CONSUMER - Ambitreports.ambitcapital.com/reports/Ambit_B2CSurvey_Thematic_Festive... · +91 22 3043 3246 riteshvaidya@ ... GSKCH 2% 2% Neutral APNT 12% 11% Positive ... consumer demand

CONSUMER

Research Analysts:

Rakshit Ranjan, [email protected]: +91 22 3043 3201

April 2016

FM

CG

DIS

CRETIO

NA

RY

1H

FY16

Festive tailwinds fade

1H

FY16

3Q

FY16

4Q

FY16

FY17

Demand Scenario

3Q

FY16

4Q

FY16

FY17

Ritesh Vaidya, [email protected]: +91 22 3043 3246

Bhargav [email protected]: +91 22 30433252

Deepesh Agarwal, [email protected]: +91 22 30433275

Abhishek Ranganathan, [email protected]: +91 22 30433252

???

???

B2C Distributors Survey

April 07, 2016 Ambit Capital Pvt. Ltd. Page 2

CONTENTS

B2C Distributors Survey: Festive tailwinds fade…………………………………...3

Survey summary………………………………………………………………………. 4

Investment implications……………………………………………………………….9

FMCG and staples……………………………………………………………………12

Paints………………………………………………………………………………….. 15

Kitchenware………………………………………………………………………….. 17

Jewellery……………………………………………………………………………… 19

Footwear……………………………………………………………………………… 21

Light Electricals………………………………………………………………………. 22

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Festive tailwinds fade

With tailwinds from the festive and wedding seasons fading, the underlying weakness in urban consumer sentiment has resurfaced in most discretionary categories in 4QFY16. Volume growth in staples has been weak, particularly in rural India with no meaningful increase in product prices YoY; we expect median volume growth of ~4% YoY in 4QFY16 vs 3.5%/5.0% for 3QFY16/4QFY15 for our coverage universe. Channel partners hope at least one of the following triggers will drive consumption revival in 2HFY17: a) normal monsoon; b) the Government’s rural initiatives; and c) the Seventh Pay Commission’s payouts. Margin benefits from softening input costs will continue to support earnings growth for FMCG/paints/kitchenware companies in 4QFY16. Our top BUYs in expectation of reasonable 4QFY16E results are ITC, Asian Paints, Titan, Havells and Bajaj Electricals.

Summary of our findings from the distributors’ survey

Category Volume Growth

Price Growth

Promotional Intensity

Most at Risk

Most Secure

FMCG & staples Flat Colgate Marico, ITC, Britannia

Paints Flat Akzo, Kansai Berger, Asian

Kitchenware Flat Hawkins TTK Prestige

Jewellery Flat Regional/ Unorganised Titan

Light electricals Flat Crompton, Bajaj Havells, V-Guard

Source: Ambit Capital research; Note: ‘’ indicates acceleration of YoY growth vs 4QFY15; ‘’ indicates unchanged YoY growth rates vs 4QFY15; and ‘ ‘ indicates deceleration in YoY growth vs 4QFY15.

Market share shifts: Key market share changes in FMCG in 4QFY16: (a) Dabur and Patanjali gained share from Colgate and HUL in modern trade in oral care; (b) ITC gained share from Nestle in noodles; (c) Britannia gained share from Parle in biscuits. Berger and Asian Paints gained share from Akzo Nobel and Kansai. TTK Prestige gained share, particularly in North India, from Hawkins. Regional players like V-Guard (water heater, fans and wires) and Finolex Cables (cables and wires) gained market share in non-South markets. Havells gained market share with renewed focus in the western region. Key recommendations: The 4QFY16 results are likely to act as a positive catalyst for firms like ITC, Marico, Asian Paints, Berger, Havells and Bajaj Electricals given healthy volume growth driven by market share gains despite the weakness in macro demand environment. We expect 4QFY16 to act as a negative catalyst for the FMCG sector as consensus earnings estimates underestimate the drag from weak volume growth and lower margin gains. Our top BUYs are ITC, Asian Paints, Titan, Havells and Bajaj Electricals.

THEMATIC April 07, 2016

B2C Distributors SurveyNEGATIVE

Consumer

Research Analysts

Consumer Rakshit Ranjan, CFA +91 22 3043 3201 [email protected]

Ritesh Vaidya, CFA +91 22 3043 3246 [email protected] Light Electricals Bhargav Buddhadev +91 22 30433252 [email protected] Deepesh Agarwal, CFA +91 22 30433275 [email protected] Jewellery Abhishek Ranganathan, CFA +91 22 30433252 [email protected]

Summary of our volume and value growth expectations for 4QFY16

Ticker 4Q volume 4Q value 4Q =

Ticker 4Q volume 4Q value 4Q =

growth growth Catalyst? growth growth Catalyst? GSKCH 2% 2% Neutral APNT 12% 11% Positive NEST NA -17% Neutral BRGR 13% 12% Positive CLGT 2% 3% Negative BATA 7% 15% Neutral HUVR 5% 4% Neutral TTAN 8% 15% Negative DABUR 3% 6% Neutral BJE 14% 10% Positive MRCO 13% 4% Positive PAG 12% 18% Neutral GCPL 8% 9% Neutral HAVL 15% 12% Positive BRIT NA 10% Positive VGUARD 12% 8% Positive ITC 0% 8% Positive TTKPT 6% 10% Neutral

Source: Ambit Capital research; Note: Volume growth is YoY and pertains to the domestic business based on our channel checks; Value growth pertains to consolidated growth based on Ambit estimates

mailto:[email protected]







Survey summary During the second half of March 2016, we conducted a survey of more than 100 large distributors and unlisted companies spread across India and most key consumption segments. This survey focused on identifying YoY growth trends in consumer demand over January-March 2016 across categories as well as individual brands. The key takeaways from our survey ARE:

1 Discretionary consumer segment revenue growth moderated after January: Demand growth in categories like kitchenware, paints, jewellery and light electricals had revived significantly during 3QFY16 due to a combination of: a) delayed Diwali, which pushed some product sales from Sept-Oct 2014 to Oct-Nov 2015; and b) the wedding season was longer than normal in November and December. As these factors faded after January, demand growth rates reflected continued underlying weakness in consumer sentiment during February and March 2016.

2 Weakness in FMCG sales continues, rural particularly weak: Our channel checks suggest that two consecutive crop failures have impacted end-consumer demand. Liquidity squeeze faced by distributors has also led to lower stocking. As a result, rural demand is at its slowest and is barely growing in line with urban demand. Urban demand tapered almost immediately after Diwali. A delayed winter further added to the woes of the seasonal categories.

3 Asset devaluation and lack of job creation continue to drag consumer sentiment: Our discussions with industry experts suggest that an increasing number of households, over the past 3-6 months, have started realising that the reduction in real estate prices (as much as 10-40% in most cities) is not likely to reverse anytime soon. This has led to a further drag on consumer sentiment given the lack of a wealth effect or a feel good factor. Moreover, there has not been any significant acceleration in new job creation or salary hikes during the quarter.

High degree of promotional activity across categories: Similar to trends witnessed in 3QFY16, input cost tailwinds in categories like FMCG, paints, and kitchenware helped firms in these sectors increase spends on advertisements and promotions in the quarter. The brick-and-mortar retail sector saw their winter sale periods being extended beyond a month for most players.

The End of Season Sale was longer than usual for most retailers Exhibit 1:

Brand Date of conclusion of winter sale in FY16

Date of conclusion of winter sale in FY15

Shoppers Stop 28/02/2016 08/02/2015

Lifestyle 29/02/2016 08/02/2015

Zara 24/01/2016 25/01/2015

Puma 31/01/2016 31/01/2015

Pantaloons 14/02/2016 08/02/2015

Westside 31/01/2016 31/01/2015

Bata 23/01/2016 25/01/2015

Source: Ambit Capital Research

Potential triggers lined up for 2HFY17: Industry experts and channel partners are hoping for a revival in urban as well as rural consumption due to the possibility of the following triggers: a) Seventh Pay Commission payouts benefitting urban disposable household income; b) a normal monsoon, which will support rural household incomes; and c) impact of the Government’s rural initiatives like direct benefits transfer and improved road connectivity in smaller cities and villages.

4Q demand was weak for both staples as well as discretionary consumer categories



Summary of our sector-specific channel checks FMCG/Staples: Volume growth to remain weak as rural demand remains tepid while urban is flat QoQ

Consumer demand for 4QFY16 has failed to show any signs of revival and, hence, remains muted. Our channel checks suggest demand in urban areas has been modest while rural is now barely growing in-line with urban. Two consecutive crop failures and an ongoing liquidity squeeze for distributors have led to weakening of rural demand. In some cases, companies have extended the credit period to distributors to achieve their primary sales targets. The highlights of the quarter that just ended were:

HUL increased the credit period given to distributors by 7-10 days in some regions, which helped it achieve record primary sales in March.

Our checks suggest that Patanjali continues to do well in select categories like ghee, toothpaste and face wash and is facing issues in food categories (ex-ghee).

ITC (flat cigarette volume growth) and Marico (+13% YoY volume growth) are our top picks.

Overall, for 4QFY16, we expect median volume growth of ~4% YoY compared with 3.5%/5% for 3QFY16/4QFY15 across our coverage universe. If Kharif crop does well, rural demand should pick up from Sep-Oct’16.

Paints: 10-12% revenue growth rates expected; another 2% price cut implemented from 19th April

We expect 10-12% revenue growth for paints companies in 4QFY16 compared to only 5-7% in 1HFY16 and 12-14% in 3QFY16. Given 2-3% YoY decline in price realisations, zero price hikes in the quarter, and greater growth momentum in economy paints than premium products, revenue growth will be largely volume-led. Asian Paints announced another cut in product prices by ~2% effective 19th March 2016. As a result, revenue growth for the sector is likely to remain volume-led for at least another 2-3 quarters. Asian Paints and Berger continue to gain market share from Kansai and Akzo Nobel. Berger’s express painting service appears to be gaining positive response from painters. Soft input costs, partially offset by the depreciation in INR vs USD, will result in gross margin expansion of 5bps-60bps in 4QFY16. We reiterate BUY on Asian Paints and Berger. Click here for our 04Jan2016 note on Asian and our 07 Dec 2015 note on Berger.

Kitchenware: New product launches help TTK Prestige gain share; liquidity constraints in the channel intensify in Feb/Mar’16

The benefits of a delayed festive season and a longer-than-usual wedding season, which had driven strong growth momentum in the sector in 3QFY16 (16% YoY growth reported by TTK Prestige for 3QFY16) continued in the month of Jan’16. However, there was a significant moderation in these growth rates witnessed in Feb’16 and Mar’16 given the sustained weakness in the underlying macro demand environment. Liquidity in the trade channel deteriorated across the country, particularly in February and March. TTK Prestige continued to gain market share during the quarter mainly due to successful rollout of new products. We expect ~10% YoY revenue growth for TTK Prestige in 3QFY16 and market share loss for peers like Hawkins in the north and Gandhimathi in the south. Given low margins reported in 4QFY15 due to exceptional costs, earnings growth for TTK Prestige is expected to be 156% YoY during the quarter. We reiterate our BUY on TTK Prestige.

Jewellery: Regulatory headwinds for near-term earnings

Channel checks conducted across various Tanishq stores and interaction with unlisted jewelers indicate that this quarter has been marred by the jewelers strike (keeping the stores closed) in protest of levy of excise duty. Also, demand was impacted to some degree due to introduction of the rule to produce PAN on purchases of jewellery above `0.2mn. The strike meant that many Tanishq stores

FMCG - We expect average volume growth of ~4% YoY vs 3.5%/5.0% for 3QFY16/4QFY15

http://reports.ambitcapital.com/reports/Ambit_Asian_Paints_ChangeinStance_Seventyyearsofexcellence_04Jan2016.pdf

http://reports.ambitcapital.com/reports/Ambit_BergerPaints_ChangeinStance_TheCoffeeCanStory_07Dec2015.pdf



were forced to shut down or where they were open customers didn’t come expecting the store to be shut. Our discussions with store managers at Tanishq reveal that footfalls have reduced as customers were unaware of the fact that Titan had not participated in the strike. Further, customers who purchase wedding jewellery are indifferent to the PAN rule, which was evident from moderate growth in the first two months of this quarter. Also, advancement of activation coupled with postponement of Gudi Padwa and Ugadi to the next quarter (in FY17 it will fall twice – 1Q and 4Q) affected revenues. Although regulatory headwinds are a risk to near-term earnings, return of GHS (contribution expected to be 12% of revenues in FY17), sharper designs, low making charges, and now levy of excise duty from 4QFY16 would result in market share gains for Titan. We are BUYers of Titan as it is best placed to gain market share and continues asset-light expansion of stores. Click here for our 29March2016 note on Titan.

Light Electricals: Moderation led by slowdown in consumer demand

Our discussions with channel partners suggest moderation in the demand environment in 4QFY16 compared with 3QFY16 led by a slowdown in consumer spending and deceleration in industrial demand. However, volume growth of high single digit is likely to be better than -1% YoY growth in 1HFY16.

Within product categories, while small appliances and water heaters have seen YoY volume growth of 10% and 5%, respectively, seasonal products such as fans and stabilisers have seen growth of 12% and 14% led by early arrival of summer. Growth of construction wires/lighting continues to remain strong at 14%/15%. Switchgears has seen 1% growth.

Channel partners expect FY17 to be a better year led by incremental demand from Government pay hikes and acceleration in industrial demand.

We are BUYers on V-Guard, Finolex Cables and Havells franchises as they are gaining market share due to strengthening of their distribution networks alongside ramp-up in product portfolios.

We are BUYers on Bajaj Electricals as we expect valuation multiple to re-rate with recovery in revenue growth/EBITDA margin in FY17. Click here for our 24th February 2016 note on Bajaj Electricals.

http://reports.ambitcapital.com/reports/Ambit_Titan_Headwindsprecedetailwinds_29Mar2016.pdf

http://reports.ambitcapital.com/reports/Ambit_BajajElectricals_CompanyInsight_Itsgettingbetter_24Feb2016.pdf



Summary of our volume and value growth expectations for 4QFY16 Exhibit 2:

Company 4QFY16E Volume Growth

4QFY15 Volume Growth

4QFY16E Value

Growth

4QFY15 Value

Growth

Will 4QFY16 results be a

catalyst?

P/E FY18 (x) Comments regarding catalysts

FMCG/Staples

GSK Consumer 2% 1% 8% 9% Neutral 28.5 We expect marginal volume growth helped by a weak base

Nestle NA 0% -17% 8% Neutral 35.8 Although Maggi noodle sales resumed during the quarter we believe it will take Nestle at least 9-12 months to normalise sales to pre-crisis levels.

Colgate 2% 5% 3% 11% Negative 26.7 Our channel checks suggest that Colgate has continued to lose market share to Dabur and Patanjali. As a result, we expect low single-digit volume growth.

HUL 5% 6% 4% 8% Neutral 30.0 Weak rural demand is expected to impact volume growth during the quarter

Dabur 3% 8% 6% 10% Neutral 26.1 Restart of juice sales and good toothpaste sales due to increased consumer demand for ayurvedic products is expected to drive modest volume growth

Marico 13% 2% 4% 14% Positive 28.3 Double-digit volume growth is expected to be supported by recent price cuts and a weak base. Saffola and VAHO are expected to do particularly well

GCPL 8% 5% 9% 8% Neutral 30.1 Volume growth in Household Insecticides and weak base should drive 8% volume growth

Britannia NA NA 10% 14% Positive 26.6

Re-launch of Good Day and new product launches have done well. Growth for Britannia is expected to be driven by urban areas while rural growth is expected to remain weak.

ITC 0% -13% 8% 1% Positive 19.6 We expect ITC to deliver flat volume growth for the first time in last 12 quarters on the back of marginal pick-up in consumer demand.

Consumer discretionary

TTK Prestige 6% 1% 10% 17% Neutral 21.8 While margins can surprise on the positive side, this will be offset by no more than 10% YoY growth in revenues

Asian Paints 12% 3% 14% 11% Positive 33.3 Double digit volume growth rate despite a weak macro environment is likely to act as a positive catalyst

Berger Paints 13% 4% 11% 12% Positive 30.6 Margin tailwinds will continue. Updates on express painting service and market share gains will be positive catalyst

Bata India 7% 0% 15% -0.8% Neutral 26.7 End of Season Sale coupled with a low base will result in revenue growth of 15% this quarter.

Page Industries 12% 25% 15% 16% Neutral 32.1 Weak macro demand overall affecting growth particularly in menswear. Kidswear products launched in November.

Titan Company 8% 25% 15% 11% Positive 26.2 Revenue growth to be marred by regulatory headwinds.

Light Electricals

Havells 15% 5% 12% 3% Positive 24.5 BUY ahead of results: Havells is likely to grow faster than industry average led by increased focus in Western region and consumer appliances

Bajaj (non-E&P) 14% 1% 14% 1% Positive 12.1 BUY ahead of results: Revenue growth is likely to recover as the channel inventory correction has already been done in 60% of sales region.

VGuard 12% 5% 8% 2% Positive 17.1

BUY ahead of results: V-Guard is likely to report strong revenue growth of 8% given the expansion of the non-south market share and strong demand for stabilisers and inverters due to early arrival of summer.

Source: Ambit Capital research.



Margin expansion to moderate in 4QFY16 Gross margin expected to expand ~100bps YoY as lower commodity prices start annualising

While crude oil and its derivatives like LLP were down by ~30% YoY for 4QFY16, the quantum of decline is reducing as lower crude oil prices get into the base. HDPE (used in packaging materials) is down only 7-8% YoY and hence should limit gains for FMCG companies in terms of lower packaging costs. Some agri-commodities like sugar (+15% YoY), wheat (+4% YoY) and liquid milk (+4% YoY) have appreciated during the quarter. This could put pressure on gross margin for Britannia. PFAD (used in soaps) and LAB (used in detergents) are down only 7-11% YoY, resulting in lower input cost gains for HUL and GCPL. However, copra price has depreciated by ~35% YoY, which should help boost Marico’s gross margin. This benefit will be partially muted due to the 7-10% YoY increase in price of edible oil inputs. (Marico coffee can note 09 Feb 2016)

EBITDA margins are likely to increase by ~120bps YoY as most of the gains at the gross margin level flow down to EBITDA level given marginal increase in A&P spends. The moderation in margin expansion along with muted topline growth are expected to result in PAT growth of only ~13% in 4QFY16 vs. 18% in both 3QFY16 and 4QFY15 for our FMCG coverage universe.

Margin expansion will moderate in 4Q; gross margin gains to mostly flow into higher EBITDA margin Exhibit 3:

Company Revenue growth (%)

YoY Change in A&P spends as %

of sales

YoY Change in Gross Margin

YoY Change in EBITDA Margin

4QFY16E 3QFY16 4QFY15 bps bps bps

Britannia 10.0% 10.2% 13.9% (23) 8 104

Colgate 3.0% 1.9% 10.9% - 100 163

Dabur 6.0% 2.3% 9.6% 39 100 45

GCPL 8.6% 5.4% 8.3% 50 230 120

GSK Consumer 8.1% 1.7% 8.5% (101) 100 154

HUL 4.0% 3.2% 7.9% 98 203 50

Marico 3.7% 7.2% 14.4% 142 500 249

Nestle -16.5% -22.6% 8.4% NA 150 (50)

ITC 7.8% 2.6% 0.6% NA 80 80

Average (ex-ITC, Nestle) 6.0% 3.2% 9.6% 39 100 120

Source: Company, Ambit Capital research

Average PAT growth in 4QFY16 for FMCG companies in our coverage is Exhibit 4:expected to be the slowest in last two years at least


-

50

100

150

200

250

300

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16E

Revenue growth (YoY %) PAT growth (YoY %) EBITDA ch YoY (bps), RHS

Gross margin expansion to moderate due to annualising of low commodity prices and increase in prices of agri-commodities

Consequently, we expect EBITDA margin expansion of ~120bps YoY for FMCG

http://reports.ambitcapital.com/reports/Ambit_Marico_CompanyInsight_Theartofpeoplemanagement_09Feb2016.pdf



Investment implications Among large-caps, we reiterate BUY on ITC and Asian Paints due to near-term catalysts, longer-term earnings growth potential and limited downside from current valuations. Among mid-caps and small-caps, we reiterate our BUYs on Titan, Bajaj Electricals and Havells, as 4QFY16 is likely to be a significant positive catalyst for all these stocks. 1. ITC (BUY, TP `423, 29% upside): Our recent channel checks suggest that

ITC’s cigarette volumes for Jan-Feb have grown in mid-single digit YoY, continuing with the improving trend in cigarette volumes since Aug’15. We expect the cigarette volumes to be slightly positive for 4QFY16. After a 10% excise hike in the Union Budget, it is interesting to note the moderation in degree of hawkishness against tobacco by various ministries. As per a recent press article (http://goo.gl/n6e2SK ), while the Health Ministry has made a representation for increasing size of warning label on tobacco products to 85% from current 40%, various other ministries have appealed against it stating that this could multiply sale of illicit cigarettes in the country. We reiterate our view that the only successful way of curbing tobacco consumption in a country is to 'gradually' make it unaffordable over long periods of time. We expect ~10% excise duty hike on cigarettes going ahead, resulting in ITC cigarette EBIT growth of 12-13% YoY. At CMP of `325/share, our reverse DCF suggests that the share price already factors in: (a) cigarette volume decline of 6% over FY15-25 and (b) excise duty hike of ~15% CAGR over FY15-25. Hence, we see limited downside from current levels. Reiterate BUY on ITC (TP `423, 29% upside). Click here for our 24th February 2016 note on ITC.

2. Asian Paints (BUY, TP `990, 14% upside) Asian Paints’ strong foundation has been built by focusing on: a) hiring top quality talent which is nurtured in a culture that provides rapid career progression and support even in employees’ personal lives; b) using technology proactively to improve operating efficiencies; c) empowering professionals and Independent Directors on the Board in strategic decision making; and d) establishing deep-rooted relationships with dealers wherein the firm and the dealers share mutual benefits. These factors are likely to result in: a) further market share gains in paints (~100bps each year); b) successful expansion into adjacent categories like adhesives/water-proofing/construction chemicals; and c) dominance through the next phase of industry evolution towards DIY/value added services. We expect revenue/ EPS CAGR of 17%/ 23% over FY15-FY20. Factoring in the longevity of these growth rates, we arrive at a DCF-based fair value of `990 (14% upside), implying an FY17E P/E of 44x. Click here for our 04 Jan 2016 note on Asian Paints.

3. Bajaj Electricals (BUY, TP `229/share, 8% Upside)

Consumer durables set to change course for better in FY17: Theory of Constraints (ToC) (new marketing strategy where company is focusing on pull rather than push) which impacted Bajaj’s primary sales is now rolled out in 35% of the sales area and the impact of inventory rationalisation is already visible in ~60% of the area. As distributors in non-TOC adopted areas also start rationalising inventory in anticipation of TOC rollout, we expect primary sales to pick up from FY17 to 11%.

Stabilising ToC to aid 120bps margin expansion over FY16-FY18: Product availability has improved significantly in ToC with timely replenishment within 1 week. Number of SKUs across categories has increased materially and price discounting has stopped (aids margins) as wholesalers who earlier pushed 2/3 SKUs for trade discounts have been discontinued.

http://goo.gl/n6e2SK

http://reports.ambitcapital.com/reports/Ambit_ITC_SignificantmarginofsafetyinITC_24Feb2016.pdf

http://reports.ambitcapital.com/reports/Ambit_Asian_Paints_ChangeinStance_Seventyyearsofexcellence_04Jan2016.pdf



Despite exit of E&P segment president (HOD), profitability should sustain given improved processes, including proper site selection (close to centralised warehouses), stringent project monitoring and rational bidding (NIL YTD losses).

Our implied target multiple of 21x for the consumer business implies 39%/28% discount to Havells/V-Guard multiples; further upgrade is subject to sustained double-digit margin, product portfolio upgrades and reduction in scale of the E&P business. Click here for our 24 Feb 2016 note on Bajaj Electricals.

4. Havells India (BUY, TP `339/share, 7% Upside)

We expect market share gain for Havells led by streamlining of discounts and new product additions. Havells is now not offering extra discount to large distributors (~20% of revenues). This should result in reduction in price wars within the channel, developing trust amidst the distributor community. Havells has also improved its portfolio (new SKUs) to strengthen its position.

Competitive intensity is likely to ease with new players struggling to survive given sub-par products and poor after-sales service. Further, they do not have sufficient product-serving staff and relevant technical knowhow, which amplifies their problems.

The Sylvania stake sale not only releases stuck capital but also management bandwidth to expand the lucrative domestic business (RoIC >50%). Capital generated through this divesture may be used to acquire a domestic appliances franchise, a category in which Havells is otherwise weak and has limited distribution network. We believe Havells can deploy ~`6bn to acquire a strong regional franchise and the remaining may be invested to make this a pan-India franchise.

Current valuation of 30x FY17 P/E, a meagre 15% premium to peers (vs 20% premium year ago), does not reflect Havells' 59% RoIC in FY16-17 (25% for peers). Our TP of `339 implies FY17 P/E of 31x (20% premium to peers). Click here for our 21 Dec 2015 note on Havells.

5. Titan (BUY, TP `384, 15% upside) New Golden Harvest Scheme to contribute materially from FY17E: The new GHS will begin contributing materially from FY17E, accounting for 12% of revenues. Moreover, discounts offered by this scheme are 80bps lower than those of the erstwhile scheme, resulting in better like-for-like margins.

Competition is in a tight spot: Low making charges (8-10%), high debt:equity (1.5x) and restrictions on customer deposits will affect sustainability and expansion of competition. Thus, Tanishq will gain market share from not only unorganised players but also organised players.

The withdrawal of the erstwhile deposit scheme and regulatory headwinds will lead to marginal decline in revenue/PAT in FY16E. However, PAT/revenue CAGR will be a strong 21% over FY16-19E given the scheme’s return, maturing retail space (37% less than 3 years old), and rising share of studded jewellery (32% in FY15 vs 26% in FY12). Our DCF-based fair value of `384 (36x FY17E EPS) reflects the strengthening competitive position and market share gains. As adornment jewellery (28% of the market; lower ticket size and gold content) grows with changing demographics, designs and repeat buying will override the impact of gold prices, warranting higher multiples than the historical average of 32x. Click here for our 29 March 2016 note on Titan.

http://reports.ambitcapital.com/reports/Ambit_BajajElectricals_CompanyInsight_Itsgettingbetter_24Feb2016.pdf

http://reports.ambitcapital.com/reports/Ambit_HavellsIndia_CompanyInsight_Likelytocreatevaluethistime_21Dec2015.pdf

http://reports.ambitcapital.com/reports/Ambit_Titan_Headwindsprecedetailwinds_29Mar2016.pdf



6. Bata (SELL, TP:̀ 388, 24% downside)

While 3QFY16 performance was aided by bundling of festive season, rolling out of the year-end discount scheme will lead to an optical jump in revenues in 4QFY16. Our concerns over eroding distribution equity, under-investment in the brand (meagre 1% of revenues over CY08-15), high fixed costs (35% of sales) and threat from ecommerce (to at least 15% of the revenues) remain. A significant turnaround is some time away given: (a) historical high inventory (nine months) requiring write-downs; (b) high possibility for gross margin compression; and (c) declining asset turns (2.4x in FY17 from 3.1x in CY09). We expect FY17E RoE to be 19%.

We remain SELLers with a target price of `388. The stock is trading at 32x FY17E EPS. Click here for our 09 December 2015 note on Bata.

Relative valuation table Exhibit 5:

Relative valuations CMP Mcap

Stance Target

Price (`) Up/

Down P/E EV/EBITDA ROCE (%) Implied P/E

Div. Yield

(%)

Rev growth

EPS Growth

(`) (` bn) FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY15 FY16-19 FY16-19

Cons: Staples

HUL 869 1,879 BUY 966 11% 36.5 30.0 26.5 21.8 107.5 107.2 40.6 33.3 1.7% 14.7% 23.1%

Nestle# 5,739 553 SELL 5,120 -11% 48.0 35.8 26.6 20.2 35.9 43.1 42.9 31.9 1.1% 16.1% 26.2%

Dabur 246 433 SELL 250 2% 30.8 26.1 23.4 19.5 28.4 29.0 31.3 26.5 0.8% 16.2% 17.0%

Godrej Consumer 1,352 461 SELL 960 -29% 34.9 30.1 24.1 21.3 20.0 20.7 24.8 21.4 0.4% 12.9% 15.3%

GSK Consumer 6,036 254 SELL 5,826 -3% 33.0 28.5 27.9 26.8 29.5 29.1 31.9 27.5 0.9% 15.4% 15.1%

Colgate 831 226 SELL 875 5% 32.2 26.7 20.7 17.2 68.4 69.4 33.9 28.1 1.4% 15.0% 20.1%

Marico 245 316 BUY 270 10% 34.4 28.3 23.4 19.5 36.2 37.5 37.9 31.2 1.0% 15.9% 22.4%

ITC 326 2,627 BUY 423 29% 22.5 19.6 16.6 14.5 30.7 31.7 29.1 25.3 1.9% 14.8% 15.1%

Britannia 2,641 317 SELL 2,470 -7% 31.7 26.6 20.1 17.0 53.2 48.9 29.7 24.9 0.6% 16.2% 19.8%

Cons: Discretionary TTK Prestige Ltd 4,308 50 BUY 5,228 21% 29.5 21.8 19.1 14.2 22.4 26.8 35.8 26.5 0.5% 20.6% 36.8%

Berger Paints 246 171 BUY 283 15% 34.8 30.6 20.6 18.3 23.5 23.7 40.0 35.2 0.5% 18.2% 24.2%

Asian Paints 870 834 BUY 990 14% 39.0 33.3 24.7 21.1 33.5 33.4 44.3 37.9 0.7% 17.6% 20.0%

Page Industries 12,143 135 BUY 14,769 22% 43.9 32.1 28.4 21.0 45.4 51.1 53.3 39.0 0.6% 28.5% 34.2%

Bata India 502 66 SELL 388 -23% 31.7 26.1 17.4 14.6 21.7 22.9 24.7 20.3 1.1% 13.8% 23.9%

Jubilant Foodworks 1,220 80 SELL 938 -27% 53.0 42.7 21.4 17.4 17.9 18.5 53.0 42.6 0.0% 20.3% 25.8%

Titan Company 339 307 BUY 384 13% 31.8 25.8 20.1 16.1 31.3 31.9 36.0 29.2 0.7% 19.6% 20.7%

Light Electricals Havells 317 198 BUY 339 7% 30.4 24.5 21.5 17.6 18.3 20.2 33.5 27.1 0.9% 14.4% 23.9%

V-Guard 891 27 BUY 1124 26% 21.7 17.1 14.3 11.4 23.9 25.2 23.9 18.9 0.5% 17.8% 26.2%

Bajaj Electricals 212 21 BUY 229 8% 14.6 12.1 7.5 6.5 16.5 17.9 16.2 13.3 0.7% 11.5% 26.2%

Finolex Cables 281 43 BUY 299 6% 16.3 14.4 12.5 11.6 9.3 9.4 17.9 15.9 1.4% 14.5% 10.2%

Source: Bloomberg, Ambit Capital research; # Companies have calendar year-ending and hence, data pertains to CY16 and CY17 instead of FY17 and FY18 respectively.

http://reports.ambitcapital.com/reports/Ambit_BataIndia_Initiation_DistributionhaslittlePowerleft_09Dec2015.pdf



FMCG and staples Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201 Consumer demand has failed to show any signs of revival in 4QFY16 and remains at the modest levels of the previous quarter. Our channel checks suggest demand in urban areas has been modest while rural is barely growing in line with urban. Two consecutive crop failures and a liquidity squeeze for distributors have led to weakening of rural demand. In some cases, companies have extended the credit period to distributors in order to achieve their primary sales targets. This was particularly the case with HUL where the credit period was increased by 7-10 days in some regions in order to achieve record primary sales in March. Our checks suggest that Patanjali continues to do well in select categories like ghee, toothpaste and face wash and faces issues in food categories (ex-ghee). ITC (flat cigarette volume growth) and Marico (+13% YoY volume growth) are our top picks. Overall, for 4QFY16, we expect median volume growth of ~4% YoY vs 3.5%/5% for 3QFY16/4QFY15 across our coverage. If the Kharif crop does well, rural demand should pick up from Sep-Oct’16.

Category-wise trends Cigarettes – expect flat volumes in 4QFY16 Our channel checks suggest that cigarette volumes have been flat to marginally negative over the last three months. The proportion of 64mm cigarettes is likely to have increased to ~20% in the overall mix. Overall, we expect ITC to deliver flat cigarette volume growth, driven by volume growth in KSFT and the 64mm segment. The flat volume growth should allay investor concerns about the increased price elasticity of cigarette demand. With possible price hike of only 10-11% in FY16 to match the excise duty hike of 10%, we expect cigarette volumes to grow by ~2% YoY in FY17.

Stock impact: positive for ITC

Biscuits – Britannia continues to lead the category The biscuit category is expected to have grown by 5-6% YoY during the quarter. This category has seen significant activity in terms of new launches from Parle (Americana and Baker Street) and Britannia (Tiger range of biscuits, Pure Magic Deuce) during the quarter. Our channel checks suggest that Britannia continues to grow the fastest in the biscuit category and is expected to grow volumes by 7-8% YoY driven by urban areas. In rural areas, Britannia is finding it difficult to grow due to: a) weakness in overall rural growth and b) Parle being entrenched in rural India. The biscuit category is expected to be one of the first packaged food categories to witness a price hike in the next 2-3 months. ITC with strong growth in Mom’s Magic is believed to be growing faster than Parle but lags Britannia. This category is seeing some initial signs of competition from western snack categories like Nachos.

Stock impact: Positive for Britannia

Packaged food and beverages – ITC, Patanjali gaining share in instant noodles; MFD category slowing With some more Maggi noodle variants launched during the quarter, sales of Nestle Maggi continues to pick up. However, our channel checks suggest that some consumers who had switched to ITC’s ‘Yippee!’ noodles when Maggi was banned have continued with ‘Yippee!’, resulting in an increase in market share for ITC in the instant noodles category. After the initial euphoria, Patanjali’s noodles are seeing limited repeat purchases according to our channel checks. Our channel checks suggest that GSK’s Horlicks and Boost have reported a slight pick-up in volume growth to 2-3% YoY as against almost flat volume growth in the previous quarters. Volume growth is also helped by a weak base for this quarter (4QFY15 volumes grew ~1% YoY). Horlicks advertising campaign in Jan’16 has also helped drive demand in an important quarter for GSK.

“Britannia continues to do well. Parle could stage a come-back in the next quarter as its new product launches gain steam.” – A Parle distributor based out of Maharashtra

“Some consumers who switched to Yippee noodles during the Maggi ban have continued with Yippee!” – Distributor supplying to modern trade outlets

We would be happy to achieve 5-6% volume growth for Horlicks; the rural demand situation is pretty bad

mailto:[email protected],



Stock impact: Neutral for GSK. Hair oil and edible oil – price cut in Parachute and new products driving volume growth; Saffola seeing some signs of volume pick-up

Marico followed the ~6% price cut of Parachute coconut oil in Jan’16 with a steeper ~13% price cut only on the 250ml SKU, which is its highest selling SKU. These price cuts were administered due to the >30% drop in copra prices during the quarter. The company has maintained prices of its VAHO portfolio with marginal increase in prices for Parachute ayurvedic oil. Our channel checks suggest that the ~17% weighted average price cut on Parachute coconut oil (PCNO) has helped drive high single-digit volume growth in PCNO, with double-digit volume growth in VAHO and Saffola, helped partially by a weak base.

Due to localised price promotions taken on Saffola and the initiative to promote lower price variants Saffola Tasty and Saffola Active, the brand reported a pick-up in volumes for the quarter. In the new product launches, Parachute Advansed Ayurvedic Gold hair oil has been successful for Marico given repeat purchases.

Stock impact: Positive for Marico Soaps and detergents: Surf and Rin detergents doing well; soap growth remains muted

Weak rural demand has resulted in muted demand for Lifebuoy and Lux from HUL. GCPL also faced muted demand for Godrej No.1, resulting in the company increasing consumer promotions for the brand. In detergents, sales of Rin and Surf were good, helped by better urban demand. Wheel for HUL and Ghari from Rohit Surfactants faced muted demand during the quarter due to weak rural demand.

Stock impact: Neutral for HUL Oral care – Patanjali gaining share; Pepsodent re-launch tepid

Our channel checks suggest that toothpaste growth has slowed across companies. Patanjali continued to dent sales growth for Colgate and HUL. Dabur Red and Meswak seem to be benefiting from the growing demand for Ayurveda-based toothpastes. Sales growth slowed for GSK’s Sensodyne as well during the quarter. Although it is early days for HUL’s re-launch of Pepsodent, the initial consumer reaction hasn’t been strong particularly due to the high competition from Patanjali. Colgate’s Active Salt with Neem has had moderate success since its launch three quarters ago.

Stock impact: Negative for Colgate and HUL; Neutral for GSK and Positive for Dabur. Thrust on primary sales undoing some distribution clean-up by HUL

In 3QFY16, HUL started streamlining its distribution channels to: a) avoid distributors encroaching into each other’s territory, b) avoiding Cash and Carry channel stock from entering the general trade channel and c) addition of bogus retail outlets to help distributors achieve their target of increasing reach. However, in 4QFY16, given weak consumer demand, in order to achieve its annual target, HUL extended the credit period offered to distributors, leading to record sales in Mar’16. However, that has again led to some of the distributors resorting to unscrupulous activities to achieve secondary sales. Investors need to ask the HUL management about stock levels at the distributor to get a sense of actual consumer demand.

Volume growth in 4QFY16 likely to be flat QoQ Exhibit 6:Company 4QFY16E 3QFY16 4QFY15 Colgate 2.0% 1.0% 5.0% Dabur 3.0% -1.0% 8.1% GCPL 7.7% 8.0% 4.9% GSK Consumer 2.0% 0.0% 1.0% HUL 5.0% 6.0% 6.0% Marico 13.0% 10.0% 2.0% Nestle NA NA 0.0% ITC 0.0% -2.0% -13.0% Median (ex-ITC, Nestle) 4.0% 3.5% 5.0%


“Patanjali continues to gain share from Colgate and HUL’s Pepsodent”

– A Colgate distributor based out of a metro

“Some of the profitability benefits which accrued due to selling discipline has gone away during this quarter” – HUL Distributor in Uttar Pradesh



Margin expansion to moderate in 4QFY16 Gross margin expected to expand ~100bps YoY as lower commodity prices start annualising

While crude oil and its derivatives like LLP declined by ~30% YoY in 4QFY16, the quantum of decline is reducing as lower crude oil prices start getting into the base. HDPE (used in packaging materials) is down only 7-8% YoY and should limit gains for FMCG companies in terms of lower packaging costs. Some agri-commodities like sugar (+15% YoY), wheat (+4% YoY) and liquid milk (+4% YoY) appreciated during the quarter. This could put pressure on gross margin for Britannia. PFAD (used in soaps) and LAB (used in detergents) are down only 7-11% YoY, resulting in lower input cost gains for HUL and GCPL. However, copra price has depreciated by ~35% YoY, which should help boost Marico’s gross margin. This benefit will be partially muted due to the 7-10% YoY increase in price of edible oil inputs.

EBITDA margins are likely to increase by ~120bps YoY as most of the gains at the gross margin level flow down to the EBITDA level with marginal increase in A&P spends. The moderation in margin expansion along with muted topline growth are expected to result in PAT growth of only ~13% in 4QFY16 compared with 18% in both 3QFY16 and 4QFY15 for our FMCG coverage universe.

Margin expansion will moderate during 4Q; GM gains to mostly flow into higher EBITDA margin Exhibit 7:

Company Revenue growth (%)

YoY Change in A&P spends as %

of sales

YoY Change in Gross Margin

YoY Change in EBITDA Margin

4QFY16E 3QFY16 4QFY15 bps bps bps

Britannia 10.0% 10.2% 13.9% (23) 8 104

Colgate 3.0% 1.9% 10.9% - 100 163

Dabur 6.0% 2.3% 9.6% 39 100 45

GCPL 8.6% 5.4% 8.3% 50 230 120

GSK Consumer 8.1% 1.7% 8.5% (101) 100 154

HUL 4.0% 3.2% 7.9% 98 203 50

Marico 3.7% 7.2% 14.4% 142 500 249

Nestle -16.5% -22.6% 8.4% NA 150 (50)

ITC 7.8% 2.6% 0.6% NA 80 80

Average (ex-ITC, Nestle) 6.0% 3.2% 9.6% 39 100 120


PAT growth for 4QFY16 is expected to be slowest in last two years at least Exhibit 8:for our coverage universe


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Gross margin expansion to moderate due to annualising of low commodity prices and increase in prices of agri-commodities

Consequently, we expect EBITDA margin expansion of ~120bps YoY for FMCG



Paints Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201 We expect 10-12% revenue growth for paints companies in 4QFY16 compared to only 5%-7% in 1HFY16 and 12-14% in 3QFY16. Given 2-3% YoY decline in price realisations, zero price hikes in the quarter, and greater growth momentum in economy paints products compared to premium products, revenue growth will be largely volume-led. Asian Paints announced another cut in product prices by ~2% effective 19th March 2016. As a result, revenue growth for the sector is likely to remain volume-led for at least another 2-3 quarters. Asian Paints and Berger continue to gain market share from Kansai and Akzo Nobel. Berger’s express painting service appears to be eliciting a positive response from painters. Soft input costs, partially offset by the depreciation in INR vs USD, will result in gross margin expansion of 5-60bps in 4QFY16. We reiterate BUY on Asian Paints and Berger.

Macro demand: 2HFY16 witnessed a seasonal revival in the paints sector’s volume growth due to the delayed festive season. This is because Diwali was in mid-November in 2015 compared with late-October in 2014, giving an extra 2-3 weeks of festivity-related paint demand during the quarter on a YoY basis. Moreover, a greater number of wedding dates in November, December and January further supported YoY demand growth in 2HFY16. A partial fading of these temporary tailwinds led to a slight reduction in revenue growth rates for 4QFY16 over 3QFY16. There is no near-term evidence available of a likely revival in demand beyond 2HFY16. Revenue growth will be driven by volumes, which in turn will be driven by economy products.

Asian Paints and Berger continue to build on their competitive advantages: As the velocity of the supply chain (i.e., time taken to deliver products once the dealer has placed an order) is the most important metric for competitive advantage, Asian Paints continues to build on its strengths around this metric. Ongoing projects include automation of input/output warehousing in the supply chain and better use of data analytics to more accurately forecast demand. Berger Paints, thanks to its aggressive approach towards distribution expansion, is likely to have further increased its footprint with dealers across the country during the quarter, thereby gaining share from Akzo Nobel and Kansai Nerolac.

Adhesives and waterproofing segment: The adhesives as well as the waterproofing segments include strong brands from Pidilite. Asian Paints entered into the waterproofing segment 2 years ago but forayed into adhesives in 4QFY16 under the brand ‘Loctite’ in partnership with Henkel. For the waterproofing segment, Asian Paints has communicated a revenue target of ~`15bn by FY17 to its dealers (no meaningful contribution to revenues currently).

Margin expansion to continue in 4QFY16: With 2-3% price cut each in Feb’15 and Mar’16, revenue growth for the paints sector will not see material contribution from an increase in realisation rates. This trend, we believe, will partially offset gross margin gains for paints companies as they continue to pass on the benefits of softening input costs to customers and the trade channel. We expect gross margin expansion of ~60bps/~5bps YoY and EBITDA margin expansion of ~205bps/~210bps YoY for Asian/Berger in 4QFY16.




Investment thesis Asian Paints has built impregnable competitive advantages around supply chain in decorative paints through extensive use of the technology to forecast demand accurately, shorten product delivery times and better manage working capital. In a voluminous product category with over 1,800 SKUs, these strengths will result in ~100bps market share gain each year over the next decade and help the company successfully expand in categories like waterproofing and construction chemicals. In the medium term, Asian Paints is expected to deliver 16%/23% CAGR in revenue/EPS. With decorative paints industry expected to grow by 13.5%/11% CAGR over FY15-FY25/FY25-FY35, we factor in this longevity of growth to arrive at a DCF-based fair value of `990 (14% upside), implying an FY17E P/E of 44x.

Berger has built a strong foundation around high quality talent, a strong work culture and prudent capital allocation over four decades. Having cemented its position as India’s second-largest paint firm, the company has implemented initiatives over FY13-FY15 around supply chain, marketing, operational efficiencies and talent hiring, which should help it increase its market share/EBITDA margin by 500bps/300bps over FY15-FY25E. We expect revenue CAGR of 16% and EPS CAGR of 27% over FY15-FY20, with RoCE rising from 17% to 29%. Factoring in the sustainability of industry revenue growth and Berger’s dominance, we arrive at a DCF-based fair value of `283 (15% upside), implying FY17E P/E of 40x.



Kitchenware Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201

Benefits of a delayed festive season and a longer-than-normal wedding season, which had driven strong growth momentum in the sector in 3QFY16 (16% YoY growth reported by TTK Prestige for 3QFY16), continued in the month of Jan’16. However, there was a significant moderation in these growth rates in Feb’16 and Mar’16 given lack of such tailwinds and sustained weakness in the underlying macro demand environment. Liquidity in the trade channel deteriorated across the country, particularly in February and March. TTK Prestige continued to gain market share during the quarter mainly due to successful rollout of new product launches. We expect ~10% YoY revenue growth for TTK Prestige in 3QFY16 and market share loss for peers like Hawkins in the North and Gandhimathi in the South. Given low margins in 4QFY15 due to exceptional costs, earnings growth for TTK Prestige is expected to be 156% YoY during the quarter. We reiterate our BUY on TTK Prestige.

Demand growth: Moderation in demand growth vs 3QFY16

Revenue growth accelerated to 16% YoY in 3QFY16 from ~7% YoY in 1HFY16 due to the delayed Diwali in 2015 (festive demand shifted to Oct/Nov in 2015 from Sept/Oct the previous year). Also, the wedding season this year has had a greater number of auspicious dates in November, December and January compared with last year, further supporting demand growth momentum. While this stronger momentum in demand growth continued in January across the country, February and March saw weak demand given lack of the temporary tailwinds and weak underlying urban consumer sentiment. Weakness in demand was particularly intense in the southern regions of the country (Tamil Nadu and Kerala). Liquidity in the distribution channel, which had improved in 3QFY16, has considerably weakened during February and March across the country due to retailers not paying distributors on time.

New product launches: Successful for TTK Prestige; not so for Hawkins

In FY16, TTK Prestige has launched a wide range of new launches including: (a) ‘Multi-Kadhai’; (b) ‘Hard Anodised 3-piece Kadhai set’; (c) ‘Cute pressure cooker (inner-lid)’; (d) ‘Clip-on’ range of pressure cookers with lids which can be used with a wide range of utensils rather than just the standard pressure cookers; (e) induction cooktops with “keep warm” feature, which is an innovation and (f) an upgraded version of induction cooktops with a “whistle counter” feature, which works in pressure cooking and places the appliance in a “keep warm” mode automatically after a desired number whistles. Products barring the ‘3-piece kadhai set’ have received strong demand from the channel and from customers across geographies.

On the other hand, Hawkins’ new launch of ceramic-coated inner-lid pressure cookers received several complaints from customers regarding the quality of its coating, higher price point, and lack of customer preference for two of the three colours launched in this range (Mustard Yellow and Apple Green).

Overall, a pan-India rollout of these newly launched products helped TTK Prestige gain market share versus Hawkins in non-south regions, supported by the success of its product launches. This is likely to further improve TTK’s market share.




Distributors do NOT expect a significant revival in macro demand environment over the next 3 months

Our discussions with distributors and market participants suggest that macro demand recovery for kitchenware categories is NOT likely to happen over the next 3 months given no visible triggers and sustained weakness in consumer sentiment.

Gross and EBITDA margin expansion for TTK Prestige

We expect ~230bps gross margin expansion and ~490bps EBITDA margin expansion for TTK Prestige in 4QFY16. This expansion will be largely led by a combination of two factors: a) increased capacity utilisation through a healthy sales growth rate will result in operating leverage related benefits; and b) exceptional costs in 4QFY15 resulted in an abnormally low EBITDA margin of 640bps for TTK Prestige.

Investment thesis TTK is likely to continue to benefit from its renewed focus on product innovation. Improved availability of its products on e-commerce aggregator websites and establishment of fulfilling centres in Hosur and Maharashtra will ensure expansion of TTK’s presence in this channel. Also, the Prestige Smart Kitchen (PSK) franchisee network has been growing strongly thanks to efficient handling of new launches and large-value SKUs.

While the softening in input costs will help expand gross margins in the near term, improved capacity utilisation (20% increase targeted in FY16) will support EBITDA margin expansion and help deliver 37% EPS CAGR in FY15-FY18E. Our DCF model generates a TP of `5,228 (21% upside, 36x implied FY17E P/E). We reiterate BUY.



Jewellery Abhishek Ranganathan, CFA, [email protected], +91 22 3043 3085

Channel checks conducted across various Tanishq stores and interaction with unlisted jewelers indicate that this quarter has been marred by the jewelers strike (keeping the stores closed) in protest of levy of excise duty. Also, demand was impacted to some degree due to introduction of the rule to produce PAN on purchases of jewellery above `0.2mn. The strike meant that many Tanishq stores were forced to shut down or customers didn’t go to stores that were open expecting them to be shut. Our discussions with store managers at Tanishq reveal that footfalls have reduced as customers were unaware of the fact that Titan had not participated in the strike. Further, customers who purchase wedding jewellery are indifferent to the PAN rule, which was evident from moderate growth in the first two months of this quarter. Also, advancement of activation coupled with postponement of Gudi Padwa and Ugadi to the next quarter (will fall twice in FY17 – 1Q and 4Q) affected revenues. Although regulatory headwinds are a risk to near-term earnings, return of Golden Harvest Scheme (contribution expected to be 12% of revenues in FY17), sharper designs, low making charges and now levy of excise duty from 4QFY16 would result in market share gains for Titan. We are BUYers of Titan as it is best placed to gain market share and continues asset-light expansion of stores.

Trends Marginal increase in demand

Demand for jewellery was up by only 6% in 3QFY16 as South India was hit by floods and customers remained resilient in anticipation of a further decrease in prices despite 3QFY16 being a festive season.

Gold prices rose steeply in 4QFY16 Exhibit 9:

Source: Bloomberg, Ambit Capital research

Return of GHS

The Golden Harvest Scheme (GHS) is expected to start contributing to revenues from 4QFY16 (`3bn). This was halted after the new Companies Act led jewellery chains such as Tanishq to stop accepting fresh deposits in the scheme from early 1QFY15. However, GHS resumed in 3QFY16 after it was amended to comply with the new regulations and is expected to contribute materially in FY17 (12% of revenues).

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Gold Price in INR for 10 gm Gold (24 karat)




Overall investment demand (bars and coins) continues to be tepid

Demand for bars and coins, which were on a marginal uptick till 3QFY16 led by festive and marriage season, slowed down in 4QFY16. Moreover, investment demand remains weak, as against jewellery demand spurt, as some investors held back in anticipation of a decrease in import duty on gold and a consequent decrease in prices.

Demand for bars and coins has tapered Exhibit 10:

Source: World Gold Council, Ambit Capital research

Investment implications Titan’s jewellery business is likely to be significantly impacted by disruptions emanating from levy of excise duty on jewellery in 4QFY16. But growth is expected to be back in the second half of FY17 through sharper designs and collections that highlight the most important element of the Tanishq brand – the product. The change in customer advance regulations along with introduction of excise duty has impacted most large organised jewelers. As a result, low making charges offered by most jewellers will not suffice to cover interest costs. Therefore, apart from their ability to compete on making charges, sustainability as well as scalability of most organised jewellers are suspect. Titan, with a net cash balance sheet (never used customer deposits for working capital financing), is in a stronger position to gain market share from not only unorganised players but also organised players.

We remain BUYers of Titan as it has a superior business model – asset-light, state of the art supply chain and net cash balance sheet. It trades at 31x FY17E EPS, which is attractive viewed in light of strong 21% EPS CAGR over FY16-19E and 400bps improvement in ROE over the period.

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Bars and Coin Demand (tonnes)



Footwear Abhishek Ranganathan, CFA, [email protected], +91 22 3043 3085

Bata reported YoY revenue growth of 15% in 3QFY16 riding on bundling of festive season and promotions. Despite being in the festive season, the growth is merely optical due to a low base. Foreign sportswear brands continue to eat into Bata’s pie and that point emerges emphatically from channel checks conducted across Bata stores. These checks also suggest that barring end of season sale (EoSS), revenues have not met expectations. We expect revenues to grow by 8% in 4QFY16 YoY on a low base and continue to remain SELLers as competition continues to chip away at Bata’s market share and weak LTL growth adds to its woes.

Channel checks indicate growth on low base led by promotions: Channel checks suggest that footfalls continue to be below par – down by at least 15% in 4QFY16. However, the conversion rate continues to be in the range of 70% and above. EoSS at the start of the quarter was able to draw more revenues. However, after EoSS, which went on for a month (27th December to 24th January 2016), sales have not ramped up despite discounts run on various articles in the consequent months. Our interaction further reveals the following:

Power, which has been contributing 15% to revenues, has not been growing.

High-ticket items like Hush Puppies have been able to generate more revenues as compared to low-ticket ones.

Stores have not been able to generate expected volumes and, hence, have not been able to meet turnover estimates.

Quantum of non-moving articles has increased despite discounts being offered on those SKUs.

Inventory levels remain elevated though they are below last quarter’s levels.

Discussions with the company to revise K-scheme commissions have been kept on hold.

Bata’s inventory days dipped on back of festive and promotional sales Exhibit 11:


Investment implications While the 3QFY16 performance was aided by bundling of festive season, rolling out of year-end discount scheme will lead to an optical jump in revenues in 4QFY16. We remain concerned over eroding distribution equity, under-investment in the brand (meagre 1% of revenues over CY08-15), high fixed costs (35% of sales) and threat from ecommerce to at least 15% of revenue. A significant turnaround is some time away given: (a) historical high inventory (9 months) requiring write-downs; (b) high possibility of gross margin compression; and (c) falling asset turns (2.4x in FY17 from 3.1x in CY09). We expect 19% RoE in FY17.

We remain SELLers with a TP of `388. The stock is trading at 32x FY17E EPS.

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Inventory Rs mn Inventory days (rhs)




Light Electricals Bhargav Buddhadev, [email protected], +91 22 3043 3252

Our discussions with channel partners suggest moderation in the demand environment in 4QFY16 over 3QFY16 led by slowdown in consumer spending and deceleration in industrial demand. However, volume growth of high single digit is likely to be better than the -1% YoY growth in 1HFY16. Within product categories, while small appliances and water heaters have seen YoY volume growth of 10% and 5% respectively, seasonal products such as fans and stabilisers have seen growth of 12% and 14% led by early arrival of summer. Growth of construction wires/lighting remains strong at 14%/15%. Switchgears have grown by 1%. Channel partners expect FY17 to be a better year led by incremental demand from Government pay hikes and acceleration in industrial demand. We are BUYers on V-Guard, Finolex Cables and Havells franchises as they are gaining market share led by strengthening of distribution networks alongside ramp-up in product portfolios. We are BUYers on Bajaj as we expect valuation multiple to re-rate with recovery in revenue growth/EBITDA margin in FY17.

Moderation in demand environment sequentially: Our discussions with channel partners suggest that demand across categories has moderated in 4QFY16 compared to 3QFY16, due to: (a) slowdown in consumer spending; and (b) deceleration in industrial demand, especially due to weak ordering by Government departments in March. However, the volume growth rate in 4QFY16 in high single digits is better than -1% in 1HFY16.

Within the product categories, consumer-led products such as small appliances and water heaters have seen YoY volume growth of 10% and 5% respectively in 4QFY16. Volume growth of construction wires remains strong at 14% (similar to 14% in 3QFY16) compared with 8% in 1HFY16. Lighting has seen growth of 15% due to sales under ESL orders. Switchgears have seen volume growth of merely 1% due to weak construction-related demand. Seasonal products such as fans and stabilisers have seen strong volume growth of 12% YoY and 14% YoY led by early arrival of summer. Our channel interaction in the South suggest that air conditioner sales have picked up well led by high temperatures in March and early onset of summer. Note ~67% of stabilisers are bought for being used with ACs.

Snapshot of growth trends across light electrical products Exhibit 12:

Product categories Volume growth YoY (%) Value growth YoY (%) Market share in 4QFY16

4QFY16E 3QFY16 9MFY16 FY15 4QFY16E 3QFY16 9MFY16 FY15 Gainer Loser

Cyclical products

Construction wires 14% 14% 9% 13% 8% 7% -1% 5% Havells, V-Guard Polycab

Switchgears 1% 0% -2% 5% 1% 0% -2% 14% Havells Schneider, Legrand

Lighting 15% 17% 12% 3% 15% 15% 10% 3% Syska, Bajaj Philips, unorganised

Consumer products

Small appliances 10% 15% 8% 17% 10% 15% 8% 17% Havells Philips

Water heaters 5% 5% 9% 17% 5% 5% 9% 17% V-Guard, Crompton AO Smith, Racold

Fans 12% 10% 3% 10% 12% 10% 3% 10% Crompton Bajaj

Stabiliser 14% 12% 8% 22% 14% 12% 8% 22% No major change

Source: Ambit Capital research; Note: We have estimated industry growth rate across the products for 4QFY16, 3QFY16, 1HFY16 and FY15 based anecdote data




Optimistic outlook for FY17: Channel partners are excited about FY17 as they believe the growth momentum will pick-up from April. The channel partners expect consumer demand to improve on the back of the Seventh Pay Commission recommendations. Channel partners expect low-ticket items like small appliances to benefit the most from average salary hikes of 24% for government employees as this time around the revised pay scale may go live with a lag of only 3-4 months compared with 30 months in the Sixth Pay Commission – which implies lower one-off arrears income. Channel partners also expect institutional demand to pick-up in FY17 led by increase in industrial capex.

On the industrial side, channel partners expect momentum to accelerate with real estate developers now focusing on completion of projects rather than going for new launches to improve cash flows (linked to milestone based completion). Light electrical products such as wires, switchgear, switches and lighting are the natural beneficiaries of a pick-up in execution of real estate projects as they are used in the final phases of construction.

Stable pricing across product categories; marginal price hikes in cables and wires: According to channel partners, pricing is stable across product categories despite the recent fall in copper prices (down 13% YoY) and crude price (key raw material for PVC; down ~16% YoY). Moreover, in cables and wires, players have taken price hike of ~2% on a sequential basis led by a 2% QoQ increase in copper prices in 4QFY16. However, on a YoY basis, realisation in cables and wires is still down ~6%. We believe light electrical companies should continue reporting YoY improvement in gross margin.

Copper and crude prices marginally bounced back in 4QFY16 Exhibit 13:


Pick-up in the promotional activities Light electrical companies ramped up promotional efforts in 4QFY16, especially for seasonal products. Bajaj (youth ad during Pro-Kabadi), Havells (ad campaign on reservation referring to fans) and V-Guard (ad campaign for stabilisers) were the key advertisers. On new schemes, Bajaj and Surya are giving free LED bulbs with electric water heaters. Competitive intensity to decline as new players struggle: New entrants like Polycab, Luminous, Surya Roshni, RR Kabel and Orient, which have recently ventured into new product categories such as small consumer durables, are facing difficulties in promoting their products given poor product quality and weak after-sales servicing. According to channel partners, these companies neither have in-house manufacturing (except Polycab in fans) nor credible sourcing partners. They also lack sufficient product serving staff and relevant technical knowhow, which amplifies their problems.

1,600

2,600

3,600

4,600

5,600

6,600

260

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360

410

460

510

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Feb-

14

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Jun-

14

Aug

-14

Oct

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-14

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Aug

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-15

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MCX Copper (Rs/kg) (LHS) MCX Crude (Rs/bbl)



Many players introduced new product categories in the last two years… Exhibit 14:Company Flagship product New products added

RR Kabel Electrical Wires Fans

Polycab Electrical Wires Fans, lighting, switches, switchgears

Orient Fans Small appliances

Luminous Invertors Fans, switches, CFLs, switchgears

Anchor Switches Electrical cables, lighting, switchgears

Surya Roshni Lighting Fans, small appliances, water heaters

Source: Industry, Ambit Capital research

Polycab has weakened due to large inventory write-down on copper inventories (inventory days for Polycab were at 76 days in FY15 vs industry average of ~45 days). Moreover, appointment of Sudhir Trehan (ex-MD of Crompton Greaves) has led to frictions within senior management.

Havells is growing better than industry average given focus on a pull-based strategy rather than push. Focus on strengthening the western markets has been increased; recently Havells hired Usha’s head of western market and a sales team and also opened a 13,000 sq. ft office in Mumbai. Havells is focusing on ramping-up its product portfolio, especially in consumer products. After launching air coolers and air fryers recently, it is gearing up to launch air and water purifiers.

Bajaj’s ToC is firmly on track and channel inventory correction has happened in a large proportion of its area (~60%, according to management). Consequently, revenue growth for Bajaj should pick up in FY17.

The new management of Crompton Greaves Consumer Electrical (CGCEL) is likely to aggressively pursue revenue growth. Channel checks reveal intent to boost focus on brand-building, new product launches, and more SKUs and, more importantly, set steep sales targets. However, growth is likely to come at the cost of margins as CGCEL may increase channel incentives and advertisement spend to gain market share.

Investment implications We are BUYers on all the four light electrical companies under coverage, i.e., Havells, V-guard, Finolex Cables and Bajaj Electricals. While we believe revenue growth for the Light Electricals sector will decline to low teens over FY15-24E after a stellar 18% growth over FY06-15, we expect strong franchises such as Havells, V-Guard and Finolex Cables to continue gaining market share as none of them have more than 10% market share in the light electricals space now.

We expect V-Guard and Finolex to continue gaining market share in the non-South market, led by focus on the distribution network and brand-building. We believe Havells may expand its small appliances portfolio by using the Sylvania sale proceeds for doing an acquisition in the domestic market. The company is also expanding its strength in the western market; it recently set up a very large regional office in Mumbai. While Bajaj’s consumer franchise is relatively weak (losing market share across categories), we believe there is value. Supply chain is now getting stable (ToC now covers 35% of sales), which should lead to improvement in Range (more SKUs), Reach (more retailers) and Replenishment (more availability); we expect growth/EBITDA margin to recover in FY17. We expect Bajaj’s valuation multiple to re-rate with recovery in revenue growth and margin expansion in FY17 due to stabilisation of ToC.

We are BUYers on Havells, V-Guard, Finolex and Bajaj



Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Aakash Adukia Oil & Gas / Chemicals / Agri Inputs (022) 30433273 [email protected]

Abhishek Ranganathan, CFA Retail / Mid-caps (022) 30433085 [email protected]

Achint Bhagat, CFA Cement / Roads / Home Building (022) 30433178 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected]

Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected]

Karan Khanna, CFA Strategy (022) 30433251 [email protected]

Kushank Poddar Technology (022) 30433203 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar, CFA Metals & Mining (022) 30433223 [email protected]

Prashant Mittal, CFA Derivatives (022) 30433218 [email protected]

Rahil Shah Banking / Financial Services (022) 30433217 [email protected]

Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected]

Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Jestin George Editor (022) 30433272 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction
















































Hindustan Unilever Ltd (HUVR IN, BUY)


Asian Paints Ltd (APNT IN, BUY)


Nestle India Ltd (NEST IN, SELL)


Dabur India Ltd (DABUR IN, SELL)


Godrej Consumer Products Ltd (GCPL IN, SELL)


Colgate Palmolive (India) (CLGT IN, SELL)


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HINDUSTAN UNILEVER LTD

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ASIAN PAINTS LTD

01,0002,0003,0004,0005,0006,0007,0008,000

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NESTLE INDIA LTD

050

100150200250300350

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DABUR INDIA LTD

0200400600800

1,0001,2001,4001,600

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GODREJ CONSUMER PRODUCTS LTD

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COLGATE PALMOLIVE (INDIA)



Marico Ltd (MRCO IN, BUY)


Britannia Industries Ltd (BRIT IN, SELL)


Berger Paints India Ltd (BRGR IN, BUY)


Page Industries Ltd (PAG IN, BUY)


TTK Prestige Ltd (TTKPT IN, BUY)


ITC Ltd (ITC IN, BUY)


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MARICO LTD

0500

1,0001,5002,0002,5003,0003,5004,000

Mar

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BRITANNIA INDUSTRIES LTD

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-16

BERGER PAINTS INDIA LTD

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

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PAGE INDUSTRIES LTD

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TTK PRESTIGE LTD

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ITC LTD



Titan Co Ltd (TTAN IN, BUY)


Trent Ltd (TRENT IN, BUY)


Jubilant Foodworks Ltd (JUBI IN, SELL)


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TITAN CO LTD

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TRENT LTD

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JUBILANT FOODWORKS LTD



Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock Disclaimer

This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital . AMBIT Capital Research is disseminated and available primarily electronically, and, in some

cases, in printed form.

Additional information on recommended securities is available on request.

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CONSUMER - Ambitreports.ambitcapital.com/reports/Ambit_B2CSurvey_Thematic_Festive... · +91 22 3043 3246 riteshvaidya@ ... GSKCH 2% 2% Neutral APNT 12% 11% Positive ... consumer demand