10 June 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]) Motilal Oswal values your support in the Asiamoney Brokers Poll 2020 for India Research, Sales and Trading team. We request your ballot. Equities - India Close Chg .% CYTD.% Sensex 33,957 -1.2 -17.7 Nifty-50 10,047 -1.2 -17.4 Nifty-M 100 14,169 -0.4 -17.2 Equities-Global Close Chg .% CYTD.% S&P 500 3,207 -0.8 -0.7 Nasdaq 9,954 0.3 10.9 FTSE 100 6,336 -2.1 -16.0 DAX 12,618 -1.6 -4.8 Hang Seng 10,121 1.1 -9.4 Nikkei 225 23,091 -0.4 -2.4 Commodities Close Chg .% CYTD.% Brent (US$/Bbl) 40 -0.2 -40.0 Gold ($/OZ) 1,715 1.0 13.1 Cu (US$/MT) 5,754 1.3 -6.4 Almn (US$/MT) 1,580 0.0 -11.3 Currency Close Chg .% CYTD.% USD/INR 75.6 0.1 5.9 USD/EUR 1.1 0.4 1.1 USD/JPY 107.8 -0.6 -0.8 YIELD (%) Close 1MChg CYTDchg 10 Yrs G-Sec 5.8 -0.03 -0.8 10 Yrs AAA Corp 7.0 -0.03 -0.6 Flows (USD b) 9-Jun MTD CYTD FIIs 0.06 2.66 -2.32 DIIs -0.10 -0.47 11.16 Volumes (INRb) 9-Jun MTD* CYTD* Cash 673 685 492 F&O 14,834 13,909 14,200 Note: *Average Today’s top research idea Market snapshot Chart of the Day: Hindustan Unilever (Strengthening building blocks) Hindustan Unilever: Strengthening building blocks HUVR’s FY20 Annual Report highlights the company’s continuous efforts to strengthen its building blocks, thus enabling the sustenance of robust growth. The report showcases the importance of the role played by Detergents (22.5% of FY20 sales) in driving overall growth. After contributing as much as ~38%/~47%/~44% to incremental sales in FY19/FY18/FY17, Detergents contributed over 100% of incremental sales growth in FY20, making up for the decline in Soaps and Cosmetics and Toiletries. HUVR’s annual report also indicates that the company was able to generate gross cost savings of 7% of sales in FY20, underlying the potential for continued margin improvement over the longer term. Management commentary on recent acquisitions exhibits their increased confidence in inorganic growth being a key driver of incremental growth. It is increasingly becoming apparent that HUVR’s WIMI strategy and superior analytics are the two factors boosting its robust growth v/s peers. Cos/Sector Key Highlights Hindustan Unilever Strengthening building blocks Titan Company Sharp earnings cut on weak FY21 outlook Godrej Consumer Prod. Change in key management as Ms Nisaba Godrej assumes reins Hero Motocorp Below est.; severe cost inflation leads to lowest ever margins MRPL Refining challenges remain PVR Cinema closures led by COVID-19 drag earnings TeamLease Operationally in-line results! India Life Insurance COVID-19 weighs on performance – Pvt. players’ individual WRP down ~32% YoY for May’20 (-36% for FY21YTD) Detergents – Stellar performance despite the huge size Y/E FY16 FY17 FY18 FY19 FY20 Detergent sales (INR m) 52,683 63,451 66,884 78,333 86,114 Contribution of detergent to total HUL sales (%) 16.8 18.7 19.3 20.8 22.5 Detergent sales growth (%) 5.6 20.4 5.4 17.1 9.9 Incremental detergent sales (INR m) 2,811 10,768 3,432 11,449 7,781 Contribution of detergent to HUL's incremental sales (%) 21.9 44.1 47.4 37.6 126.9 Source: Company, MOFSL Research covered
Transcript
10 June 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: Hindustan Unilever (Strengthening building blocks)
Hindustan Unilever: Strengthening building blocks HUVR’s FY20 Annual Report highlights the company’s continuous efforts to strengthen its building blocks, thus enabling the sustenance of robust growth.
The report showcases the importance of the role played by Detergents (22.5% of FY20 sales) in driving overall growth. After contributing as much as ~38%/~47%/~44% to incremental sales in FY19/FY18/FY17, Detergents contributed over 100% of incremental sales growth in FY20, making up for the decline in Soaps and Cosmetics and Toiletries.
HUVR’s annual report also indicates that the company was able to generate gross cost savings of 7% of sales in FY20, underlying the potential for continued margin improvement over the longer term.
Management commentary on recent acquisitions exhibits their increased confidence in inorganic growth being a key driver of incremental growth.
It is increasingly becoming apparent that HUVR’s WIMI strategy and superior analytics are the two factors boosting its robust growth v/s peers.
Cos/Sector Key Highlights
Hindustan Unilever Strengthening building blocks
Titan Company Sharp earnings cut on weak FY21 outlook
Godrej Consumer Prod. Change in key management as Ms Nisaba Godrej assumes reins
Hero Motocorp Below est.; severe cost inflation leads to lowest ever margins
MRPL Refining challenges remain
PVR Cinema closures led by COVID-19 drag earnings
TeamLease Operationally in-line results!
India Life Insurance COVID-19 weighs on performance – Pvt. players’ individual WRP down ~32% YoY for May’20 (-36% for FY21YTD)
IRDAI scraps all packaged long-term motor covers citing mis-selling and pricing challenges Insurance Regulatory and Development Authority of India (IRDAI) has withdrawn all long term packaged third party covers which insured cars for three years and two wheelers for five years noting that these policies being forced upon customers…
UVARCL gets NCLT nod to take over Aircel In the first step towards the resolution of defunct Aircel, the National Company Law Tribunal (NCLT), Mumbai, has approved the takeover of its assets by UV Asset Reconstruction Company Ltd (UVARCL). The approval came on Tuesday, and following which the asset reconstruction company has to get approvals from the Department of Telecommunications and the Supreme Court. UVARCL, which had only placed bids for the mobile business, can now bid for Aircel’s remaining businesses, bulk SMS and enterprise businesses. Aircel, which owes about ₹20,000 crore to a clutch of 12 financial institutions, was being managed by a Resolution Professional (RP)…
Adani Green wins world's largest solar project worth $6 billion Adani Green Energy Ltd has bagged a manufacturing-linked solar contract from the Solar Energy Corporation of India (SECI) to develop 8 GW of projects. The transaction is valued at ₹45,000 crore, or $6 billion, according to a stock exchange filing. As part of the order, Adani Solar will establish 2 GW of additional solar cell and module manufacturing…
EMI purchases on cards go up with consumers buying even low priced items on finance As the lockdown across the country eased, a distinct trend of consumers preferring to purchase even low value goods on equated monthly instalment (EMI) emerged with retailers, online marketplaces and banks reporting a surge in financing on credit cards…
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BHEL commissions 270 mw thermal plant in Telangana State-owned BHEL on Tuesday announced commissioning of 270 mega watt (MW) thermal power plant in Telangana. Located at Manuguru in Kothagudem district of the state, the project was awarded to BHEL by Telangana State Power Generation Corporation Limited (TSGENCO), the company said in a statement…
Bharti Airtel arm picks up 6.3% stake in Dhaka-based telcom firm Bharti Airtel on Tuesday said its Singapore-based Bharti International has bought an additional 6.3 per cent stake in Bangladesh-based Robi Axiata Ltd. "Bharti International (Singapore), a step-down subsidiary of the company…
Serum Institute investing USD 100 million on potential COVID-19 vaccine Serum Institute of India, the world's largest vaccine manufacturer, is investing USD 100 million on a potential COVID-19 vaccine being developed at Oxford University, according to a company official. The Pune-based company has partnered with AstraZeneca…
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Hindustan Unilever’s (HUVR) FY20 Annual Report highlights the company’s continuous efforts to strengthen its building blocks, thus enabling the sustenance of robust growth. Key insights highlighted from the report below: Setting up/adapting to key trends keeping HUVR ahead in the game: The Personal Care category witnessed significant effects of the slowdown in 2HFY20, which culminated with the sharp COVID-19 led decline toward the year-end. Despite this, HUVR reported another year of double-digit earnings growth, taking its earnings CAGR over the past 3 years to 16.6%, even as peers (many of whom are much smaller) witnessed revenue deceleration over the same period. If not for the COVID-19 disruption impact, sales growth would have been healthy for the third consecutive year as well. A few factors from the FY20 Annual Report and our observations on the same, which highlights HUVR’s strengths. Sustained strong growth in Detergents, transformation potential in Skin
Cleansing: The MGT-9 section in the annual report showcases the importance of the role played by Detergents (22.5% of total sales) in driving overall growth. After contributing as much as ~38%/~47%/~44% to incremental sales in FY19/FY18/FY17, Detergents contributed over 100% of incremental sales growth in FY20, making up for the decline in Soaps and Cosmetics and Toiletries (the other two large product categories). Strong premiumization and considerable success in growing volumes as part of the company’s ‘Winning in Many Indias’ (WIMI) strategy has led to another year of (near) double-digit sales growth even as the rest of its portfolio has slowed down.
While performance of Soaps (~27% of FY20 sales) has been tepid over the past 5 years now, we believe that the ‘COVID’ and ‘post-COVID’ scenarios offer an opportunity for transformative growth – not only in terms of sales but also in terms of premiumization in the category – both benefits that HUVR is already enjoying in the Detergents business. Thus, the potential resumption of growth in Soaps should provide strong momentum to half of HUVR’s sales.
Relentless pursuit of cost savings: HUVR’s annual report indicates that the company was able to generate gross cost savings of 7% of sales in FY20, another remarkable achievement, which also underlines the potential for margin improvement over the longer term, especially with strong synergies from the GSKCH business. While margin expansion may take a backseat in FY21 owing to the COVID-19 fallout, the company’s ability to extract more savings compared to peers should drive continued superior earnings growth.
9 June 2020
Annual report Update | Sector: Consumer
Hindustan Unilever
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Increasing confidence on inorganic growth: HUVR’s annual report also enumerates its success and/or ambitious plans on the acquisition of Indulekha, Adityaa Ice-cream, GSK CH and potentially V-Wash. This leads us to believe that inorganic growth would remain a highly important part of HUVR’s incremental growth. While HUVR has the skillset, we believe it now seems to be exhibiting increasing confidence on inorganic growth due to (a) access to impressive cash flows, (b) ability to leverage its wide distribution reach, (c) superior understanding v/s peers on usage of lower unit packs (LUP), and (d) new-found nimbleness in all aspects of decision making.
WIMI and superior analytics to continue being significant game changers: While pace of sales growth is likely to slow down temporarily in FY21 due to the COVID-19 impact, HUVR’s annual report again highlights the quantum of their lead v/s peers on the WIMI strategy/analytics. Both these factors enable HUVR to leverage its overall superiority on total distribution reach as well as direct distribution reach.
Sustainability: HUVR’s efforts on a host of critical factors like renewable energy (now 71% contribution), reduction in environmental footprint, 85% reduction in carbon dioxide emissions over 2008 levels, waste water reduction, and more recently sustainable sourcing strengthens its long-term investment case.
Valuation and view: Despite being the largest consumer company in India, its 10-year sales/EBITDA/PAT growth has been healthy at 8.1%/13.3%/12.4% CAGR. Earnings growth has consistently gained momentum in recent years, which is particularly impressive given the weak mid-single earnings growth posted by (much smaller) peers in recent years. HUVR has delivered EBITDA/PAT CAGR of 13%/13.1% in the last five years, while both EBITDA/PAT have reported ~17% CAGR in the last three years ending FY20.
HUVR’s best of breed analytics and execution ability (exhibited by successful implementation of the WIMI strategy, cost savings plans, herbals, etc.) are key factors driving this pace of earnings growth. Additionally, our conviction over the medium-term is further strengthened by its (a) strong balance sheet, (b) robust cash flow generation and increasing willingness in recent years to use cash flow for inorganic growth, (c) excellent management quality/ corporate governance, and (d) proven track record of consistent delivery even in a weak consumption environment.
Further, as highlighted in our detailed report in Feb’20, we remain positive on HUVR from a medium-term perspective due to (a) robust earnings growth potential beyond the near term owing to its portfolio and execution strengths, (b) significant synergies in FY22E as a result of GSK CH, and (c) its RoCE levels being well ahead of peers. All these factors mean that premium multiples are likely to sustain. Moving our forecasts to merged numbers (which add over 9% to FY22E EPS due to the nature of the GSK merger and synergies), we value the company at 55x merged EPS, to arrive at a TP of INR2,400 and maintain Buy.
CMP: INR997 TP: INR965 (-3% ) Neutral Sharp earnings cut on weak FY21 outlook While 4QFY20 results came in above expectations, negligible Apr’20 sales
due to lockdown, 10–15% of normal sales in May’20, and around 40% of normal sales in Jun’20 are likely to render 1QFY21 a near washout. Management expects gradual recovery, targeting normalcy only in 4QFY21.
In addition to the COVID-19 impact, higher prevailing gold prices and management’s reluctance to reduce staff costs, while good for long-term growth, would have an adverse impact on near-term profitability.
Changes to the model resulted in ~30%/20% cut in FY21/FY22 EPS. While we continue to remain enthused over the longer term investment case, rich near-term valuations of 52x FY22 EPS fully capture the upside from a one-year perspective. Retain Neutral rating.
Sales growth in-line; lower other expenses drive margin expansion 4QFY20 consol. revenue declined 3.6% YoY to INR47.1b (est.: INR49.6b).
EBITDA grew 36.6% YoY to INR6.1b (est.: INR4.8b) and PBT 12.8% YoY to INR5.1b (est.: INR3.7b), while recurring PAT declined 1.5% YoY to INR3.4b (est.: INR3.2b).
Consol. gross margins were up 250bp to 30.4%. Lower other expenses as a percentage of sales (70bp YoY to 9.3%) and lower ad spend as a percentage of sales (80bp YoY to 2.1%) were offset by higher staff costs as a percentage of sales (20bp YoY to 6%). Thus, EBITDA margins were up 380bp YoY to 13% (est.: 9.7%) in 4QFY20. Margin expansion seems optically higher, to some extent, on account of Ind-AS 116.
The company reported a mixed 4QFY20 consol. segmental performance. A) Jewelry sales declined 5% YoY to INR39b, with the segment’s margins up 140bp YoY to 13.6%. B) Watches segment sales grew 5.1% YoY to INR5.6b, with the EBIT margin up 740bp YoY to 9.7%.
FY20 sales / EBITDA / adj. PAT grew 6.4%/25.1%/8.9% YoY. On an average basis, FY20 inventory days increased by 11 days to 131 days,
whereas receivable/payable days declined by 1/6 days to 6/47 days. The overall cash conversion cycle increased by 17 days to 90 days in FY20.
Cash flow from operations stood at (-INR3.5b) in FY20 v/s INR12.4b in FY19. Highlights from management commentary No material revenue was reported in Apr’20; May’20 revenues were 10–
15% those of normal sales. Moreover, despite the pace of store re-openings being healthy, Jun’20 sales would be 30–40% of earlier targets as the ramp-up in demand would be low.
Management expects normalcy only in 4QFY21. 1QFY21 would also take a hit due to the ‘ineffective hedge’ on account of
higher gold prices, which would be reversed in subsequent quarters. A one-off gold sale back to suppliers in 1QFY21 is also expected, on which
no profit would be made.
9 June 2020
4QFY20 Results Update | Sector: Consumer
Titan Company
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Valuation and view Changes to the model have resulted in a ~30%/20% reduction in FY21/FY22 EPS.
While 4QFY20 results were above expectations, negligible Apr’20 sales due to lockdown, 10–15% of normal sales in May’20, and around 40% of normal sales in Jun’20 are likely to render 1QFY21 a near washout. Management expects a gradual recovery, targeting normalcy only in 4QFY21.
In addition to the COVID-19 impact, higher prevailing gold prices and the likely lower share of high-value studded jewelry would weigh on profitability. Moreover, management’s reluctance to reduce staff costs, while good for long-term growth, would have an adverse impact on near-term profitability.
The increasing share of exchange gold and outright gold purchases from customers are also resulting in a reduction in creditor days and lower OCF and ROE. Management is trying to find solutions to these issues.
While we remain believers in the structural topline growth story, which remains one of the best among Indian consumer plays, valuations are rich at 52x FY22 EPS, leading us to retain our Neutral rating.
Consolidated Quarterly Performance (INR m) Y/E March FY19 FY20 FY19 FY20 FY20 Var. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QE (%) Net Sales 44,510 45,672 58,715 48,888 51,511 46,616 65,274 47,115 197,785 210,515 49,625 -5.1
Change in key management as Ms Nisaba Godrej assumes reins Ms Nisaba Godrej, currently Executive Chairperson of GCPL, would assume charge as MD and CEO of the company from 1st July 2020 after Mr Vivek Gambhir would step down on 30th June. After 11 years with GCPL, including seven years as MD and CEO, Mr Vivek Gambhir’s exit marks the end of a significant era. Here is a look at the key milestones achieved by the company during his tenure: Mr Gambhir joined GCPL in 2009 as Chief Strategy Officer responsible for
guiding overall Group strategy, conducting portfolio analysis, and driving special projects. He helped define the CREATE portfolio approach and the 10X10 objective for the Group. He was also the key architect of GCPL’s ‘3 by 3 Strategy’ and was instrumental in driving the company’s efforts to become a leader in emerging markets.
During his tenure as MD and CEO (Jul’13–Jun’20), GCPL transformed into a leading emerging markets home and personal care company, with ambitious aspirations that accelerated its diversification into various emerging markets.
Over FY13-17, GCPL clocked healthy revenue/EBITDA/PAT/EPS CAGR of 9.6%/17.9%/16.2%/18.7% to INR92.7b/INR19b/INR13.1b/INR13. Gross margins/EBITDA margins expanded by 250bps/520bps over the same period. RoE remained in the range of 20-25%, with RoCE at 15-17%. The company acquired a few significant brands, such as Strength of Nature (SON), Darling Group, Frika Hair, etc. OCF/FCF CAGR stood robust at 22.7%/31.8% over FY13–17.
However, slowdown in sales in recent years in the domestic business and continued inability to scale-up margins and improve on the weak ROCEs in the international business have had an adverse effect on pace of earnings growth. Apart from Covid-19 led lockdown challenges which are more of a short-term phenomenon, the loss of dominance in Hair Colour, the advent of unorganized incense stick players in HI and weak execution on the Africa business remained points of worry. As a result GCPL’s revenue/EBITDA/PAT/EPS CAGR stood at mere 2.3%/4.1%/3.5%/3.9% over FY17-20. Gross/EBITDA margins expanded by 160bps/110bps. RoCEs remained in the range of 16% and OCF/ FCF reported decline of 4.6%/4.5% over the same period.
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Godrej ConsumerSensex - Rebased
9 June 2020 Update | Sector: Consumer
Godrej Consumer Products
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Below est.; severe cost inflation leads to lowest ever margins 4QFY20 realizations grew 5.6% YoY (+3% QoQ) to ~INR46.75k (est.:
INR46.6k). QoQ realization improvement would be driven by BS6-related price increase as supply commenced in Feb’20. We await clarity on whether BS4 inventory-related discounts to dealers are factored in 4QFY20 or they would reflect in 1QFY21.
FY20 revenue/EBITDA/PAT grew 4.6%/-19.7%/-8.3%. Net sales declined ~21% YoY (-11% QoQ) to ~INR62.4b (est.: ~INR62.2b). Gross margins declined ~20bp YoY (-260bp QoQ) to ~30.8% (est.: ~32.6%),
possibly impacted by passing BS6 cost without the loading of contribution margins.
Furthermore, other expenses were higher than estimates and flat QoQ in INR terms despite ~13.4% QoQ decline in volumes. This may include some COVID-19 related cost not mentioned in the press release.
As a result, EBITDA margins declined ~300bp YoY (-420bp QoQ) to ~10.6% (est.: 13.9%). These are the lowest ever margins reported on a like-for-like basis.
EBITDA declined 37–38% on a YoY/QoQ basis to ~INR6.6b (est.: ~INR8.6b). Lower depreciation and lower tax restricted PAT decline to ~15% YoY (-
30% QoQ) to ~INR6.2b (est.: ~INR6.3b). Final dividend of ~INR25/sh (taking the total dividend to ~INR90/sh for
FY20 v/s ~INR87/sh in FY19) implies FY20 dividend payout at ~70% (v/s 62% in FY19).
Mr Niranjan Gupta, CFO, commented in a press release, “As we march towards rapid recovery from lockdown, we have taken several measures towards saving cost, improve productivity of spends, and conserve cash. We have rationalized capex spends for the financial year by half, doubled target for the Leap-II program, and launched an initiative to improve the productivity of our overheads.”
Valuation and view: The stock trades at 19.8x/16.2x FY21/FY22E EPS.
9 June 2020
4QFY20 Results Flash | Sector: Automobile
Hero Motocorp
RESULTS FLASH
10 June 2020 10
Quarterly Performance (S/A)
(INR m) Y/E March FY19 FY20 FY19 FY20 FY20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QE Total Volumes ('000 nos) 2,105 2,134 1,800 1,781
Shareholding pattern (%) As On Dec-19 Sep-19 Dec-18 Promoter 88.6 88.6 88.6 DII 3.6 3.5 3.2 FII 1.5 1.6 1.7 Others 6.4 6.3 6.5 FII Includes depository receipts
CMP: INR33 TP: INR40 (+20%) Neutral
Refining challenges remain MRPL’s core GRM was higher than expected at USD6/bbl, with lower opex at
USD1.2/bbl. However, its GRMs have not always been good on a sustainable basis; at times, it was hit by water woes and at times, by technical issues.
Also, refining margins have been under pressure due to large incremental supply glut amidst weak global demand.
Poor refining margins should continue for a few more months. Dependence on the Nethravathi river until the desalination plant comes on stream in 2021 would also adversely impact performance; reiterate Neutral.
Better-than-expected core GRM, but concerns remain MRPL reported EBITDA loss of INR14.1b in 4QFY20 (v/s est. loss of INR12.6b
and gain of INR7.1b in 4QFY19), with lower opex (at USD1.2/bbl). Reported GRM stood in line with est. at loss of USD4.52/bbl (v/s gain of
USD5.01/bbl in 4QFY19). Forex loss during the quarter was INR5.1b resulting in PBT loss of INR22.8b. The company recognized deferred tax assets of INR6.8b for the quarter (totaling to INR12.5b in FY20).
At the PAT level, the company reported loss of INR16b (v/s est. loss of INR12.2b and gain of INR3.2b in 4QFY19).
FY20 reported EBITDA stood at a loss of INR18.5b (v/s gain of 19.6b in FY19); PAT loss stood at INR27.1b (tax rate 31.5% and v/s gain of INR3.2b in FY19).
Throughput dips owing to COVID-19 lockdown Crude throughput was in line with est. at 3.83mmt, down 11% YoY, implying
102% utilization for the quarter. Core GRM for 3QFY20 stood at USD5.96/bbl (v/s est. USD2.7/bbl and
USD3.21/bbl in 4QFY19). Inventory loss for the quarter was USD10.5/bbl (v/s gain of USD1.8/bbl in 4QFY19).
FY20 refining throughput was down 14% YoY to 14.2mmt with core GRM at USD2.24/bbl (v/s USD3.45/bbl in FY19).
Valuation and view In 1QFY20, the company’s refinery complex faced a major challenge in terms
of fresh water shortage from the Nethravathi River, wherein MRPL was forced to close its refining units for ~75 days (similar issue faced in 2012 and 2016 also). However, the company is on track to set up a sea-water desalination plant, likely to be completed by 3QFY21 (with capex of ~INR6b).
Thus, factoring in the refinery challenges, we build in refinery throughput at 15.1/16.5mmt (earlier 15.4/17mmt) for FY21/FY22E.
Originally, it was expected that the INR150b Phase-III expansion would generate better GRMs. However, the current environment for GRM remains highly tepid owing to global demand destruction.
Factoring in the aforementioned, our FY21 EBITDA is revised down by 11%. We value the stock at an EV of 5x FY21E EBITDA to arrive at a fair value of INR48/share for the standalone refinery and deduct INR8/share for OMPL. Our target price stands at INR40. Maintain Neutral.
9 June 2020
4QFY20 Results Update | Sector: Oil & Gas
MRPL
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Shareholding pattern (%) As On Mar-20 Dec-19 Mar-19 Promoter 18.5 18.4 20.3 DII 34.7 30.1 28.3 FII 38.4 42.9 42.0 Others 8.4 8.6 9.4 FII Includes depository receipts
CMP: INR 1,087 TP: INR 1,350 (+24% ) Buy Cinema closures led by COVID-19 drag earnings PVR’s 4QFY20 revenue/EBITDA plunged 23%/73% in 4QFY20 due to cinema
closures led by the COVID-19 pandemic. Revenue was in line, while EBITDA was better than expected on lower-than-estimated operational expenses.
Given the complete washout in 1QFY21 (on the nationwide lockdown) and talks of reduced capacity due to social distancing, we have cut our estimated FY21/FY22E revenue by 45%/13%. We expect EBITDA loss of INR677m in FY21E (v/ profit of INR5b earlier) and cut EBITDA est. by 20% for FY22E.
INR6.5b (inline), mainly due to closure of cinemas during the last few days in Mar’20 owing to the COVID-19 crisis.
Subsequently, footfalls declined 29% YoY to 19.5m while occupancy stood at 30.6% in 4QFY20. Average ticket price rose to INR204 (4.6% YoY) along with an increase in spend per head to INR96 (5.7% YoY).
On pre Ind-AS 116, EBITDA declined 73% YoY to INR428m (v/s est. INR108m). Margin contracted 1,260bp to 6.6% as revenue declined more than operating expenses.
The company reported PBT loss of INR344m (v/s est. loss of INR945m) from INR749m profit in 4QFY19. Net loss came in at INR388m (v/s PAT of INR484m in 4QFY19 and INR708m in 3QFY20). After adjustment, net loss stood at INR369m.
Net debt stood at INR7.8b. PVR had liquidity of INR3.2b as at Mar’20 and INR2.3b as at 7th Jun’20, which includes undrawn committed bank lines.
On consolidated basis, total screen count increased to 845 in 4QFY20 from 763 in 4QFY19, a growth of 11%.
Highlights from management commentary Rental recognition: Unlike INOX, PVR recognized rentals in 4QFY20 as it has
yet not received credit notes. In 1QFY21, PVR has not paid rent yet; a decision on accounting will be taken once more clarity emerges.
Fixed cost reduction: PVR’s monthly opex run-rate stands at INR1.4b, of which rental and CAM charges account for INR600-650m; this fixed cost should reduce by 70-75% during the lockdown period.
Capex: Priority is to complete screens that are 80-90% done. Currently, 20-50 screens are in various stages of fit-out; committed capex ranges between INR500m-1b. However, management will re-evaluate it once operations resume.
Valuation and view The near-term earnings outlook remains subdued due to COVID-19 as a
decision on cinemas reopening would be taken in the last phase. Further, reduced capacity due to social distancing norms may further hurt the revenue generating capability of cinemas.
9 June 2020
Results Update | Sector: Media
PVR
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However, we remain positive on the long-term growth outlook of the cinema industry. Also, the sharp cost reduction measures should aid in making the business viable in such tough times. Better ticket prices and higher screens are expected to provide a competitive edge and should enable PVR to bounce back earlier than competitors.
We expect PVR to deliver revenue/EBITDA CAGR of 3%/4% over FY20-FY22E and value the company at 13x FY22E EBITDA to arrive at a target price of INR1,350. Maintain Buy.
Operationally in-line results! In 4Q, TeamLease’s revenue / adj. EBIT / adj. PAT grew 14%/-23%/-26% YoY v/s
our estimate of 16%/-19%/-14% YoY. For FY20, revenue / adj. EBIT / adj. PAT grew 17%/-13%/-15% YoY.
Growth On an organic basis, revenue increased ~13% YoY. Including inorganic
contribution from the IMSI acquisition, overall revenue growth was at ~14.3% YoY.
Across segments, General Staffing grew ~13% YoY and Specialized Staffing reported ~16% YoY (organic) growth. Including contribution from IMSI, Specialized Staffing reported ~34% YoY growth.
TL.com, the hiring portal, went live in FY20 and contributed ~20% to hiring in the General Staffing segment in 4QFY20. Hiring through this portal is expected to increase to ~40% by the end of FY21.
Profitability Average realization during the quarter remained more or less stable (INR748
per associate per month v/s INR751 in 3Q). Other operational metrics such as working capital funding exposure remained
stable (at 14% for the General Staffing business). There seem to be three one-off items in the reported financials: a) a P&L
provision out of abundant caution in the current situation (INR62m), b) provision write-back from the previous quarters (INR70–80m), and c) MAT credit write-off (INR496m) as the company is moving to the new tax regime.
Adjusting for one-offs and quarterly tax aberrations due to Sec 80JJAA, results were more or less in line with our estimates.
Valuation and view: We await management commentary before changing our estimates and target price. As the economy prepares for a gradual re-opening and enterprises look to dodge supply disruption, we believe the company/sector has already passed the peak of uncertainty. As both the central and state governments look forward to liberalizing and formalizing the labor markets, TeamLease should be among the biggest direct beneficiaries.
9 June 2020
Results Flash | Sector: Others
TeamLease
RESULTS FLASH
10 June 2020 16
Consolidated Quarterly Performance (INR m) FY19 FY20 FY19 FY20 Est. Var.
COVID-19 weighs on performance – Pvt. players’ individual WRP down ~32% YoY for May’20 (-36% for FY21YTD) LIC’s individual WRP dips ~3% YoY (-23% for FY21YTD), resulting in 20% YoY drop (-30% for FY21YTD) in overall industry Private players’ individual weighted received premium (WRP) declined 32.1% in
May’20 (v/s -40.3% YoY in Apr’20) while industry posted decline of 19.8% YoY (v/s -43.7% YoY in Apr’20). The decline was mainly due to the COVID-19 outbreak, which continues to weigh down business performance. For FY21YTD, private players’ individual WRP plunged 35.5% YoY; for the industry, it dropped 30% YoY.
Amongst the listed players, Max Life witnessed the lowest decline of 20% YoY while HDCF Life saw a decline of 33% YoY. SBI Life/IPRU Life reported decline of 46%/52% YoY.
Amongst mid-sized players, Bajaj Allianz witnessed decline of 18% YoY while Birla Sun Life/Tata AIA saw growth of 10%/3% YoY.
LIC reported much lower decline of 3.1% YoY (v/s -47.9% YoY in Apr’20) in individual WRP. During FY21YTD, LIC’s individual WRP declined 23.0% YoY.
Private players’ individual WRP market share contracts to ~49% for May’20 (52% as on FY21YTD) Private players’ individual WRP market share contracted ~910bp to ~49% in May’20 vs 58% in Apr’20 as LIC posted much lesser decline of 3.1% YoY as against 19.8% YoY decline by the industry whereas private players reported higher decline of 32.1%. During FY21YTD, HDFC Life (9.5%) remained the largest private insurer in terms of individual WRP, followed by SBI Life (7.7%) and IPRU life (6.5%). On an un-weighted basis, SBI Life was the largest private insurer with market share of 7.6%, followed by HDFC Life (6.4%) and IPRU Life (4.6%). Performance of key private players The combined market share of listed players – SBI Life, ICICI Prudential Life, HDFC Life and Max Life– on an individual WRP basis stood at ~56.8% as at May’20 (v/s 62.9% in FY20). Tata AIA, Bajaj Allianz and Birla Sun Life are getting firmly positioned amongst the 5-7th largest private insurers on individual WRP. Amongst the key listed players, on the basis of individual WRP – HDFC Life reported 33% YoY decline (-32% YoY in FY21YTD); total un-weighted
premium declined ~47% YoY (-50.2% YoY in FY21YTD). SBI Life reported decline of 46% YoY (-57% YoY in FY21YTD); total un-weighted
premiums declined 31.3% YoY (-15.5% YoY in FY21YTD). IPRU Life reported decline of 52% YoY (-54% YoY in FY21YTD); total un-weighted
premium declined 2.3% YoY (-29.6% YoY in FY21YTD). Max Life reported 20% YoY decline (-20% YoY in FY21YTD); total un-weighted
premium declined 18.3% YoY (-16.8% YoY in FY21YTD).
Sector Update | 10 June 2020
India Life Insurance
Individual WRP and YoY growth (%)
Individual WRP, INRm May-20 YoY
growth Grand Total 34,778 -19.8%
Total Public 17,810 -3.1%
Total Private 16,968 -32.1%
HDFC Life 3,096 -33.2%
SBI Life 3,023 -45.9%
ICICI Prudential 1,915 -52.4%
Max Life 1,606 -19.5%
Tata AIA 1,583 3.3%
Birla Sun life 982 10.3%
Bajaj Allianz 966 -18.0%
Kotak Life 753 4.9%
PNB Met Life 595 -30.3%
Reliance Life 501 -6.7%
Source: Company, MOFSL
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Divergent trends in sum assured – reflects improving business mix According to our observation, while premium growth has been under pressure for most insurers, growth in the sum assured, however, is witnessing divergent trends. For private insurers, while the total un-weighted individual single/non-single premium has declined 14.5%/32.6% YoY in May’20, the individual sum assured has, on the contrary, grown 24.4%/12.2% YoY. For the total industry, sum assured declined 7.9%/2.8% YoY in May’20 as against the decline of 17.9%/19.9% in total un-weighted individual single/non-single premium. This was largely due to LIC, which reported a much higher decline of 44.9%/45.9% in sum assured as against a decline of 19.6%/1.8% YoY in total un-weighted individual single/non-single premium. Thus, this re-iterates the fact that private insurers have been focusing on the protection business, which has a higher sum assured in proportion to the premium. On the other hand, ULIPs have been facing pressure due to volatile capital markets, which generally has a higher average ticket size. Amongst listed players – HDFC Life reported much lower decline of 3.9% in sum assured as against
decline of 32.5% in total unwtd individual non-single premium. IPRU Life too reported lower decline of 30.9% in sum assured as against decline
of 53.2% in total unwtd individual non-single premium. SBI Life, however, reported higher decline of 56.7% in sum assured as against
decline of 46.5% in total unwtd individual non-single premium. Max Life, on the contrary, reported growth of 35.8% in sum assured as against
decline of 20.8% in total unwtd individual non-single premium. Mid-sized players like Tata AIA, Bajaj Allianz and Kotak Life reported growth in
sum assured as against decline in total unwtd individual non-single premium.
Un-weighted new business premium and growth – sorted on May’20 basis
INR m May-20 YoY growth FY21YTD YoY
growth FY20 YoY Growth
Grand Total 137,390 -25.4% 204,667 -27.9% 2,588,966 20.6% Total Public 102,115 -24.3% 137,932 -26.5% 1,779,771 25.2% Total Private 35,275 -28.3% 66,736 -30.7% 809,196 11.5% ICICI Prudential 6,787 -2.3% 9,349 -29.6% 123,482 20.4% SBI Life 6,385 -31.3% 15,559 -15.5% 165,918 20.3% HDFC life 6,376 -46.9% 13,065 -50.2% 173,963 16.2% Canara HSBC OBC 2,368 279.4% 2,639 7.2% 15,275 4.6% Max Life 2,336 -18.3% 4,054 -16.8% 55,836 8.2% Tata AIA 2,218 13.0% 3,762 18.1% 32,411 30.9% Bajaj Allianz 1,756 -46.2% 4,897 -10.2% 51,787 5.2% Kotak Life 1,578 -51.6% 2,791 -56.8% 51,058 28.4% Birla Sun Life 1,507 -15.7% 4,124 38.6% 36,571 -6.6%
Source: Company, MOFSL
10 June 2020 19
HDFC LIFE : RISK-BASED PRODUCTS LIKE PURE TERM PLAN ARE DOING VERY WELL; Vibha Padalkar, MD & CEO The need for life insurance is becoming more and more apparent and that is
evident from just one metric. Company has written more than one lakh policies in the first two months of this year. For company to be able to service customers, have settled over 500 death claim settlements, over 10,000 maturity claims and close to a lakh annuity payout. So it is not so much limping back to normalcy but definitely a roadmap towards normal.
Typically we as a sector piggyback 2-2.5x GDP. Some of the economists are predicting a degrowth for India Inc and if that is the case, at best it would be flat and that would be a good place to end. But if we start seeing recovery towards the end of H1, which is around the corner or at least middle of quarter three, then we should show low single digit growth as a sector. But it is still fairly hazy in terms of what the shape of recovery is going to be; will be U-shaped, L- or W-shaped. Sense is it is more likely to be a W-shaped recovery.
Online channel has shown positive growth in YTD May as against overall degrowth for the company and the sector. So that clearly shows that some heavy lifting is being done by online channels. Also, Bancassurance channel versus April, May has done significantly better.
Protection continues to do well; so you will see double digit growth in the protection part of our business. Unit-link is on the other end of the spectrum and because of the turbulence in markets, we are not seeing a huge demand for unit-linked products as of now. Somewhere in between, our participating products continue to do well for us followed by non-participating products.
THE GREAT INFLATION CONUNDRUM THAT THE INDIAN ECONOMY FACES Indian monetary policy makers delivered a surprise in May. It had nothing to do
with their decision on interest rates. The Reserve Bank of India (RBI) did not release forecasts for either economic growth or inflation as part of its latest monetary policy announcement. The monetary policy committee (MPC), in its meetings every two months, usually provides estimates of inflation over the next four quarters. The Monetary Policy Report, published twice a year in April and October, provides inflation forecasts for the next eight quarters. Central bank communication to our financial markets pivots around these inflation forecasts. These are not trivial matters. Monetary policy works with a lag of around three quarters, so what RBI does today is based on where it expects inflation to be three or four quarters down the line. Interest rate policy cannot be based on current levels of inflation. In fact, a central bank with a formal inflation target uses its price-level forecast as an intermediate target of monetary policy. So, not releasing such a forecast strikes at the heart of the new monetary policy framework. The explanation offered by RBI governor Shaktikanta Das was that unprecedented uncertainty combined with the fluid state of affairs in an environment battling the covid-19 pandemic made forecasting very fragile. There is some validity to this explanation. Forecasting in uncertain times is a tricky job, as model parameters become unstable. However, it would still have been possible to provide an inflation forecast with a wide range of possibilities around a central estimate in fan charts.
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