HDFC sec Reality Check Forum Key takeaways sec Reality... · Pricing and ticket sizes of unsecured loans suggest aggression by dominant players. Unsecured loan ticket sizes have seen

INSTITUTIONAL RESEARCH

HDFC sec Reality Check Forum Key takeaways

03 Oct 2019

Darpin Shah (Banks / NBFCs) [email protected],+91-22-6171 7328

Aakash Dattani (Banks / NBFCs) [email protected],+91-22-6171 7337

Naveen Trivedi (FMCG, Appliances) [email protected],+91-22-6171 7324

Siddhant Chhabria (FMCG, Appliances) [email protected],+91-22-6171 7336

Rajesh Ravi (Cement) [email protected], +91-22-3021 2077

Saurabh Dugar (Cement) [email protected], +91-22-3021 2072

Mansi Lall (Autos) [email protected], +91-22-3021 2070

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HDFC sec Reality Check Forum

Reality bites! The recently held HDFC Sec REALITY CHECK Investor Forum differed from our other corporate access events in a vital aspect. Instead of inviting listed companies in a sector, we hosted key partners/ intermediaries of listed cos (retailers, distributors, DSAs, valuers, channel partners, unlisted competitors) for a more candid view on their business dynamics. In our view, this was a vital need because it gave investors a ring side view of the businesses of their investee cos, in addition to management commentary.

The event spanned four sectors that are crucial to macro direction of the Indian economy : Financials, Consumer, Autos and Cement. More than FORTY such enterprises engaged with institutional investors over a staggering 670+ meetings at the two-day event.

The findings were uniformly sobering. There is a broad based slowdown in consumption and consumer confidence that is unlikely to be revived with a mere tax cut. While we remain confident on the longer term trajectory for Indian macros, there is strong evidence of a sticky slowdown that merits policy actions. For its part, the government deserves credit for ushering structural changes like demonetisation, GST, RERA , BSVI, Electric Vehicle incentives, etc. However, on-ground transition has been messy. India is slowly (and painfully) aligning with the changing rules of business.

While Financial sector guests echoed some old truths (such as better credit policies, superior customer engagement/experience by pvt banks and select NBFCs), they also revealed new insights such as the rising leverage of households and the rising proportion of unsecured lending in the aggregate credit mix of many lenders. Interactions suggest a decisive increase in borrower leverage and delinquencies in granular segments across the board. While current levels are not worrisome, these trends are likely to persist.

On the Consumer side, the slowdown worries look a tad overstated, despite the soft data. FMCG distributors stated that despite down trading by consumers, tougher channel dynamics

and softer volume growth the pain is not expected to be permanent. Consensus expectations for a recovery in demand was from festive season onwards.

For FMEGs, although demand from new homes are weak (real estate slowdown), replacement/renovation demand is driving category growth. Cooling appliances are expected to deliver strong performance led by low channel inventory. Distributors are bullish on the upcoming festive season demand.

Automobile volumes are going through a funk right now and it’s easy to get carried away on the downside by the nos. as well as the discouraging commentary by most auto dealers we invited. However, our view is that cyclicality is a given in the sector and that sentiments move on a dime. Dealer pain and disillusionment represents a major risk for players with dominant marketshares like Maruti and Eicher (Enfield). In contrast, Hero Motocorp seems to enjoy higher dealer confidence even through the slowdown in volumes.

Cement dealers and executives from unlisted companies confirmed our view that the strong monsoon has driven down demand in the short term, but will only reinforce individual home building (and hence trade) demand quickly as the festive season sets in. But, despite the weak demand the cement prices have been stable YoY in the North, Central and West regions.

All in all, India (or at least a significant chunk of the Indian economy) is slowly picking itself up after a few mishaps. The pain persists and healing will take time. But the confidence on longer term trajectory is not broken at all. Only time will tell whether this is misplaced bravado or prescient insight.

Read on for our detailed takes on each sector inside (Financials, Consumer, Autos and Cement)

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Banks / NBFCs

Participants

Andromeda Loans

Finwizz

HDFC Sales

RU Loans

JR Financial Consultants

Hardcore Financials

CRIF Highmark

Valuers: Svee India, Adroit, Sundeep HB & Co.

Participants

Marketing executive from Central

Marketing executive from East

Marketing executive from South

Marketing executive from West

Cement dealers from north, central, east, south and west markets

Cement

Participants

CV dealers from North, East and West

Passenger Vehicles dealers from North and West

Two Wheelers dealers from West

Fleet Operator from West

Auto

Participants

Corporates

Multinational B-B Cash & Carry

Panasonic Life Solution (Anchor)

NRAI (National Restaurant Association of India)

FMCG Distributors

Marico, GSK Consumer, Amul and L'Oreal

Marico, HUL and Nestle

Britannia, Cadbury and Amul

Nestle, Godfrey, Kellogs

Multi-brand liquor

FMEG/Appliances Distributors

Great Eastern

LG RAC and Kenstar Aircooler

Daikin, Lloyd, Whirlpool and Racold

Fans, Industrial

Consumer

Participants

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Banks / NBFCs

Consumer

Cement

Auto

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Rationale for the Event Post a fairly good FY19, an air of uncertainty has descended yet again on the BFSI sector, with credit growth slowing down (even vs. seasonal trends) and the emergence of fears on asset quality in smaller ticket retail segments.

In these times, investors prefer to have their ears to the ground than listen to templated commentary (from many, even if not most) managements.

At the HDFC Securities Reality Check Investor Forum, we hosted DSAs, asset/property valuers and a credit bureau. These financial services intermediaries spoke on actual lending practices, product-wise and geography-wise growth and asset quality trends.

Institutional investors gathered insights on the ground reality wrt listed financial services cos. They could thus corroborate information conveyed by financial statements and management commentary.

Participants

Name Profile

Andromeda Loans DSA for PL, BL, LAP, HL etc. Pan India presence. Partnered with some of the leading financial institutions in the country. Sources ~Rs 190bn a year

Finwizz DSA for PL, BL, LAP, HL etc. Pan India presence (22 states). Partnered with some of the leading financial institutions in the country. Sources ~Rs 120bn a year

HDFC Sales 100% owned by HDFC. Sources ~Rs 600bn a year and a/c for ~50% of HDFC’s mortgage business. Also distributes group cos’ life and general insurance policies.

RU Loans DSA for PL, BL, LAP, HL etc. Pan India presence (330 cities). Partnered with some of the leading financial institutions in the country. Sources ~Rs 100bn of loans a year.

JR Financial Consultants Pune based DSA for PL, BL, LAP, HL, SME Loans, Developer loans etc. Tie ups with Banks and NBFCs.

Hardcore Financials DSA for PL, BL, LAP, HL etc. Fast growing business with ~700 clients. Tie ups with most PVT banks.

CRIF Highmark RBI licensed credit bureau and provider of business information, credit information and business analytics. Specialised bureau related to micro and retail credit information. Tracks a portfolio of Rs 110bn with ~400mn live cases.

Valuers: Svee India, Adroit, Sundeep HB & Co. Engaged in valuation of real estate, industrial properties, infra projects etc.

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Bureau (CRIF Highmark)

Insights included observable trends from aggregated lender data. A credit bureau has a unique viewpoint to evaluate lending on a national level with both macro and microscopic lenses. Key insights from the interaction are:

Retail asset quality deteriorated steadily over FY19 and the trend persists. Absolute growth in delinquent loans became more apparent with credit growth slowing down.

Mortgages are more than half of its rated portfolio; delinquencies (90+dpd) are ~0.7%. Personal loans form ~20% and exhibit delinquency levels of ~1.8% (+20bps in the last 1 year and +40bps in 2 years). Auto loan delinquencies too, have risen to 1.2%.

Sharp credit growth, post demonetisation, was driven by a rise in supply. This was not accompanied by a commensurate rise in real disposable income, which portends asset quality deterioration. This trend is likely to persist.

PVT banks are the best off in terms of asset quality, while NBFCs and PSBs are operating at similar delinquency levels. We believe this masks significant skew across NBFCs.

PL stress is likely to increase in cases where borrowers do not hold deposits with lenders (banks). NBFCs are thus more susceptible. Smaller lenders in this space may face a solvency crunch.

Microcredit Portfolio Trends:

The microcredit o/s reported by MFin and various bureaus does not include bank lending to SHGs.

Susceptibility to event risk remains high while the credit risk level is not alarming at present.

While ticket sizes are increasing, data suggests that the risk of increasing borrower leverage is more pertinent.

The West Bengal portfolio is highly susceptible to concentration and event risk, but credit risk is not significantly higher average. The number of new microcredit lenders in WB has risen in recent times. This poses additional risk.

The number of non-microcredit loans held by microcredit borrowers has increased significantly, i.e. 1 in 7. This is another metric not conventionally captured by MFin/ published bureau data. This is particularly high in TN.

NBFC-MFIs comply with RBI guidelines in letter but not in spirit. For example, they do not consider loans given by other types of lenders while calculating borrower leverage limits.

Valuers (Swee India, Adroit and Sundeep HB & Co.)

While the underwriting and collection practices in lending have come a long way, valuation has lagged (although now catching up with increasing formalisation, standardisation and regulatory recognition). Our interactions suggest the following trends in the process/ profession:

While most banks view collateral valuation as just a tick in the box, the approach of top tier PVT banks stands out.

The nuances and methodologies of the valuation report are not inspected by most lenders, especially in the valuation of industrial properties.

Non-compliance with regulations, borrower malpractice and lack of diligence by lenders were ranked as the top 3 causes for failure of the valuation methodology.

Assignments related to appraisal of real estate and infrastructure projects have seen a significant slowdown.

The demand for small-ticket NCLT related valuation cases has increased.

Key Takes

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DSAs (Andromeda, HDFC Sales, RU Loans, Finwizz, JR Financial, And Hardcore Financial)

Participating DSAs spanned retail products and sourced an aggregate of ~Rs 1tn of loans in FY19. Interactions and questions were directed towards broad trends across products and individual lender practices. Excerpts from the interactions are:

Retail lending is witnessing strong polarisation with PVT banks gaining market share. Growth in unsecured lending remains healthy.

Pricing and ticket sizes of unsecured loans suggest aggression by dominant players.

Unsecured loan ticket sizes have seen a decisive increase with the salaried segment reaching ~Rs 1mn. More than 40% of several PVT banks’ portfolios have ATS>Rs 2mn. Interest rates are ~11%. Sanctions are typically capped at ~1x annual take home salary.

Monthly disbursal volumes for unsecured loans are ~Rs 150bn.

Tier II & III cities are now increasingly contributing to unsecured credit growth.

Large ticket unsecured lending is not well understood by most lenders due to difficulty in assessment of underlying cash flow.

While individual borrower leverage levels have certainly increased, current levels are not worrisome, especially in the salaried class.

Significant growth in mortgage/home loan sourcing over FY19 was observed by a large DSA specialising in the product. Large HFCs (DHFL and IBHFL) have been nearly inactive over FY19. A large PSB-

backed HFC has almost stopped disbursing home loans recently (HL).

The largest mortgage lender has the most competitive rates, and borrowers appear to be very sensitive, even to a 10-15bps difference. It has improved its TAT and customer service considerably in recent times.

Repo linked loans offered by this lender have higher EMIs initially, in spite of lower EIRs (effective interest rates) due to faster amortisation of the principal amount. On the ground, its branches were pushing MCLR linked home loans over Repo linked loans.

Lenders are likely to increase spreads to keep margins intact and provide insulation from increased interest rate risk on external benchmark linked products.

A certain large PVT bank, whose risk and credit practices are viewed by market participants as very stringent is reported to be lending at 200% FOIR excluding informal income and attaching more value to collateral (an interesting revelation, we must confess).

Unsecured retail loans sourced for PVT banks do not seem to be seeing adverse trends as of now.

DSAs acknowledged the prowess of the distribution, analytical and underwriting skills of a diversified NBFC specialising in CD financing.

A fast growing mid-sized PVT bank is reportedly facing stress in certain portions of its retail portfolio.

Key Takes

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While our day long interaction with financial services intermediaries mostly confirmed our thesis on coverage cos and the sector, it also led to some interesting revelations.

Longstanding Notions on Underwriting (mostly) Confirmed: Underwriting rigour and credit policies of various lenders as perceived by DSAs, in line with our longstanding notions, are corroborated by asset quality trends of granular portfolios. Here, however, the revelation was secured loans at 200% FOIR, and inclusion of informal sources of income, compensated by over-collateralisation (preference given to collateral over cash flows in this case was contrary to our expectations) by a conservative PVT bank. Fast growing mid-tier private banks appear to be facing issues in parts of their granular portfolio. We did not anticipate this.

Retail Growth Robust, Driven By Unsecured Products: Even as systemic credit growth slows, retail loan growth for top tier PVT banks remains healthy due to market share gains. Even as PVT banks have gotten pickier, calibrated aggression was visible in unsecured lending, with some irrationality on pricing and ticket sizes. Unsecured credit growth remains healthy. Individual borrower leverage has decisively increased. Tier 2 & 3 cities are increasingly contributing to credit growth.

Housing Market Competition Intensifies, Repo Linked Loans Not As Attractive: Several large HFCs have nearly exited the market. However, competition between the remaining players (banks, HFCs, NBFCs) has intensified. Borrower rate sensitivity has increased (even 10-15bps). While the largest mortgage lender in

the country offers home loans linked to the repo, several facts suggest that it is not a desirable alternative for the lender.

Valuation Practices - Unrealised Potential (A long way to go): Valuers unanimously agreed on the need for lenders to focus more on the nuances of valuation reports as certain obvious underwriting mistakes could be avoided. Further, they have seen a drop in the number of fresh cases for loan sanctions while the number of small-medium sized IBC related valuation assignments has increased.

Retail Risks Slowly Mounting: Bureau data suggests a definitive rise in retail delinquencies (not alarming yet), almost across the board (product-wise). They attributed this to the oversupply of credit not being met by a corresponding increase in disposable income, post demonetisation. The trend was accentuated by the NBFC crisis and is likely to continue.

Microfinance Concentration Risks Unaddressed: Credit risk has not changed much while event risk associated with geographically concentrated portfolios remains high. Increasing borrower leverage (mostly under reported) is a greater concern vs. rising ticket sizes.

Post 1QFY20, we cut growth and increased GNPA estimates across our coverage universe. As most interactions confirmed our longstanding thesis on the sector and specific cos as well (with a few revelations), we have not altered our estimates and recommendations, post the REALITY CHECK Investor Forum. Our Top Picks (AXSB, CIFC and CUBK) remain unchanged.

Conclusion

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Banks / NBFCs

Consumer

Cement

Auto

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Consumer Sector: Intensity of slowdown is overrated We invited unlisted corporates and distributors of FMCG & Appliances to get a pulse of the trade channel and some sense on consumer sentiment. While demand growth has moderated for both staples and discretionary products, it is still in mid single digits (unlike Autos, for example). Urban consumers continue to be aspirational for premium segments in staples driven by robust growth in modern trade. In appliances, 'need based' buying supported by consumer financing is driving demand. Low channel inventory for cooling products will provide room for channel filling prior to the upcoming festive season. Interestingly, there was consensus (from dealers and distributors of all categories of

consumer goods) on demand recovery in the upcoming festive season. We sense that primary growth may well be healthy in 2HFY20.

In our modeling, we were already estimating a recovery from festive season. Our interaction with trade partners and unlisted corporates further increases our confidence. We maintain our estimates and recommendation for our coverage universe. Top Picks: ITC, Jubilant FoodWorks, Britannia (recent addition) and Symphony.

Distributor/Corporate Designation/Distributor Category Location Description

Corporates

Multinational B-B Cash & Carry CEO FMCG and Appliances (MBO)

Pan-India Large wholesaler and food retailer with >20 stores clocking >Rs 50bn revenues

Panasonic Life Solution (Anchor) Joint MD and VP Marketing

FMEG Pan-India Anchor electricals revenue is >Rs 30bn. Anchor has a 40% market share in wiring devices. Co also has a presence in fans, lighting and switchgear

NRAI (National Restaurant Association of India) President Food Service Industry Pan-India President of NRAI. The association represents >500k restaurants in India.

FMCG

Marico, GSK Consumer, Amul and L'Oreal Distributor FMCG UP Multi-brand distributor and stockist mainly for upcountry market

Marico, HUL and Nestle Distributor FMCG Rajasthan Multi-brand distributor and stockist

Britannia, Cadbury and Amul Distributor FMCG Maharashtra Multi-brand distributor Nestle, Godfrey, Kellogs Distributor FMCG Maharashtra Cigarette and FMCG distributor Multi-brand liquor Distributor Liquor Maharashtra Large distributor for spirits and beer in Maharashtra FMEG/Appliances

Great Eastern Director MBO for Appliances Pan-India Large distributor of appliances in East, North and West with 54 stores clocking a turnover of Rs 10bn

LG RAC and Kenstar Aircooler Distributor Appliances Rajasthan Largest LG RAC & Kenstar distributor in Rajasthan

Daikin, Lloyd, Whirlpool and Racold Distributor Appliances NCR Large RAC distributor of Daikin, Lloyd and Racold. Also deals in B-B projects

Fans, Industrial Dealer and Distributor Appliances Maharashtra Large distributor for Havells, Orient and Crompton fans. Also distributor for Lighting and Industrial products

Participants Profile

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Key Takes: FMCG

Volume growth has moderated in 2Q: Industry growth rates have moderated but continue to grow (unlike Autos) in 2Q. Distributors have witnessed a pick-up in demand from Aug vs. May-July. Liquidity in the channel is still tight and distributors are compelled to pass on discounts to retailers along with higher credit. This has squeezed distributor margins partially – which is not expected to be continue. Distributors are expecting recovery in demand from festive season.

Trade inventory level is not a concern: Distributors at our event stated that channel inventory is near normal and scope for inventory to rise in FMCG is always limited. They also mentioned that leading cos do not fill the trade pipeline significantly even for a short-term growth.

Premiumisation and emerging channels are gaining share: Premium products continue to outpace value products as consumers are aspirational. Modern trade is growing at ~20% and is gaining share from general trade. General trade has been under pressure and is growing in low single digits.

Packaged Food

Nestle: Channel has given positive feedback on Nestle’s new management and more friendly trade partners. Maggi continues to grow at a healthy pace and further consolidates its share. NesPlus, Nestle’s shot in the breakfast space (tough segment to crack) has seen weak consumer response. While, Nestle’s new launches/re-launches (Nestea and Milo) in ready to drink tetra packs are promising.

Britannia: BRIT’s growth trajectory has improved in Aug and Sep. New launches have received positive feedback. LUPs are growing at a faster pace vs. large packs. Packaged food category is

becoming crowded as new players have entered in the recent past. However, snacking market is growing at a healthy pace and hence large players continue to deliver healthy growth.

Amul: Co is witnessing healthy growth, supported by new launches and entry into new categories. Amul is providing support to the trade with higher credit period (7-8 days) vs. cash basis earlier. As per the trade, Amul has become aggressive in chocolates.

Personal and Home Care

HUL: Price cuts in soaps (Lux and Lifebuoy) has received positive feedback from trade. Distributors expect HUL’s market share in these brands to recover. HUL is losing share in hair care owing to stiffer competition from national and regional players. Recent launches in hair care have received a like warm response like Pure Derm, Sunsilk Coconut Water etc. HUL’s focus has shifted to hair oil category which has resulted in healthy growth in Indulekha. In detergents, HUL continues to drive premiumisation. While in dishwash, Vim bar and liquid is gaining share from unorganised players post GST.

Marico: Parachute continues to report healthy growth. New launches in VAHO are also witnessed good traction. In Saffola, co is taking several initiatives (promotion strategy) in the trade and field level communication to regain market share.

Cigarette

Cig. volume growth is weak: Volume growth remains under pressure in 2Q while pricing is support value growth. Switch cigs are growing at a healthy pace. Marlboro is gaining share in switch segment.

Expect recovery from festive season

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Key Takes: Liquor

Demand has moderated: Maharashtra vols are growing at 4-6% (vs. 10-12%) in 2QFY20E. Premium brands are growing at ~2x of market. Upcoming state elections are expected to impact demand and supply in October. Maharashtra continues to be the most profitable state for liquor companies as pricing is not government controlled.

UNSP vs. Pernod – Cut throat competition: Pernod’s product portfolio is better suited to Indian consumers (semi-premium and premium brands). United Spirits is focusing on semi-premium and super premium brands as it is very difficult to compete with Pernod in premium segment.

Pernod’s Blender’s Pride (growing at 25-30%) is gaining share at the cost of UNSP’s premium range i.e. Royal Challenge, Signature (witnessing de-growth) and Antiquity. Consumers are upgrading from semi-premium brands (McDowells) to premium brands (Blender’s Pride).

McDowells No. 1 (key brand for UNSP) is growing at a healthy pace (25-30%) and giving stiff competition to Imperial Blue (Pernod’s brand). UNSP is yet to increase prices of McDowells No. 1 (expect it to hike shortly) post the excise duty hike in Jan-19. McDowells Platinum is not gaining traction and witnessing stiff competition from Royal Stag.

UNSP’s super-premium product portfolio (Black & White, Black Dog and Vat 69) is very strong and has a promising future. UNSP is focusing on outsourcing (3rd party bottling) and reducing manpower (down 50% in last 2 years).

Radico is an upcoming player: Radico is the only domestic company to be able to compete with large MNC competitors. Radico is winning in the Vodka space as Magic Moments (4lac cases in Maharashtra) continues to gain share. Growth for Magic Moments in Maharashtra has accelerated (35% growth vs. 25% growth) driven by variants (flavours) and price hikes by peers (Smirnoff increased by 25%). As a result, price gap between Smirnoff and Magic Moments has widened (Rs 1,500/750ml vs. Rs 760/750ml).

Beam Suntory – Entering semi-premium space: The makers of Teacher’s whisky are planning to launch new products Oak Smith Black (semi-premium) and Oak Smith Gold (premium). These launches are expected during the end of 2019 in Maharashtra. Oak Smith Black is expected to compete with McDowells & Imperial Blue while Oak Smith Gold will compete with Blenders Pride and Antiquity.

Brewery space is heating up: UB is driving uphill to premiumise its product portfolio. Kingfisher Storm has received a luke warm response. UB is witnessing stiff competition from both ends i.e. Carlsberg/Tuborg at the entry level and Budweiser/Bira at the premium end.

AB InBev is planning to capitalize on the new found love for craft beers with the launch of its regional based (North, South, East and West) craft beers under the Budweiser family. Pricing of these new beers will be at par with Kingfisher. AB InBev has now started focusing on pushing Sab Miller products (Haywards 5000, Fosters etc) post the acquisition.

Demand has moderated in Maharashtra

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Key Takes: Cooling Products

RAC

RAC channel inventory is very low. Surge in demand during this summer led to stock-outs for many SKUs. Companies with a strong manufacturing footprint (including third party providers) have benefited as they were able to meet the spike in demand. Market leaders like Voltas, LG and Daikin continue to gain market share.

Two MNC brands are struggling : Samsung’s comeback in RAC failed in this summer. Carrier has gone into a deep sleep, which is beneficial for premium brands like Daikin.

Voltas is gaining share: This summer, growth for low priced RACs (Window RAC and Fixed speed) was high owing to heat wave (Voltas benefited). Voltas has improved its service (key for RAC industry) and is looking to close the gap with LG.

Channel’s hope on Lloyd is hinged on its new robotic plant: Lloyd struggled this summer owing to price hikes as consumers preferred Voltas in the same price range. Lloyd’s new RAC plant is technologically advanced (robotic) and has the capability to manufacture premium products. Trade channel awaits supply of products from this plant.

Lloyd to focus on EBOs: Havells has plans to aggressively launch EBOs for Lloyd’s product portfolio along with Havells consumer appliances - a strategy which has benefited LG in India. Lloyd will also expand its product portfolio to refrigerators and more SKUs in washing machines.

Daikin becomes aggressive: Daikin not only cut prices prior to summer-19 but also increased channel margins (higher vs. Voltas). Higher channel margins are not expected to be sustainable.

LG is a tough competitor: LG enjoyed the first mover advantage in inverter RACs. LG’s 5 star inverter RACs continue to outperform the market. However, channel partners believe LG’s 3-star inverter RACs are expensive vs. other brands.

Air Cooler

Air cooler channel inventory is low: After a strong summer-19, channel inventory for air coolers is very low.

Not witnessing shift from unorganized to organized : Unorganized players have raised prices (after GST) but their coolers are still at a discount to organized players. (Rs 4-5k vs. >Rs 7k). It is evident that the shift from unorganized to organized is not playing out.

Kenstar is losing share: Kenstar which used to be in the top 3 air cooler players, has lost significant market share owing to deterioration in parent’s health (Videocon). Orient has launched a promising new range of air coolers. No branded player is playing a price war in the industry.

Fans

Replacement cycle has shortened: Consumers are replacing fans sooner with decorative range. To drive premium fans, in-house manufacturing is key to maintain quality and supply chain.

Havells is the strongest player in fans. Crompton’s innovation in fans has been limited. Consumers are not interested in tech enabled fans. However, decorative fans are gaining share. Affordability in premium fans has improved over the years. Havells credit terms are more favorable vs. Crompton (45 days vs. 30).

Historically low level of trade inventory

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Key Takes: Panasonic Life Solutions (Anchor)

Demand trends: The industry is witnessing a moderation in growth. Correction in channel inventory is impacting primary sales. Co is also seeing stress in B-B and B-G orders. However, Panasonic’s revenue mix is skewed towards B2C (unlike Havells). Co has grown at 12-13% in 1HFY20.

Healthy demand from replacement: Slowdown in the real estate market (last 2-3 years) has impacted new demand but healthy growth from replacement has supported FMEG products. Consumers are upgrading their homes and hence purchasing premium products of fans, switches, lighting etc.

Focus on premiumisation: Anchor has a lower market share in premium wiring device segment vs. its share in mass-premium segment. Co is focusing on driving premiumisation.

Aim to strengthen B-B and B-G: Co is under-indexed in the B-B and B-G space (8% combined revenue mix) and looks to expand its share over the next 3 years (aim is 25% revenue share).

Switches: Switches is a Rs 45-50bn market with Anchor’s share at 35-38%. Legrand and Havells are the no 2 and 3 player. Gross margins for switches are 8-10% higher vs. switchgear. Non-modular switches are priced at Rs 7-10, entry level modular at Rs 11-15, mid-premium modular at Rs 18-22 and premium modular at Rs 26-32 per switch. Anchor has a stronger presence in the Rs 8-20 segment (65% industry mix vs. 75-80% for Anchor). Co has launched new range (in 2017) of ROMA modular switches at Rs 25-28.

Lighting margins are under pressure: Co has a ~2.5% market share in the Rs 200bn lighting category. Bulbs and Battens are 65% of lighting mix, while fixtures mix is at 25-30%. Lighting margins continue to be volatile. Margins in low wattage LED bulbs are minimal while higher wattage LED bulbs have a single digit margin. Fixtures have a healthy margin profile of 17-18%.

Focusing on direct reach: Co looks to expand its direct reach, so as to improve its visibility in secondary sales.

Healthy replacement demand

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Key Takes: QSR

Dine-in pressure remains: Dine-in is witnessing moderation in growth since the beginning of 2019 as consumers prefer to order meals home.

Delivery growth is healthy: Free delivery and consumer offers is driving delivery growth. Aggregators are transacting ~100mn orders per month with Swiggy and Zomato commanding lion’s share.

AOV (Avg. order value) on aggregator platforms has declined: Aggregators are driving habit to eat out which has led to a decline in ticket size (Rs 170/order). At times, consumers also break orders to maximize discounts. Aggregator platforms use order counts as a key operating metric while raising funds from PE and not AOV.

Zomato and Swiggy have reached 500 cities: Aggregator platforms have penetrated 500 cities at a very fast pace. Largest QSR (Domino’s Pizza ) has reached only 300 cities.

Pizza is the most searched cuisine on Swiggy: Although Pizza is the most searched on aggregator platforms, Biryani is the most ordered cuisine in India. Consumers have a higher brand preference for Pizza’s vs. Biryani.

Subsidizing delivery cost is not sustainable: Delivery cost for Swiggy is Rs 75/order. Aggregators have subsidized delivery cost to drive habit. Lower AOV’s have also meant lower realizations for platforms. Passing on delivery cost over the next 2-3 years may impact order counts.

QSR is a multi-year story in India: As eating out patterns evolve, ‘value for money’ becomes key to drive frequency. Domino’s is a strong player in QSR, JFL is aggressively looking to expand its franchise in more cuisines and formats. New management is working aggressively to expand JFL’s addressable market.

QSR is a multi-year story

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Banks / NBFCs

Consumer

Cement

Auto

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Cement In the recently concluded HDFC Sec Reality Check Investor Forum, we hosted cement dealers representing all regions in India and also marketing executives from unlisted cement companies. They have decades of experience handling cement sales and shared insights on demand-supply dynamics, competition, pricing and changing trends.

All of them highlighted that demand has weakened during 2QFY20, owing to the strong monsoon, slowdown in government spending post central election and system-wide liquidity crunch. However, they were optimistic and expect a better 2HFY20 led by a pick-up in capex spend and good monsoon. While cement prices have sequentially cooled off across markets (seasonal impact), the correction has been lower in the north, central and western regions. Even the southern region players took price hikes in early Sep.

Sales vol contraction in 2QFY20 is a near term worry. We have factored in the same in our estimates as we trimmed our industry estimates for cement volume growth for FY20 to 3% owing to weakness in 1HFY20, in our recent note – Tax axe (published on 22nd Sep 2019). Despite weak demand, the cement pricing environment across north, central and west markets remains encouraging. Falling crude and coal prices further cost tailwinds. We thus remain positive on cement and prefer cos with strong cost metrics, improving balance sheets.

Our top picks: UltraTech, Dalmia Bharat, JK Cement, Orient Cement and Star Cement.

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Key Takes: Central region We hosted an ex-marketing executive from an unlisted cement company in the central region, having an in-depth understanding of Madhya Pradesh markets.

MP consumes ~1.5mn MT of cement monthly. The top five sellers in the state control about 75% of total regional demand: UltraTech (30-35% market share), Birla Corp (15-20%), Heidelberg (10-12% market share), ACC (8-10%) and Prism Cement (7-8%) Additionally, both JK Cement and Wonder Cement have about 5-7% market share each.

UltraTech has a strong brand pull in the MP market. It also has a strong distribution network in the state and is the price leader. In Bhopal markets, UltraTech sells at about Rs 335/bag, while ACC, Heidelberg and Birla Corp are all priced at about Rs10/bag lower. JK Cement, Century Textiles and Wonder sell at a further discount of Rs 5-10/bag.

Over the past few years, ACC’s marketing team has become very aggressive and responsive to dealers/ customers’ concerns/ feedback. ACC has massively churned its dealers’ network to improve its sales. In the central region, ACC has a stronger presence UP than in MP.

Companies supply cement in the Bhopal market mainly through road, while supply in the Indore market, about 80% comes through rakes. Companies from Satna cluster generally target sales to UP markets (better pricing and lower lead distance). In MP, these plants sell cement up tp Bhopal (400-450 Kms) as pricing in better here. However, Indore markets are largely served by players from

Rajasthan and Dhar (in MP) as the lead distance is lower.

In the non-trade segment, UltraTech, Birla Corp, JK Cement and Wonder Cement are all major suppliers. Due to weak demand, the non-trade prices hover at Rs50-60/bag lower than trade prices. Earlier this difference was below Rs 30/bag.

Cement demand in MP has been weak YoY for 2QFY20, owing to heavy rains in addition to construction slow down in general. In MP West, there have been crop damages due to incessant rains. There are lots of infrastructure projects stuck up in MP, due to lack of funds. Due to weak demand and liquidity stress, many dealers have seen their working capital stretched. Much of their money is stuck with builders and infrastructure clients.

Wonder Cement and ACC are adding cement capacities in MP. Wonder Cement’s GU is expected to come up by the end of this year.

In the white cement-based putty segment, UltraTech and JK Cement are still preferred brands even though a multitude of cement-based putty brands have come up over the last few years.

Conclusion

Cement demand has been weak in 2Q across the central market owing to slow down in infrastructure execution and also on account of heavy rains. There is an expectation of demand and price recovery in 2HFY20. Overall pricing is quite stable in the central market, despite seasonal correction.

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Key Takes: Eastern region We hosted a marketing executive from an unlisted cement company, with an in-depth understanding of the eastern region.

The eastern region consumes about 75mn MT of cement annually. Of this, West Bengal and Bihar are the largest consumers in the east with 20mn MT of annual demand each. Odisha is the third-largest market with 13mn MT in cement demand. Chhattisgarh/ Jharkhand/ NE regions follow next with annual consumption of 10/8/7.5mn MT respectively.

Construction activities in the eastern region are regularly interrupted by a multitude of festivals throughout the year and sand shortages further aggravate the issue. Cement demand in the eastern markets has declined by about 5% YoY during Apr-Aug 2019 period, led by declines across all states barring Chhattisgarh, where demand has been flattish this year. Cement demand is not expected to pick-up up until October of this year.

Cement prices have also rolled back owing to weak demand amid high competition amongst brands. Within the eastern region, cement pricing is lowest in Chhattisgarh while it is highest in Bihar. Lower pricing in Chhattisgarh has urged regional producers to supply large chunks of their cement to neighbouring states in the east and in Maharashtra.

Trade sales as a % of total sales across various eastern states are as follows: West Bengal (50%), Jharkhand (60%), Bihar (70-80%). While in Odisha, the trade sales are lower vs the non-trade sales.

Over the past few years, cement demand in Bihar has grown as IHB demand remains strong. While this trend has reversed in 1HFY20,

demand is expected to pick up in 2HFY20. Shree Cement has a strong presence in Bihar and Jharkhand markets while it has a very small presence in West Bengal markets.

In Jharkhand, A-group brands have close to 45% market share. UltraTech and Dalmia dominate Odisha markets.

Logistics cost through railways is not very competitive as compared to road transport in the east due to uncertainty in rakes availabilities. Hence, cement companies mainly prefer roadways to supply cement in eastern markets.

Cement companies are becoming more price-focused, as against earlier trends of aggressive volume push. Companies have also been focusing on cost controls to improve margins.

In east, OPC is preferred for infra projects, PPC for plastering works while PSC is gaining preference for concrete and slab works.

Conclusion

Cement demand has contracted across the eastern region during 1HFY20. There is a general expectation of demand recovery post Monsoon. While branding plays a major role in eastern region which is largely a trade market, currently, there is a gradual increase in non-trade sales. Further, there is also a large influx of new brands in the eastern region. Thus, existing companies are focusing on cost controls to sustain profitability. The price hikes taken in Apr-May 2019 have been completely rolled back over the past three months. No price recovery is expected before Nov 2019.

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Key Takes: Southern region We hosted a marketing executive from an unlisted cement company, with an in-depth understanding of Southern markets, especially Tamil Nadu.

Cement demand has been weak from the housing and realty sectors in Tamil Nadu markets. While low-income group real estate segment is seeing good demand, inventories for middle-income and high-income segments have piled up due to developers not reducing prices. Real estate prices have seemingly peaked out in Chennai markets. Demand from NRI customers have also come down. Property price correction is required to move these inventories.

Cement demand is mainly coming from infra projects – Metro (Chennai Metro phase 2), roads, drainage, airport, etc. Additionally, a few very large IT parks are being constructed in Chennai by Raheja, RMZ, Embassy Splendid groups which should help boost cement demand.

Unlike all other regions, there have been price hikes in the southern region in Sep. The trade prices in Chennai increased by Rs 15-20/bag MoM in Sep to Rs 370-380/bag. Similarly, the non-trade prices increased by Rs 30-35/bag to Rs 330-340/bag.

In Tamil Nadu, the top eight companies control about 80% of the cement demand. The rest of the demand is met by about 30 companies but their supplies are erratic. This also gives the top-8 companies to sell at a higher price compared to the rest.

Due to low pricing in AP markets, many producers are pushing volumes in the higher-price Tamil Nadu markets.

AP players have to incur higher freight costs to cater to the TN markets. The costing however still compares with the AP players (because they are very old and hence have high variable costs). The newer plants in TN make high margins owing to low variable costs.

In the non-trade segment, companies have to currently extend the credit period of about 40-60days in Tamil Nadu to bolster sales. In the trade segment, the credit period is lower at 10-15days.

All cement manufacturers in Tamil Nadu supply cement to ‘Amma Cement Supply Scheme’ at a discounted rate – currently at ~Rs200/bag (at landed basis). These supplies account for about 6-8% of the total cement consumption in the state.

Conclusion

Cement demand in the south has flattened during 1HFY20, after strong growth in FY19. While the real estate segment is under pressure, infrastructure projects remain a key demand driver in Tamil Nadu markets. As demand decelerated, the price hikes implemented between Feb and April 2019 also came under pressure, leading to almost full rollback between May-Aug 2019. With a renewed focus on margin, the companies have increased prices the across south and a part of the hike is implemented in Sep 2019.

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Key Takes: Western region We hosted a marketing executive from an unlisted cement company, with an in-depth understanding of Maharashtra markets.

Maharashtra market consumes about 2.7-2.8mn MT of cement per month. Of this, Mumbai and Pune regions account for one-third of total demand in Maharashtra. Gujarat market consumes about 1.5mn MT of cement per month. Of this, Ahmadabad, Baroda and Surat regions account for about 40% of total demand in Gujarat.

UltraTech, ACC and Ambuja control about 40-45% of total cement sales in Maharashtra. In Gujarat, again UltraTech and Ambuja are dominant players followed by JK Lakshmi Cement and Sanghi Industries.

While cement demand in Maharashtra was strong in 1QFY20, it has been weak in Q2. Liquidity crunch has slowed down consumption and has interrupted payments inflow. Sales in southern parts of Maharashtra have been seriously impacted due to heavy floods, though demand is now recovering in the region. Demand from road projects has also been weak in Q2FY20. The credit cycle for cement dealers has increased to 80days vs 45days YoY in the Maharashtra markets.

Companies expect demand to pick up from 2HFY20. The bullet train project is expected to be a big cement consumption centre.

Meanwhile, the work for Mumbai Metro lines 10, 11, 12 is expected to boost cement demand. Also, there have not been any funding issues for Metro projects so far.

Currently, Mumbai trade cement prices is Rs. 300-320/bag (A-brands) and that of the non-trade Rs. 280-290 (bulker). Generally, cement prices in Mumbai are Rs15-20/bag higher than in Pune. Again then cement price in Pune is Rs10/bag higher than that in other major markets like Nasik and Nagpur.

Cement prices have come down by Rs 15/bag vs 1Q average and similar correction has been seen across both the trade and the non-trade. Cement prices have seemingly bottomed out in west markets in Sep and prices are increasing Oct onwards by Rs10-15/bag.

Conclusion

Liquidity crunch continued pain in the real estate sector and heavy monsoon has weakened cement demand in 2QFY20 in Maharashtra markets. However, the mood is upbeat that with a plethora of infrastructure projects, demand will recover in subsequent quarters. Cement prices have seen only seasonal correction and is expected to improve as demand recovers.

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Key Takes: Cement dealers from across India We hosted large cement dealers from Jaipur, Bhopal, Kolkata, Chennai and Mumbai.

North dealer (Jaipur)

Cement sales in Rajasthan has declined 10% YoY in 1HFY20. Monthly sales in Rajasthan has reduced to 1.76 mn MT per month run rate in 1HFY20 vs 1.95 mn MT YoY and vs 2mn MT for FY19. There is a sharp slowdown in real estate construction and even government projects have failed to take off this financial year.

Top six sellers account for 75% of total sales in the state- UltraTech (20% sales market share), followed by Shree Cement (15%), Wonder Cement (10%), JK Lakshmi (10%), Ambuja (10%), JK Cement (~8%).

Cement prices have been declining over the past few months from the recent peak of Rs 350/bag (trade segment) seen in Jun 2019. During each of the three months of 2Q, prices have corrected by Rs10/bag each to Rs 310/bag currently.

Amid heavy monsoon and weak demand environment, the non-trade prices have corrected sharply and is currently selling at Rs60-70/bag lower than trade prices. The usual difference is Rs 30-40/bag. Dealer highlighted the gap widened mainly owing to heavy monsoon.

Central dealer (Bhopal)

In the Bhopal market, UltraTech sells at the highest price, followed by ACC, Heidelberg and Birla Corp which sell at Rs10/bag lower than UltraTech. Cement brands of JK Cement, Century Textiles and Wonder sell at further discounts of Rs 5-10/bag.

Cement prices have largely remained stable and there has been Rs 20/bag fall in companies’ realization (trade segment) over the past two months on account of an increase in dealers discount. This is driven by demand slowdown as heavy rains hampered construction activities.

While cement sales have been badly hit during 2QFY20, the dealer expects cement demand to recover post October.

The non-trade market is very competitive here and is priced almost Rs50/bag lower compared to the trade prices. The dealer noted that the non-trade prices are expected to recover by Rs 10/bag from 1st Oct.

East dealer (Kolkata)

During 1HFY20, cement demand has declined YoY in all the five months across all states in the east.

Awareness and demand for blended cement in on the rise in the eastern regions. Further, Customers are increasingly becoming price-focused.

Further, with an influx of multiple brands, cement prices have been under pressure. Cement prices fell Rs 10/bag MoM in Sep to Rs 300/bag in the trade and Rs260/bag in the non-trade segment. There is limited scope for major price recovery during 3QFY20.

There is no issue of sand availability in West Bengal markets.

As the non-trade sales are on an increase, the dealer network is also evolving. Business is shifting away from traditional dealers focused on the trade sales towards dealers with better financial strengths and networks who can drive sales in the non-trade.

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Key Takes: Cement dealers from across India.. continued South dealer (Chennai)

In Chennai markets, cement prices increased by Rs 50/bag at the start of Sep’19, but the actual price absorption in less than Rs. 15-20/bag (in the trade segment) so far due to increased competition among brands. the non-trade price has however recovered by Rs30/bag MoM. Post the increase, A-grade trade prices stand at Rs 370-380/bag and the non-trade price at Rs 330-340/bag.

There is almost a gap of Rs80-100/bag between prices of A-grade and C-grade brands in the Tamil Nadu market. The differential persists as about eight major brands control 80% of the total Tamil Nadu market.

Dealers have seen stretch in their working capital requirement by 20-30% over the past year, owing to liquidity concerns with customers.

In the retail segment, companies are supplying only PPC cement. There is hardly any OPC supply in the trade segment.

West dealer (Mumbai)

Mumbai is a non-trade market with 90% of sales in the region being the non-trade.

Overall cement demand is growing in the Maharashtra markets. Cement supply to the real estate sector has reduced by about 10% YoY. The pain for the real estate sector has aggravated post the NBFC crisis last year. However, fund availability is relatively better for builders whose projects are at least 60% complete.

Despite weak real estate sector, cement demand has been growing led by the infrastructure sector. The Navi Mumbai airport project will start soon boosting cement demand. Coastal road project is another major infra project in the city.

Amid weak demand and liquidity crunch, dealers have to extend credit of 60days vs 30days earlier in the non-trade segment. In the trade segment, the credit period is currently at 45 days.

In most infra projects, only UltraTech, ACC and Ambuja get the tenders for cement supplies.

Amid heavy rains cement prices have corrected to Rs 330/bag in Sep vs peak of Rs 380/bag in May. On a QoQ basis, Mumbai prices have corrected by about Rs20-25/bag.

Conclusion

Overall demand and pricing environment has been weak across all markets during 2QFY20. Cement demand has declined across all markets barring south where demand has been flat YoY.

However, cement price cuts have been higher in the east and south markets, whereby all the price hikes taken in preceding 4-5 months were rolled back, leading to ~8% QoQ price decline in 2Q. This is on account of intense competition amid subdued demand. There has been a renewed effort in the south to rationalise cement prices upwards during Sep. In the north, central and west markets, the cement price correction has been lower (~5% decline QoQ).

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Banks / NBFCs

Consumer

Cement

Auto

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India has witnessed a sharp downturn in the automobile industry amidst slowing economic growth. The fall in vehicle sales has affected not only the automobile industry but also the industries and services linked to it including parts and components.

The demand has been affected due to various reasons:

20% increase in tonnage for commercial vehicles has severely affected sales for MHCVs.

Upward revision in road and registration charges by state governments is increasing vehicle ownership costs.

Adoption of BSVI emission standards will impact demand for the existing BSIV vehicles as they will not be allowed to register post Mar-20.

The restricted availability of finance has impacted demand for vehicles.

Demand for 2Ws, tractors and entry level cars is adversely affected due to sluggish growth in the rural economy.

The sector attracts the highest GST slab of 28% and the OEMs have been consistently requesting for rate cuts to increase their volumes.

We hosted channel partners from various segments and multiple geographies to learn about the on ground situation in the current market. Insights from these partners will enable investors to assess demand trends and on ground challenges.

Participant Profiles: We hosted channel partners from the Northern, Eastern and Western regions. The participants were represented across passenger car, two wheeler and commercial vehicle segments including a fleet operator.

Rationale for the event

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Key takes: Commercial Vehicles CV demand is impacted as (1) The increase in axle-load norms

have effectively increased industry capacity (2) Despite higher depreciation benefits, sales has not picked up as customers are waiting for an anticipated GST rate cut (3) Finance availability is restricted for this segment due to the excesses of the past.

Implementation challenges for the expected scrappage policy: There are operational challenges in implementing this policy due to non availability of scrappage parks in the country. Further, smaller truck owners are opposed to such a scheme as it impacts their livelihood. Thus, the government will have to adopt a calibrated approach while announcing this scheme.

Demand for buses: While demand for mid-sized buses is present, customers are postponing the same as they are evaluating purchases of electric powered vehicles due to the recent incentives announced under the FAME II scheme. Passenger buses qualify for a subsidy of Rs 20,000/kWh.

Fleet operators are witnessing weak freight availability due to (1) Sluggish economic conditions, which is impacting availability of return cargo (2) Competition from new entrants such as Rivigo and Black Buck. These operators are under cutting rates as they are well capitalized. The GST/e-way bill driven efficiencies has led to a 15-20% improvement in turnaround times.

The immediate impact of the depreciation benefit for CVs is yet to reflect in higher sales. Customers remain on the sidelines as profitability is impacted due to the slowdown.

Tata Motors

Demand in the northern states is driven by infrastructure activities and market share gains.

The OEM is gaining share due to aggressive marketing efforts. Market share is upwards of 65% in the northern region.

Demand in selective northern markets is relatively better off due to execution of construction works (particularly in UP). New projects announcement like Ganga and Bundelkhand expressways will be supportive of demand for CVs in this region benefit the sales for tippers.

Ashok Leyland

Discounts are at elevated levels.

Possible announcement of scrappage policy and expectations of GST reduction has created uncertainty in the minds of the customers.

Industrial activity has slowed down in the east which is impacting sales as well.

VECV

Axle load norms are impacting sales.

Infrastructure activities in the western region has come off which is also impacting demand.

Biggest customers are the e-commerce companies and they prefer ~5-14 tons of trucks.

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Increased incentives to drive sales in festive season: The higher discount schemes introduced in Sep-19 will drive footfalls in the upcoming festive season. The recently concluded Ganesh Chaturthi festival in the west had a sedate response due to the excess rainfall in the month of August.

Down trading is visible: Consumers are preferring second hand vehicles across regions due to the price hikes for passenger cars particularly in the entry segment.

While taxi aggregators are not present in the semi urban areas, metro consumers are delaying their second car purchases due to these service providers.

BSVI related uncertainly is highest in passenger cars: The uncertainty around BSVI and Maruti’s exit from the diesel segment is leading to a void in the passenger car segment, particularly in the Dzire category. The adoption of CNG in smaller centers is not an option due to non availability of the fuel. Channel partners highlighted that GST rate cuts should be introduced in 1QFY20 along with transition to BSVI to offset the price increase on vehicles.

High inventory levels: Inventories are elevated at ~45 days of sales despite the recent production cut back by OEMs. To increase sales, dealers are increasing focus on salaried customers as the trading community/SME customers are adversely impacted by the downturn.

Financing availability has been impacted: The availability of financing for customers is impacted in semi urban centers. While rural centric NBFCs such as Mahindra Finance are stepping up to fill the void, LTVs have risen for customers and loan sanctions are delayed.

Maruti Suzuki

Maruti offered higher discounts on Brezza which has helped to improve retail.

However, the uncertainty around diesel will impact near term demand.

Higher prices of Alto are impacting entry level sales.

NEXA dealers are witnessing high overhead cost pressures due to the upfront investments.

Finance availability is restricted. Rural NBFC’s are filling the void as smaller players have exited.

Maruti’s used car business (True Value) is witnessing healthy growth in Tier-II and Tier-III cities as customers are down trading.

The impact from taxi aggregators is only seen in the metro cities since penetration of these services in smaller cities is low.

Customers are deferring their purchase in the hope of lower GST rates.

Key takes: Passenger Vehicles

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Good rainfall to improve retails in 2HFY20: While retails have declined between 0-15% YTD FY20, the channel partners expect 2 wheeler sales to benefit from higher rural incomes on the back of normal monsoons. System inventories at the semi urban dealerships should normalise from hereon.

Urban demand trends are weak: The demand for two wheelers in the metro markets is more volatile. To support retails, dealers are offering limited discounts, particularly for scooters. Further, dealer viability is being impacted as OEMs have expanded the channel network in the cities.

Transition to BSVI: Channel partners expect consumers to purchase vehicles ahead of the BSVI rollover as the price hike for the new variants will be ~Rs 5k. However, there is some postponement, too, as consumers are waiting for higher discounts closer to the BSVI deadline!

High penetration levels for ‘lifestyle’ bikes: The penetration levels are high for lifestyle bikes in the Tier-I cities of western India. Consequently, footfalls at the dealerships have fallen as first time customer walk ins have reduced over time.

Royal Enfield

First time buyer footfalls in showrooms have come down due to higher penetration levels.

Recent reduction in prices of Bullet and Classic (~Rs 9k) has shifted demand to lower end variants.

Sales are down ~15% YTD at the dealerships who visited our event.

Hero Motocorp

While sales are down ~10% YTD, expectations from the festive season are high due to good rainfall.

Hero is creating separate, prominent spaces in the showrooms to promote its recently launched premium bikes.

Inventory levels have corrected to ~45 days from 55-60 days after the OEM had cut down production in the last couple of months.

HMSI

Sales are down sharply in urban dealerships (~15% YTD).

Co is offering selective discounts at the dealership to promote sales.

The outlook for the festive season is suprisingly mixed.

Key takes: Two Wheelers

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Conclusion After witnessing a material decline in sales over the past year, we

believe the sector volumes should improve from hereon on a low base.

We have recently revised our earlier cautious stance on the sector. In our view, the earnings downgrade cycle for the auto sector is likely bottoming out.

Corporate tax cuts come as a relief to auto OEMs ahead of the festive season. Amidst a weak demand environment, cos have either taken price cuts (e.g. Royal Enfield) or have increased discounts (e.g. Maruti Suzuki). Thus, income tax cuts will offset the margin impact due to the above.

The high discounting and the expected improvement in the rural economy (aided by normal monsoons) will drive up-country demand for 2Ws and cars.

Top picks

Our earlier top picks were Maruti and Subros. However, we subsequently downgraded Maruti to NEUTRAL post 1QFY20 results due to delay in demand recovery and weak industry outlook.

Our top picks in the autos and transportation segment now are Bajaj Auto, Hero Motocorp and Container Corporation of India (CONCOR).

2W stocks will benefit on the back of tax cut measures, festive season which will be aided by good monsoons and recent introduction of discounts by 2W OEMs. Bajaj/Hero are trading at reasonable valuation of 16/14x FY21EPS.

We have been positive on CONCOR since our initiation in Jul-19. The co is well positioned to benefit from the commissioning of the DFC. The medium term growth opportunity post DFC will drive up valuations.

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Disclosure: We, Darpin Shah, MBA, Aaksh Dattani, ACA, Naveen Trivedi, MBA, Siddhant Chhabria, PGDBM, Rajesh Ravi, MBA, Saurabh Dugar, MBA & Mansi Lall, MBA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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