to maintain Neutral rating.
DABUR’s high exposure to the wholesale channel (where recovery is even more uncertain compared to rural recovery), overseas business that contributes ~25-30% to overall sales and expensive valuations of 48.6x FY21 EPS leaves little room for an upside.
Exhibit 1: Pace of FMCG growth has declined sharply until 4QCY19 (3QFY20)
Source: Nielsen, MOFSL
Exhibit 2: Volume growth of companies with higher rural exposure/ incrementally higher rural sales
Pre-Budget III: Why will 2020-21 be more challenging year? Weak RBI support could entirely offset better tax growth
In this third and final report of our pre-budget series, we discuss the factors that make the Union Budget 2020-21 very challenging. In FY20, while net taxes are likely to grow only ~3% (v/s budgeted growth of 25.3%) and divestment proceeds will also be likely only 50-60% of the target (down 30% from FY19), total receipts are still expected to grow 6% YoY, primarily helped by unexpectedly large dividends from the RBI amounting to INR1.48t. Besides, the cumulative rate cuts of 135bp in CY19 will help the government save ~INR600b on its interest payments. Together, thus, the RBI provided a massive support of INR2.1t (or 1.03% of GDP) in FY20, which went almost unappreciated.
Things, however, will be different in FY21. Even if we assume disinvestment proceeds of INR1t and higher growth of ~10% in (net) tax receipts, the absence of the RBI’s support can turn out to be an offsetting factor. With (a) the banks parking excess funds (averaging INR1.9t till 24th Jan’20) at the RBI’s liquidity adjustment facility (LAF) window v/s average LAF deficit of INR459b last year and (b) no room for further rate cuts, the government is unlikely to receive as large a support in FY21. Also, if the RBI provides an interim dividend this year, the surplus next year will be even lower.
Overall, notwithstanding expectations of better GDP growth next year, total receipts could grow slowly at only ~4% YoY in FY21 vis-à-vis expected growth of 6% this year. Assuming an unchanged fiscal deficit of 3.5% of GDP, spending growth would also be lower at 6.6% next year, as against ~7% this year. The budgeted estimates (BEs) to be presented in the budget on 1st Feb’20, however, could be very different from these estimates.
In Part I of our pre-budget note series, we had highlighted the need for a fiscal policy to match the monetary policy and discussed about the limited fiscal space available in Part II. In this third and final note, we argue that, notwithstanding higher expectations, the Union Budget 2020-21 could be even more challenging. RBI’s exceptional support in otherwise dismal year Total receipts of the government increased at a respectable ~13% YoY in the 8MFY20 (Apr-Nov’19) – much better than 3.4% growth in the year-ago period but short of 25% growth budgeted in the Union Budget 2019-20 presented in Jul’19. Details of total receipts, however, reveal a very interesting insight. While (net) tax receipts increased at a dismal 2.6% over Apr-Nov’19 (vis-à-vis 4.6% growth in the same period last year), large part of reasonable growth in total receipts is attributed to non-tax revenue receipts, which increased ~68% YoY, following 31% YoY growth in the corresponding period last year (Exhibit 1 on the next page). It implies that taxes (which account for ~80% of total receipts) accounted for only ~16% of total receipts growth (2.1 percentage point (pp) out of ~13% growth), while non-tax revenue receipts (NTRR) accounted for more than four fifths of total receipts growth (10.5pp out of ~13% growth) in 8MFY20 (Exhibit 2). Disinvestments, albeit 10% higher than in the year-ago period, accounted for only ~2% of total receipts growth in 8MFY20.
Taxes accounted for only ~16% of total receipt
growth, while non-tax revenue receipts
accounted for more than four fifths of total receipt
Shareholding pattern (%) As On Dec-19 Sep-19 Dec-18 Promoter 56.2 56.2 56.2 DII 15.6 15.0 13.4 FII 23.2 23.4 22.7 Others 5.0 5.3 7.7 FII Includes depository receipts
CMP: INR6,997 TP: INR8,000 (+14%) Buy
Miss on higher discounts; demand outlook improving Performance bottoms out; Buy into weakness MSIL’s 3QFY20 results are a reflection of the company’s efforts to revive
demand through discounts during the festive season and ahead of year change/BS6 transition. We believe MSIL’s operating performance has bottomed out and recovery is expected from 1QFY21.
Our FY20/FY21 EPS estimates remain unchanged and we would buy into any weakness post such weak results. Maintain Buy.
Record-high discounts dilute benefit of operating leverage MSIL’s 3QFY20 revenues/EBITDA/PAT grew 5%/9%/5% YoY to
Domestic PV market share recovered 130bp YoY (+240bp QoQ) to 52%. Net realization increased 3% YoY (-6% QoQ) to ~INR473k (v/s est. ~INR499k).
QoQ decline was due to higher discounts and adverse mix. Discounts inched up to ~INR33k/unit (v/s ~INR24k in 3QFY19 v/s INR25.8k in 2QFY20).
Gross margin declined ~150bp QoQ due to (a) higher sourcing from Gujarat (accounting impact), (b) higher discounts (~190bp QoQ), (c) lower production (v/s wholesales; ~100bp QoQ impact), and (d) ~60bp benefit of lower cost.
EBIT margins improved 10bp YoY (+200bp QoQ) to 6% (v/s est. ~6.2%). EBIT grew ~7% YoY (+83% QoQ) to ~INR12.4b (v/s est. ~INR13.6b).
Highlights from management commentary Demand environment is improving, which can be gauged by the increase in
inquiries. While rural demand is now better than urban, outlook is also promising based on encouraging estimates for Rabi crop. SIAM has forecasted PV industry growth at 3-5% for FY21. Our estimates factor in recovery from 1QFY21 and volume growth of 8.5% for FY21.
MSIL does not expect material pre-buying in 4QFY20 as it plans to stop diesel car production beginning Feb’20. Currently, it has <10 days inventory for diesel.
Post BS6, it expects a further decline in industry share of diesel to 15-20% (from ~29% in 3QFY20). Even in mid-sized SUVs like Hector, Creta and Venue, share of petrol is picking up. For MSIL, we expect the loss in diesel to be made up by petrol and CNG/hybrids.
In Jan’20, key models have seen INR5-6k reduction in discounts and price increase of INR5-6k. This implies 200-250bp QoQ recovery in gross margins.
Commodity prices, which have started to increase (steel, rhodium, palladium etc.), will start reflecting in P&L from 1QFY21. We have lowered our gross margin estimates to reflect the inflation in key commodities.
Valuation & view Signs of headwinds easing augur well as it should enable faster recovery for
MSIL. A key monitorable in the near term would be the smooth transition of diesel to petrol.
Valuations at 26.7x/20.6x FY21/FY22E consol. EPS are on the early recovery cycle, as we estimate ~30% EPS CAGR over FY20-22E. Maintain Buy with TP of ~INR8,000 (~25x Dec’21 consol. EPS).
28 January 2020 3QFY20 Results Update | Sector: Automobiles
A quarter of broad-based growth Better-than-expected performance: Airtel Africa’s 3QFY20 performance
was marginally better than our expectations. Revenue increased 4.6% QoQ to USD883m on a reported basis and 5% QoQ to USD896m (in-line) on a constant currency (CC) basis. EBITDA was up by 15.3% QoQ at USD421m on a reported basis (margin expansion of 440bp to 48%) and by 7.4% QoQ to USD404m on a CC basis (5% beat; margin expansion of 100bp to 45%). PAT grew by 7.3% QoQ to USD103m on a reported basis and by 29.4% QoQ to USD110m on a CC basis. Blended ARPU was up 3.8% QoQ at USD2.8 (in-line), with net subscriber addition of 3.3m to 107.1m. Monthly churn increased 70bp to 5.2%.
Revenue growth on all fronts: Voice, Data and Mobile Money revenue grew by 4.5%, 7.9% and 6.3% QoQ to USD513m, USD247m, and USD84m, respectively. ARPU was up 4% QoQ to USD2.6 in Data, declined 5.6% QoQ to USD1.7 in Mobile Money and remained flat QoQ at USD1.6 in Voice. In terms of subscribers, Mobile Money exhibited the highest increase of 7.2% QoQ to 17m, while Data/Voice subscribers were up 3.1% QoQ at 33m/107m. This indicates growth in Mobile Money/Voice was led by healthy subscriber addition, while Data growth was driven by both ARPU and subscribers. Region-wise, Nigeria recorded highest revenue growth of 8.8% QoQ to USD357m, East Africa revenue increased 4.6% QoQ to USD321m and Rest of Africa revenue was flat at USD222m. EBITDA grew across regions, with Nigeria/East Africa/Rest of Africa recording sequential growth of 12.1%/4%/7.8% to USD195m/USD130m/USD83m.
Concall Highlights: (1) Voice revenue growth was driven by both existing and new areas, but Data revenue growth majorly came from existing towns. (2) Mobile Money growth remained strong but slowed down YoY (base quarter had one-time benefit of extensive network rollout); KPIs of Mobile Money remained healthy. (3) Effective tax rate for 9MFY20 stood at 41.7%, implying a marginal increase due to higher withholding tax on dividend from subsidiaries (it is expected to remain similar level for the year).
FCF improvement led by healthy earnings and lower interest: Airtel Africa’s FCF increased to USD391m (+94% YoY) in 9MFY20, mainly on account of better EBITDA and lower interest cost (lower debt), partially offset by increasing capex. However, FCF is expected to be lower in the next quarter as capex is skewed toward the fourth quarter. Management’s guidance for FY20 capex was unchanged at USD650m-700m. Further, Airtel Africa has reduced its leverage to 2.2x from 3.2x a year earlier.
Valuation: Airtel Africa trades at GBX72 on LSE with market cap of USD3.5b and EV (excl. lease obligation) of USD5.6b. The stock trades at FY21E EV/EBITDA of 3.3x.
28 January 2019 3QFY20 Results Update | Sector: Telecom
Airtel Africa 3QFY20 concall highlights Key Highlights FCF stood at USD391m (+94% YoY) for 9MFY20. It is expected to be lower in 4QFY20 as
capex is skewed toward fourth quarter. The guidance for FY20 capex remains unchanged at USD650-700m.
Effective tax rate for 9MFY20 stood at 41.7% – the marginal increase is due to higher withholding tax on dividend from subsidiaries. It is expected to remain at similar level for the year.
Mobile Money growth remained strong but slowed down YoY (base quarter had one-time benefit of extensive network rollout); KPIs of Mobile Money remained healthy.
The company has filed an application to buy 10MHz of 900 spectrum at USD74m, excluding regulatory fees, and awaiting approval; payments will be made post approval.
Voice revenue growth has come from both existing and new areas, but Data revenue growth majorly came from existing towns.
Operational Highlights Airtel Africa reported double-digit revenue growth for the eighth consecutive
quarter. Growth is in line with management’s strategy of improving Voice and Mobile
Money revenue. The company’s blended ARPU increased by 3.5%. FCF for 9MFY20 stood at USD391m (up 94% YoY), mainly due to higher EBITDA
and lower interest cost, partially offset by increasing capex. Due to management’s deleveraging measures, leverage reduced to 2.2x from
3.2x in 3QFY19. In 3QFY20, Airtel Africa recognized exceptional item benefit of USD27m. Due to the company’s change in criteria of calculating number of customers,
there is a correction of 2.5m customer base in Nigeria. The company launched Airtel TV in certain geographies like Nigeria, wherein it
provides large content to customers. Most of it can be seen without subscription, driving data usage. Content cost for the company is very nominal.
Licensing & Network Highlights The company is waiting for approval of payment service bank in Nigeria. It
remains hopeful of receiving the same. It launched 4G across markets and is able to provide this service across 14
countries. Partnerships Entered into a partnership with Mastercard and Ecobank that enables
customers to get international money directly in their wallets. Launched virtual card with Mastercard which will enable customers to have
access to all Mastercard merchants.
29 January 2020 10
Outlook In certain sub-Saharan markets, customer penetration is ~44-45%, which
provides opportunity to grow Voice revenue. FCF in 4QFY20 is expected to be low as capex is skewed toward the fourth
quarter – guidance for FY20 capex remains unchanged at USD650-700m. Looking for growth opportunity in Voice in under-penetrated markets and for
huge growth opportunity in Data. Rest of Africa has lagged other markets due to phase out of 4G investments;
management is expecting 4G momentum to kick in and is looking for reasonable growth.
Looking for opportunity to buy spectrums. Intends to apply for NTO license (deadline 31 Jan, 2020) in Uganda. Proceeds from Malawi IPO should be received in the fourth quarter.
Exhibit 4: Airtel Africa consolidated performance (Reported Currency) Bharti Africa - In Reported Currency (USD m) 3QFY19 2QFY20 3QFY20 YoY% QoQ% Revenue 783 844 883 12.8 4.6 Total Expenditure 465 479 462 -0.6 -3.5 EBITDA 318 365 421 32.4 15.3 EBITDA margin (%) 41% 43% 48% 706.5 443.2 Depreciation 144 162 163 13.2 0.6 Net Finance Cost 73 58 76 4.2 31.0 Other Income 5 7 4 -27.1 -42.9 PBT 106 150 186 76.2 24.0 Tax -28 54 83 -396.4 53.7 PAT 134 96 103 -22.9 7.3
Source: MOSL, Company
29 January 2020 11
Exhibit 5: Airtel Africa consolidated segment-wise summary (USD m) in Constant Currency USDm 3QY19 2QFY20 3QFY20 YoY% QoQ% Regional Revenue Nigeria 289 328 357 23.5 8.8 East Africa 298 307 321 7.7 4.6 Rest of Africa 232 221 222 -4.3 0.5 Regional EBITDA Nigeria 144 174 195 35.4 12.1 East Africa 125 125 130 4.0 4.0 Rest of Africa 88 77 83 -5.7 7.8 Regional EBITDA Margins Nigeria 49.8% 53.0% 54.6% 479bps 157bps East Africa 41.9% 40.7% 40.5% -145bps -22bps Rest of Africa 37.9% 34.8% 37.4% -54bps 255bps Africa Consolidated (in CC USD m) 3QY19 2QFY20 3QFY20 YoY% QoQ% Segmental Revenue Voice Revenue 500 491 513 2.6 4.5 Data Revenue 180 229 247 37.2 7.9 Mobile Money Revenue 68 79 84 24.0 6.3 Segmental ARPUs Voice ARPU 1.7 1.6 1.6 -5.9 0.0 Data ARPU 2.1 2.5 2.6 23.8 4.0 Mobile Money ARPU 1.6 1.8 1.7 4.4 -5.6 Segmental Subscribers Voice Subscribers 97,922 1,03,881 1,07,140 9.4 3.1 Data Subscriber 29 32 33 12.4 3.1 Mobile Money Subscribers 14 16 17 20.5 7.2 Segmental KPIs Subscriber base 98 104 107 9.4 3.1 Net adds (QoQ) 3.8 4.2 3.3 -14.9 -22.6 Monthly Churn 4.7% 4.5% 5.2% 10.6 15.6 ARPU (blended) 2.8 2.8 2.8 0.0 0.0
Source: Company
29 January 2020 12
Exhibit 6: Airtel Africa consolidated region-wise performance Region Wise Performance (in CC USD m) 3QY19 2QFY20 3QFY20 YoY% QoQ% Nigeria Segmental Performance
Strong execution in P&A, RM pressure abating UNSP not only reported 8% sales growth in the Prestige & Above (P&A)
segment (mainly led by the return of mix improvement and despite a challenging base of 16% growth in 3QFY19), but also ended the quarter with healthy winter and Christmas/New Year eve sales. This is comforting, particularly when looked at the uncertain outlook on P&A at end-2QFY20.
After facing RM cost pressure for a few quarters, management cited some relief on ENA costs over the last two months.
Despite significant pressure on the gross margin from ENA costs, the company (contrary to expectations of EBITDA margin pressure for FY20) reported ~120bp YoY operating margin improvement in 9MFY20 (adjusted for bulk scotch), including 210bp YoY expansion in 3QFY20.
Premiumization trend returned with each sub-segment growing faster than the one beneath it.
Sales growth below expectations but significant beat on EBITDA Standalone net sales grew 3.4% YoY to INR25.8b (our estimate: INR26.8b). Reported volumes declined 1.8% YoY (our estimate: +5%). P&A volumes
grew 2.7% YoY, while Popular volumes were down sharply by 6.5% YoY. EBITDA grew 18.4% YoY to INR4.2b (our estimate: INR3.7b). Despite significant gross margin compression, the EBITDA margin expanded
210bp YoY to 16.4% (our estimate: 13.8%), primarily led by savings in operating costs and to a lesser extent by the lower marketing reinvestment rate (other expenses were down 390bp YoY, staff costs were down 150bp YoY and ad spends were down 100bp YoY).
PBT grew 7.9% YoY to INR3.4b (our estimate: INR3.2b). Adj. PAT was up 21.7% at INR2.6b (our estimate: INR2.4b), led by higher EBITDA and lower corporate tax rates.
For 9MFY20, sales/EBITDA/PAT growth stood at 5.4%/18.9%/18.3% YoY.
Highlights from management commentary P&A is likely to grow in double-digits and Popular in low-single-digits. Liquidity in trade (a problem in 2QFY20) has improved sequentially. Reduction in debt and working capital continued in 9MFY20. ~INR15b of
assets are to be monetized, providing more opportunity for debt reduction.
Valuation and view Despite (a) healthy earnings CAGR of 35.2% for the five years ending FY20
(since Diageo took control), (b) among the best-of-breed earnings outlook (~29.5% CAGR over the next two years) and (c) continued RoCE improvement, the stock trades in line with peers at 42.1x FY21E EPS.
On our DCF calculations, we arrive at a target price of INR801, implying a 22% upside (effective target multiple of 40x Mar’22E EPS).
28 January 2020 3QFY20 Results Update | Sector: Consumer
Shareholding pattern (%) As On Dec-19 Sep-19 Dec-18 Promoter 51.2 51.2 51.2 DII 15.4 15.3 13.2 FII 25.3 25.6 27.4 Others 8.2 8.0 8.2 FII Includes depository receipts
CMP: INR352 TP: INR420 (+19%) Buy Business growth continues to moderate MMFS reported 3QFY20 PAT of INR3.7b (+15% YoY) – a 6% miss. Better-
than-expected margins (NII beat of 6%) and opex performance (4% beat) led to PPoP beat of 13%. However, contingency provision (for customers who have a prolonged default history) of INR940m led to a PBT miss of 4%. Adjusted for the same, the PBT beat was 14%.
Other highlights: (a) Loans were up 2.5% QoQ/12% YoY. (b) Spreads were up 10bp QoQ (9M v/s 1H). (c) Asset quality disappointed with GS3% up 60bp QoQ to 8.5%. (d) Share of securitization in borrowings increased to 15% from 12% last quarter.
MMFS remains comfortable on the funding side. However, near-term growth challenges will remain with pressure in the underlying segment. We cut our estimates by 5% (led by higher provisions) and factor in ~13% AUM CAGR with RoA/RoE of 2.2%/15%. Maintain Buy.
Mid-teens AUM growth; NIM improves Value of assets financed declined by 4% for 3Q/9M, leading to further
moderation in loan growth to 12% YoY. While AUM mix was largely stable, MMFS would place a greater focus on pre-owned vehicle book.
Reported gross spreads (derived from cumulative reported) improved 30bp QoQ to 7.9%, which surprised us positively.
MMFS continues to reduce its dependence on term loans from banks and NCDs while offsetting it with increased PSL securitization (share up from 6% in 3QFY19 to 12% in 2QFY20 and 15% currently) and more fixed deposits (share up from 9% to 14% YoY).
Pressure on asset quality; contingency provisions leading to higher PCR Given the weak farm cycle, the GNPL ratio increased 60bp QoQ to 8.5%,
driven by a 9% QoQ increase in NPL contracts to 137k. MMFS incurred a termination loss and bad debt recovery stands at INR1.4b.
MMFS also took INR940m one-time provisioning for customers who have been delinquent for a long time. These factors resulted in 300bp+ QoQ improvement in PCR to 23%.
Highlights from management commentary Amongst product segments, highest asset quality pressure is felt in CV
finance. MMFS may have to increase PCR if asset quality pressure sustains. It may increase the share of securitization to 20% if the bond markets
remain weak.
Valuation and view MMFS’ performance in FY20 is marred by weak growth in the underlying segment and risk aversion toward segments like NBFCs/SMEs. Given its parentage, it has been able to raise debt at reduced costs and thus improve margins. GNPL ratio increased meaningfully in 9MFY20 led by weak rural economy, but a stronger-than-expected rural recovery can provide a significant upside to earnings. We bake in credit cost of 1.7% in FY21 v/s 2.3% in FY20. We factor ~13% AUM CAGR with RoA/RoE of 2.2%/15% over the medium term. We cut our estimates by 5-6% to factor in higher- than-expected provisions. Buy with an SOTP-based TP of INR420 (Sep’21E based).
28 January 2020 3QFY20 Results Update | Sector: Financials
In-line revenues, margins surprise on cost optimization Revenue declined 3% YoY to INR14.5b and was in-line with our estimate.
Domestic market grew 4% YoY while exports declined 16% YoY. Note that for 9MFY20, domestic market growth stood at 4% vs guidance of 3-5%, while exports has declined 22% vs. guidance of 20% decline.
Gross margins remained stable at 34.9% (3QFY19: 35.0%; 2QFY20: 34.9%). EBITDA margins surprised at 14.8% (-30bp YoY) vs expectation of 13.0% as
company opted for cost optimization. Thus, EBITDA stood at INR2.2b (-5% YoY) and was 11.5% ahead of our
expectation. PBT declined 6% to INR2.5b and was 6% ahead of expectation. Effective tax rate came in at just 22%. Adj. PAT grew 5.6%YoY to INR2.0b and was 10% ahead of our expectation. Exceptional item included VRS related one-time expense of INR160m (net of
tax benefits = INR112m) as 73 employees opted for VRS. Subsequent to 31 Dec 2019, the company has discontinued services of some
employees and the aggregate amount of compensation paid out stood at INR38m.
Quarterly Performance (INR M) FY19 FY20E FY19 FY20E Vs Est. Var. Y/E March 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 3QE (%) Sales 13,280 14,869 15,038 13,404 13,430 13,084 14,534 14,937 56,590 55,986 14,885 -2.4 Change (%) -1.0 28.9 11.0 8.7 1.1 -12.0 -3.3 11.4 11.3 -1.1 -1.0
Shareholding pattern (%) As On Dec-19 Sep-19 Dec-18 Promoter 40.0 40.3 40.8 DII 9.3 7.7 5.8 FII 43.1 44.6 44.5 Others 7.6 7.4 8.9 FII Includes depository receipts
CMP: INR2583 TP: INR3280 (+27%) Buy
This too shall pass! Fundamentals remain strong; Reiterate Buy The soft job market and the weak festive season translated into lower-than-
expected headcount/revenue growth (by up to 6%) in general staffing. However, TEAM's ability to command an increase in mark-ups (from INR739 in 2Q to INR750) amidst weak demand and continuous mark-up pressure was impressive. This comes without any increase in the share of working capital funded clients (at 14%). Demand issues, along with multiple one-offs which adversely impacted margins, have translated into depressed earnings in FY20. However, as demand improves and margins normalize, we expect a rebound in earnings over the medium term (34% CAGR over FY21-22).
We downgrade our EPS estimate for FY21-22 by 3%-7%, given the weak near-term outlook. Despite the macro/demand issues, the fundamentals of the business remain strong, in our view. Reiterate Buy.
Miss on headcount and revenue growth; Adjusted EBITDA in-line Headcount addition in general staffing (2,187) was weaker than our estimate
(4,500). General staffing/overall revenue was 5%-6% below our estimate. This was largely led by the soft job market and the weak festive season.
On an organic basis, both specialized staffing and other HR services remained largely flat YoY, further constraining growth.
EBITDA margin adjusted for one-time provision in general staffing (2.1%) was marginally ahead of our estimate (by ~13bp).
Reported general staffing EBITDA margin (1.6%) was optically lower (by 20bp QoQ) due to one-time provision and higher salary per associate.
On a sequential basis, adjusted EBITDA margin expanded ~20bp, led by IT staffing, partial integration of IMSI and other HR services.
Reported EBITDA margin of Evolve was optically lower (by 60bp QoQ). This was due to the renegotiation of working capital terms with a top client.
Despite the weakness in the job market and no increase in the share of working capital funded clients (remains at 14%), mark-ups increased from INR739 (in 2Q) to INR750. We see this as a key positive reflecting TEAM's ability to defend pricing and margins.
Staffing productivity (associate to core ratio) increased marginally. Tax assessment for the first year of claiming Sec 80JJAA (FY17) was cleared. Downbeat commentary on revenue growth and margins TEAM expects ~10% rise in general staffing headcount in FY20. This
translates into headcount addition of ~2,300 in 4QFY20 (v/s 1,400 YoY), which is a seasonally weak quarter with impact of roll-offs/absorptions.
Overall revenue growth is expected to be ~18% for FY20. It expects steady state EBITDA margin of 2% in general staffing in the near
term. Some cost-rationalization measures are underway, both in general staffing
and specialized staffing (eliminating redundancies at acquired entities). It is confident on provision reversal (INR40m) in staffing/HR services in 4Q.
28 January 2020 3QFY20 Results Update | Sector: Technology
Valuation view – medium-term outlook remains robust TEAM should continue to be the key beneficiary of (i) robust foreign funding into
Indian businesses increasing the need for labor law compliances, (ii) formalization of workforce in the end industries and (iii) shift of clients from unorganized to organized staffing vendors.
Medium-term headcount growth should be strong (14% CAGR over FY21-22). Given the continuous mark-up pressures in the industry, the EBIT margin is a
more critical variable to watch out for, in our view. (i) Scale-driven operating leverage in general staffing, (ii) pick-up in apprentice addition, (iii) recovery in margins of Evolve technologies, (iv) stabilization of other HR services and (v) complete integration of E-Centric and IMSI should drive ~40bp expansion in the EBIT margin to 1.9% by FY22.
While the market is over concerned about the potential provision related to ILFS/DHFL exposure in the PF trust (INR1.7b, 32% of FY19 net worth), we believe the likelihood of TEAM having to take this provision is limited. We get this comfort from (i) strong liquidity cushion in the PF trust and (ii) higher preference given to PF trusts in the insolvency proceedings.
The company should continue to avail the benefits of Sec 80JJAA exemption under the new tax regime. However, it need not pay MAT (hitherto at ~20.5%) going forward. This is a key positive from an FCF standpoint.
Given the expected non-linearity in headcount and EBITDA trajectory, P/E multiples on FY21/22E do not adequately capture the potential value creation in the long term. We prefer 10-year DCF. Our DCF-based TP of INR3,280 implies 34x FY22E EPS (v/s current multiple of 38x FY21E EPS).
29 January 2020 20
Consolidated Quarterly Performance (INR m) FY19 FY20E FY19 FY20E Est. Var.
1. HDFC: LOAN DEMAND IN LOW-TICKET SEGMENT ROBUST BUT SLOWING FOR HIGH-END MARKET; Keki Mistry, VC and CEO
Individual loans in the affordable housing segment continue to remain good. Focus on affordable housing loans continues unabated. If one looks at the breakdown of the lending company has done in this quarter, and the nine-month periods, it is almost the same.
The loans given to customers, who are in the economically weaker section (EWS) or the lower income group (LIG) would constitute in number terms 36 percent, in value terms 18 percent. For that segment of the market, the demand is fairly strong and robust. Problem is in the high-end market. Demand for high value loans, higher ticket items is slowing down.
The transition of Gruh into Bandhan happened during the course of this quarter because the National Company Law Tribunal (NCLT) approval happened now and therefore under the accounting rules, company had to mark-to-market (MTM) the Bandhan shares based on the share price. Cannot reflect it at cost price, the way company was reflecting the Gruh price.
So, there is a MTM gain that gets recognised but on that MTM gain, have created the deferred tax liability - in future, if company has to sell it, it has to pay tax, there is a deferred tax liability that is being created.
2. WOCKHARDT : RESTRUCTURING UNDERWAY TO RAISE
FUNDS; Habil F Khorakiwala, Founder, Chairman and Group CEO
Company is looking to raise some equity and cash through some kind of restructuring of the organisation.
(Restructuring) would be rather soon in next month or so. Have completed most of remediation measures and are in communication with
USFDA [the US Food and Drug Administration] and there are certain additional information USFDA is requiring which company is providing and hope that during the coming financial year, there will be an inspection early enough and hope that company should be back on track.
India business has three components, one is branded business which is not down very significantly — it is down by less than single digit. The generic business that company had, more or less company has discontinued that and that is also showing a decline. Third element was some Active Pharmaceutical Ingredient (API) business domestically is down but internationally it is up.
Globally focus is on three-four big areas. One is pharma business which is very important worldwide including India. Second in terms of therapy area antibiotics since company has the research programme with the new chemical entity (NCE). Third is biosimilars especially the insulin Glargine and other analogues are important because USFDA has come out with new guidelines a month back and company is seriously considering to enter the US market with our biosimilars.
1. OPPORTUNITIES FOR INDIA IN THE ASIAN CENTURY India is at an inflection point. Its recent period of significant growth—faster than
the global average—has stalled in the face of global headwinds against trade, volatile commodity markets, stagnant private investment, weaker domestic consumption and constrained government spending in the wake of recent fiscal and monetary reforms. At the same time, Asia is becoming the world’s powerhouse and economic center. New research from the McKinsey Global Institute finds that Asia could generate more than half of the world’s GDP by 2040 as cross-border flows shift toward the region, which is rapidly integrating; with 60% of goods traded, 56% of greenfield foreign direct investment (FDI) and 74% of journeys by Asian air travelers taking place within the region. This research identifies 4 distinct sub-Asias—diverse groups of economies with characteristics that complement each other, which are fast becoming increasingly interconnected. As a result, dynamic new flows and networks are appearing, redefining globalization as we know it. The new era will be one of regionalization, and Asia is taking a lead. Historically, India—and other countries in ‘Frontier Asia’ (Bangladesh, Sri Lanka, Kazakhstan, Uzbekistan, etc)—have had relatively low levels of integration when compared with the rest of the region; only around 31% of their flows are intra-regional. Yet, how they now respond to these shifting flows, and the opportunities they present, could be key in defining and delivering its next chapter of growth.
2. MONETARY POLICY’S BLINKERED VIEW OF CREDIT The RBI’s frequent shifts in policy relating to bank lending rates over the last 25
years — starting with the PLR in 1994, the BPLR (2003), Base Rate (2010), the MCLR (2016), and now, external benchmarking — reflect policy rate uncertainty. Leaving aside the market rates, even banks’ lending rates remain at variance with monetary policy intents. Growing financial sector instability/vulnerability, growth uncertainty, credit-constrained MSMEs, low farm prices, surplus liquidity with banks as against unprecedented liquidity constraint with businesses and a high level of cash in the economy despite digitisation reflect poor monetary policy outcomes. How did we get to such adverse conditions? Why is the financial sector more vulnerable now than ever before, despite the experience/expertise gained by the RBI over the last 25 years, the advent of monetary-model based policy analysis and economic forecasting, and Big Data analytics? One of the key reasons lies in the bank-centric monetary policy framework. It misses out on the systemic role of the trade credit channel in defining monetary policy transmission (MPT). A guesstimate of working capital requirement based on the turnover of 94.3 lakh firms which filed income tax/service tax returns for FY14, the outstanding working capital of banks and miniscule bank working capital flows to the unorganised sector show that banks meet less than one-third of the aggregate working capital needs of businesses. A monetary policy architecture which built on a narrow, bank-centric base cannot be stable and sound.
3. AMERICA’S WAR ON CHINESE TECHNOLOGY The worst foreign-policy decision by the United States of the last generation –
and perhaps longer – was the “war of choice” that it launched in Iraq in 2003 for the stated purpose of eliminating weapons of mass destruction that did not, in fact, exist. Understanding the illogic behind that disastrous decision has never been more relevant, because it is being used to justify a similarly misguided US policy today. The decision to invade Iraq followed the illogic of then-US Vice President Richard Cheney, who declared that even if the risk of WMDs falling into terrorist hands was tiny – say, 1% – we should act as if that scenario would certainly occur. Such reasoning is guaranteed to lead to wrong decisions more often than not. Yet the US and some of its allies are now using the Cheney Doctrine to attack Chinese technology. The US government argues that because we can’t know with certainty that Chinese technologies are safe, we should act as if they are certainly dangerous and bar them. Proper decision-making applies probability estimates to alternative actions. A generation ago, US policymakers should have considered not only the (alleged) 1% risk of WMDs falling into terrorist hands, but also the 99% risk of a war based on flawed premises. By focusing only on the 1% risk, Cheney (and many others) distracted the public’s attention from the much greater likelihood that the Iraq War lacked justification and that it would gravely destabilize the Middle East and global politics.
Explanation of Investment Rating Investment Rating Expected return (over 12-month) BUY >=15% SELL < - 10% NEUTRAL > - 10 % to 15% UNDER REVIEW Rating may undergo a change NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation *In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend. Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. 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