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Notes from the Road: Travelogue from Uttar Pradesh July 2017 An integral part of our research process is to conduct road trips to assess ground realities. On ground interactions render a better understanding of the state of the economy, the effectiveness of government policies, the reality of business practices, as well as the psyche of the consumer. These, in our view, are one of the better ways to identify gaps between perception and reality. For instance, in the months immediately ensuing the demonetisation announcement by the Government, our ground visits indicated that the situation was not as bad as it was projected to be. This helped us to remain invested in the markets and rejig our portfolio to take advantage of the recovery in stock prices from December 2016 onwards. In a way, therefore, these trips are useful tools in fighting some of the ‘fallacies of our minds’ that we have discussed in our earlier communiqués. The journey In the month of June 2017, we traversed around 500 km, covering around 6 districts of India’s largest and most populous state - Uttar Pradesh (UP). UP gains significance as a state since it contributes heavily to India’s demographic mix, but is a drag on the national average in most of the development indicators; thus, any sort of socio-economic transition in this state may lead to large benefits to national averages. Further, given that 77% of the population of UP lives in rural areas, and given the government’s focus on rural development, the transformation can be quite swift and remarkable if policies are executed well (especially given the same political dispensation at both state and national level).

Figure 1: Route map of road trip – Lucknow to Varanasi

Source: Google Maps, Tamohara

Our channel checks covered sectors like Financials, Automotive, Cement & Infrastructure, and population segments like farmers, government employees, and the common public at large. We briefly summarise key takeaways from the trip in the following sections. Sentiment is changing, so are the glasses Our biggest takeaway from talking to various people was that the law and order situation is improving; it is now safe to travel through large sections of the state even at night. There is widespread optimism in people (the general public, large and small business owners, Uber drivers as well as farmers) and a belief

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that there would be reverse migration of labour to UP if the situation continues to improve, especially on the law and order and job creation front. Government offices were a pleasant sight early in the morning – not only was attendance high, but the offices were also clean with high activity levels. We understand that the pace of work has picked up across departments, with most working under clear deadlines. The 7th Pay Commission is expected to be a big positive, given the large proportion of government employees. Businesses seem to have recovered completely from the impact of demonetisation. With Eid around the corner, local shops were doing brisk business. The implementation of GST also did not seem like an issue, as even restaurants along the highway appeared to be well prepared. A peculiar thing that we noticed in some of these restaurants was that they continued to serve liquor despite the recent ban on sale around highways. In order to avoid drawing attention however, the liquor was being served in opaque glasses. The road to Tomorrowland is under construction Among the cities visited, Lucknow was the only city which has seen marked improvement in infrastructure. Varanasi is a city to watch out for in our opinion, as a lot of work is underway - Metro, Airport road, Ring Road, underground wiring of electric cables, 4 lane highway projects connecting Varanasi to other cities, and development of the waterfront. A lot of projects are under planning across the state. Our interactions with locals suggest that while Gorakhpur has seen a lot of projects getting announced (Gorakhpur Metro, AIIMS, broadening of roads, beautification of Ramgarh Tal, development of Airport), it will take a while before works start on the ground. We feel that FY19-21 could be big years for cement companies if these projects move from planning to the development stage. On the condition of highways, our takeaways were really mixed - while some were really world class, others could hardly be considered as roads. Lucknow-Faizabad-Gorakhpur was a 4-lane highway with speeds of 80-90kms/hour achievable without any hassle, while Gorakhpur-Varanasi highway was in shambles (it took us 8 hours to traverse 180kms at a speed of less than 30kms/hour). Work however, was on full speed for 4 laning the highway, which is expected to be completed by September 2018. Beyond the highways, the streets were dirty with a lot of potholes and erratic traffic everywhere in the cities we visited (Lucknow being the only exception). The UP government had promised to make UP roads pothole free by 15 June 2017, however we feel they are far away from the target, although we were told that the condition is way better than earlier years.

Figure 2: Luxury residential building in Gorakhpur Figure 3: Highway from Faizabad to Gorakhpur

Source: Tamohara Source: Tamohara

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Availability of electricity, we were given to understand, has improved across the state and this has led to a pick-up in industrial productivity. Solar panels are also gaining popularity. While real estate prices have been subdued, they have received some fillip, post the new government. A lot of builders were aware of the Prime Minister Awas Yojana (PMAY) and planned to start projects in the affordable housing segment. Some of the builders that we interacted with anticipated huge demand for housing in the range of INR 1.2-1.5mn value, especially on the back of the subsidy scheme of the government. Upon checking the allocation from the Central Government, we realised that UP has received the highest allocation under this scheme! On the promptness and innovativeness of the banker Our interactions with Banks and NBFCs were very insightful. We met with different business heads across Personal loans, Auto loans, CV financing and SME loans. Apart from SBI, most PSU banks are losing market share. One interesting highlight was that due to non-availability of power back-up in PSU bank ATMs, people are moving towards large private sector banks for account opening, deposits and loans. ATM refilling is also random among most of the PSU banks, thus losing customers to more prompt private banks. A notable takeaway was that personal loan and business loan customers don’t mind paying 1-2% extra interest rate but they want fast loan disbursal. Most of the personal loan customers are government employees, especially from the teaching background and a personal loan is usually availed for home improvement, medical purposes or a marriage in the family. Very few customers understand the floating rate of interest. Most of the NBFCs thus re-calculate loans on fixed rate at initial principle amount. Thus, car loans were marketed as 7% fixed rate loans (the 7% refers to the EMI of INR 7000 on INR 100,000 of borrowing, where the customer does not understand the concept of reducing principle and thereby the implied higher IRR of the loan). Effectively, these loans yielded 12-13% to the financier. Some other key points: The Auto loan segment will be the biggest beneficiary of the 7th Pay Commission; post demonetisation, the 2-wheeler loan segment saw lot of delinquency but that has stabilised now; Small finance banks are opening branches near large private banks to garner CASA and to enhance visibility, however, in our view, they have met with limited success.

Figure 4: Interaction with Gold loan customer Figure 5: Small finance bank’s branch next to large bank

Source: Tamohara Source: Tamohara

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Automotive landscape – bigger, lighter, and greener Talking to auto dealers indicated that brand trust on Maruti is very tough to match for any auto maker, although the rural centric population has a high affinity for SUVs, especially Mahindra and Toyota (UP is one of the largest markets for the Fortuner, it seems). Similarly, within motorcycles, owning a Royal Enfield (RE) bike is seen as a symbol of prosperity in the small cities of UP.

Figure 6: Customer inquiry at RE showroom Figure 7: Focus on merchandising

Source: Tamohara Source: Tamohara

The demand for commercial vehicles has been impacted on account of sand mining issues. However, with the e-auction process expected to begin over the ensuing two to three months, demand is likely to pick up in the second half of the year. Further, the new government has been strict on restricting overloading, and most market participants think this is likely to be the norm going forward. This will further give impetus to demand. Demand for construction equipment is also on an upswing and NPAs should come down from that portfolio. In addition to hailing a taxi from the smartphone, UP also offers an environment friendly option – the e-rickshaw. The vehicle costs INR 130,000-135,000 (cash down) and INR 150,000 through financing options, with 24-30 months EMIs. It runs on 4 lead acid batteries, costing INR 25,000, with a warranty of 6 months. However, these are generally replaced only after a year. The maximum load capacity of these vehicles is 4+1 (driver). The driver makes around INR 300-400 a day, depending upon the number of hours he puts in.

Figure 8: E-rickshaw plying small distances Figure 9: 6-seater E-rickshaw

Source: Tamohara Source: Tamohara

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Baba is gaining prominence in the land of the Sadhus We interacted with several distributors/dealers of FMCG/Appliance companies. One key takeaway was that Patanjali has made serious inroads across the state. We also visited a Patanjali Mega Store and were amazed by the look and feel of the store. It was about 2000 sq. ft in Gorakhpur with most of the product categories available. Clocking revenues of INR 100,000 a day, the business was split 70%-30% between FMCG and Ayurveda.

Figure 10: Patanjali Mega Store in Gorakhpur

Source: Tamohara

The store owner suggested that Patanjali products are gaining market share in most of the categories from branded FMCG players rather than from unbranded ones. However, this data doesn’t corroborate with the market share reported by listed FMCG companies. The elephant is moving! As we bowed in respect to the Holy river Ganga, ending our 5 day, 500km long journey, we couldn’t help but notice a slow underlying change in UP. Indeed, a lot needs to be done for this change to be remarkable, but one can’t deny that steps are being initiated in the right direction. With its size being equal to or more than many European countries, the UP transformation story would take 5-10 years to play out; but if it does play out well, it will have a huge positive impact on the overall economy. Until next month, On behalf of Team Tamohara, Sheetal Malpani.

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