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INSIDE THE ISSUE

INFRASTRUCTURE: INTERESTING TRENDS IN ORDER INFLOW AND ORDERBOOKS

In our quarterly publication – Orderbook-Keeper – we saw some interesting trends in the order inflows for the infrastructure sector this quarter (read the latest one here).

Detailed story on pg. 2

NON-LIFE INSURANCE: NO SIGNS OF EASING COMPETITIVE INTENSITY

We spoke to the division head at New India Assurance who said that growth remains a concern for non-life insurers, particularly in the motor segment.

Detailed story on pg. 3

SUPPLY-CHAIN DISRUPTION DUE TO THE CORONAVIRUS OUTBREAK

The coronavirus outbreak has disrupted the supply chain of the Indian consumer durables industry, which is highly dependent on China’s manufacturing units. Detailed story on pg. 3

RETROSPECTIVE PERSPECTIVE

Snippets Please stand by. De-globalisation in progress…

India-Malaysia relations strained

USMCA: What is it all about?

Coronavirus – when species collide

India: Tax revenue shortfall for FY20

News round-up of the month

Detailed story on pg. 4 & 5

Road Less Travelled

20 February 2020 | Vol-2, Issue-2 MONTHLY PUBLICATION

20 February 2020 | Vol-2, Issue-2 | Page - 2 Road Less Travelled | MONTHLY NEWSLETTER

Infrastructure: Interesting trends in order inflow and orderbooks by Vibhor Singhal

In our quarterly publication – Orderbook-Keeper – we saw some interesting trends in the order inflows for the infrastructure sector this quarter (read the latest one here). The NET order inflow reported was quite weak in Q3FY20 at Rs 7bn only (-96% yoy) vs. Rs 201bn in Q2FY20. However, this was largely due to record order cancellations at Rs 131bn by various players including NCC, IRB, and Simplex. Adjusting for this and with the new/L1 order received at Rs 70bn, GROSS order inflows for Q3 stood at a strong Rs 209bn (+6% yoy, last four-quarter average at Rs 183bn). Strong order award activity across segments (excluding roads) boosted order inflows.

Interestingly, almost all EPC companies currently have decent orderbooks, representing 2-3x book-to-sales. This is despite muted order inflows in the last few quarters, especially from NHAI. While orders have trickled in from other segments like buildings and metros, one

reason for a healthy book-to-sales ratio is the lower turnover. Most companies (excl. PNC, KNR) reported a yoy decline in topline in Q3 and 9MFY20, primarily due to a delay from govt. bodies (in payments, awarding) and an extended monsoon. This led to lower TTM (trailing twelve months) topline and hence higher book-to-sales numbers.

Overall, NHAI has been largely responsible for the lackadaisical order inflow this year, having awarded less than 3,500km YTD in FY20 (FY18/19 awarding at 7,400/2,200km). However, we have seen a sharp pickup in NHAI order award activity in the last few weeks, with PNC/Ashoka grabbing orders of Rs 51/10bn in this month already. We see a healthy pipeline of orders from NHAI over the next two months and expect order award momentum to continue through Q4FY20 into Q1FY21.

Most EPC companies have orderbooks in the range of 2.0-3.0x book-to-sales …

… primarily because they have reported yoy decline in revenues in 3Q/9M FY20?

Multiple order cancellations led to weak NET order inflows in Q3FY20 – but GROSS inflow stood strong Inflow (Rs mn) 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Cancellation New/Stuck 3QFY20 Net Inflow Gross Inflow

NCC 45,115 1,04,009 -55,143 14,100 -60,068 71,000 - 10,932 Jkumar 18,742 8,754 -997 43,713 -1,080

- -1,080

KNR 1,582 31,905 10,828 10,358 12,760

6,350 19,110 PNC 25,730 53,207 618 -23 -725

19,970 19,245

ITD Cementation 10,365 9,908 8,670 15,994 23,221

3,500 26,721 Ahluwalia 14,711 11,884 2,838 6,373 11,093

7,000 18,093

H.G. Infra 15,934 8,773 141 4,742 10,218

- 10,218 Dilip Buildcon 16,529 6,420 1,452 30,729 32,937

8,605 41,542

Simplex 13,874 7,897 6,556 11,106 -23,028 23,000 1,640 1,612 IRB 2,240 3,533 9,673 18,889 -31,728 30,000 - -1,728 Ashoka 6,946 1,645 6,511 1,394 15,904

14,544 30,448

Sadbhav 547 -6,231 4,197 -7,234 -3,550 7,000 -930 2,520 JMC Projects 6,940 9,695 11,149 4,707 17,188

9,500 26,688

Capacite 14,614 1,556 2,502 45,233 889

889 PSP 3,861 6,153 7,313 1,015 3,101

3,101

Total 1,97,731 2,59,107 76,307 2,01,097 7,133 1,31,000 70,179 2,08,312

% YoY -22% -40% -71% 84% -96%

5%

Source: Companies, Phillip Capital India Research

0

1

2

3

4

5

6

7

0

50

100

150

200

250

300

NCC

Jkum

ar

KNR

Cons

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ITD

Cem

PNC

Infr

a

H.G

. Inf

ra

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ia

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plex

JMC

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a

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hav

Capa

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PSP

Proj

Boo

k - t

o - S

ales

Ord

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ok (R

s bn

)

Orderbook Book-to-Sales (RHS)

-10%

0%

10%

20%

30%

40%

50%

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

3QFY

20

Rev yoy growth (%)

20 February 2020 | Vol-2, Issue-2 | Page - 3 Road Less Travelled | MONTHLY NEWSLETTER

Non-life insurance: No signs of easing competitive intensity by Sujal Kumar

We spoke to the division head at New India Assurance who said that growth remains a concern for non-life insurers, particularly in the motor segment. While lower auto sales, because of a general economic slowdown, is one of the key reasons, there have been instances of commercial-vehicle owners (driven by slower business) not renewing policies or delaying renewals.

PSU players are also resorting to higher discounts to chase growth and branches that have claim ratios within specified limits have been allowed to increase discounts on premiums until March. Pricing for motor third-party (TP) may also come under pressure due to muted growth, and IRDAI could reduce pricing for TP premiums.

Loss ratio is likely to remain high in motor OD (own-damage) given low premiums. Private cars and two wheelers have higher loss ratios in OD compared to CVs as CV owners normally do not put forward claims. However, claims ratio is higher for CVs in the TP segment.

Merger of PSU insurers and capital infusion could increase competitive pressure, as the government is likely to infuse growth capital; the long-term plan is to list the merged entity.

Crop insurance: Re-insurance rates have hardened in the last few months, as current premiums are not sustainable. Hence loss ratio for the crop segment will continue to remain high.

Supply-chain disruption due to the coronavirus outbreak by Deepak Agarwal

The coronavirus outbreak has disrupted the supply chain of the Indian consumer durables industry, which is highly dependent on China’s manufacturing units. Products that are imported from China include AC compressors, refrigerator compressors, small appliances, and LED chips. At the beginning of 2020, most compressor/appliances manufacturing units in China were shut due to the Chinese New Year; the outbreak extended this shutdown. China’s internal supply chain and shipment of goods is disrupted.

By the second week of Feb, there was some relief as some of the AC component-manufacturing facilities began to operate, but not at full utilization; challenges in internal supply chains continue to exist.

There is a silver lining though – our channel checks suggest most companies have maintained inventory for seasonal products such as ACs; c.45 days for Q4. Also, components-manufacturing units in China are likely to have adequate inventory as they start building for the season in November, which generally peaks in March. However, we believe if the situation prolongs, it may negatively affect Q1FY21. AC players have already taken price hikes due to the season, and to be on the safe side and considering the current situation in China, they could take more price hikes.

Our channel checks with AC importers revealed that it takes 30-35 days to receive a compressor from China and 10-15 days of manufacturing/assembling and dispatching to channel partners in India. Therefore, total time-to-market is c.45 days. To make goods available in April, they have to be ordered by the third week of February. Going by the current situation, we see a time lag of 10 days.

Improvement in China’s internal supply chain and restarting of shipments are important factors – should happen from the end of February. Once shipments start, the situation may normalize, or could still have a lag of 15-20 days. In the near term, we expect companies to hike prices by 3-5% and work on better inventory management.

20 February 2020 | Vol-2, Issue-2 | Page - 4 Road Less Travelled | MONTHLY NEWSLETTER

RETROSPECTIVE PERSPECTIVE – by Roshan Sony Snippets

Please stand by. De-globalisation in progress… Globalisation peaked and began plateauing several years before the

current trade wars even began.

An age of populism and tariffs; ‘national champions’ will be pushed. Supply chains could be localised.

Key questions: o What kind of companies will thrive in a protectionist world? o Will small and local become beautiful again? o Will de-globalisation sap growth and efficiency?

Globalisation started speeding up in the 1970s and 1980s, saw huge gains in the 1990s, and was steady through the early part of the 21st century. However, the golden age of globalisation seems to be flagging for a decade or so, ever since the financial crisis of 2008 and the recession that followed. De-globalisation seems to have firmly set in.

In this, the leaders of the world (the US, China) are setting completely different examples. China has protected its markets (de-globalisation) and has still managed rapid growth and benefitted hugely (from globalisation) – developing nations including India are trying to take this approach. Under President Trump, the United States has become increasingly protectionist, and the President has been urging other developed nations to follow his example.

India’s prime minister Narendra Modi has decried protectionism, but continues to remain nationalistic, citing the economic disparity between India, a developing nation, and the already developed ones. The US has recently criticised India for having the highest tariffs among major world economies. India has a history of stagnation under protectionist policies. It has already strained relations with long-time trade partner Malaysia (more on this below) and is increasingly (but so far largely unsuccessfully) trying to curb imports from China because of its staunch support for Pakistan on various issues.

India-Malaysia relations strained India’s relations with Malaysia have been tense over Malaysian Prime Minister Mahathir Mohamad's criticism about domestic issues (CAA, Kashmir) and the SE country’s refusal to cancel permanent resident status for controversial Islamic preacher Zakir Naik. India has begun to place curbs on exports from Malaysia; it has already come down heavily on palm oil imports. Malaysia’s India exports grew 20% to US$ 11bn in FY19 and were US$ 7bn in April-November. India's exports to Malaysia were lower at US$ 6.4bn and US$ 4bn. In addition to palm oil, copper and aluminium wires, microprocessors, computer and telecom products, turbojets, and aluminium ingots could also come under fire.

USMCA: What is it all about? The US-Mexico-Canada trade agreement (replacing NAFTA) is expected to create 176,000 US jobs over 15 years. With US President Trump set to visit India on Feb. 24, it is worth looking at this agreement from an India perspective. During the visit, the US’ main agendas would include tying up terms of a trade deal and increasing sales of defence equipment to India.

Auto: Country of origin rules: North American content in cars and trucks needs to be 75% vs. 62.5% earlier. Aim is to limit the automakers from sourcing parts from Germany, Japan, South Korea, or China to be assembled in Mexico. 70% of a vehicle’s steel and aluminium has to originate in North America. Labor provisions: By 2023, 40-45% of a vehicle’s value must come from high-wage workers (minimum US$ 16/hour (c.Rs 1,000), namely US and Canada worker). The aim is to provide greater protection to workers, including migrants and women, and to make it easier for Mexican workers to unionize. Will similar provisions be imposed on Indian auto exports?

Less protection for drug companies: Certain protections for advanced and a costly class of drugs called biologics have been pared; earlier US had 10-year protection from cheaper alternatives in Canada and Mexico.

Dairy: US farmers to have more access to the highly-protected Canadian dairy market: In return, the US opened up more access to its market for Canadian dairy and sugar. The US has been vocal about high Indian protection for dairy products. Citing cultural issues, India has not accepted milk products from cows that are fed non-vegetarian feed (US dairy farmers feed animal products to their cows).

Intellectual property and digital trade: Provides internet companies with some protection from lawsuits in terms of posted user content. It prevents governments from asking tech companies to disclose their source code or put duties on electronic transmissions. The US has never been happy about India’s price controls on devices such as medical stents.

Sunset clause set at 16 years: The deal is subject to a review every six years. This could indicate that any deal that US and India sign could have a limited shelf life, which could make long-term investors cagey.

Coronavirus – when species collide Officially confirmed cases: 75,201; Official deaths: 2,010; Affected

territories: 29.

SARS-CoV-2 is capable of human-to-human transmission.

Declared a Public Health Emergency of International Concern by the World Health Organization.

The economic impact of travel bans and people not working is yet to be ascertained.

Some pandemics of 2010s: 2009 flu pandemic in India (1035 deaths), 2015 Indian swine flu outbreak (+2,000), 2018 Middle East respiratory syndrome outbreak (41), 2002 to 2004 SARS outbreak (774 in 29 territories), Western African Ebola virus epidemic (11,323) and the ongoing DRC/Uganda outbreak (2,251), and the 2018 Kerala Nipah outbreak (17).

India: Tax revenue shortfall for FY20 Some estimates peg this at Rs 2.0-2.5tn, mainly in direct taxes.

20 February 2020 | Vol-2, Issue-2 | Page - 5 Road Less Travelled | MONTHLY NEWSLETTER

News round-up of the month

J a n u a r y ( 1 5 - 3 1 )

INDIA Indonesia agrees to increase its imports of buffalo

meat, automobiles, and sugar from India in exchange for an increase in imports of Indonesian-produced palm oil, amid growing trade disputes.

Uber sells India food-delivery business to Zomato.

Retail inflation rate in Jan. at 7.59% vs. 7.35% in Dec. Breaches RBI’s medium-term target of 4% for the fourth straight month. Jan. core inflation was 4.8% vs. 3.7% in Dec. IIP at -0.3% in Dec. vs. +1.8% in Nov. Govt revises FY19 GDP growth to 6.1% from 6.8% earlier. RBI starts making public minutes of its board meetings.

IMF says India is the 'biggest contributor' to downward revision in global growth; cuts India growth est. to 4.8% for 2019.

Investment in equity-oriented mutual fund schemes at 2019 – down 41% yoy.

NSE 'dark fibre' case: Sebi exonerates Ravi Narain.

RBI buys gold after 5 months; now holds 625 tonnes.

INTERNATIONAL United States–Mexico–Canada Agreement passed

by US Senate. Once ratified by Canada, it will supersede the NAFTA.

US economy misses Trump's 3% growth target in 2019 (2

nd year in a row). Grows 2.3% in 2019 vs.

2.9% in 2018.

Iranian Supreme Leader Ali Khamenei, at a sermon, his first in eight years, defends the Revolutionary Guards’ accidental killing of passengers onboard Ukraine International Airlines Flight 752 and praises Operation Martyr Soleimani for giving a “slap on the face” to the US.

The Guardian becomes the first major news outlet to stop accepting ads from the fossil fuel industry.

The UK formally withdraws from the EU at 23:00 GMT on 31 January 2020.

At 6.1% in 2019, China's growth hits 29-year low. China's to ban single-use plastic bags in major cities by the end of the year, nationwide by 2022.

Two large crude production bases in Libya begin shut down amid military blockade.

F e b r u a r y ( 1 - 1 5 )

INDIA AAP sees historic win in Delhi, BJP trounced.

Kejriwal Delhi CM again.

Exports contracted for sixth month in a row in January, by 1.66% to US$ 26bn; imports down 1% to US$ 41bn.

Foreign investors remained net buyers in the first half of February at Rs 246bn.

S&P retains India's rating at 'BBB-' with stable outlook – says the country's GDP is likely to gradually recover towards longer-term trend rates over the next 2-3 years.

SBI Cards IPO gets SEBI nod; likely to raise c.Rs 55-60bn by the end of Feb.

RBI grants 5-year exemption to loans disbursed from CRR buffer

Vodafone seeks 10 years to pay AGR principal. SC refuses to hear plea.

India Budget 2020 unveiled. Largely focused on rural India.

26/11 terrorist Hafiz Saeed sentenced to 11-year jail term.

US approves sale of US$ 1.9bn Integrated Air Defence Weapon System to India.

SC upholds SC/ST Act that bans pre-arrest bail.

Anil Ambani says net worth is nearly zero.

India to get 13th major port at Vadhavan in Maharashtra.

INTERNATIONAL Ola launches London operations, over 25,000

drivers sign-up.

UK PM Johnson reshuffles cabinet.

The 2021 census could be the last one ever carried out in the UK largely due to ballooning costs.

Taliban terrorist who shot Malala escapes Pak prison.

A foreign language film wins the best picture award at the Oscars for the first time in its 92-year history. Parasite (a satire about class division from South Korea) usurped WW1 saga 1917.

Trump acquitted by Senate in impeachment trial.

Chinese doctor who first warned about coronavirus outbreak dies.

Petrol and diesel cars to be banned from sale in the UK from 2040 vs. 2035 earlier.

Nissan shuts Japan factory due to shortage of Chinese parts (coronavirus impact).

Record rains douse Australia wildfires.

Yemen Al-Qaeda leader al-Raymi killed by US strike.

The US Justice Department unveiled new charges against Chinese telecom company Huawei and its subsidiaries including racketeering conspiracy and conspiracy to steal trade secrets.

US$ 26.5bn T-Mobile and Sprint merger approved.

Thailand soldier kills +29 people and injures dozens at a military base and shopping mall.

Qassim al-Rimi, al-Qaeda leader, killed in an airstrike in Yemen.

US trade deficit drops for the first time in 6 years.

Trump unveils long-awaited Middle East peace plan - two-state solution. To recognize Israeli settlements in the West Bank, give Israel 30% of that territory, uphold Israel's sovereignty over Jerusalem. Palestinians to get the remaining 70% of West Bank, East Jerusalem as capital, limited sovereignty, no army.

Key indicators Sensex Steady

Gold Rising

Rupee Falling

Oil Falling

10-year G-Sec Yield Falling

Retail inflation Rising

Interest rates Steady

Current account deficit (Jul-Sep) Narrowing

IIP (Dec 2019, yoy) Falling

Business confidence (2Q data) Falling

Manufacturing PMI (Jan, qoq) Rising

Services PMI (Jan, qoq) Rising

Consumer confidence (Sep.) Falling

Forex reserves (Feb) Rising

Gold reserves (physical, Dec) Steady

Exports (mom) Falling

Imports (mom) Rising

Car production (Jan, mom) Rising

Car registrations (Jan, mom) Rising

Trade deficit (Jan, yoy) Widened

Aluminium price Rising

Aluminium inventory Falling

Copper price Falling

Copper inventory Falling

Zinc Falling

20 February 2020 | Vol-2, Issue-2 | Page - 6 Road Less Travelled | MONTHLY NEWSLETTER

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